CPA firms serving construction clients practice one of the most complicated forms of business accounting in existence. All top CPAs are well-versed in accounting, bookkeeping and tax advice. The best bring balance and stability to thousands of construction companies as highly trusted business advisors. For this inaugural ranking, CE reached out to hundreds of U.S. accounting firms with a dedicated construction practice to learn what is keeping their clients up at night.
The labor deficit is the #1 concern for construction CPAs and their clients. During the Great Recession of 2007-2009, multitudes of projects were delayed or canceled. Thousands of contractors went out of business. Construction suffered more layoffs than any other sector as unemployment reached a staggering 15% rate. Legions of skilled workers left the industry or simply retired.
A decade later, CPAs report their contractor clients are still recovering from the aftershock. “Every client we talk with has the challenge of finding skilled laborers and candidates willing to join the trades. Our clients are ready to pay high dollars, but so is their competition,” says John Schwab, construction practice leader at Wipfli.
Legislation and political pressure on immigration reform have taken a toll on an already tight labor force, notes Todd Feuerman, chair of the construction services group at Ellin and Tucker. “Companies are struggling to find skilled people to work in a very challenging manual work environment at the proper pay scale.”
“Our clients’ biggest concern is the ability to attract top-notch talent and retain them in this competitive labor market,” says Jill Bosco, managing principal of construction for CLA. “They want to increase profitability and decrease turnover by incentivizing and motivating their employees.”
Exacerbating this issue in the Pacific Northwest, large employers like Amazon and Boeing are scooping talent out of the market. Rhett Ennis, construction practice group leader at Seattle-based Berntson Porter & Co., attributes the lack of laborers, carpenters, tradesmen and women entering construction to the emphasis on post-secondary education. “We are seeing construction businesses investing in high school vocational programs to address this significant problem,” he says.
Contractors attitudes towards employees are evolving, says Martin McCarthy, managing partner at McCarthy & Co. “Companies are changing their culture to attract workers. Never has there been a time that the employee has as much control as they do now.”
While it’s true that contractors can’t get 20 years of experience from a 20-year-old, tapping into the tech-savvy generation provides an edge over competitors. “Contractors need to change from what has worked with the baby boomers, who are retiring, and create interest so that millennials will enter, stay and succeed in the construction industry,” says Schwab.
In addition to attracting younger workers, digital transformation of existing business processes often has surprising financial and productivity gains. “Transformation requires documenting and understanding every step of existing processes,” says Robert Nagle, principal at Rehmann. “Think accounts payable or payroll to start. Does your field labor enter time with mobile devices? If this is not already in place, you are behind some of your competitors. And chances are your organization is incurring needless hours manually compiling hours and job costing details, with risk of error. Younger workers embrace automation and feel confident the organization is investing in the future.”
The looming exodus of experienced building boomers has top CPAs fielding an increasing number of questions from construction clients about business valuation, retirement planning and a smooth transition to family members, employees or new owners. “Succession concerns are growing at an exponential pace, mostly a result of our graying baby boomer entrepreneurs now seeking a comfortable exit into their golden years,” says Matthew Burchett, partner at Brown Edwards & Co.
“With succession to family or key employees, owners need to know they have options, how the value of the company is determined, and how it can be structured to make it affordable, yet not burden the company with debt,” notes Schwab.
Many family-owned businesses have concerns about passing the torch to the next generation. “Current leaders fear a lack of intensity and drive among successor generations may result in entity failures. The older group has sacrificed mightily for its success, whereas the younger group is quite vocal and insistent upon ‘work-life’ balance,” says Burchett. Overcoming these differences requires bridging the generation gap. “One hopes the jury will be out for a long time on this question, because a quick verdict is unlikely to be favorable.”
“While a family-owned construction company often wants the next generation to run the business, the level of experience and commitment to the business, along with access to capital, can limit the ability to ensure a smooth transition,” says Feuerman. “Then the real issue becomes, how do you sell the company to maximize value? Who is the right buyer? And how do you ensure the business will live long after you leave?”
“We’ve seen clients selling to PE groups, rather than being able to find a legacy alternative to continue to run the business,” notes James Mitchell, partner at Smith Leonard.
“The more proactive a contractor is, the more successful the transition will be for both parties,” adds Brian Bohman, partner at Wipfli.
As technology increasingly disrupts the industry, cyber attacks are evolving and occurring more frequently. More than 67% of The Top 50 Construction Accounting Firms provide cybersecurity consulting services. “Contractors must look for ways to prevent them and detect potential intrusions early in order to mitigate damage,” advises Schwab. “Currently, the average time it takes between a network compromise until it is discovered is over 200 days. Detection and response solutions can shrink this time to minutes or hours.”
Ennis agrees. “Evaluate your firm’s vulnerabilities and implement data breach protection tools. Using varying layers of protection and redundancies where you can afford them can compartmentalize a breach if one happens,” he says. “The key, though, is the education of all employees. Ninety-five percent of cybersecurity breaches are due to human error, phishing or social engineering.” Ennis recommends providing annual security awareness training and reinforcing it with ongoing mock phishing and social engineering campaigns.
“The most important advice we can give any firm is to assume that you are vulnerable,” says Leslie Paull, senior manager at LaPorte CPAs. “Firms may want to consider purchasing cybersecurity insurance.”
As if contractors don’t have enough problems, the consequences of climate change are beginning to impact the bottom line. “We’ve had more rainy days in the past two years than I can remember,” says Dennis Dlugosz, director of construction services at Midwest-based Corrigan Krause CPAs. “It’s extremely unpredictable.”
For contractors that are paid on performance, the record number of rainy days is bad news indeed. Due to an inability to perform the work because of the weather, many companies are carrying larger backlogs and lower billings. “This creates less profitable years and the need for more working capital,” explains Dlugosz. “Try going to the bank and saying, ‘Hey we need more money because we lost money. But look at all this work that we have, but couldn’t complete.’ That only works so many times. I see further stress being created on working capital lines if this weather pattern continues.”
Factory or field? To maximize labor investments and make weather delays a non-issue, construction firms are embracing the benefits of prefabrication. “Contractors are performing more of the work previously done on the job site in factories,” says Robert Mercado, partner at Marcum LLP. “Allowing the work to be performed in a controlled environment accommodates a reduced workforce and leads to more innovation in automation.”
Faced with increased competition and shrinking margins, construction owners should begin preparing now for the inevitable downturn, says Bosco. “Our clients are rightfully concerned over the impending financial downturn. Planning begins now, during profitable times in order to prepare for any setbacks.”
Schwab agrees. “Contractors should prepare for how they will adjust and adapt their businesses when the construction environment slows. With growth and a strong construction environment, some bad habits and inefficiencies are developing. Identifying these inefficiencies and making necessary adjustments will be key to surviving any future downturns.”
“Construction, by its very nature, is a cyclical industry. Even after the recovery began, to remain viable, many construction companies entered markets they had not participated in previously and lowered their margins,” says Paull. “The economy is expanding but many companies are committed to multi-year projects at those lower margins. At the same time, competition for construction workers is heating up, raising labor costs, and shrinking margins further. Tariffs are increasing the price of many key construction materials such as steel. The result is that economic growth has not benefited the bottom line of many construction companies."
While contractors must plan for an eventual downturn, “the general current trend for the industry is positive,” says Joseph Natarelli, national construction services industry leader at Marcum LLP. “We have seen a major increase in the number of commercial construction backlogs and improvement in the general business environment. Infrastructure, hospitality and office construction, in particular, have been standouts.”
“Subcontractors have been especially selective and are seeing margins grow tremendously because they are in high demand,” notes Mitchell. “GCs are having trouble finding subs to perform all the work, and it’s coming at a higher price tag.”
To ensure a healthy business lifespan, treat your relationship with your experienced construction CPA as you would a trusted doctor. Check in regularly, show them everything, heed their advice and get a second opinion if needed.
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