ENGINEERS

First the good news. ACE, the Association of Consulting Engineers, reports that for the past four successive quarters, a majority of consultants have enjoyed an increase in UK workload. This has not happened for a long time.

Now the bad news: gross fees for the same period (to autumn 1994) are down - by 7%.

The explanation is as ominous as it is simple. Competition is cutthroat, margins have been slashed, and consultants now run unacceptable risks as a matter of routine.

Add to this the current downturn in two of engineering's staple UK markets, water, and highways and you have a pretty grim picture. Few in the profession doubt that several more consultants will follow Travers Morgan to the wall before the situation improves. Eric Mansfield, business affairs spokesman at ACE, says: 'The hard truth is that there is a small pool of work and an oversupply of engineers. Firms are putting in suicidal, below-cost bids that cannot satisfy the client. Yet clients are themselves short of money and find it very hard to accept anything other than the lowest bid.' To further increase the misery of hard up engineers, clients continue to exploit the low-bid market by inviting tenders from large numbers of firms.

Sydney Lenssen, a director of Pell Frischmann, explains what happened when he inquired recently about selection procedure on a job with a capital value of œ30 million. 'I was told that a shortlist of five was to be drawn up from 40 prequalifying firms. Those five were to be interviewed and two or three firms selected. They would have to return for a further interview before a final appointment would be made.'

He adds that clients know consultants are prepared to risk considerable time and money in tendering - even when the odds are heavily against a contract win. Lenssen believes many firms now operate an unrealistic balance between risk and reward - a view which is now a consensus within the consulting profession. Having battled through the recession, it seems many firms will not survive a recovery.

In a relatively secure position is Mott MacDonald. It is one of the UK's largest firms, enjoying perhaps a 10% share of the UK consulting market. It also has a good spread of expertise which was reinforced last year by the acquisition of power and communications specialist Ewbank Preece.

Mott MacDonald has the capacity to exploit engineering opportunities in virtually any sub-sector of the home market - so it is a measure of how tight the market has become when group director Peter Chesworth admits he is still 'not terribly optimistic' about the UK.

'It's getting harder to improve our slice of the domestic market,' he said. 'There are not too many new areas left for us to go into.' Given the immediate prospects for UK workload, that is a serious situation.

Said Chesworth: 'We have already been affected by recent reviews of the roads programme. For instance, we were involved in both the Newbury and the Doncaster bypass schemes, but these have now been postponed.'

Water spending is continuing to slow down. 'Despite a slight increase in the building sector, overall UK workload is now almost static. And as highways and water spending run down further, it could be about to decline.'

The bleak condition of the home market has driven many consultants to search abroad for sunnier economic climes. There has been some success, with UK firms currently involved in some œ66 billion (capital cost) of work worldwide.

Chesworth says overseas markets now account for around 60% of Mott's earnings - up from around 40% three years ago. Similarly, Halcrow has increased its overseas share from 30% to 50%, and mighty Maunsell now receives just 35% of total earnings from the whole of Europe.

Commenting on the overseas picture, chief executive of Maunsell in UK and Europe, Peter Jarvis, said: 'Europe is quiet at the moment, but there's growth in South East Asia, and China in particular is very strong. Australasia also now seems to be seeing some real recovery.'

He admits that certain markets permit a profitability now unusual in the UK. But as if to soothe jealous rivals he added: 'It is quite possible to go for a job in Asia and find tender lists every bit as long as in the UK and competition just as fierce.'

Despite more widespread international competition, there is no doubt that foreign work is now a mainstay of those UK firms which can make it so. It cannot, however, provide a lifeline for every British engineer.

As Chesworth points out: 'Margins in Asia might be wider than here, but the culture is different and the risks are greater. You never know when something is going to suddenly turn and bite you.'

And as well as the natural increase in risks associated with working away from home, the political risks run by contractors and consultants in Malaysia, Hong Kong and China have become well known in recent years.

For companies without a strong tradition of extensive work abroad, such risks loom especially large.

Pell Frischmann's Lenssen said: 'We have increased our proportion of earnings from overseas to around 5%. I wish we could do more, but we do not find it easy. It costs around œ150,000 or more per annum to send someone to a new country - and it can easily be two or three years before you get any work out of it.

'It is an enormous investment and the returns are risky.' Unfortunately, the same can be said of the new opportunities now arising from one of the few bright spots on the domestic scene - the Government's Private Finance Initiative (PFI).

Consultants have teamed up with contractors and banks in consortia to bid for such schemes as the Channel Tunnel Rain Link and DBFO (design build finance and operate) roads. The size of such projects means they could compensate for large amounts of business lost through cuts in public spending, and so firms which succeed in this area can look forward to a significantly rosier future than their less fortunate colleagues.

However consultants have signed up for PFI under very different terms. Maunsell, for example, is determined not to take any unnecessary risks. Jarvis said: 'We have given this a lot of thought, and decided to remain advisers, rather than equity owners. We are self-owned, and have to consider carefully the risks and call on capital involved.'

Given the full consortia members are expected to participate in the financing of projects costing up to œ1 billion, perhaps Jarvis's caution is understandable. However most other consultants, Mott among them, hope to take an equity stake in a successful PFI consortium. The revenue towards rewards from taking such a risk could be considerable, and the wish of engineers to see a decent return for once is equally understandable.

Strongly placed in this high stakes investment game is consultant Acer, owned by Welsh Water. At interim results in September last year Acer reported an operating loss of œ2.8 million. But chief executive Stuart Doughty plans to use the financial strength of the parent utility to reverse Acer's fortunes. He said: 'It puts us in a very beneficial position. We should be able to operate at slimmer margins to our competitors who do not have the same ability to invest. PFI is a great opportunity for us and we intend to make the most of it.'

One might expect such a bullish stance from his rival to perturb Jarvis - or at least raise the concern that Maunsell might be left out if PFI proves as profitable as some hope. But not a bit of it. In fact Jarvis is promulgating a plan whereby Maunsell shares the profits without directly sharing in equity or risk.

He said: 'Suppose our idea for a DBFO road saves the consortium we are advising œ1 million in construction - or œ1 million per annum in running costs. It is reasonable for us to ask for some recognition of that. We are entitled to be rewarded.'

Clearly Maunsell is confident, believing that consortia bidding for the largest schemes will be unable to ignore its unrivalled capacity. The corollary to this is that lesser firms will have to buy their way into consortia - exposing themselves to risks they may be less able to make.

So it is the largest names, with the money and resources to take on new opportunities, which look likely winners in the coming shake-out. As in the world of contracting, the professional firms of the future will be fewer, bigger, and more commercially astute.