Periods of economic downturn afford contractors an opportunity to re-evaluate their internal financial controls and business processes. “It is often easier to implement new systems and technologies when owners, managers and key employees are not as busy and times are quieter around the office,” says Morgan Sadler of Jonas Software.
A slowdown is a great time to maximize surety bonding capacity and be on the lookout for bargains from suppliers. Equipment and fleet management software can help evaluate a potential purchase and determine the actual cost of ownership compared with renting or leasing.
When thinking about operational changes, a CPA well-versed in the unique challenges of construction can assist in the decision-making process and help identify the benefits, costs and any potential pitfalls.
Construction Executive asked some of the industry’s top CPAs and leading technology solution providers for their insights on what you can do now.
J. Dan Holliday, II
CRI Construction Industry Leader
Carr, Riggs & Ingram, LLC
According to the U.S. Census Bureau, the value of total annual construction fell 10.5 percent nationally from April 2009 to 2010. The positive news is that plummeting construction spending creates an opportunity to become one of the “best of the best.”
The most successful contractors always seek to maximize bonding capacity through an ever-improving surety relationship. Given the inevitable market tightening, securing and enhancing surety bond credit is one of the single most important actions a construction company can take.
As an accountant that has worked within the construction industry as both a CFO and accounting consultant for three decades, I believe contractors—especially in the face of a construction downturn—should continuously build upon the four Cs of surety credit:
- Capital—Does the construction company and its owner(s) have the financial strength—including adequate working capital, equity and credit—to meet the project’s financial obligations?
- Capacity—Does the construction company have the personnel, equipment and experience to complete the project on time and within budget?
- Character—Does the construction company have a positive reputation in the market?
- Communication—Does the construction company maintain a continuous dialogue with its surety company and surety agent?
Some contractors without adequate financial resources, credit, experience and project opportunities may not survive these market conditions. However, construction firms may not only survive, but thrive, by maximizing opportunities with the help of specialized construction professionals, including CPAs, attorneys and bankers.
Tim Skelly
Principal-in-Charge, Construction and Real Estate
LarsonAllen LLP As construction markets begin a slow recovery from recession, backlogs will increase and equipment resources may be stretched thin. The question for many contractors is whether this is a trend or a short-lived, pent-up demand for their particular service.
Intuition is important, but it must be used in combination with an analysis of the economic cost-benefit of adding equipment to the company’s spread—either by purchase, lease or rental. Among the issues to be considered:
- Is the backlog adequate to utilize an additional unit beyond the immediate project need?
- Is authorized or financed work in your service sector growing or shrinking?
- What impact would a significant purchase have on your balance sheet’s working capital? Will it affect your bonding and credit capacity?
- Does your company have better, higher yielding alternative uses for its capital?
- How long can the company meet the new debt service requirements should revenues fall again?
- Is flexibility in the short term more valuable to you than equipment value ownership in the long term?
Strengthening working capital, remaining flexible, leveraging low debt and maintaining a competitive advantage in pricing will be the marks of a successful contractor during the recovery.
John Meibers
President
ComputerEase Before purchasing equipment, it’s important to have technology in place that allows you to track the information needed to maximize the investment over time, specifically costs, revenue and utilization. Equipment costs fall into two categories: costs to own, such as depreciation and insurance, and costs to operate, which include fuel, maintenance and repairs. Equipment revenue is the internal rental rate charged to jobs. Utilization is the number of hours that a piece of equipment is used.
Although equipment tracking can be handled using makeshift spreadsheets, the ideal option is to use an equipment management system that integrates with your accounting program. Designated equipment management systems provide many benefits over less robust technology options. Features for tracking preventative maintenance schedules, generating associated work orders and automating tasks like recurrent billings are just a few examples. Most importantly, an equipment management system provides the detailed reporting and historical data needed to make informed business decisions that enhance the profitability of your fleet.
If you’re currently renting heavy equipment, it may be tempting to assume that ownership will save your company money. But without a systematic method for managing the complex variables associated with equipment, how will you determine whether an equipment purchase is a prudent capital expenditure?
Successful equipment management is similar to successful project management. Visibility into the day-to-day details is what allows you to control the final outcome. In either case, technology is key.
Morgan Sadler
Sales Associate
Jonas Software As we slowly emerge from an unstable economic state, spending remains a frightening exercise for many business owners. Making significant capital expenditures may be the last thing on many contractors’ minds. However, making such investments now could be one of the smartest business decisions you make.
With vendors struggling as well, this is a buyer’s market. The likelihood of getting a good deal is much greater when demand is lower.
Your competitors also are struggling. Investing when times are slower puts you in a better position to rebound faster than your competition when more lucrative times return.
Lastly, investments that require time and attention—such as training or the implementation of new computer hardware and software—are likely to be far more successful when times are quieter around the office. Owners, managers and employees will be able to devote more attention to a business improvement project and make sure it is executed properly.
Before saying “no” to that new truck, training program or software investment, give it some serious consideration. Purchases such as new technology to streamline business processes and reduce inefficiencies can save you money while paving the way for significant expansion in the long run. More importantly, you may find yourself miles ahead of your competition when business begins thriving again.
Bassem Hamdy
Vice President, Solutions
CMiC In order to prosper in a slowly expanding economy, contractors need to implement a customer relationship management (CRM) system that is embedded in the financial and project management software system. An embedded CRM software system gives contractors the upper hand in a very competitive market by allowing them to stay on top of current and upcoming opportunities, streamline the bid process and store all business development information in a central location. The traditional approach to CRM, in which the business development department uses a non-construction-industry-specific software system that is disconnected from the rest of the organization, creates too many inefficiencies and causes too many problems in terms of accessing and transferring information.
Every project starts with the CRM system—it is where the project is first identified and when the flow of information begins, eventually leading to the job being billed out into job cost, general ledger and accounts receivable. Having an embedded CRM system means the flow of information doesn’t require data to be re-entered, saving time and resources for the contractor and ensuring data accuracy. An embedded CRM solution allows all project stakeholders to access the data, so project accountants can drill down into detail while executives can access a big picture overview of the project. This level of access to information is essential for contractors to prosper in this economy.
Justin Zinke
Executive V.P. Global Business Operations
Coreworx Inc. A slowly improving economy is an ideal time to seize competitive advantage by maximizing your return through strong cost control and avoidance practices. While the process of capturing information for billing and management practices is not a new concept, it’s critical to minimize the delay between the physical incurrence of costs and providing that information to site, project and executive management.
Utilizing a streamlined process designed to minimize data entry delays, accelerate approval routing, capture work progress and provide real-time cost summation affords contractors an opportunity to make adjustments and corrections to timelines, resourcing, scope and budgets.
Remember the childhood game of telephone, where a phrase is repeated from one person to another and passed around a circle, never quite ending up the same? This is similar to the accuracy of operational information that flows through disparate systems. Having a strong operational managerial system that services all facets of the cost control process centralizes this information and eliminates the chain of potential errors.
Demonstrating a continuous ability to deliver timely, high-quality and cost-effective results is key to establishing a solid industry track record. The ability to tightly control costs, improve bottom line margins and provide strong bid packages will help contractors flourish as more project opportunities continue to surface.
Catherine R. Terwilliger
Sales and Marketing Director
Construction Industry Solutions (COINS) While there are many analytical and control procedures to choose from, my answer is to pick the ones that are right for your company and that will position it for growth and success. So what should you concentrate on?
It can be challenging to review current operations, identify weaknesses, evaluate solutions and then drive through the required changes. The industry contains many avenues to help you through the process, but an obvious one is often overlooked: leveraging your enterprise resource planning (ERP) investment. The right ERP provider can draw on its experience and expertise—particularly if it specializes in the construction industry—to pass on best practices and processes.
Built-in business intelligence, workflow, triggers and alerts can provide an early warning system to quickly alert key personnel of problems, control costs if anything goes over budget, manage cash, reduce subcontractor risk and improve the efficiency of procurement processes.
The COINS team works with clients to put successful change programs in place as dictated by the company’s requirements. One client is using real-time cost variance reporting. At another, procurement workflow automatically checks against budget when a purchase order is raised. Managers at a third company receive focused alerts when a project is in trouble, instead of wading through reports on all projects. Subcontract risk is managed proactively at another company, where dashboards visually indicate compliance items such as overdue bond submissions or insurance within 30 days of expiration.
One answer does not fit all, but there are ways for every company to improve.
Tony Stagliano
National Director of Construction Industry Services
CBIZ and Mayer Hoffman McCann P.C. To prosper in this “new normal” construction economy, contractors must first survive. It’s back-to-basics time, and the fundamentals of good business practices apply like never before in recent memory. Contractors must monitor their cash flow daily. Their procedure should be to update their job-by-job cash forecast on a rolling weekly basis for a minimum of three months. The fact is more contractors go out of business from a lack of cash flow than a lack of profitable jobs.
Also, all contractors need to either develop or revisit their strategic business plan, which should include a budgeting process that monitors actual results compared to the projected budget. As part of this analytical process, more than one scenario and action plan needs to be developed, including specific steps to take if contract revenue and gross profit are forecasted at unacceptable levels. Reaction time is so critical for the profitability and, more importantly, the survival of the construction company.
A good job cost system is essential to monitor job profitability and cash flow accurately. This becomes the contractor’s early warning detection system and best way to feel the pulse of the company. If this diagnosis results in bad news, then drastic measures unfortunately may be necessary.
Jim Flynn
President & CEO
Maxwell Systems, Inc. Companies able to keep a keen eye on costs and profit opportunities will prosper. There always will be problems that occur during job execution, but the ability to properly diagnose what caused a problem and having the means to remedy it are critical. Further, being able to recognize certain problems as opportunities for additional profit is another way the right controls can spur prosperity.
To achieve this level of control, contractors can invest in software tailored to the needs of construction and allowing end-to-end control of business operations. When a contractor sees an issue arise during project execution, he needs a software solution that allows him to easily access real-time information, look back at the estimate and ascertain if there have been modifications on the job compared to what was bid. He also must diagnose if site conditions caused the issue, if there were changes in scope that demand change orders, if assumptions were made regarding resources that need to be accounted for, and so on.
Using end-to-end construction software, owners have a view of where every penny is going and can be diligent in comparing estimates to actual costs throughout job performance and on a daily basis. This enables contractors to manage with real-time understanding of where the business stands, how to mitigate issues and where more profit can be gained. To truly prosper and be equipped for long-term success, now is the time construction executives should be evaluating and investing in a robust, complete software solution.
Fred Ode
CEO and Chairman
Foundation Software
To me, “emerging technology” is relative to what each individual company can successfully utilize in its daily activities. Let’s face it: There is never a shortage of new and exciting technologies to talk about, like PDA remote field entry, cloud computing, BIM and document imaging. But, these items are useless until companies are able to handle the basics, the crawl-before-you-walk approach.
These are all great technologies, and many of our clients utilize them to their fullest extent. But in order for a company to graduate to this level, it must first address the basics.
It’s no secret that many contractors fail to take advantage of even the simplest technology. In fact, our industry has been stereotyped as notoriously late to the technology party. Case in point: Many contractors fail to use technology that’s been around for years, like construction-specific job cost accounting software. Instead, they cling to spreadsheets and low-end, generic accounting packages, unable or unwilling to take advantage of technology designed for their industry.
Contractors that ignore technology miss out. Construction accounting systems continue to improve, adding features and reporting that help contractors understand their costs, leading to better business management and profitability. Most systems can handle far more than just back-office bookkeeping. In fact, many integrate accounting and operations functions, meaning the entire company benefits from improved efficiency and easy access to data. Where should a contractor start? Educate yourself about technology and create a practical business plan.
Don’t rush into a purchase just because it’s the latest, must-have trend. Remember, you wouldn’t buy a 52-inch flat screen HDTV if you didn’t first have access to electricity. Start simple. For accounting, that may mean switching from a generic system into a construction-specific one. Then incorporate new pieces as you are ready and they make sense. This will have the biggest, most positive impact on a construction business.