August 2008

SCOTT TRACY
Assurance Partner, Construction Practice
Clifton Gunderson LLP
Avoiding common financial mistakes in a strong economy is one of the best ways for construction companies to weather an economic downturn. Accurate budgeting and estimating, cost control and strategic growth planning are good business practices regardless of the economy, but contractors can get into trouble when they don’t proactively manage and plan in two significant areas: overhead costs and cash flow.

Overhead costs. Many contractors tend to overlook overhead costs when setting rates and preparing project bids. As a result, jobs that appear marginally profitable may actually lose money when overhead costs are factored in. Direct costs like materials and labor are easy to get a handle on, but they’re only part of the picture. What contractors often fail to recognize are indirect costs like insurance, equipment and support staff (supervisors, estimators, etc.) that must be shared and allotted to every project. It is critical to recognize these costs in rates and mark-ups, while working to manage and control them on every job.

Cash flow. Contractors of all sizes in all sorts of economic conditions suffer the consequences of poor cash flow management. When business is good, a company can bleed cash knowing that there is always another job and a fresh infusion of working funds waiting in the wings. Multi-year projects, unanticipated cost increases (such as fuel costs in the past six months) and periods of hit-and-miss work can quickly drain cash reserves and drag a company down. Banks will only come to the rescue with short-term working capital so many times before demanding more effective financial management.

In an economic downturn:

• avoid taking on marginally profitable jobs just to prevent layoffs;
• raise your line of credit threshold early to allow for adequate cash flow;
• avoid jobs that are too large based on your current experience and infrastructure;
• maintain and strengthen relationships with clients, prospects, bonding companies and financial institutions before your survival depends on those relationships; and
• review equipment needs and dispose of idle equipment.

Fortunately, construction is a cyclical business that almost invariably returns with the same or greater strength. The contractors that manage cash flow and overhead costs will remain strong and still be around to enjoy the next upturn.

EMILIO ALVAREZ
President / CEO
E. F. Alvarez & Company, P.A.
Regardless of how you spin it or call it, the construction industry is in the midst of a contraction. Contractors that were fortunate enough to end 2007 with a backlog going into 2008 should pay close attention to the performance of the work to avoid any profit fades, which are likely because of the inefficiencies created by employees who foresee layoffs due to lack of work, increases in material prices, material shortages and other factors.

Contractors also should be selective in the type of work they pursue and exercise caution in the estimating process by resisting the temptation to get work at little or no profit just to keep the crews working. The construction industry is risky enough without factoring in project work at extremely low or nonexistent margins.

The formula for successfully getting to the other side of the present economic situation is to be extremely efficient, cut operating expenses to the bone and maintain liquidity.

The reward will come when you find yourself positioned to partake in the next upswing of the economy, which is no doubt coming.

Steve Battreall
Chief Commercial Officer
GE Capital Solutions, Equipment Finance Services
Are you "equipment rich" but struggling with cash flow?

Excessive liquidity and favorable financing rates during the boom years of 2004 to 2007 drove an unprecedented buildup of construction assets. In decline, however, much equipment is no longer working a full shift or is sitting idle.

The good news contractors can leverage the value of their hard assets, which is crucial to weathering this economic downturn. This strategy can be summarized in four words: appraisal, refinancing, consolidation and planning.

Appraisal. A record amount of construction assets is now being disposed of in the marketplace, and overseas sales are up more than 40 percent due to the weakness of the dollar. The weak dollar is a benefit in this case because international demand is keeping equipment values relatively stable. If demand slows, equipment values likely will decline, so it is critical to have equipment appraised as soon as possible.

Refinancing. One mistake many contractors made during the boom times was to finance equipment for short terms, typically 24 to 36 months fully amortized, often the result of a dealer or bank promotion. The higher payments weren’t a problem when the economy was strong, but are now a major hurdle. Refinance equipment over a longer period of time while equipment values are stable and rates are relatively low to improve your cash flow.

Do you have hard assets free and clear of debt? Consider leveraging the equity in those assets through a sale-leaseback or a cash-out refinance to improve liquidity and working capital position. You also may be able to establish a revolving line of credit backed by your equipment.

Consolidation. Consolidate your debt. We see contractors paying as many as 30 different notes every month, which is time-consuming, costly and inefficient. Total debt consolidation with longer maturities is an extremely effective way to improve cash flow and preserve liquidity, which can help offset higher fuel and material costs. You can consolidate all of your equipment into one note and stretch amortization to 60 to 72 months.

Planning. Plan a conservative course for the near term because the next boom time may be a long way off. Gone are the days when two to three contractors would bid on a project; now it’s more likely to be 15 or 20. We suggest looking back to the work on hand and margins of seven to eight years ago—and forecasting to those levels for the next three to four years. And lastly, aim to have a financing partner who can provide more than money. A national provider with a strong balance sheet and local expertise can help implement strategies other contractors around the country are using to successfully weather the storm.

TIM SKELLY
Principal-in-Charge of Construction and Real Estate
LarsonAllen, LLP
The best advice on how to weather a down market really applies to any market conditions: understand your cash flow demands and know the details of your cost of doing business.

Know which costs are truly fixed and which are variable and to what degree they can be changed or influenced in the near term. When business is strong, a company’s overhead tends to creep up. Owners may not really notice the slowly increasing cost of doing business until the market turns, volume decreases or margins decline.

Owners and managers who know exactly what costs they can control and how fast they can adjust to changes have more flexibility. When people truly understand the details behind their costs, they can also realistically bid on projects (and still be profitable) and figure out how they can contribute to covering their fixed overhead costs and cash flow requirements.

Having a greater knowledge of costs allows companies to more accurately predict cash flow needs and their financing position, and be more proactive in a downturn. By anticipating their needs, they can better use their collateral and credit, and adjust their financing plan to meet the demands of their changing operations.

A lot of owners get blindsided because they don’t understand their financing structure or options. They don’t know their cost of doing business, and they are not realistic about their future operating results. If they wait too long to act—if they don’t anticipate their cash position and go to the bank early on to talk about cash flow and financing—they’ll lose control because the bank is going to be at the table not as a partner, but as an investor that is worried about its investment.

TONY STAGLIANO
National Director of Construction Industry Services
CBIZ and Mayer Hoffman McCann P.C.
The economic news on a national level is definitely disappointing. The housing market crisis continues to spread, causing tighter lending requirements. Commercial projects have been impacted less than residential construction, but commercial construction usually lags the overall economy due to the long lead-time it takes to plan, design, obtain permits, procure financing and then construct the buildings. Even though commercial work is currently available to bid, increased competition is squeezing margins.

If this isn’t bad enough, prices are surging. The price for highway diesel fuel is almost 70 percent higher than a year ago. Building materials such as steel and copper keep moving upward, keeping pace with the rising cost of oil and gas.

Contractors must find ways to ride out the economic storm. Financially savvy contractors keep a watchful eye for warning signs of a downturn. Most of all, they realize a tight market presents the opportunity to revisit and retool their operations.

Here’s some advice for giving your construction company a business tune-up that will help you weather an economic downturn.

• Strategically cut overhead early in the cycle while retaining key personnel.
• Cash is king: Aggressively bill and collect receivables. Remember, the squeaky wheel gets the grease—if you don’t ask, you don’t get.
• Call creditors and work out payment terms. Negotiate a reasonable discount for early payment or use line of credit to take discounts.
• Document and pursue change orders.
• Sharpen your job estimates.
• Know when to walk away from unprofitable business.

More contractors go out of business due to a lack of cash rather than a lack of profits. Successful contractors know collecting money is their right, not a privilege. Top contractors also manage their cash flow. They pay creditors within payment terms. Common terms such as 2 percent, 10 days and net 30 days can equate to discounts of up to 36 percent. This yields significantly more interest income to the contractor than the interest expense incurred to take the discounts. This spread in the rates is referred to as arbitrage.

In a downturn, contractors also should sharpen their estimating skills. As competition for the available work increases, and as residential contractors try to enter the commercial market, bidding is likely to be fierce. You must accurately know your costs to know how low you can go before you walk away.

The best contractors have made satisfying their customers an underpinning of their ongoing corporate philosophy. In a downturn, your past customers are likely to be the best source of new business and referrals.

"What emerging technologies in construction accounting will have the greatest impact on contractors and construction accountants?"

BASSEM HAMDY
Vice President of Solutions
CMiC
The biggest change I see in construction accounting is not so much a change in technology but a change in culture. Long gone are the days when financials and operations could be considered separate entities. In order for organizations to remain viable as the market continues to become more competitive, a more holistic approach, where all departments are considered as a collective entity, must be implemented.

The technological infrastructure an organization needs to support this sea of change is a system that reflects an integrated approach. The separate data silo era, with financial information in one database and project management information in another, is dead and buried. Progressive organizations that anticipated this trend already have cast their lot with fully integrated solutions that allow accountants in the back office to know what the contractor is doing in the field. The axiom that information is power has never been truer than in this new age, and organizations need a system that will provide enterprise-wide access to accurate and up-to-date data.

Executives must be wary of technological solutions that provide the illusion of integration. Peel back the skin on these solutions and one will find data bridges and workarounds that only provide temporary improvements. Breakthrough improvements in productivity only can be achieved with a standard software solution that stores all critical data in one database.

JEFFREY GERARDI
President
Construction Management Software
The paperless office concept has been around for a long time and is finally starting to take root in the construction industry. A few years ago, contractors had limited choices for managing information electronically. Today, many companies are developing technology specifically designed to electronically manage the mountains of paperwork they generate.

The paperwork starts piling up during the estimating process and continues through the accounting, job costing and project management processes. From POs and invoices to payroll timecards and project correspondence, the amount of paperwork generated during a single day of construction accounting is staggering. Electronic document management provides a better way to address construction paperwork.

Even the estimating process has begun to benefit from this emerging technology. The development of digital takeoff capabilities, for example, provides the ability to perform takeoffs on-screen with a mouse and eliminates the need to produce paper blueprints. Not only does this support the green movement, it also offers tremendous time and cost savings to construction firms.

The ability to manage construction processes using paperless workflow provides instant access in the need-it-now world of contracting. Companies that adopt electronic document and blueprint management will undoubtedly reduce administrative expenses and gain greater control over costs, which will allow them to remain competitive in a tightening construction market.

JOHN MEIBERS
President
ComputerEase Software, Inc.
One of the biggest impacts that emerging technology will have on contractors is the ability to process information in the field via a tablet PC. Unlike its predecessor, the handheld device, a tablet offers field personnel the ability to not only receive and send data on a much more user friendly screen, but also the ability to capture signatures on important documents such as field work orders, requests for change orders and service work orders. The ability to process these documents in the field will allow companies to become more productive and profitable with their existing staff and also will allow a quicker turnaround on billing for work, which will have a positive impact on improving cash flow.

Contractors also benefit from electronically routing documents within the office for approval. Electronic document routing can occur within the physical office or can involve remote personnel. Being able to recognize an invoice in job costing and in the general ledger as soon as it enters a contractor’s office is critical to getting real-time financial and job cost reports. Without this technology, invoices that need approval are manually routed from desk to desk before finally (if they have not been misplaced) ending up back in the accounting department office to be recorded in the accounting and job costing systems. The ability to first record and then electronically route invoices and all supporting documents not only provides more accurate reports, it also reduces the time it takes to get these documents approved.

The days of hard-to-read reports, cluttered with numbers running together, are quickly becoming a thing of the past. Today’s sophisticated reporting software allows a contractor to quickly and easily pull up a trend graph for important items such as projected cost and over/under-billing, allowing key managers to identify negative trends before they impact the company’s bottom line. The ability to drill down from these graphs to text-based information that spells out the problem allows contractors to address the issue with vital information in hand. This ability to find the problem and then see the data just for that problem is a dramatic improvement from the old days of sorting through mountains of data to determine if there are any problems. Today’s graphic reports find the problem for contractors and then provide the data needed to help solve the problem.

BRAD MATTHEWS
Vice President of Marketing
Dexter + Chaney
Mobile data collection technology will have a major impact in the coming years. Construction companies rely on more accurate and timely information to control construction processes and expenses. This means better productivity and lower costs. It also means saving time in the office and reducing overhead. The result is a better-managed company with a leaner cost structure.

Look at the process of collecting payroll hours in the field. Most companies have struggled with this time-consuming and imprecise process. The collection of labor hours is not accurate due to the delay in recording hours and the inevitable errors. Handheld mobile technology means data is captured as it happens. Employee badges are scanned as they check in at the jobsite and at the end of a shift. The supervisor on the job simply has to collect the data. The data is automatically transferred via a cell phone connection to the company’s payroll system. Payroll hours and costs are more accurate and time is saved throughout the process.

One company that implemented this process across its workforce of more than 400 achieved significant results. Because labor hours are more accurate, it saw a 2 percent improvement in labor productivity—a savings of $140,000 in the first year. The company also saved in staff time to process payroll—almost a $30,000 reduction in overhead. The almost $170,000 savings equates to more than $400 saved per field employee.

SCOTT PREWETT
Chief Technology Officer
Exaktime
Two seemingly unrelated technologies that are now coming into their own will impact construction: third generation (3G) cellular networks and GPS technology. Both of these address the need for a manager or owner to effectively manage multiple jobsites from a central location.

GPS is being used in the United States for fleet and equipment tracking and can easily be used to track employee attendance. The new 3G-cell network has greatly expanded but adoption will be a bit slower as we wait for more feature-laden 3G phones to be released into the market.

With the advent of new 3G cell technology, expect the release of applications on cell phones to be fast and furious. In 2007, the 200 millionth 3G subscriber was connected; however, out of 3 billion cell phones worldwide, this isn’t even 7 percent of the total user base. Phones that can process and transfer video telephony (live video from your cell phone) and also handle other high bandwidth applications will provide project managers with tools to more effectively make decisions as they are needed rather than waiting until they can get over to the jobsite and see it for themselves.

The worldwide GPS system was made available for public use in 1983, but only in the last few years have a bevy of affordable GPS receivers come to market. A full GPS receiver for your vehicle costs around $250. Many companies now offer GPS tracking services that install a GPS receiver and transmitter that allow live location tracking of vehicles, equipment and other assets. Want to know where all of your trucks are at 3 p.m. on Friday? No problem. New employee attendance tracking systems also have been released this year that allow workers to clock in and out while they move from jobsite to jobsite. The GPS receivers built into these low-cost devices easily can track and confirm their actual location throughout the day.

FRED ODE
CEO/Chairman
Foundation Software, Inc.
In Jim Collins’s book, Good to Great, he concluded that great companies leverage technology to take advantage of something they already do well. Consequently, what may be an "emerging technology" for one construction company may hold little value to another.

For example, if you already are taking advantage of good job cost accounting software, then document imaging and/or PDAs in the field will most likely provide great benefits to your construction business. On the other hand, if your accounting software is a generic off-the-shelf package and your life revolves around spreadsheets for reporting and billings, then “emerging technology” takes on a whole different light.

Statistically, the majority of contractors run generic, off-the-shelf accounting software. As simple as it may sound, the emerging technology in construction accounting is accounting software specific to the construction industry. It has been that way for the last 20 years and will remain that way until the majority of contractors embrace the technology.

Dann E. Kroeger
President
HeadsUp Technologies
Traditionally, accounting defines percent complete for pay applications by dividing the scheduled value for work completed by the project to date cost. This works well if the percentage complete is reasonably close to the actual work completed at the jobsite.

What happens, for example, if a high dollar invoice does not get posted in accounting for an item that has been received and inventoried or used on the project? In this situation, the period cost would be low and the contractor would not receive full value on its pay application.

A more accurate approach is to capture the percentage complete in the field—preferably by cost code—and apply this percentage to the scheduled value. In the past, this may have been more effort than it was worth.

Today, many scheduling and project management systems can identify both scheduled and committed costs by item and cost code. They allow users to track percent complete in the field on a daily basis using PDAs or laptops. This allows the contractor to easily determine work completed by calculating the work completed at both the beginning and end of the period.

A similar situation often exists with cost accounting. Traditionally, the percent complete is determined by actual cost divided by budgeted or committed cost. If invoices and other costs are not posted in the proper time period, however, the percent complete can be significantly different than at the jobsite.

Today’s technology provides a more accurate picture of true costs by multiplying field-gathered percent complete against budgeted or committed costs to develop earned value. Comparison of actual costs and earned value can assist accounting in making sure invoices are posted to the correct accounting period, as well as highlight healthy and unhealthy trends during the life of the project.

JIM FLYNN
President & CEO
Maxwell Systems, Inc.
The evolution of estimating and accounting platforms with stronger product functionality, improved technology infrastructure and better integration with other systems will continue to dramatically impact contractors large and small.

More contractors are realizing the profit potential in their businesses by utilizing integrated systems that tie together estimating, job cost accounting and project management. These contractors are competing on a much smarter level—a level with real-time intelligence of material costs, labor rates, estimated versus actual budgets, productivity comparisons of crews and much more.

An integrated system allows transparency of jobs from bidding through the end of the project. Contractors gain critical insight and visibility into what’s working and what’s not. An integrated system reveals when and where the scope of work has changed in a timely manner so costs can be absorbed by the customer requesting the work instead of the contractor.

The real power of an integrated solution lies in the business management "dashboard," where executives have a complete overview of their entire project portfolio. The dashboard helps identify where profit is captured, allowing management to develop smarter business plans and sound management practices.

An integrated solution that shares data across estimating and accounting allows different parts of the company to develop new ways of thinking about business capture. Owners evolve the way they extract and analyze information from critical business areas. As an example, an owner sees at a glance that although one estimator is winning 10 times more jobs than its peer, the other estimator’s wins are significantly more profitable. Armed with that insight and knowledge, the owner can consider the "hidden" profit potential and refine the estimating process to ensure future bids and jobs are more profitable.

When evaluating such solutions, contractors should consider two critical items: the quality of the vendor (and its solutions) and the capability for tight integration with other systems. Only consider technology providers with a long history in construction business management software. Tech vendors must be financially stable with offerings beyond the software package, including implementation support, training and maintenance. Demand tight integration with other systems.

On the surface, separate systems may work well and even produce standard profit/loss job reports. But until you make the leap to a truly integrated system, you won’t have access to technology’s state-of-the-art analytical tools for improved decision-making that will help you achieve the next level of knowledge and understanding about your business and its profit potential.

John Geffel
Senior Vice President/General Manager, Construction and Real Estate Business Unit
Sage Software
In an increasingly competitive and collaborative industry, business management software is an essential component construction companies must consider more carefully.

Technology must help construction companies ensure their back office and field staff have the information they need when they need it. Technology should help accounting work seamlessly with estimating, procurement and project management. Good technology will provide reports to owners, orders to vendors and work orders to subcontractors using one set of data from the same application.

Construction companies need the right tools in the office as much as on the worksite, but unlike a nail gun and power drill, technology can’t be pulled off a shelf when needed and put back on the shelf when the job is completed. Construction business software becomes an integral part of the way you manage the workflow of your business.

People make the ultimate difference in the success of a business, so a key to success is for construction business owners to equip all of their employees with what they need to work better and to work better together. This starts with individual productivity. The right business tools can help people reach their potential, working faster, smarter and happier. The best business tools take productivity to the next level by helping productive people work better together, integrating the different parts of the company and letting everyone share data and knowledge.

Finally, technology should have features that let stakeholders better communicate and collaborate with all the players involved—suppliers, owners, subcontractors and designers. This enables contractors to claim an advantage over the competition, winning more work and completing work on schedule and at a profit.

Steven J. Mulka
Partner
SIS Software, LLC
The next generation of computing represents an industry shift that combines web-based applications with client and server software to offer customers a choice of software and services to fulfill their business requirements. Companies are demanding more functionality, rapid deployment and availability to all their employees. Considering the major software systems required to operate a construction company—accounting, service management, inventory, corporate intranets, office productivity tools, scheduling, estimating, file storage and more—it becomes a challenge for any company to maintain all the infrastructure and software needed to support these operations.

A growing alternative to traditional software is the new software-plus-services model designed for the needs of construction clients. Using Microsoft solutions, a contractor looking to increase its project backlog and sales revenue in today’s economy can rapidly deploy a CRM solution in as little as 15 days without any additional hardware requirements. Similar solutions exist for accounting, project management and document management.

More custom solutions for contractors are being built on Microsoft’s business applications and technology. One example is Compass, a project management tool built by SIS and powered by Microsoft SharePoint that provides project document management, issue and task management, and more.

When considering new technology implementation, construction executives also are factoring in the costs of employee adoption, training and hardware. It could be far easier to roll out new business management solutions powered by the productivity tools personnel already know.

ROGER D. KIRK
President / CEO
Computer Guidance Corporation
Construction organizations are realizing major efficiencies with integrated technology solutions that extend far beyond financial and project management. Contractors now have access to sophisticated solutions for accounting, job costing and project scheduling that also incorporate document imaging, workflow, electronic forms, service management and human resources. Gone are the days when customers accepted separate systems that required information to be duplicated between multiple vendors and their systems.

Today’s customers demand a single integrated solution which provides the real-time information vital to making critical decisions. Top management no longer accepts the problems and redundancies inherent in multiple systems with duplicate job setup, or running one accounts receivable application in the service division and another in the construction division.

In an increasingly competitive market with tighter margins and a lower margin of error, the best contractors insist on a single integrated set of enterprise-based applications designed and supported by their financial vendor. These companies are discovering greater profits by harnessing the power of integrated solutions to streamline workflow, improve business processes and reduce the inefficiencies inherent in disparate "best of breed" vendor applications.

Integrated solutions give your project, financial and executive teams shared access to real-time information. In the past, key managers had to query the system to search for critical data. Today, vital financial and project information is pushed to your desktop using rule-based alerts, management dashboards, email and other tools.

The largest contractors in North America already understand the importance of integrated technology and its impact in improving bottom line results. The next generation of emerging contractors is not far behind. Industry customers will continue to demand more advanced features and functions from their tech solution vendors that address the critical aspects of their business across the entire construction enterprise.

ANDREW KARR
Product Manager
Viewpoint Construction Software
To stay ahead in today’s challenging market environment, leading construction companies are demanding the ability to leverage core technologies for positive impact across all areas of their organizations.

Unfortunately, many emerging technologies focus on peripheral improvements to company performance such as better jobsite communications and enhanced document management capabilities. However, those "solutions" lead only to small, incremental improvements to isolated parts of the business.

Contractors need technology that will improve their businesses from the inside out. It must benefit both the project manager and construction accountant. Fully integrated project management and accounting/financial management systems are key to driving productivity gains and increases in profitability in larger organizations. Integrated systems bring project and accounting managers together on one common platform, enabling everyone to work more efficiently. By sharing the same data, executives can make more informed and timely decisions.

A key advantage of an integrated system is a common platform for company standards. In many companies, it’s not unusual to have project managers in the field using a different system than the financial managers in the back office. The results are predictable and painful: increased costs, different business procedures and silos of data. A single integrated system allows a company to define and drive a common language across all departments that produces profitable results on every job.

An integrated system also increases efficiencies, reduces errors and ultimately lowers risk by eliminating duplicate data entry. Data only has to be input once, instantly updating the data in every application across the entire organization. Information in the field populates the accounting table, and information from the office appears in reports for the field.

Integrated systems also facilitate the collection of immense amounts of data in a single database. Only with a single database can both accountants and project managers create reports that represent the entire financial and operational picture of a given project. These reports provide executives with unmatched information through custom reports or dashboards to make better business-critical decisions on a day-to-day basis.

Leveraging technology to improve core functions across the entire construction enterprise is a winning strategy. Integrated construction management systems deliver just that by empowering project managers and giving construction accountants the tools and timely, accurate information they need to deliver tangible bottom-line results.


Donald Berry is the national sales manager for Construction Executive. For more information, call (908) 852-7466 or email dberry@constructionexec.com.