The business climate for architects extended its decline in December and, in a foreboding sign, construction projects appear headed toward a slowdown in 2024, according to the American Institute of Architects.

Monthly billings sent by architects to clients in December scored 45.4 based on a monthly index compiled by the AIA and software maker Deltek. That followed scores of 45.3 in November and 44.3 in October. Any score below 50 indicates a decline in billings.

The AIA also reported that the pace of spending for commercial construction will drop to a growth rate of 4% in 2024. That’s down from the 20% year-over-year growth recorded in 2023. The 2024 forecast is based on a survey of industry professionals.

Higher interest rates have constricted lending for construction projects, leading to the expected slowdown, the AIA said. In addition, higher costs for construction materials and labor, declines in commercial property values and ongoing weakness in the office markets are all expected to dent construction spending.

“We already started to see construction starts either slow dramatically or turn negative in virtually all construction sectors in the latter part of 2023,” AIA chief economist Kermit Baker said in a news release.

Billings declined in all regions of the United States tracked by the AIA except for the 12-state Midwest region, which posted an index score of 50.3. The 17-state South region had the weakest result with a 43.4 index score.

Architecture firms' billings are viewed as a predictor for the direction of commercial development projects, as architects are typically hired early in the process.

Project delays and cancellations are spreading throughout the design and construction sector, the AIA said. About 31% of architecture firms surveyed said they are seeing an increase in projects that have been significantly delayed. About 19% said they’re seeing a rise in the cancellation of projects.

In a promising sign for the architecture sector, Congress and President Biden recently approved a change in federal contract law for architecture and construction firms. Previously, payments for work done for the U.S. Department of Defense were capped at 6% of the total estimated project costs. The cap was raised to 10% as part of the 2023 National Defense Authorization Act.

Elizabeth Chu Richter, former president of the AIA, said the organization hopes other federal agencies will push for a higher cap on architects’ pay or for removing the cap entirely.

The AIA plans to lobby the U.S. General Services Administration to adopt the Defense Department’s new payment structure for architects, Richter told CoStar News. The GSA is the federal government’s real estate arm.

A GSA spokesman declined to comment.

The 6% cap was implemented in the late 1930s to accelerate the design and construction of military bases ahead of World War II, said Richter, CEO of Richter Architects in Corpus Christi, Texas. The 6% cap was added to the proposed legislation to encourage Congress to pass the measure. But federal design work is more complex now, she said.

“We’re no longer designing things like Quonset huts that can be built in four months,” she said. “There are more requirements and regulations now and technology has advanced.”

Federal design and construction contracts can be big business for architects. The GSA plans to develop a $2.5 billion headquarters for the FBI in Greenbelt, Maryland, replacing the J. Edgar Hoover building in downtown Washington, D.C.

Since the pay limit has outgrown its original purpose, some federal agency administrators have told the AIA that they would like to see the 6% figure raised or removed, Richter said.

“It turns out they too are frustrated because they want to hire good people and get quality work,” she said.

Architects’ and building contractors’ pay is still based on a percentage of estimated project costs, which also constrains their total compensation, Richter said. That’s because most projects end up costing more than their initial estimates. The AIA hopes to convince federal officials to base the percentage on final project costs.

“What we really want is to have a chance to negotiate fair and reasonable compensation that’s market-driven,” Richter said.