As the country emerges into a post-COVID-19 world, contractors have been relying on construction-certified public accountants to navigate federal stimulus programs, analyze cash flow concerns, review budgets—which include new, safety-related equipment and material prices unseen before in the industry—and provide advice on the best ways to remain profitable, no matter what the economic landscape holds.

For this 2021 ranking of The Top 50 Construction Accounting Firms^TM, Construction Executive reached out to hundreds of U.S. accounting firms with a dedicated construction practice to learn how they are guiding their clients amid ongoing economic uncertainty. Among their top concerns were supply chain stability, labor shortages and how to manage cash flow.

SUPPLY CHAIN

As the industry recovers from the sticker shock of vital materials, many contractors learned the importance of maintaining supplier relationships and reviewing contracts carefully. Lumber, which hit a record $1,700 per thousand board feet in early May, dropped to $937 in mid-June (a 44% decrease) indicating some relief for material shortage delays.

“It is increasingly important for firms to have escalation clauses for materials in their contracts,” says Nick Balaity, partner at Aldrich CPAs + Advisors LLP. “We are encouraging clients to contractually protect themselves for both cost escalation and schedule delay due to materials being more expensive and harder to procure.”

Adam Kellerhals, principal at Smith Schafer & Associates, agrees. “One positive thing about the continued increase in material cost is that it is well documented and known, which means escalation clauses should be added into contracts to reduce the risk of large spikes in costs. However, contractors may need to pass any material cost savings on to customers,” he says.

Writing an escalation clause into a contract is a layer of protection that every contractor should employ, but maintaining relationships with suppliers, instituting financial planning and analysis (FP&A) and making supply chain contingency plans are also important considerations.

“Supply chain issues are a very real challenge and have increased the need for good procurement and control processes tied into financial forecasting and modeling. Construction companies need a good accounting system and a FP&A tool for financial forecasts to understand the impact of increasing costs on profit,” says Scott Stafford, audit partner for Armanino LLP. “Running a construction business without financial insights and systems that provide adequate forecasting is a recipe for disaster,” he cautions.

Managing relationships with vendors is in itself a tool for supply chain success. Making personal connections and maintaining friendly communications with vendors can ease supply chain issues and ensure a contractor is aware of changes in pricing in a timely manner.

“Supply chain and construction cost issues have benefited best-in-class operators that made more of an effort to build relationships and nurtured strong partnerships among general contractors and subcontractors rather than focusing exclusively on price,” says Doug Houser, principal director of construction and real estate services for Rea & Associates. “Those that relied on the cheapest supplier or working with the lowest-cost subcontractor are finding that the lack of true relationships is now a major hindrance.”

CYBERSECURITY

Recent ransomware attacks on Colonial Pipeline, Travelex and JBS made headlines as these breached companies paid millions in cryptocurrency to get back to business as usual. Contractors should be just as wary of potential ransomware attacks and enforce strict protocols surrounding sensitive financial information.

“Phishing, ransomware and other cyberfraud continue to be among the top risks for contractors. It is no longer a question of if you will be breached, but when and how significant the loss will be,” says Jon Zeiler, managing partner of real estate and construction at Crowe LLP. “Having cyber insurance and understanding your coverage is paramount for risk mitigation, but the best protection continues to be training your employees on what not to click. With the explosion of ransomware, maintaining and periodically testing a backup system is key because backups can also be exposed to ransomware schemes. Best practices include holding three copies of the data, using two different backup methods or mediums and storing one of those copies offline,” says Zeiler.

The COVID-19 crisis prompted many companies not to simply go remote during the worst part of the pandemic, but to stay remote indefinitely. This naturally accrues risk for companies as workers use personal devices in unmonitored settings to complete their tasks. “With more people working from home and processing changes, false claims of changing bank accounts, addresses or other processes are more believable,” says Kellerhals. “Unfortunately, this has led to an increase in cyberfraud. The best defense against such attacks is employee education.”

Cybersecurity firms can also help by assessing exposure, developing protocols, reviewing business continuity plans and implementing protections to reduce risk.

“Under the New York Department of Financial Services’ first-in-the-nation cybersecurity regulation, New York State-based companies are required to implement written third-party cyber risk policies and confirm that due diligence is performed to evaluate the adequacy of third-party cyber practices,” says Joseph Natarelli, national construction services leader for Marcum LLP.

“Contractors are increasingly asked to demonstrate sound cybersecurity practices, whether under a law such as New York’s or as an emerging best practice. The standardization of cyber risk assessments makes it easier than ever for companies to vet third-party vendors and contractors. Construction companies that either lack these internal controls or are unable to effectively communicate them may be unable to survive many RFP processes—or even be ineligible to participate or prequalify for a project owner.”

Combining cyber insurance, employee training and cyber risk assessments is becoming more commonplace. Cyber insurance can act as a safeguard for construction firms that do not have a full-time IT person and give potential clients, vendors and subcontractors peace of mind while providing another level of protection when utilizing third-party services such as cloud service providers.

“The frequency of phishing and cyberattacks increased during the pandemic, and the pace does not appear to be slowing,” says Brian Bohman, partner and construction industry practice leader for Wipfli. “The most frequent types of cyberattacks are related to either ransomware or business email compromise, specifically accounts payable fraud. That is where a hacker pretends to be a vendor or contractor and requests a change to the payment instructions, so that payment is sent to the hacker rather than the vendor,” Bohman says.

CASH FLOW

Supply chain disruptions, labor shortages and rising materials prices continue to negatively impact the industry. But there is a silver lining. This perfect storm of financial factors forced many contractors to closely scrutinize and streamline outdated financial processes in order to improve cash flow. During the height of the pandemic, many construction companies turned to their accounting firms for advice on the best way to both manage finances and take advantage of federal and state assistance programs.

“We stressed the importance of building financial resiliency by using a 13-week cash flow model, which proved to be an invaluable tool during uncertain times,” says Todd Carpenter, managing partner for Baker Tilly. “A well-defined and regularly updated cash flow model defines fixed and negotiable costs, identifies levers to trigger if necessary to improve cash flow and defines non-core assets that can be divested to generate cash. Having this model available not only makes it easier for the leadership team to understand how to improve cash flow when needed, but also is helpful when seeking guidance from your accounting, financial and legal partners,” Carpenter says.

The Payroll Protection Program helped many contractors retain employees, putting them in a better position to tackle project backlogs. “Scheduling and planning was challenging for many, causing cash flows to be constrained at times. Without the PPP funds, it would have been a much different story,” says Adam Tillman, shareholder and market leader for BerganKDV. “Despite all the unknowns and concerns, many of our clients did very well last year. The PPP funds were able to act as a buffer that allowed contractors to keep people employed so they were ready to take on work as it began instead of scrambling to mobilize.”

“Project timetables were extended due to COVID-19, but with the assistance of PPP loans and the construction industry being deemed essential, contractors were back working quickly,” says John Gallo, national construction practice leader at UHY LLP. “The short downtime helped contractors keep cash flow moving and the PPP loans helped to eliminate any major cash flow issues.”

“For the first time in years, many construction companies have had to dig into lines of credit,” says Marshall Shepherd, partner for Melton & Melton, LLP.  “Their backlog of work is down and jobs are taking longer, resulting in decreased revenues. If construction companies have not done so already, they need to develop a treasury plan for cash management. A few areas where construction firms should take a deeper look include making sure their current financing options are still viable, proactively managing receivables, focusing on inventory management and auditing transactions.”

TAX PLAN PREPARATION

The roughly $1.2 trillion American Families Plan, now inching its way to being passed by Congress, includes spending for expanded public transit, road repair and infrastructure renewal. While it is unclear when the plan will be implemented, some key takeaways are: a 12.4% Social Security payroll tax for wages over $400,000, the repeal of elements of the Tax Cuts and Jobs Act for high income filers and a 15% minimum book tax for corporations making $2 billion or more (a big change from the originally proposed minimum tax on companies making $100 million or more). Whether these changes affect one’s business or not, consulting with a tax expert can ease any concerns and better prepare contractors for the years ahead.

“For those who feel the uncertainty of pending changes does not command the use of current resources to make changes for the pending unknowns, they may be best served by directing attention to ensure they are maximizing the already enacted tax provisions related to the pandemic—most notably, maximizing Employee Retention Tax Credits if their organization qualifies for the ERTC,” advises Bob Nagle, principal for Rehmann.

“Though the proposed tax legislation is uncertain, it is just another piece of the equation to navigate a challenging environment. The expectation is that the corporate and flow through tax on both ordinary and capital gain rates will increase,” says Ken Hedlund, principal at Somerset CPAs and Advisors. “Other considerations, such as depreciation rules, will be impacted. It will be important to monitor the legislation from the current proposal to its final form. Once known, there will be extensive proactive strategies to consider in order to minimize the impact of any negative legislation and maximize the benefit of any positive legislation.” Estate planning for a business should not be ignored with tax changes looming on the horizon. With a proposed capital gains rate of 43.4% (up from 23.8% on earnings of more than $1 million) and the elimination of tax exemption for capital gains at death, contractors should prepare now for this change.

“Look at your strategic plan, succession plan and estate plan now. If you were planning to make any significant changes in the next year or two, I recommend talking to an advisor and potentially making that change this year,” says Shane Brown, construction and real estate industry group leader at Plante Moran. “Tax increases are expected, so if a significant change is in your future, make the call today. Your advisor can also lead the tax planning process, which is an essential part of your overall business plan.”

THE SUM OF IT

With the financial lessons learned from the pandemic fading in the rearview, contractors are preparing to forge ahead with a renewed expectation of work. History, however, has shown that it’s never clear what lies around the next bend in the road. Owners and managers must exercise caution when recruiting new talent and continually revisit their financial practices.

“The pandemic has been disruptive to many businesses and requires an evaluation of infrequent and unfamiliar financial reporting issues that construction companies have not encountered before,” says Lisa Palladino, partner for The Bonadio Group. “Areas needing further consideration are fair value measurement and asset impairment, going concern, revenue recognition, loss contingencies, insurance recoveries and subsequent events disclosure. Construction companies should complete a thorough evaluation of the impact of the pandemic on financial reporting.”

Julian M. Xavier, managing principal of industry, construction for CliftonLarsonAllen LLP, offers a list of key focus areas. “Contractors should update business plans and cash flow projections to make sure they understand what their costs look like over the short term; study backlog revenues and then make hard decisions on expenses to ensure the viability of the company; revisit bidding and pricing practices on new work to make sure that pricing for materials, labor productivity, etc. are aligned with current conditions; and examine and place heightened awareness around billing and collection practices to keep cash coming in the door,” Xavier says. “Meet with project teams to identify any issues or delays to make sure these are quantified and captured as potential contract changes, and take another look at contract terms for appropriate language around delays/cost overruns to incorporate the changing market conditions.”

Keeping flexible and planning for ongoing disruption are key to successfully navigating through future downturns. A CPA experienced in construction can help identify and address weak points in a company’s financial system and better position a business for the next bump in the road.

“The world has changed, and companies need to be able to pivot. Work will be there; it will just be different. Water systems, HVAC systems, as well as buildings and roads aren’t getting younger. Contractors will be needed to repair them. It just won’t be business as usual,” says Marty McCarthy, managing partner for McCarthy & Company, PC.

 Methodology for The Top 50 Construction Accounting Firms
CE developed The Top 50 Construction Accounting Firms™ ranking by asking hundreds of U.S. construction accounting firms to complete a survey. The data collected included: 1) 2020 revenues from the firm’s construction practice; 2) number of CPAs in the firm’s construction practice; 3) percentage of firm’s total revenues derived from its construction practice; 4) number of states in which the firm is licensed to practice; 5) year in which the construction practice was established; and 6) number of AEC clients served during fiscal year 2020. The ranking was determined by an algorithm that weighted the aforementioned factors in descending order of importance. Note: A number of accounting firms elected not to share revenues, which affected their ranking. For more information, contact surveys@magazinexperts.com.