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New AIA Economic Indicator Measures Value of Design Contracts
Fluctuations in the value of design contracts can predict changes in billings
A new economic indicator developed by AIA Chief Economist Kermit Baker, Ph.D., Hon. AIA, and the AIA’s economic research staff will be able to extend this predictive time span back by half a year by measuring variations in the value of signed design contracts. From design contracts, to architecture firm billings, to construction spending, the ABI is now able to trace the path of money as it flows into the design and construction economy from the earlier conceptions of architecture and design, until it results in built work. This new indicator was recently unveiled in the AIA economic research white paper “Designing the Construction Future: Renewing the Performance and Extending the Applications of the AIA’s Architecture Billings Index.”
Much as construction contract awards provide an indication of future construction spending, design contracts are expected to provide a similar window into future billings and design activity, and thus function as an early indicator of subsequent construction contract awards. Trends in the dollar volume of design contracts, therefore, can fill an important gap between more subjective trends in project inquiries and actual design billings.
In addition to collecting data on architecture firm billings from the ABI survey panel every month, panelists have also been asked about inquiries for new work (e.g., bids, RFPs, solicitations, invitations for interviews). As with billings, they are asked to indicate whether those inquiries have increased, decreased, or remained the same from the previous month. However, because reporting trends in new project inquiries are rather subjective on the part of the panelists, the AIA has been investigating a more rigorous way of estimating future levels of billings activity.
Responses by ABI panelists indicated that, in their view, the most accurate predictor of future design workloads would be the monthly change in the dollar value of new design contracts—agreements between the client and architecture firm on the scope of and compensation for design activity. In a recent AIA survey, architecture firms indicated that 88 percent of their projects have a signed design contract, and that nearly all billable work for a project is typically completed after that contract is signed. However, in an effort to include projects with more informal arrangements, firms are asked to include all new projects in which they have a letter of agreement or a formal authorization to proceed—effectively anything that provides assurance that a firm can bill a client for future design services.
The AIA began collecting data on design contracts in October 2010 and now has three years of data—enough to seasonally adjust the index, although it remains too early to determine the exact relationship between design contracts and subsequent architecture billings. However, through visual analysis it does appear that when firms report an increase in design contracts, an increase in firm billings follows within the next six months or so. In the future, this new indicator should prove valuable by providing even earlier insight into future design and construction work.
Read the new AIA Economic Research white paper “Designing the Construction Future: Renewing the Performance and Extending the Applications of the AIA’s Architecture Billings Index”