May 6, 2008 – Design and construction markets related to environment, infrastructure, and facilities began to slow their rate of growth in 2007, and growth rates are expected to decline still further in 2008, according to the 20^th annual State-of-the-Industry Report delivered by management consultants Farkas Berkowitz & Company to an invitation-only conference of CEOs from leading architectural, engineering, and construction firms.

Designers for transportation, power, water quality, remediation, and facilities in the U.S. enjoyed, in aggregate, a robust growth rate of 12 percent in 2007, down slightly from the phenomenal 15 percent growth rate of 2006. Alan Farkas, Managing Director of Farkas Berkowitz & Company, explained that the volatile power engineering market masked a more significant growth rate decline. He explained, “Excluding power engineering, the aggregate growth rate of the remaining segments in 2007 were half that of 2006, declining from a 14 percent growth rate in 2006 to a 7 percent growth rate last year.”

Farkas Berkowitz & Company forecasts that the five infrastructure markets in aggregate will grow 5 percent in 2008 and 7 percent in 2009. “We expect the current economic slowdown to affect all major markets, but the timing and significance will vary,” said Mr. Farkas. He noted that preliminary estimates of first quarter 2008 Gross Domestic Product (GDP) growth rate was 0.6 percent, unchanged from the 0.6 percent rate of growth in the 4^th quarter of 2007. The slowdown in growth coupled with the housing crisis, rising fuel prices, and the disruption in the municipal bond market will result in a slowing of growth in design markets related to transportation, water quality, and remediation. The slow rates of growth will be partially offset by the still rapidly growing design markets for power and non-residential facilities. Moreover, the U.S.-based design firms doing business abroad will continue to see more robust rates of growth from international projects. Mr. Farkas pointed out, “Longer term, infrastructure needs should bolster strong design and construction markets well into the next decade.”

Transportation, Engineering and Construction

Farkas Berkowitz & Company estimates that the transportation engineering market grew 4 percent to $9.8 billion in 2007. Mr. Farkas noted, “This was the second consecutive year of declining growth rates. We saw the growth rate peak at 12 percent in 2005, decline to 7 percent in 2006, and we expect the rate of growth in this design market to decline further in 2008 and 2009. We look for a 2-3 percent growth rate this year and no growth in 2009.”

Exhibit 1

U.S. Transportation Engineering Market, 2006-2009

($ Billions)

Source: Farkas Berkowitz & Company

Actuals based on ENR Top 500 Design Firm Survey

Mr. Farkas went on to point out that a shrinking highway and bridge market in 2008 and 2009 would offset growing rail, aviation, and ports and harbor segments.

Highway construction increased 7 percent in 2007. According to the U.S. Census Bureau’s annual value of construction put in place, the construction market has increased 30 percent over the three years 2004-2007. However, Mr. Farkas noted, “Unfortunately, construction costs have increased more than 30 percent since 2004. Therefore, real dollar investment in this important asset class actually declined over the three-year period.”

Farkas Berkowitz & Company estimates that the engineering market for highways and bridges will contract by 5 percent in 2008 and contract another 5 percent in 2009. “We have the highway equivalent of ‘the perfect storm.’ We could call it ‘the perfect pile-up.’ A confluence of political and economic forces will subject this market to extraordinary pressure.” The report quotes experts who forecast a $3 - $4 billion deficit in the highway trust fund, which could result in a cut back in obligations of $16 billion in federal FY 2009. The firm forecasts that we will see another significant delay in the re-authorization of the Federal law, now due to expire on September 30, 2009. Meanwhile, high gasoline prices are causing motorists to cut back on driving, resulting in a decline of revenues flowing into state highway trust funds.

Mr. Farkas explained, “Given the growing importance of local and state sources of highway funding, we find that the outlook varies considerably by state and region. We look for strongly growing markets on the West Coast and most of the Southwest.” The report notes that the hottest state market is California, thanks in large part to funding from the self-help counties. The coldest market is Texas, where spending on highway capital improvements is expected to decline from $5 billion in 2006 to less than $3 billion in 2008. Florida and Georgia were also cited as relatively weak markets.

Public-private partnerships and toll roads will be a positive force in the marketplace over the coming years, but neither funding mechanism will have a significant impact this year or next. The firm believes that public-private partnerships, particularly for greenfield projects, will be increasingly favored, and the development of toll roads, especially for arterial highways, will help over time to narrow the funding gap.

Farkas Berkowitz & Company estimates that the transit engineering market grew at an 8-10 percent growth rate in 2007, showing a steady acceleration from an estimated low single digit rate of growth in 2005. The freight rail market seemed to slow for engineers in 2007, but the firm predicts bright long-term prospects. “The cost advantage that railroads have over trucking, with a better than three-to-one fuel efficiency rating, will continue to allow freight rail to broaden its market from one of hauling raw materials to transporting containerized consumer goods.” explained Mr. Farkas.

Turning to the aviation market, construction on airports grew 14 percent in 2007. The U.S. Census Bureau reports that most of this growth is accounted for by terminal construction, while work on runways and taxiways remained virtually unchanged from 2006. The firm estimates that design work for airports increased 5 percent in 2007, equaling the growth rate in 2006. Mr. Farkas reported that firms serving this market expect strong double digit growth in 2009 and 2010. Farkas Berkowitz & Company, however, is projecting a 5-10 percent growth rate this year and next. As Mr. Farkas explained, “With jet fuel costs increasing 70 percent in the last 12 months, the pressure on airfares is too strong to ignore. As airfares increase, we expect passengers to cut back on travel. As passengers cut back on travel, some airport authorities will delay their expansion plans.”

The firm reports that engineers serving ports and harbors enjoyed their fifth consecutive year of growth greater than 10 percent. In 2007 firms benefited from the conduct of due-diligence studies to support a change in terminal ownership, with more terminals now in the hands of international shippers, port operators, and private equity funds. “We look for growth in the engineering market to slow in 2008 to about 5 percent, but then increase in 2009 and beyond as ports, particularly in the Southeast and the Gulf Coast prepare for the widening of the Panama Canal,” said Mr. Farkas.

Power Engineering and Construction

Work on design and construction of coal-fired plants initiated in 2006 produced a phenomenal 57 percent growth rate in engineering design in 2007, according to Farkas Berkowitz & Company. The firm projects that this rate of growth will slow to 10 percent this year and next.

Source: Farks Berkowitz & Company

Actuals based on ENR Top 500 Design Firm Survey

The report reveals that the top five engineering firms are growing at a much faster rate than their smaller competitors. Revenues from international as well as domestic projects enabled the top five, in aggregate, to nearly double their revenues in 2007. Power engineering revenues increased 96 percent for these top five. The next 10 largest engineering firms grew only 6 percent in 2007.

According to the U.S. Census Bureau, construction grew strongly at a 27 percent rate of growth to nearly $50 billion in 2007.

Mr. Farkas noted that in 2004 and 2005 coal plants were staging a comeback, but the outlook for coal plants started to darken in 2006 and it continued darkening in 2007. The firm estimates that 53 coal-fired plants were cancelled or delayed last year. Mr. Farkas noted, “The 24 plants currently in construction will generate growth for engineers and constructors alike this year and next. Of the 15-20 now in the permitting stage, we expect to see only three or four new starts through 2010.” The report points out that natural gas is taking center stage again and will likely be the fuel of choice for new starts over the next five years. Finally, the firm notes that nuclear power is edging closer to a renaissance.

Water Quality Engineering and Construction

According to Farkas Berkowitz & Company, the water quality engineering market grew 6 percent in 2007, breaking a string of at least eight consecutive years of annual growth at 10 percent or better. The firm forecasts that growth will slow further to 3 percent this year and then return to double digit growth in 2009.

Exhibit 3

U.S. Water Quality Engineering Market, 2006-2009

Source: Farkas Berkowitz & Company

Actuals based on ENR Top 500 Design Firm Survey

U.S. Census Bureau estimates construction on water and wastewater plants grew 6 percent in 2007 to $40 billion. These statistics include waste management facilities, as well.

The firm reported that the first signs of a slowdown in the engineering market were seen in mid-2007. Project delays and cancellations have been seen in such Sunbelt states as Florida, Georgia, Arizona, Nevada, and New Mexico. Mr. Farkas pointed out, “As a result of the housing crisis, we saw population growth slow considerably in many of the fastest growing counties in the Sunbelt states. This rather abrupt slow down in population growth not only reduced the need for additional water and wastewater infrastructure, but also significantly impacted those public utilities that rely on hook-up fees as an important source of revenue to fund capital improvements.” He went on to add, “Recent disruptions in the municipal bond market could also be having a chilling effect on water infrastructure projects. The municipal bond market is still adjusting from concerns over the credibility of insurance that guarantees many municipal issues, and this adjustment combined with a large supply of bonds on the market helps to explain the relatively high interest rates that municipal bonds are currently fetching.”

The report suggests that a slowdown in Sunbelt state population growth will also cause the water design-build market to reduce its phenomenal rate of growth from a better than 20 percent growth rate in 2007 to a 10 percent rate in 2008. The report noted that the number of competitors for each design-build procurement is increasing as general contractors begin to flock to this attractive market and engineering firms increasingly gear up to play prime contractor roles.

Water Quality Public-Private Partnerships

Based on a survey recently reported by Public Works Financing magazine, Farkas Berkowitz & Company estimates that the water public private partnership market showed no growth, even in nominal dollars, in 2007. The firm’s analysis of past surveys shows that the number, average duration, and average annual contract value has declined steadily over the last five years.

Exhibit 4

Profile of New Water Public-Private Partnerships, 2002-2007

Source: Farkas Berkowitz & Company

Based on survey conducted by Public Works Financing

“Not surprisingly, major firms in the partnership market continue to diversify their services,” noted Mr. Farkas. As examples, he cited United Water’s acquisition of a water tank services company, Utility Services Company, and OMIs continuing emphasis on comprehensive city services. The report does note that investment in the core business is growing. Mr. Farkas speculated, “Increasing use of membrane technology for desalination and water reclamation could spur more design-build-operate projects and give contract operators some hope.” He went on to note, “The greater use of operationally sensitive membranes combined with the increasing financial burdens shouldered by public utilities could also cause more municipalities to look to private partners to operate their facilities.”

Remediation Consulting and Engineering

The State-of-the-Industry Report estimates that the remediation consulting market declined 1-2 percent in 2007. Moreover, the firm forecasts an additional five percent contraction this year and a flat market in 2009.

Exhibit 5

Remediation Consulting and Engineering Market, 2006-2009

Source: Farkas Berkowitz & Company

Actuals based on ENR Top 500 Design Firm Survey

Farkas Berkowitz & Company found that, as in other markets, larger firms, with international projects, fared far better than those reliant on the domestic market. The top five firms in remediation consulting grew an average of 17 percent, counting revenue from both domestic and international projects, while those not in the top 15, saw their revenues contract by an average of 16 percent.

The firm expects a slower mergers and acquisitions market to reduce both due diligence studies and associated remediation projects in 2008 and 2009. In addition, Mr. Farkas noted, “During 2009, we will be transitioning to a new administration. Even if the White House remains in Republican hands, transition to a new president could slow decision making on remediation projects and cause a lull in the market.” Farkas Berkowitz & Company expects that those remediation consultants serving big oil clients and those with significant permitting practices for energy related projects should avoid seeing much of an impact from the current economic slowdown.

Based on interviews with major remediation contractors to the Department of Defense (DOD), the firm estimates that the DOD remediation market contracted again in 2007 after shrinking in 2005 and 2006. Overall, many DOD remediation contractors saw revenues decline by as much as 50 percent during the three-year period. “Most major contractors believe that the DOD remediation market is entering the end-game stage.” He went on to point out, “The Army and Air Force are centralizing procurement in a manner that would appear to place a greater emphasis on price and a declining emphasis on past performance and strong client relationships.”

The report notes major pending procurements at the Department of Energy (DOE), where major firms continue to fight for a share of the over $5 billion in environmental management appropriations.

Facilities Engineering and Construction

Alan Farkas announced that the firm was initiating analysis of the broad facilities market in an effort to make its CEO conference more relevant to CEOs from architecture and construction companies.

Farkas Berkowitz & Company estimates that the facilities engineering market grew at a 14 percent rate in 2007, continuing a record of strong growth rates going back to at least 2005. The firm expects the facilities market, which is largely non-residential, to continue at a double digit rate of growth in 2008 and 2009.

Exhibit 6

Facilities Design Market, 2006-2009

Source: Farkas Berkowitz & Company

Actuals based on ENR Top 500 Design Firm Survey

Mr. Farkas noted that construction rates of growth in 2007 were as strong as architectural and engineering growth rates. According to the U.S. Census Bureau, construction growth rates were in the 13-19 percent range for such important segments as health care, education, and office buildings.

In its report Farkas Berkowitz & Company noted two major trends cutting across all facilities market segments, sustainable design and the use of building information modeling (BIM). “Virtually all owners, regardless of market segment, now want some level of sustainable design,” said Mr. Farkas, “The utilization of BIM is not yet so universal.” However, Mr. Farkas explained, “BIM is reshaping the designer-contractor relationship from one that was traditionally arms length or even adversarial to one that places a premium on collaboration.” The report goes on to explain that BIM is being embraced by designers and contractors working on complex structures such as health care and manufacturing facilities. It has yet to make much of an impact in the education

market or the private office building market. Nevertheless, Mr. Farkas points out, “By providing a platform for collaboration among designer, contractor, owner, and other parties to the building process, BIM holds the potential for life cycle cost optimization and creating a partnership among key players for the life of a facility.”

In discussing the facilities outlook, the report points out the flood of appropriations for the DOD’s Base Realignment and Closure (BRAC) program, which now totals $16 billion, covering federal FY2006-2008. The report describes the differing approaches used by the Army Corps of Engineers and NAVFAC for the Navy. The Corps is mandating the use of BIM; the Navy has not yet made a decision to do so. The Corps is relying on design standardization, with district offices specializing in standard designs and construction oversight for certain types of facilities. Contracts are being let by these standardization centers and on a regional basis. The Navy is letting base-specific contracts. The report explains that major construction firms thus far have been the big winners. They are wary over the design-build format of all BRAC work, particularly for the Corps.

In terms of the outlook for the civilian facilities market, Farkas Berkowitz & Company expects that the office building segment could see some slowing of design growth in 2009-2010. In the education market, a slowing of the growth rate in 2009-2010 could occur, particularly for K -12, community colleges, and public universities. But the long-term outlook for the education segment is strong. Finally, the firm expects the health care facilities market to be unaffected by the economic slowdown.

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Farkas Berkowitz & Company is a management consulting firm serving companies that provide design, construction, and operational services relating to infrastructure, environmental protection, and facilities. Established in 1983, the firm assists clients with strategy, organizational development, and mergers and acquisitions. Inquires should be addressed to Chris Frangione at 202-833-7530 or frangione@farkasberkowitz.com or visit their website: www.farkasberkowitz.com.