p a g e 1

When architectural and engineering firms provide certain services to the government, they are allowed to bill for a portion of their overhead costs related to those services.

Firms calculate the amount of overhead they can charge to their contracts by developing an “overhead rate” that is a percentage of their direct labor costs. The overhead rate can include certain indirect labor and general and administrative expenses such as rent, utilities, certain insurance costs, various recruiting, training, and education expenses, and other costs of doing business.

Calculating overhead rates can be tricky. Charge too much, and firms risk payment delays and even penalties; charge too little, and firms risk leaving money on the table.

With scarce federal budget dollars, government agencies are managing costs closely. As a result, overhead audits are becoming more common as agencies place greater attention on how overhead rates are calculated to verify that government contractors charge only what regulations allow.

To improve the process of determining supportable overhead rates, architectural and engineering firms should understand which expenses they can factor into their overhead rates and which they cannot, capture those costs throughout the year, and be able to document them in the event they are subject to an overhead audit.

The Federal Acquisition RegulationThe primary ruling source for government spending is the Federal Acquisition Regulation (FAR).1 Established in 1984, FAR provides thousands of pages of rules that most federal agencies follow when procuring goods and services and is supplemented by additional rules for certain agency-specific needs. In addition, many state and local governments base their procurement rules on FAR. The primary area of FAR that government contractors need to understand is Section 31, which specifically outlines allowable versus non-allowable overhead costs.

Examples of overhead costs permitted or forbidden by FAR include:

▪ ESOP costs. Costs of Employee Stock Ownership Plans (ESOPs) are generally allowable, however are subject to certain conditions in order to determine the portion that can be claimed as allowable.

▪ Product or service information. Advertising generally is not allowed to be included in the overhead rate, but a printed marketing brochure with product or service information could be allowed.

FALL 2017

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Providing financial advisory solutions to middle market and large cap companies

THIS ISSUE

Overhead Rates and Government Contracts, p. 1-2

M&A Activity, p. 3-7

ACEC Fall Conference, p. 7 Chartwell AC Index Performance, p. 8-10

Recent & Upcoming Events, p. 10

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W W W . C H A R T W E L L F A . C O M

Overhead Rates and Government Contracts: What Architectural and Engineering Firms Need to Know

Contributed By:

Jonathan K. Zeiler, CPA, CCIFP, and Amy K. Holmes, CPA

Continued on page 2 >>

p a g e 2

OVERHEAD RATES AND GOVERNMENT CONTRACTS (CONT.)

1 Acquisition Central, Federal Acquisition Regulation, www.acquisition.gov/far/

Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction. © 2017 Crowe Horwath LLP

▪ Entertainment. Company policy may allow certain client entertainment costs to be reimbursed, but FAR may not. It is important to have documentation that supports the purpose of the costs along with sufficient detail. A credit-card statement might not be enough for FAR reporting purposes.

▪ Transportation and travel. These costs generally are allowable, but documentation is key to supporting the expense.

▪ Bonuses and incentive compensation. FAR generally allows these costs, but there are program documentation requirements and often ceilings on the amounts allowed.

General Ledger Control ChallengesOne of the biggest challenges that architectural and engineering firms face when determining their overhead rates is lack of general ledger control.

It is not uncommon for professional services firms to work on both government and private projects. As a result, professionals and staff who work on both types of projects might not have all the special codes or the general ledger accounts needed to capture the allowable expenses required to calculate the overhead rate for their federal government projects. Inconsistent or missing documentation can create problems at year-end, forcing firms to spend many hours poring over timesheets, expense reports, and general ledger accounts so that expenses can be reclassified into their proper categories.

Other obstacles can arise with information technology (IT) system limitations that make it difficult for employees to report their time and expenses according to the required categories. If the IT system is not initially set up to track costs as either direct or indirect and allowable or non-allowable, reporting under FAR principles cannot be accomplished on a continuous basis.

Establish accounts for allowable and non-allowable expenses. Professional services firms should set up accounts in their time and billing systems and general ledgers to segregate non-allowable expenses from those that are allowed. Many times this is accomplished simply by adding additional suffix numbers to existing accounts. In addition to providing a clear method of tracking these two major classes of expenses, these accounts will help demonstrate to any government or third-party auditors an understanding of FAR principles as well as the intent to isolate and exclude non-allowables from claimed overhead.

Educate firm principals and staff on proper coding. Overhead rates are only as accurate as the codes that employees enter into time and billing systems and general ledger accounts. Consequently, architectural and engineering firms need to educate their staff on the importance of proper coding and establish corresponding policies and procedures.

Educating staff and establishing clear coding procedures will help make sure that costs are charged appropriately as either direct or indirect costs and as either allowable or non-allowable. Having strong internal controls to properly segregate direct and indirect expenses and identify allowable and nonallowable expenses is critical to an efficient and supportable overhead calculation process.

While it is certainly better to correct any coding errors before determining overhead rates, frequent time transfers among account classifications are red flags that might increase audit risk. Proper coding of billable hours and expenses can help reduce this risk.

Review overhead reporting throughout the year. Unfortunately, many architectural and engineering firms wait until the end of the year to calculate their overhead rates. Monitoring overhead expenses should be a monthly – if not a weekly – activity in order to identify and correct costs that might be miscoded and verify that costs are supported with appropriate receipts and other documentation. As part of this approach, firms should:

▪ Audit allowable accounts for miscoding throughout the year.

▪ Verify that costs submitted on expense reports are appropriately coded in accordance with FAR.

▪ Monitor the overhead rate for consistency throughout the year. Set expectations for the rate and investigate if the rate fluctuates outside of expectations. In addition, fluctuations in overhead rates from year to year can also be considered a red flag and increase the risk of an audit.

A Profitable Business DecisionDiversifying into the federal government sector can be a profitable business decision for architectural and engineering firms, especially at a time when economic pressures have diminished some opportunities among private clients.

When launching into or expanding government work, however, professional services firms need to understand how to determine appropriate overhead rates, manage the processes to capture the necessary information, and monitor those processes throughout the year.

Contact InformationJon Zeiler is a partner with Crowe Horwath LLP in the Oak Brook, Illinois office. He can be reached at 630.575.4237 or jon.zeiler@crowehorwath.com.

Amy Holmes is an audit senior manager with Crowe Horwath LLP in the Oak Brook, Illinois office. She can be reached at 630.575.4209 or amy.holmes@crowehorwath.com.

p a g e 3

MERGER & ACQUISITION ACTIVITY – Q1 & Q2 2017

Announce/Close Date

Acquirer Target Target Headquarters Location Deal Notes

1/11/2017 SourceOne Energy, Inc. Enovity, Inc. - Building commissioning and energy services

San Francisco, California Veolia North America, LLC acquired Enovity, Inc. on January 11, 2017.

4/1/2017 AXIS/GFA Architecture + Design

Gene Fong Associates - Engineering and scientific research services

Westwood, California AXIS Architecture + Design acquired Gene Fong Associates on April 1, 2017. Under the transaction, the new merged entityis known as AXIS/GFA Architecture + Design. Staff complements at the former AXIS office in San Francisco and the former GFA office in Los Angeles remain unchanged following the merger.

4/28/2017 Stantec Inc. Inventrix Engineering, Inc. - Mechanical engineering

Seattle, Washington Stantec Inc. acquired assets and liabilities of Inventrix Engineering, Inc. on April 28, 2017. The acquisition was made for cash consideration. In addition, Stantec announced the completion of the divestiture of Innovyze to EQT Mid Market US fund. Inventrix’s 22 staff joined Stantec.

5/1/2017 Eppstein Uhen Architects, Inc.

Burkettdesign (nka:BurkettEUA) - Architectural services

Denver, Colorado Eppstein Uhen Architects, Inc. acquired Burkettdesign on May 1, 2017. Burkettdesign changed its name to BurkettEUA, and its entire 27 person staff joined Eppstein Uhen Architects. Burkett's leadership team, including owner Rick Burkett and principals, Catherine Quintero, Michele Ponicsan, Gillian Hallock Johnson and Kitty Yuen, became shareholders in Eppstein Uhen Architects.

5/4/2017 NV5 Global, Inc. Holdrege & Kull, Inc. - Environmental engineering - Reported Revenue = $6.0 million

Nevada City, California NV5 Global, Inc. acquired Holdrege & Kull, Inc. on May 4, 2017. The deal was executed as an all-cash transaction. In a related transaction, NV5 Global acquired Lochrane Engineering, Inc. In another related transaction, NV5 Global signed an agreement to acquire remaining 60% stake in Energenz LLC.

6/5/2017 TestAmerica Laboratories, Inc.

CH2M Applied Sciences Laboratory - Environmental testing services

Corvallis, Oregon TestAmerica Laboratories, Inc. acquired the assets of CH2M Applied Sciences Laboratory on June 5, 2017. The existing CH2M Applied Sciences Laboratory laboratory staff, including the Laboratory Director, senior scientists, project managers and chemists continue to serve their clients on a business as usual basis as part of the TestAmerica network.

6/22/2017 Stantec Inc. RNL Design, Inc. - Urban design services

Denver, Colorado Stantec Inc. agreed to acquire RNL Design, Inc. on June 22, 2017.

WEST

SOUTHWESTAnnounce/Close Date

Acquirer Target Target Headquarters Location Deal Notes

1/23/2017 Al Ross Group LLC Windrose Land Services, Inc. - Residential and commercial land surveying services

Houston, Texas Al Ross Group LLC acquired Windrose Land Services, Inc. in January 2017.

1/23/2017 Al Ross Group LLC Arthur Surveying Co., L.P. - Residential and commercial land surveying services

Lewisville, Texas Al Ross acquired Arthur Surveying Co., L.P. in January 2017. Under the terms, Arthur Surveying operates separately from Al Ross.

2/28/2017 JQ Engineering LLP Baldauf Herrin & Associates, Inc.- Structural engineering services

Dallas, Texas JQ Engineering LLP acquired Baldauf Herrin & Associates, Inc. on February 28, 2017. Pursuant to the transaction, Tom Herrin and Steve Baldauf joined JQ as principals and office out of JQ’s corporate headquarters.

3/1/2017 Luna Middleman Architects

Mdn Architects, Inc. - Architectural design services

San Antonio, Texas Luna Architecture + Design acquired Mdn Architects on March 1, 2017. Both the firms merged to form Luna Middleman Architects. The newly formed Luna Middleman Architects has a team of 23 staff members with expertise in architecture, urban and master planning, interior design, and visualization.

p a g e 4

MERGER & ACQUISITION ACTIVITY – Q1 & Q2 2017 (CONT.)

MIDWESTAnnounce/Close Date

Acquirer Target Target Headquarters Location Deal Notes

1/11/2017 Ecolab Inc. Abednego Environmental Services, LLC - Waste water treatment systems and purified water systems operations and management

Novi, Michigan Ecolab Inc. acquired Abednego Environmental Services, LLC on January 11, 2017. After the completion of transaction, Abednego became part of Ecolab’s Nalco Water business operations.

2/23/2017 POWER Engineers, Incorporated

Sega Inc. - Engineering and technical services company, provides design, planning, procurement, training, and field services

Overland Park, Kansas POWER Engineers, Incorporated entered into a letter of intent to acquire Sega Inc. on February 23, 2017.

3/1/2017 Zachry Holdings, Inc. Ambitech Engineering Corporation - Engineering, construction, and project management services

Downers Grove, Illinois Zachry Holdings, Inc. acquired Ambitech Engineering Corporation on March 1, 2017.

4/3/2017 Colliers International Group Inc.

Welsh Companies, LLC - Architecture and interior design services

Minnetonka, Minnesota Colliers International Group Inc. acquired Welsh Companies, LLC on April 3, 2017. As part of the deal, Colliers International Group Inc. acquired the brokerage, property management, facilities, and architecture divisions of Welsh Companies, LLC.

4/14/2017 NV5 Global, Inc. Bock & Clark Corporation - Commercial real estate survey services - Reported Revenue = $39.0 million - Reported Revenue Multiple = 1.08x

Akron, Ohio NV5 Global, Inc. acquired Bock & Clark Corporation for $42 million on April 14, 2017. The consideration was paid fully in cash with the exception of restricted stock granted to key employees and was subject to customary closing working capital adjustments. Bock & Clark Corporation has eight offices in the U.S.

6/2/2017 Wendel WD Architecture, Engineering, Surveying & Landscape Architecture, PC

Architectural Design Group, Inc. - Architecture, engineering, and surveying services

Peoria, Illinois Wendel WD Architecture, Engineering, Surveying & Landscape Architecture, PC acquired Architectural Design Group, Inc. on June 2, 2017. Architectural Design Group principals Steve Gausman, David Kimball, David Cihasky, and 22 staff members joined Wendel post completion.

6/6/2017 NV5 Global, Inc. Richard D. Kimball Company, Inc. - HVAC, electrical, plumbing, fire protection, technology design, and other mechanical engineering services - Reported Revenue = $33.0 million

Hudsonville, Michigan NV5 Global, Inc. acquired Richard D. Kimball Company, Inc. on June 6, 2017. The consideration will be paid in cash and common stock of NV5 Global.

NORTHEASTAnnounce/Close Date

Acquirer Target Target Headquarters Location Deal Notes

1/12/2017 Loureiro Engineering Associates, Inc.

Dicesare Bentley Engineers Inc - Civil engineering services

Groton, Connecticut Loureiro Engineering Associates, Inc. acquired assets of DiCesare-Bentley Engineers, Inc. on January 12, 2017.

2/2/2017 Christopher Consultants Ltd.

Paciulli, Simmons & Associates, Ltd. - Engineering consulting services

Leesburg, Virginia Christopher Consultants Ltd. acquired Paciulli, Simmons & Associates, Ltd. on February 2, 2017. Paciulli, Simmons & Associates, Ltd. became a wholly-owned subsidiary of Christopher Consultants Ltd. Paciulli, Simmons & Associates' President and CEO, Joe Paciulli, LS continues to head their management team.

2/9/2017 Collecte Localisation Satellites SA

Woods Hole Group Inc. - Environmental, scientific, and engineering planning and consulting services

East Falmouth, Massachusetts Collecte Localisation Satellites SA acquired Woods Hole Group Inc. on February 9, 2017.

3/15/2017 R.G. Vanderweil Engineers, LLP

The Procz Group, Inc. - Mechanical, electrical, and engineering services

Langhorne, Pennsylvania R.G. Vanderweil Engineers, LLP acquired The Procz Group Inc. on March 15, 2017. The founders of The Procz Group became principals at Vanderweil and are part of the overall healthcare leadership team for the firm.

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MERGER & ACQUISITION ACTIVITY – Q1 & Q2 2017 (CONT.)

NORTHEAST (CONT.)

Announce/Close Date

Acquirer Target Target Headquarters Location Deal Notes

3/31/2017 New Mountain Capital, LLC; New Mountain Partners IV, L.P.

TRC Companies, Inc. - Engineering, consulting, and construction management services - Reported Revenue = $521.0 million - Reported EBITDA = $44.9 million - Reported Enterprise Value = $653.9 million - Reported Revenue Multiple = 1.26x

Windsor, Connecticut New Mountain Partners IV, L.P. managed by New Mountain Capital, LLC entered into a definitive merger agreement to acquire TRC Companies, Inc. from The Clark Estates, Inc. and other shareholders for approximately $600 million. Under the terms, New Mountain Partners paid $17.55 for each share of TRC common stock in an all cash transaction. New Mountain operates TRC as a standalone business operation with the current management team remaining in place.

3/31/2017 Hatch Ltd. Chester Engineers, Inc. - Architecture and design services

Moon Township, Pennsylvania Hatch Ltd. acquired Chester Engineers, Inc. on March 31, 2017. Pursuant to the transaction, Chester Engineers merged with Hatch Ltd. to form Hatch Chester.

6/1/2017 NELSON & Associates Interior Design and Space Planning, Inc.

KA Architecture and Cope Linder Architects - Architecture services

Cleveland, Ohio & Philadelphia, Pennsylvania

NELSON & Associates Interior Design and Space Planning, Inc. acquired KA Architecture and Cope Linder Architects on June 1, 2017.

6/9/2017 McGoey, Hauser & Edsall Consulting Engineers, D.P.C.

Shute Engineering, PLLC - Mechanical engineering services including electrical, plumbing, and fire protection services

Goshen, New York McGoey, Hauser & Edsall Consulting Engineers, D.P.C. acquired Shute Engineering Pllc. Lyle R. Shute P.E., Founder of Shute Engineering joined McGoey, Hauser & Edsall Consulting Engineers, D.P.C. as a Principal and manages the Mechanical, Electrical, and Plumbing Engineering department.

6/21/2017 Koontz Bryant, P.C. (nka:Koontz Bryant Johnson Williams)

Geo-Solutions Inc. - Geotechnical environmental and civil engineering solutions

New Kensington, Pennsylvania Koontz Bryant, P.C. acquired Geo-Solutions Inc. Under the terms of the agreement, Koontz-Bryant P.C., Geo-Solutions Inc., and Willmark Engineering PLC were merged to form a new company, Koontz Bryant Johnson Williams.

6/21/2017 Koontz Bryant, P.C. (nka:Koontz Bryant Johnson Williams)

Willmark Engineering, PLC - Civil engineering services to the commercial and industrial market sectors

Ashland, Virginia Koontz Bryant, P.C. acquired Willmark Engineering, PLC. Under the terms of the agreement, Koontz-Bryant P.C., Geo-Solutions Inc., and Willmark Engineering PLC were merged to form a new company, Koontz Bryant Johnson Williams.

SOUTHEASTAnnounce/Close Date

Acquirer Target Target Headquarters Location Deal Notes

1/10/2017 Mcgill Associates, P.A. Compass Pointe Engineering, PA - Civil and environmental engineering services

Shallotte, North Carolina Mcgill Associates, P.A. acquired Compass Pointe Engineering, PA on January 10, 2017.

2/28/2017 Veritas Capital Chicago Bridge & Iron Company N.V., Capital Services Business - Environmental and redemption services - Reported Revenue = $2.0 billion - Reported Enterprise Value = $755.0 million - Reported Revenue Multiple = 0.38x

Baton Rouge, Louisiana Veritas Capital Fund Management, LLC through Veritas Capital Fund V, L.P. and Veritas Capital Fund VI signed a definitive agreement to acquire CB&I Government Solutions, Inc. from The Shaw Group Inc. Upon closing, Capital Services business will be renamed and will operate as an independent company.

3/13/2017 Draper Aden Associates, Inc.

Solutions-IES, Inc. - Environmental engineering services

Raleigh, North Carolina Draper Aden Associates, Inc. acquired Solutions-IES, Inc. on March 13, 2017. Solutions-IES operates as a division of Draper Aden Associates and is known as Solutions-IES, a Division of Draper Aden Associates. 18 team members from Solutions-IES joined Draper Aden Associates.

3/31/2017 Bennett & Pless, Inc. KingGuinn Associates, PA - Structural engineering

Charlotte, North Carolina Bennett & Pless, Inc. acquired King Guinn Associates on March 31, 2017. Post-acquisition, King Guinn keeps its name. The nine employees at King Guinn are now employees of Bennett & Pless.

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MERGER & ACQUISITION ACTIVITY – Q1 & Q2 2017 (CONT.)

SOUTHEAST (CONT.)

Announce/Close Date

Acquirer Target Target Headquarters Location Deal Notes

4/17/2017 The Winslow Orcutt Partnership

Street Dixon Rick Architecture, PLC - Architecture and commercial real estate services

Nashville, Tennessee The Winslow Orcutt Partnership acquired Street Dixon Rick Architecture, PLC on April 17, 2017. Street Dixon Rick now uses the Orcutt | Winslow name.

5/1/2017 NV5 Global, Inc. Lochrane Engineering, Inc. - Civil engineering and survey services - Reported Revenue = $6.5 million - Reported Revenue Multiple = 0.76x

Orlando, Florida NV5 Global, Inc. acquired Lochrane Engineering Incorporated for $4.9 million. Under the terms of the agreement, NV5 Global, Inc. paid with a combination of cash at closing and future note payments.

5/2/2017 Kain Capital King Engineering Associates, Inc. - Engineering services

Tampa, Florida Kain Capital acquired a majority stake in King Engineering Associates, Inc.

5/12/2017 Shanghai Safbon Water Service Co., Ltd.

Doosan Hydro Technology, Inc. - Engineered water and water treatment plants

Tampa, Florida Shanghai Safbon Water Service Co.,Ltd. agreed to acquire Doosan Hydro Technology, Inc. for $7.4 million on May 12, 2017.

5/22/2017 Vanasse Hangen Brustlin, Inc.

McGee Partners, Inc. - Civil engineering consulting

Atlanta, Georgia Vanasse Hangen Brustlin, Inc. acquired McGee Partners, Inc. on May 22, 2017. The two firms consolidated their Atlanta teams in a new location. The Buford team remains in its current location.

6/26/2017 Wantman Group, Inc. Carl Walker, Inc. (nka:Carl Walker, a division of WGI) - Structural engineering and consulting services

West Palm Beach, Florida Wantman Group, Inc. agreed to acquire Carl Walker, Inc. on June 26, 2017. The Carl Walker name is integrated with WGI, operating as Carl Walker, a division of WGI. Gary Cudney, President and CEO, and all key Carl Walker principals and associates continue in their roles. The transaction increased the company by 60 employees and added new offices in Michigan, Illinois, Indiana, North Carolina, and Texas.

INTERNATIONALAnnounce/Close Date

Acquirer Target Target Headquarters Location Deal Notes

3/13/2017 John Wood Group PLC Amec Foster Wheeler plc - Engineering consultancy, project management, operations and construction services - Reported Revenue = $6.7 Billion - Reported EBITDA = $381.4 Million - Reported Enterprise Value = $3.7 Billion - Reported Revenue Multiple = 0.55x - Reported EBITDA Multiple = 9.7x

London, England John Wood Group plc entered into an agreement to acquire Amec Foster Wheeler plc on March 13, 2017. Upon completion of the transaction, Amec shareholders will own 44% of the share capital of the combined group. Robin Watson and David Kemp, currently CEO and CFO of Wood Group, respectively, will continue as CEO and CFO of the combined group, while Ian Marchant will continue as Chairman. Four members of the Amec Board will join the Board of the combined group upon completion of the combination as Non-Executive Directors, with Roy Franklin joining as Deputy Chairman and Senior Independent Director.

4/3/2017 SNC-Lavalin Group Inc. WS Atkins plc - Design, engineering , and project management services - Reported Revenue = $2.5 Billion - Reported EBITDA = $218.9 Million - Reported Revenue Multiple = 1.11x

Epsom, United Kingdom SNC-Lavalin Group Inc. made an offer to acquire WS Atkins plc for £2.2 billion. SNC-Lavalin offered £20.8 per WS Atkins' share. The combined entity will continue to have its head office in Montreal, Canada.

4/4/2017 Minecorp Energy Ltd. BOE Oil Tools Inc. - Engineering services to the oil and gas industry - Reported Enterprise Value = $747,000

Calgary, Alberta Minecorp Energy Ltd. entered into a letter of intent to acquire 70% stake in BOE Oil Tools Inc.

Source Data Provided by Capital IQ as of 8/31/2017

p a g e 7

MERGER & ACQUISITION ACTIVITY – CHARTWELL COMMENTARY

4441

31

2427

29

39 38

25

37

4642

29

17

28

36

26 26

1922

0

5

10

15

20

25

30

35

40

45

50

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

(# o

f tra

nsac

tions

)

2012 2013 2014 2015 2016 2017

M&A Activity: Engineering, Architectural, and Surveying Services Industry {And the consolidation continues…albeit at a somewhat slower pace, the market continues to be very active. NV5

is doing its part, notching five acquisitions during the first six months of 2017. However, it’s the “mega mergers” that have grabbed most of the headlines of late. It’s been quite a run these past few years. Going back to Genivar’s acquisition of WSP in 2012, there have been at least 11 acquisitions of firms with revenue in excess of $1.0 billion. The most recent, of course, was Jacob’s announced purchase of CH2M in August. In addition, we have seen SNC-Lavalin’s acquisition of WS Atkins, Veritas Capital’s acquisition of Chicago Bridge and Iron, and Wood Group’s announced takeover of AMEC during the first six months of 2017, not to mention New Mountain Capital’s acquisition of TRC ($520 million in revenue). That’s five deals with target revenue in excess of $500 million so far this year!

A trend is clearly emerging…but not just the obvious one. Two of these targets were purchased by private equity groups, while a third (CH2M) involved a private equity seller in Apollo Group, which purchased a $300 million stake in the firm in 2015. While the industry has long been neglected by private equity, there appears to be a growing appetite for investment in the space given the lower risk profiles of professional services firms. Because of the ability to flex staff to meet workload fluctuations, AE firms seldom lose money over an extended period and almost never file for bankruptcy. Coupled with aging infrastructure worldwide (and renewed confidence in a domestic infrastructure funding package), there is significant optimism in the continued stability and future growth prospects of the industry.

MONDAY, OCTOBER 16 - CFO COUNCIL SESSIONS

Chartwell is proud to be a Gold Sponsor of the 2017 ACEC Fall Conference & the Anchor Sponsor of

the CFO Council’s Finance Track since 2012!

Funding Future Capital Claims/Risk MitigationPresented by: Rich Chapman, ChartwellThe professional service corporation is faced with the ongoing challenge of repurchasing shares from departing stockholders. This continual capital call creates operating pressures which must be managed in the context of other competing capital claims of the business. This session will explore concepts to create an optimal capital structure, including alternative funding vehicles and private placement asset allocations to help manage and fund these emerging long-term liabilities.

CFO RoundtableModerated by: Chris Staloch, ChartwellJoin us for this interactive session to discuss hot topics in the engineering industry. Hear from your peers on how they are dealing with issues from compensation structures to ownership transitions to acquisitions… and everything in between and around!

Engineering Firms & ESOPsPresented by: Bob Grossman, Lathrop and GageWhy are there so many engineering firms with ESOPs?! What are the advantages and drawbacks of such a structure? What type of firms are the best candidates and when should you look at other options? Come find out the answers to these questions and many more!

M&A Trends PanelModerated by: Joe Skorczewski, ChartwellThis session will explore recent trends in mergers and acquisitions within the AE space. We will discuss some of the recent “mega deals” and provide some insights on what’s driving all the activity and where it is likely to go in the near term.

Emerging Ownership StructuresPresented by: Tim Cleary, ChartwellHistorically, professional service firms have transitioned ownership by having new shareholders buy-in. Frequently, the next generation does not have the ability or desire to invest the dollars required to execute these transitions. As such, we continue to see firms explore Employee Stock Ownership Plans (“ESOPs”) as alternative ownership vehicles. This session will explore some of the main reasons why firms choose to utilize ESOPs, including various combination structures that provide the tax advantages of an ESOP while still providing opportunities for direct ownership.

Impact of Upcoming Revenue Recognition and Lease Accounting Standards on Engineering FirmsPresented by: Jon Zeiler and Amy Holmes, Crowe HorwathThe impact of the new revenue recognition and lease accounting standards will be far-reaching, but the coming changes will affect different industries in different ways. Financial executives in the engineering industry need to understand the new guidance and determine the best way to implement it in their organizations.

TUESDAY, OCTOBER 17 - CFO COUNCIL SESSIONS

p a g e 8

Source Data Provided by Capital IQ as of 8/31/2017$ in millionsLTM = Latest Twelve MonthsNTM - Next Twelve Months1 As of Q1 2017 (most recent available)

AE INDEX FINANCIAL PERFORMANCE

And then there were 16…that’s the number of publicly traded companies we are currently tracking in our index, three less than six months ago thanks to the deal activity previously mentioned. Interesting times for some of the largest firms in the industry...of the top five, only Fluor and WSP have seen better than market revenue growth over the LTM. AECOM, Jacobs, and Arcadis each had revenue declines during the LTM…and AMEC, which was number four on the list six months ago, had been experiencing declining revenue as well! As a whole, the LTM has been positive for most firms in the index, with average and median revenue growth of 9.4% and 4.8%, respectively. Certainly, a portion of this is being driven by the significant acquisition activity noted previously, but there is clearly some core growth happening with a number of firms. In fact, looking at the NTM projected revenue, only four firms are anticipating growth of less than 3.0% (Cardno is actually projecting a decline).

With regard to profitability, we see that revenue growth clearly does not always equate to profitability. Fluor’s revenue was up 7.1% during the LTM, while it’s EBITDA declined by 46.2%! AECOM and Arcadis also saw significant declines in EBITDA during the LTM even though their revenue was relatively flat. While these three firms significantly drag down the averages, most of the remaining firms performed rather well with regard to EBITDA during the LTM. Looking ahead, virtually all are anticipating major increases in EBITDA over the NTM, equating to median growth of 20.6%. Are you buying? When compared to a year ago, median EBITDA was projected to grow 7.5% over the NTM…only four of the companies (RPS, IBI, NV5, and Wildan) with projected EBITDA met or exceeded the forecast!

EBITDA margins are also anticipated to increase over the NTM. In fact, all but one firm reporting forward looking EBITDA is expecting an increase in margin. The result is a significant increase in the aggregate margin, from an average and median of 7.8% and 7.0%, respectively, to 10.0% and 9.9%...2-3%!

LTM NTM

2.9% 4.2%

4.5% 5.7%

6.4% 6.6%

7.5% NA

5.7% 6.7%

10.7% 12.0%

10.7% 12.1%

-1.1% 4.6%

11.0% 11.2%

10.4% NA

23.1% 25.2%

12.1% 11.4%

6.2% 8.5%

11.3% 11.9%

-1.8% NA

5.6% NA

7.8% 10.0%

7.0% 9.9%

EBITDA MarginRevenue

LTM LTM ▲ NTM NTM ▲

Fluor Corporation 19,309 7.1% 20,254 4.9%

AECOM 17,670 -0.8% 18,252 3.3%

Jacobs Engineering Group 10,010 -12.5% 10,575 5.7%

WSP Global Inc. 5,157 7.8% NA NA

ARCADIS NV 3,764 -0.4% 3,800 1.0%

Stantec Inc. 2,660 33.2% 2,910 9.4%

Tetra Tech, Inc. 2,031 11.3% 2,157 6.2%

Cardno Limited 907 0.8% 890 -1.9%

RPS Group plc 798 4.6% 801 0.3%

VSE Corporation 779 32.9% NA NA

Exponent, Inc. 312 5.0% 327 5.1%

IBI Group Inc. 277 3.3% 286 3.2%

Willdan Group, Inc. 256 62.3% 257 0.1%

NV5 Global, Inc. 271 41.2% 383 41.2%

Versar, Inc.1 124 -32.8% NA NA

Ecology & Environment1 101 -12.6% NA NA

Average 4,027 9.4% 5,074 6.5%

Median 853 4.8% 1,523 4.1%

EBITDA

LTM LTM ▲ NTM NTM ▲

562 -46.2% 856 52.3%

790 -22.3% 1,042 31.9%

644 -5.1% 697 8.3%

388 30.2% NA NA

216 -17.5% 254 17.1%

286 26.2% 348 21.8%

217 12.8% 261 20.6%

(10) NA 41 NA

88 12.5% 90 1.7%

81 1.8% NA NA

72 -0.5% 83 15.0%

33 4.2% 32 -2.9%

16 39.6% 22 37.6%

31 NA 46 48.8%

(2) NA NA NA

6 -13.5% NA NA

214 1.7% 314 22.9%

85 1.8% 172 20.6%

p a g e 9

AE INDEX MARKET PERFORMANCE

“Trump bump” you say?! Check out the chart to the right in case you were questioning the validity of the theory. While pricing did come down during the second quarter, there still remains significant optimism in the market, reflected in both valuations as well as financial projections. While there were a few laggards (five saw enterprise value declines), the majority of companies in the index have seen significant increases in their valuations during the latest twelve months. Over the past six months, we again see the three largest firms in the index struggling. Valuations for Fluor, AECOM, and Jacobs were all down, which obviously reflects the lack of revenue and EBITDA growth noted previously. Because of the significance of these firms, they exert a substantial drag on the market weighted index, resulting in the downward trend seen in the graph here…even though the median market cap is up 16.2% over that time period!

Source Data Provided by Capital IQ as of 8/31/2017$ in millionsLTM = Latest Twelve Months

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EXPERIENCED PROFESSIONALSChartwell has significant experience working with companies in the AE industry. Our professionals understand the financial operations of companies in this sector.

C H R I S TO P H E R S TA L O C H , A S AManaging Director, AE Practice Leader612-230-3111chris.staloch@chartwellfa.com

R I C H C H A P M A NManaging Director, Risk Mitigation Practice Leader612-351-5931rich.chapman@chartwellfa.com

T I M C L E A R YManaging Director, Ownership Advisory Practice Leader612-351-5926tim.cleary@chartwellfa.com

M AT T K E E N EManaging Director, Compensation Practice Leader919-614-7810matt.keene@chartwellfa.com

J O E S KO R C Z E W S K I , C FAPrincipal, AE Project Manager 612-230-3103joe.skorczewski@chartwellfa.com

O L I V I A P I E S C H E LAssociate, AE Project Manager503-416-4425olivia.pieschel@chartwellfa.com

Index Ticker Value LTM p Q4 to Q2 p

Fluor Corporation NYSE FLR 6,116 -12.2% -13.9%

AECOM NYSE ACM 8,341 -4.6% -9.3%

Jacobs Engineering Group NYSE JEC 6,136 0.4% -7.1%

WSP Global Inc. TSX WSP 4,884 32.0% 21.9%

ARCADIS NV ENXTAM ARCAD 2,148 10.0% 24.7%

Stantec Inc. TSX STN 3,319 -4.2% -4.2%

Tetra Tech, Inc. Nasdaq TTEK 2,789 39.8% 5.2%

Cardno Limited ASX CDD 456 97.2% 37.1%

RPS Group LSE RPS 860 37.1% 23.0%

VSE Corporation Nasdaq VSEC 707 14.9% 7.9%

Exponent, Inc. Nasdaq EXPO 1,346 -1.1% -1.7%

IBI Group Inc. TSX IBG 256 9.3% 12.0%

Willdan Group, Inc. Nasdaq WLDN 241 162.9% 40.1%

NV5 Global, Inc. Nasdaq NVEE 447 79.1% 30.0%

Versar, Inc. AMEX VSR 24 -23.3% -8.3%

Ecology & Environment Nasdaq EEI 44 16.2% 20.5%

Average 2,382 28.3% 11.1%

Median 1,103 12.5% 10.0%

Enterprise Value

Value LTM p Q4 to Q2 p

6,399 -6.7% -12.5%

5,035 3.3% -10.1%

6,550 7.9% -4.9%

4,236 38.7% 25.6%

1,555 20.7% 30.4%

2,870 4.4% -0.3%

2,615 46.8% 6.2%

444 128.6% 35.7%

739 47.5% 23.9%

488 35.2% 16.2%

1,508 -0.5% -2.3%

158 61.5% 16.2%

263 202.0% 39.8%

450 58.5% 29.6%

15 38.8% 9.4%

54 22.9% 19.0%

2,086 44.4% 13.9%

1,124 36.9% 16.2%

Equity Value

90.0%

100.0%

110.0%

120.0%

130.0%

Jun-16 Sep-16 Dec-16 Mar-17 Jun-17

One Year Index Performance

S&P 500 Index Chartwell AE Public Comparables Index

p a g e 1 0

The result? Valuation multiples are sky high! In terms of revenue, we see quite a bit of stability when compared with six months ago, as the average and median multiples are relatively consistent. However, relative to a year ago, the median has increased by 0.26x…nearly 39%! To be fair, the average is only up .07x during this period, but the point here is that all but five companies had increased revenue multiples over the LTM.

The trend in EBITDA multiples is equally dramatic. While there hasn’t been much of a shift during the past six months (median EBITDA multiple is now 10.9x versus 10.2x), only one company in the index (Stantec) has a lower multiple than it did 12 months ago. The median EBITDA multiple is now 10.9x versus 8.7x as of June 30, 2017. More importantly, however, are the forward-looking multiples. At an average of 10.0x and median of 9.6x, these measures are up significantly relative to a year prior (8.4x and 8.0x, respectively).

Source Data Provided by Capital IQ as of 8/31/20171 As of Q1 2017 (most recent available) }

AE INDEX IMPLIED MARKET MULTIPLESRECENT & UPCOMING 2017 EVENTS

September 11-12 ACEC National Finance Forum Austin, TX

September 13-15 Employee-Owned S Corporations of America (ESCA) Policy Conference Washington, DC

October 3-4 The National Center for Employee Ownership (NCEO) Fall Forum Tampa, FL

October 8-11 ACEC California Chapter Annual Conference Incline Village, NV

October 11-13 The ESOP Association California/Western States Annual Conference San Diego, CA

October 15-18 ACEC National Fall Conference Orlando, FL

November 9-10 The ESOP Association Las Vegas Conference Las Vegas, NV

5 Year Q2 2016 Q4 2016 Q2 2017 Q2 2018E

Fluor Corporation 0.35x 0.38x 0.38x 0.31x 0.30x

AECOM 0.49x 0.50x 0.53x 0.49x 0.48x

Jacobs Engineering Group 0.55x 0.53x 0.63x 0.63x 0.59x

WSP Global Inc. 0.91x 0.77x 0.85x 0.95x NA

ARCADIS NV 0.69x 0.49x 0.52x 0.57x 0.56x

Stantec Inc. 1.52x 1.54x 1.55x 1.32x 1.21x

Tetra Tech, Inc. 1.04x 1.11x 1.37x 1.37x 1.29x

Cardno Limited 0.63x 0.35x 0.42x 0.50x 0.51x

RPS Group plc 0.94x 0.79x 0.93x 1.06x 1.06x

VSE Corporation 0.99x 1.03x 1.08x 0.93x NA

Exponent, Inc. 3.55x 4.59x 4.66x 4.34x 4.13x

IBI Group Inc. 0.88x 0.84x 1.00x 0.92x 0.89x

Willdan Group, Inc. 0.58x 0.58x 0.96x 0.97x 0.97x

NV5 Global, Inc. NA 1.47x 1.53x 1.65x 1.17x

Versar, Inc.1 0.27x 0.17x 0.19x 0.20x NA

Ecology & Environment1 0.35x 0.33x 0.36x 0.43x NA

Average 0.92x 0.97x 1.06x 1.04x 1.10x

Median 0.69x 0.67x 0.89x 0.93x 0.93x

5 Year Q2 2016 Q4 2016 Q2 2017 Q2 2018E

7.6x 6.5x 8.2x 10.8x 7.1x

9.4x 8.7x 10.2x 11.0x 8.3x

8.8x 9.0x 10.4x 9.7x 9.0x

12.4x 10.8x 11.1x 12.6x NA

9.8x 7.0x 8.7x 9.8x 8.4x

12.3x 13.6x 14.4x 12.3x 10.1x

11.4x 10.6x 13.1x 12.9x 10.7x

7.7x 9.1x 17.4x NA 11.1x

7.9x 7.7x 9.1x 9.6x 9.4x

7.6x 7.6x 8.5x 8.9x NA

15.2x 18.8x 20.7x 18.8x 16.4x

9.2x 7.0x 8.3x 7.6x 7.9x

8.8x 8.1x 13.4x 15.7x 11.4x

NA 12.7x 12.9x 14.6x 9.8x

NA 9.5x 7.2x NA NA

6.6x 5.7x 8.2x 7.7x NA

9.6x 9.5x 10.5x 11.6x 10.0x

9.0x 8.7x 10.2x 10.9x 9.6x

Enterprise Value/Revenue Enterprise Value/EBITDA