r e p r i n t

CONSTRUCTION FINANCIAL MANAGEMENT ASSOCIATIONT he S ource & Resource for Con st r uc t ion Financial P rofessional s

May-June 2010

CFMA BP May-June 2010

THE TOP FIVE CHANGE FACTORS for the Remainder of 2010

BY LAURA B. CULP

It’s in our nature to resist change: It’s un-comfortable and sometimes painful. Butin this unforgiving economy, change isthe key to survival.

As we know, the construction industryoperates within a very tough environ-ment. Most contractors started 2009 witha backlog that kept them working formost or part of the year. But, increasedcompetition, grabs for market shares inother niches, and jobs with low marginsmade 2009 difficult.

This year has been even more challeng-ing since contractors started with smaller,if any, backlogs. And, low or no margincontracts (often at or below cost) havecontributed to their financial woes.

Contractors must focus on the presentand make the necessary changes now toensure they’re around in the future.

COST-CUTTING SPECIFICS

Cutting costs is critical if you want toremain profitable. As many others havesuggested, review all business areas forpossible reductions and carefully developa plan.

Personnel IssuesKeeping such critical assets as key em-ployees can help ensure your company isready for growth when work picks up.However, many contractors have had toreduce their workforces due to a slowerdemand. The goal: Find the right balance.(See “When You’re Out of Options: Key

By maintaining the status quo, contractors can be

assured of one thing: As market forces go, so will their

bottom lines.

Since doing the same thing over and over again gener-

ally yields the same results, perhaps the most prudent

choice would be to do something differently.

Change.

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Financial Metrics for Downsizing” by Owen Cavanaugh.)

Gregory Monsanty, Vice President and Chief Estimator atWolf Creek Engineering and Contracting, Inc., explains thisdouble-edged sword: “If a company wants to continue toexist, it must maintain its organization. And, the people whomake up the company are its organization. A company mustalso not deplete its assets for the sake of maintaining theorganization or it will cease to exist.”

The trick is to develop a forward-thinking strategic ap -proach that reduces costs, as well as maintains relationshipsand assets. Layoffs are often the first item considered whencost reductions are necessary. So, take this opportunity toassess your current workforce and cut poor performers; butremember, it’s important to maintain as much of your keystaff as possible.

To help keep staff on payroll, consider using internal staff toperform jobs previously done by external workers. Or, usefurloughs for short periods of time, depending on the avail-ability of work.

Mark Rader, Surety Practice Leader for the insurance broker-age firm Oswald Companies, concurs: “In this environment,many contractors need to make quick adjustments to becomesmaller organizations with much less overhead. Unfortunatelyfor many companies, this means layoffs and reduced compen-sation. The alternative is going out of business.”

Vendor DiscountsWhile labor costs represent a major expense for contractors,every cost center must be evaluated for potential savings.

In general, the current business environment has fostered anattitude of “Let’s try to help each other get through this reces-sion.” So, if you’ve maintained good relationships with your ven-dors, consider asking for discounts for a limited period of time.

Vendors should be open to providing temporary price reduc-tions in return for long-term relationships. This applies not onlyto material and job-related costs, but to G&A costs also.

In addition to direct costs, you may be able to find significantsavings in nonstrategic costs. For example, you might reevalu-ate your insurance program; office supply practices; and print-ing, communication, and waste management services.

Changes to Bidding Practices“Everyone has cut costs wherever possible,” says Gary Road-ruck, Senior Vice President at Dawson Companies, an insur-ance and financial services brokerage firm.

“There were very few equipment purchases in 2009. And,some contractors that had previously been unwilling to bid a job for less than cost have rethought that approach and arenow willing to take on jobs at a loss, as long as the loss ismanageable.

“Of course, no one wants to lose money on a project, but ifthe job is big enough to keep key employees working and tokeep the organization intact, and if the financial strength ofthe company is there to absorb the loss, then it might makesense to lose a little bit of money on a specific project. This isa risky approach, though. You can’t do it often, or for very long.”

One approach that has been successful for Wolf Creek is topursue smaller projects it would not have bid in the past.According to Monsanty, these jobs are more numerous andhave profit margins 2-3 times higher than larger jobs.

Another bonus: Smaller jobs can be bid more aggressivelyand there is less at risk if the job goes bad. Many contractorsare also expanding their service offerings, as well as theirservice territories, in an effort to stay busy.

Management Efficiencies

With less work, contractors have time to manage jobs moreefficiently and avoid costly overruns. There is also the oppor-tunity to perform value engineering, where the cost savingsare shared between the owner and the contractor.

This fine-tooth comb approach to every business detail alsoapplies when you evaluate whom your company is workingwith and for. So, qualify subcontractors to ensure they are fis-

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“It’s UNFORTUNATE that a RECESSION must occur to FORCE contractors to REASSESS their businesses – but, those that do will be here

to reap the benefits in the future.”

CFMA BP May-June 2010

cally sound and able to complete their work. This will protectyour company from losses and litigation due to failure to com-plete a project on a timely basis.

And, even though work might be slow, this is not the time toaccept jobs from owners who are not financially equipped topay. (See “Improving the Collection of Receivables: Strategies& Experiences of an Attorney” by Antony L. Sanacory.)

MAINTAIN & DEVELOP RELATIONSHIPS

Current & Future ClientsCutting costs and reevaluating margins will help your companystay competitive; however, it’s also important to reinvigorateyour relationships and marketing strategies.

Tari Rivera, President of Regency Construction Services,Inc., says her company remains focused on staying in front ofcurrent clients, meeting face-to-face with prospective clients,and expanding its marketing efforts.

Russell Gregory, Vice President and Treasurer of The RuhlinCompany, a construction management and general contract-ing firm, agrees: “I encourage contractors to stay in touchwith private and public customers through sales and market-ing efforts. They will remember who stayed in contact whenthe economy improves.”

No matter how little might be happening right now, main-taining and fostering relationships with clients and financialpartners is critical.

Surety & Other Professional ServicesGregory states, “At Ruhlin, it’s standard operating policy tocommunicate frequently with our surety through our agent;discuss the type of work we are bidding on; and review ourjoint venture partners and the type of work we are doing to-gether, as well as the larger jobs where we are the primecontractor. Proactive communication keeps our suretyaware of our financial condition and the status of our bank’ssupport.”

Randy Clarahan, President of Tri-C Construction Company,echoes the importance of regular meetings with financial part-ners: “We make it a point to meet quarterly with our (bonding)agent and surety, whether we need to or not. We use themfor risk analysis.”

Rader says sureties like to see contractors actively demon-strate they understand what a surety wants, and then put

forth their best effort to meet those needs:

“It’s really not much different than a marriage in many respects.The exact requirements of each surety may differ, but at thecore, all sureties need to receive high-quality, accurate, andtimely financial information.

“Sureties also need to be assured that their contractors aresurrounded with strong outside advisors who understandconstruction, and that they focus on a particular area of con-struction expertise – while retaining the profits and the creditquality necessary to support bonding.

“Also, always keep the doors of communication open withyour bonding company to encourage an environment of trust,collaboration, and no surprises. We’re emphasizing how im-portant it is to maintain your surety relationship in this eco-nomic environment, where it could be difficult to get a newsurety on board (especially considering the potential suretyfallout and reunderwriting that may happen in 2010 if suretylosses start to mount).”

Some contractors think it’s better to wait to share bad news,but that approach can harm your business. Roadruck advises:

“Even if a contractor is losing money, it’s better to lay the cardsout on the table, face up. If you consult with your surety pro-fessional, and then have frank, open discussions with yourbanker and surety underwriter, you might avert a withdrawalof or reduction in your working capital line of credit (whichmight be necessary in order to keep the surety’s support so youcan stay in business).”

It’s always important to keep communication channels open,but even more so now. Work with all your financial advisors,bankers, sureties, bonding agents, attorneys, and accountantsto keep them informed about what’s going on in your businessand use their insights on business management during thesedifficult times.

PLAN, PLAN, PLAN

In business, as in all aspects of life, surprises happen – andsometimes, they are not pleasant. So, be prepared. Now is thebest time to reassess your workforce, in addition to your busi-ness and contingency plans.

Be sure to include an assessment of your company’s strengthsand the best way to capitalize on them in a changing market-place. (For example, take a look at such market trends asdesign-build, and decide if your company’s skill sets might be

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successful in winning these types of contracts and perform-ing them profitably.)

It might seem illogical to start planning for the future whenyou aren’t even sure if you’ll make it through the year, but hav-ing a detailed business plan can be the first step in protectingyour company’s goodwill and assets. Plan A is usually, “Dogood work, get more business.” Unfortunately, this economydemands a Plan B and, at times, a Plan C.

Now is the time to demonstrate good business managementskills to your surety and bankers. A well-formulated businessplan that addresses best- and worst-case scenarios and howyour company is going to weather this storm is essential. (See“Construction Business Planning in a Tough Economy” byJonathan Nobis and Kenneth Julien .)

EXPLORE PARTNERSHIP OPPORTUNITIES

Contractors are also using joint ventures to move into differ-ent markets. A joint venture allows companies to complementeach other’s strengths and work jointly on jobs that they couldnot do separately.

This works especially well on large jobs that are beyond onecompany’s capacity, but by partnering with another company,both can qualify for the contract. Also, utilizing each other’s ex-pertise can make a joint venture relationship valuable and re-sult in winning contracts.

Since federally funded contracts require a certain amount ofwork to be awarded to Disadvantaged Business Enterprises(DBEs), partner with a DBE to compete for these projects.

In addition, some contractors have expanded their businessby forging relationships with companies in other geographicallocations. Working with local contractors can also help yourcompany navigate the various rules, regulations, and require-ments that apply in different states.

WITH CHANGE ORDERS, GET ALL YOUR

DUCKS IN A ROW

“Document, document, document!” is the mantra when itcomes to change order policies and practices in 2010. In thiseconomy, contractors are so eager to say “Yes” to workthat they often overlook the proper procedures that will pro-tect them from losing money on change orders.

Now more than ever, it’s important to ensure that all of the

“t’s are crossed and the i’s are dotted.” Legal minds concur.Russell O’Rourke of O’Rourke & Associates Co., L.P.A., advisesthat contractors start with a well-written contract that ad-dresses the change order process – and then, follow thatprocess!

Specifically, if a contract states that changes must be approvedand in writing, then tell your PMs and superintendents not totake verbal directions in the field. “If nothing else, get some-thing signed in the field; while not good enough by itself, itestablishes that field notes are now allowed as an amendmentto the contract.”

“Something in writing with a signature gives an attorneysomething to work with,” agrees Bob Hager, a Partner atBrennan, Manna & Diamond. He recommends the use of fieldorders and the inclusion of a field order process as an interimstep in the change order contract language.

Field orders give your PMs and supervisors authority to workup to a certain limit; but, before the work begins, the ordersmust be signed by an authorized company official so there isno question that your company is due payment. The fieldorder information is then incorporated into the change order,including the actual cost of the change and its impact on theschedule.

“If it’s not possible to give the price at the time, do it on a T&Mor equitable adjustment basis; then agree to proceed and keeptabs of the cost so that the change order can be discussed later.Any claim has potential for liability and damages, and fieldorders protect that liability – as opposed to the traditionalhandshake deal, which often gets disputed due to miscom-munication and misunderstanding,” says Hager.

Rivera also discusses the need for an open dialogue: “Whetheron the side of receiving or issuing change orders, it’s impor-tant to be clear upfront about the change’s scope to eliminatesurprises for the owners. The ideal best practice is to havesigned correspondence (e-mail, meeting minutes, etc.). Thedocument acknowledges that increased scope is needed andbecomes even more important if the price is not established.Documentation is key.”

Clarahan echoes those sentiments: “We’re diligent about mak-ing sure that they (the owner) know that if there is a significantchange to scope, we will let them know the cost and optionsas soon as we know.

“It’s amazing how quickly decisions can be made. It’s a no-winto have discussions about work that was not authorized. Some-times, we need to call decision-makers and explain that work

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cannot be done without signed authorizations. Sometimes,that’s written into the contract.”

While documenting the authorization for the change order isimportant, it’s equally important to ensure that systems are inplace to properly account for the costs associated withchange orders. A good system is only good if properly utilized,so it’s essential that your PMs know how to use the system totrack these extra costs. Another option is to use a professionalclaims manager.

As Roadruck observes: “Some of my customers have hiredprofessional claims managers to ensure that their costs, proj-ect delays, change orders, etc., are all well-documented. Thisseems to be most advantageous when the job is being coor-dinated by a construction manager. I have seen situationswhere good claims-management companies more than paidfor themselves.”

TOP CHANGE FACTORS FOR 2010

The wildfire-like effects of this recession has forced contrac-tors to change and adapt to new conditions. It’s unfortunatethat a recession must occur in order for contractors to reassesstheir businesses – but, those that do will be here to reap thebenefits in the future.

Here are the top change factors to address during the re-mainder of 2010:

1) Cost-Cutting Specifics – Carefully assess where yourcompany can cut back in costs, but keep your key em-ployees. This also means taking a fine-tooth comb to all operations – from bidding to evaluating owners andsubcontractors to reviewing margins.

2) Maintain and Develop Relationships – Take the time to meet with your clients, vendors, and businessadvisors. When work is slow, spend more time withyour clients so you can understand the pressures their businesses are facing. Ask them how you canserve them better.

3) Plan, Plan, Plan – Now is the time to create or reevaluate your business and contingency plans. Assess what kind of work your company does best and focus on how to capitalize on those strengths.

4) Explore Partnership Opportunities – Collaborate with specialty contractors, those in other geographiclocations, and/or minority contractors to generateincreased opportunities.

5) With Change Orders, Get All Your Ducks in a Row –It’s all about thorough documentation and incorpora-ting field orders as an interim step within the changeorder process.

According to Rader: “Only the most efficient and smartestcontractors will be left standing at the end of 2010.” All thedata suggests that the economy is simply not going to pick upfast enough to support anywhere near the level of construc-tion activity we have seen over the past decade.

LAURA B. CULP, CPA, CCIFP, is a Shareholder and theDirector of Taxation at BCG & Company in Akron, OH,where she leads the company’s Construction and RealEstate Practice Group.

Laura has more than 25 years of public accounting expe-rience in the construction and real estate industries, andhas extensive knowledge of construction taxation rulesand requirements, including federal and multi-state issues.She has spoken at tax conferences nationally and inter-nationally.

Laura holds a BA in Economics & Business from LafayetteCollege, Easton, PA, and a Master of Taxation from theUniversity of Akron. She is a member of CFMA’s NortheastOhio Chapter, Ohio Contractors Association (OCA),AICPA, Ohio Society of CPAs, National Association ofWomen in Construction (NAWIC), and SubcontractorsAssociation of Northeast Ohio (SANEO).

Phone: 330-572-8044E-Mail: laura.culp@bcgcompany.comWebsite: www.bcgcompany.com

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CFMA BP May-June 2010

Copyright © 2010 by the Construction Financial ManagementAssociation. All rights reserved. This article first appeared in

CFMA Building Profits. Reprinted with permission.