As we approach the home stretch of fiscal year 2023, we continue to witness a period of immense opportunity and challenge for our business, for our communities, and for our nation. I personally relish this environment because it requires innovation in both approach and technologies, and discipline in our execution to succeed and thrive as we continue to implement our strategic and business plans.
In previous messages, I conveyed that one of the largest challenges facing infrastructure design and construction was inflationary pressures, and this, combined with an inadequate supply of a trained and skilled workforce, continues to be the greatest hindrance since mid-way through 2021. Inflation is a negative for design firms, as it squeezes our project budgets through increased operational overhead costs and rapid wage increases, with both having the potential to weigh heavily on profitability. Unlike many other businesses, but consistent within most professional service firms, labor costs and associated benefits can approach 70% of our expenses. So, the combined effect of rapidly increasing labor costs and simultaneous inflation-induced cost increases in nearly every other expense puts immense pressure on bottom-line results.
Midway through the third quarter of 2023, it is becoming apparent that two things are occurring as the Fed works overtime to control inflation. First, the highest interest rates in the past decade are starting to significantly impact specific markets in private development. And second, the red-hot labor market has started to cool noticeably, if not significantly. These two observations are certainly correlated and are, in fact, the desired effect of U.S. Federal Reserve policy.
Despite these cooling effects in our national economy’s private business sectors, the public infrastructure sector and specific private development segments remain strong, especially in the southeast and south-central United States. The fact is that population growth -- through internal migration and immigration -- is reshaping many markets where we have a significant presence, particularly in Texas, Florida, and North Carolina. And, of course, that’s great for professional services firms like WGI that depend on new construction and expansion to grow our business. That population growth also creates opportunities for our clients – public and private – to capitalize on new infrastructure and real estate development opportunities.
At WGI, we see our overall project backlog continues to increase year-to-date. As we anticipated, our federal and state transportation and infrastructure markets continue to demonstrate resiliency as spending from the Infrastructure Investment and Jobs Act continues apace. Echoing what I reported earlier in the year, our contracted project backlog has never been stronger in the 50+ year history of our firm.
Periods of challenge and uncertainty typically provide opportunities to make the world a better place. Nationally, in just the past 90 days, we have seen devastating wildfires, unprecedented flooding, and the kickoff of our annual hurricane season. These occurrences serve to reinforce the requirement that today’s design professionals and firms must incorporate resiliency and adaptability into the design program ethos for the benefit of our clients, end users, and community stakeholders.
Our markets are dynamic, but resiliency and safety have never been more in focus. Every day, our clients make difficult decisions about where to invest their human and financial capital, and we’re proud and honored to assist them as trusted partners. As an example, WGI’s wholly owned subsidiary, Streamline Technologies, is actively contracting with government agencies to provide our unique software solution to real-time flood forecasting for many thousands of square miles -- and millions of homeowners and businesses. The future is here today, and from a resiliency and safety perspective, we can now predict evacuations, strategic placement of emergency response teams, and other needed protective measures days before severe weather events. It’s just one of the many ways WGI is adapting to the opportunities of our changing world.
At WGI, we remain committed to offering our clients solutions to market challenges with technology-based solutions – as always, we are focused on safety, resiliency, sustainability, and adaptability. Working together, our clients and our associates are creatively transforming how our world is envisioned, designed, and experienced. I’m very proud of the impact that our clients are making in our communities. And I’m incredibly grateful to be working alongside the very dedicated and talented design professionals at WGI.
David Wantman, PE
Chief Executive Officer, WGI
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