Construction Executive’s first special section on Construction Finance aims to help contractors understand the factors lending institutions take into account when considering requests for capital to expand operations, finance equipment and material purchases, and provide interim project financing. At press time, the financial markets continue to see wide-ranging turmoil in the banking and credit industries.
Against this backdrop of dramatic change,
Construction Executive asked top executives at leading construction financial service firms and providers of technology solutions what advice they would offer to contractors seeking capital. Their advice is solid, sound and just plain common sense.
TOM MEREDITH
Commercial Leader
GE Capital Solutions, Construction Finance Today’s construction environment is one of the most challenging contractors have experienced, with many factors simultaneously squeezing their businesses. For many, simply maintaining the status quo may be more realistic than planning a business expansion. Our recommendations require a high level of self-discipline to weather the storm and position your business for expansion when the turnaround occurs:
- Put an immediate strategy in place to get you through the next 12 to 18 months. It should account for increased fuel and raw material costs, margin compression and fewer bid opportunities.
- Know every detail of your current job costs, including what’s in the pipeline and what’s being bid on.
- Map out your cash flow streams and when payout requirements will occur. Manage cash flow on a day-to-day and month-to-month basis.
- Consider sale-leasebacks of assets to generate additional working capital and improve balance sheet ratios.
- Consolidate short-term debt into fewer, longer terms and be selective about from whom you seek capital.
- Look for opportunities to streamline your processes, which can lower costs and increase productivity. Remove steps that don’t add value to customers and drive profitable growth for your enterprise.
- Have an ongoing dialogue with your finance partners, accountants and key advisors to get a better perspective on cost-control and management opportunities.
PETER SCHWARTZ
President & Chief Executive Officer
Construction Financial Management Association (CFMA)CFMA members are construction financial professionals within, and financial service providers to, construction companies. They tell us there are three key factors to consider when deciding whether to extend financing to a company:
- Does the company have experience in the type of work to be performed?
- What is the strength and depth of the company’s professional management team?
- What is the ownership’s equity position in the company?
Lenders look to work with experienced firms with solid management teams and willingness to share a project’s financial risk.
DONALD W. BARRICK
President & Chief Executive Officer
Resource Management Partners, Inc. Most times, contractors approach us on a pressure-cooker, deadline-sensitive basis. We understand the need for fast turnaround, usually within a few days. Here are some of the factors we look at to determine credit-worthiness:
- Technical capabilities. Is the contractor actually capable of performing the work?
- Financial character. If the contractor is a factoring customer, we do not require a rock solid balance sheet or a history of profits.
- Credit history. If credit scores are subpar or questionable, we look into the contractor’s credit character. Does it pay its bills? Is its credit history an indicator of "behind-the-eight-ball" behavior rather than a pattern of delinquency?
- Judgment and litigation search. These searches are conducted in the interests of obtaining a clear picture of how the applicant operates. We look for a pattern of behavior and business conduct. Is this contractor in a downward spiral? Are payables and other current liabilities well in excess of their receivables and current assets?
- Project analysis. Each job or project must be analyzed from a standalone perspective to avoid the domino effect in which one project in jeopardy might endanger the company as a whole. Beyond approving the contractor for a grand total credit line on factored invoices, we typically enforce some guidelines on individual contracts. For example, our primary focus is public works, not residential or speculative development. We also look at the credit profile (i.e., D&B, payment experiences) of the general contractor if our factoring client is a subcontractor to minimize the risk of having to sue the general contractor for the final payments to the subcontractor.
JOHN ARMOUR
Director
CBIZ and Mayer Hoffman McCann P.C.
Most companies do too little too late in addressing these two areas.
Business continuity planning tends to focus on business interruption risks such as the death or disability of key owners and management members. I normally recommend an assessment of the retention of adequate capital and the adequacy of insurance coverage on a three-year cycle. However, some events might trigger an immediate review, including a sudden change, up or down, in the size of the contractor, changes in tax laws that impact taxation of insurance or capital, or a change in the risk profile of any insured party.
Succession plans should be thoroughly reviewed at least every three to five years. If an owner is within 10 years of leaving the business, a succession plan should be developed with specific objectives and defined strategies for implementation. It normally requires 10 years to identify, hire, train and develop leadership talent to step into the shoes of the departing management owners. The first five years of this 10-year transition period should focus on the personnel aspects of management succession. During the next five years, address key issues such as business valuation, sources of financing, terms, surety indemnity and bank guarantees. For companies with multiple owners, the succession plan naturally folds into strategic long-term plans for growth and capital retention.
If a contractor is planning on moving its surety or banking relationship, I always recommend freshening up both the business continuity and succession plans. Well-designed plans addressing these areas of business risk go a long way toward improving the credit worthiness of the contractor.
BASSEM HAMDY
Vice President of Solutions
CMiC
Technology can help contractors sustain corporate growth by having all mission critical information in one database. With true integration—meaning all information in a central repository and not residing in separate systems connected by data bridges—contractors can reduce the amount of times data is entered into the system. This in turn reduces the possibility of errors, which further increases the accuracy of the data. With all the information in one database, data can be accessed quickly for crucial business decisions that positively affect the bottom line.
Technology also can make a business more efficient and more productive, which can lead to greater corporate growth. By eliminating non-value-added tasks, such as data entry, employees can re-focus their energy and time on more valuable tasks that drive the business forward.
JEFFREY GERARDI
President
Construction Management Software
The current credit crisis has made it increasingly difficult for contactors to secure financing for projects, equipment and other corporate growth initiatives. As loan conditions tighten, construction companies adept at controlling costs and demonstrating profitability stand the best chance of keeping their credit options open. Technology helps make these achievements possible.
While accounting, job costing and project management software form the fundamentals of cost control, the foundation of a profitable project is the estimate. Using the latest estimating and takeoff technology, a contractor can produce accurate information about the cost of a project, which helps eliminate cost overruns. Over time, consistently producing accurate estimates should demonstrate a contractor’s ability to deliver the projected profit in the original bid.
When a lender is provided with detailed estimating data—including takeoff quantities, material lists and hard-dollar project costs—in addition to required financial statements, it can develop a multi-faceted assessment that goes beyond the contractor’s current balance sheet. This transparency into extended financial data creates confidence about the contractor’s ability to deliver projects on time and on budget—and to successfully meet its financial commitments.
JOHN MEIBERS
President
ComputerEase Software, Inc.
It is no secret that contractors need accurate, timely financial reporting if they want to attain financing. Bonding agents and financial institutions need these reports to authorize such financing, and financial statements are only good if they are up to date. As technology becomes more commonplace, real-time financial information is no longer desired so much as it is demanded.
Recent technology has given us the ability to seamlessly link the home office system with remote locations. Information is now reported from all field locations instantaneously, allowing the contractor to bill as soon as the work is performed, eliminating the lengthy billing process and giving the contractor accurate information on a constant and regular basis.
Paperless invoice routing technology also has brought about entry of invoices into job cost and general ledger within a much smaller time frame. Invoices no longer sit under a mountain of paperwork awaiting approval, only to be put under another mountain of paperwork on another desk awaiting entry into the accounting system.
All of this allows for more accurate and useful financial reporting. In turn, this precise reporting gives the contractor an advantage when dealing with financial institutions to ensure funding. In this time of economic uncertainty, contractors that can demonstrate a solid financial balance sheet by utilizing the newer technologies are in a better position to secure financing and see corporate growth.
ROGER D. KIRK
President/CEO
Computer Guidance CorporationThe largest contractors in North America already understand the importance of unified technology and its impact in improving bottom-line results. Many growing mid-sized contractors are not far behind.
Ultimately, technology that supports accounting and project management—front and back-office functions—on a single system, lets construction business owners and managers reduce inefficiencies, streamline business processes and run their contracting organizations more efficiently and profitably.
With state-of-the-art technology in place, data entered in the field immediately is reflected in the system. This allows the construction enterprise to easily provide more accurate, up-to-date reports when financial statements are required by a lending institution or a surety.
With better technology, your company is better managed. When this happens, the financial reports look better to lending institutions when it’s time to secure capital to expand your operations.
FRED ODE
CEO/Chairman
Foundation Software, Inc.
At a minimum, contractors must be able to provide the type of financial reporting required for approval of financing and bonding. With the proper accounting software technology in place, the following reports should be readily available at a moment’s notice, including percent complete, over/under-billing, cash flow and basic financial statements.
More important for the contractor is the ability to produce the type of reporting needed to manage jobs on a daily basis. Depending on the contracting business and projects, this can involve a number of different types of job cost reports, such as projected cost to complete, production reporting, cash flow by job, unit cost, committed cost and others. In addition, the ability to bill in a timely fashion consistent with the job’s requirements and to track change orders and other documents (transmittals, submittals, RFI, etc.) is critical from the financial institution’s perspective.
Finally, contractors must recognize that technology will not automatically create long-term success. Contractors that stand the test of time know how to use technology to control their numbers and manage their documentation. These contractors will have the easiest time securing the type of financing necessary to fund a project or further their corporate growth.
Dann E. Kroeger
President
HeadsUp Technologies Most lending institutions prefer hard assets to back their loans.
A construction loan provides funds as the asset is being built. From a bank’s perspective, risk increases when advanced funds exceed asset value. This can occur a number of ways:
- the contractor may have front-loaded its general conditions and/or profit;
- a subcontractor may be upside down (billed more than the work done);
- a subcontractor may file bankruptcy; or
- significant delays may cause additional general condition expenses to erase profits and reduce the contractor’s viability.
Web technology can assist the contractor and the lending institution by monitoring task completions daily at the worksite. At month’s end, a report can be produced that shows all work completed year to date, who completed it and the earned value of the work. This report may be attached and entered into the American Institute of Architects’ Application and Certificate for Payment. This process assures the lending (and bonding) institution that percent complete comes directly from the field and is not a guess in accounting by dividing posted invoices by the contracted amount.