CBIZ & MHM Executive Education Series™

Benchmarking for Contractors

Presented by: Anthony M. Hakes, CPA

Anthony R. Stagliano, CPA

July 22, 2014

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Before We Get Started…

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This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar.

External participants will receive their CPE certificate via email immediately following the webinar.

CPE Credit

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The information in this Executive Education Series course is a brief summary and may not include all

the details relevant to your situation.

Please contact your service provider to further discuss the impact on your business.

Disclaimer

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Today’s PresentersAnthony M. Hakes, CPA, CCIFPShareholder, MHM602.650.6225 | ahakes@cbiz.comTony is an MHM Shareholder and CBIZ director in the Phoenix office and

leads their Construction Industry Services Group. Tony services a variety of client including general contractors, home builders and real estate developers. He has provided consultation to clients on various accounting and reporting issues including revenue recognition, joint ventures, leases, variable interest entities and evaluation of change orders and claims. Tony is also a designated Certified Construction Industry Professional (CCIFP).

Anthony R. Stagliano, CPA, CCIFPShareholder, MHM610.862.2410 | tstagliano@cbiz.comTony, based in our Philadelphia office, is the Managing Practice Leader of the Construction Industry Group and has over 35 years of experience exclusively with construction and real estate industry clients. He specializes in providing attest, tax and consulting services for contractors and is recognized nationally as a leading expert in construction industry financial management. He is active in several construction associations. Tony is a Certified Construction Industry Financial Professional (CCIFP).

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Today’s Agenda

1

2

Overview and Background

Financial Benchmarking

Operational Benchmarking 3

4 Questions

OVERVIEW AND BACKGROUND

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What is Benchmarking?

Definition: “Benchmarking is the continuous process ofmeasuring products,services, and practicesagainst the toughestcompetitors or thosecompanies recognizedas industry leaders.”

David T. Kearnes, CEO, XEROX Corporation

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Embracing Benchmarking

Wanting to improve your chances for success Analyzing your financial statements looking for warning

signs Start with your balance sheet and income statement Calculate important ratios Compare results with peers in the construction industry Be proactive in implementing improvement Innovation the key component of top performing

companies Innovation requires commitment & paradigm shift

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Performance Planning Process

Responsibility of top management Understand your company’s purpose The overriding goal equates to success for the company Goal must be attainable and achievable Goal must be formally forecasted and measured Compare yourself to competitors

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Principal Types of Benchmarking

Process benchmarkingFunctionalBest practices

Self-comparison benchmarkingInternalBaselines

Performance benchmarkingCompetitive“Best-of-class”

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Self-comparison Benchmarking

Benchmarking without action is just keeping score

People attempt to perform at higher levels if their performance is measured

How do we compare against ourselves (last year, last job, etc.): Comparative financial statements Closed job analysis Historical ratio analysis Unit of measure productivity assessments

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Measuring Performance

Use reliable financial data A system of accurate job cost data Timely and readily available

financial and job cost data

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Financial Ratios

Liquidity Ratios Profitability Ratios Leverage and Performance Ratios Efficiency Ratios

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Liquidity Ratios

Current Ratio Quick Ratio Days in Cash Working Capital Turnover

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Profitability Ratios

Return on Assets Return on Equity Return on Sales Gross Margin Times Interest Earned Gross Profit in Backlog

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Leverage and Performance Ratios

Debt to Assets Debt to Equity Interest Bearing Debt to Equity Annual Principal Debt Service Annual Revenue Increase Cash to Overbillings Underbillings to Equity Revenue to Working Capital

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Leverage and Performance Ratios

Revenue to Equity Overhead to Equity Job Profit Fade/Slippage Backlog to Equity Months in backlog General and Administrative Expenses to Revenue Equity to General and Administrative Expenses

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Efficiency Ratios

Backlog to Working Capital Months in Backlog Asset Turnover Fixed Asset Ratio Days in Accounts Receivable Average Age of Receivables Days in Inventory Days in Accounts Payable Average Age of Payables Operating Cycle

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Operating Performance Measures

Other half of a comprehensive overall performance measurement system Consists of operating performance measures Looks at operating statistics Flows from financial performance measures Provides a more detailed analysis of specific areas

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Key Operating Indicators

Labor and equipment productivity Subcontractor performance Vendor and customer quality Financial and job cost reporting performance Jobs completed ahead of schedule or with minimal

punch list items Cost of processing certain types of transactions Cost of performing contracts on certain sized jobs Productivity of project managers and crews

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SIC NAICS____

Industrial & 1541, 1542 236210, 236220 Nonresidential

Heavy & Highway 1611, 1622, 237110 to 237990 1623, 1629

Specialty Trades 1711-1799 238110 to 238990

Website: www.naics.com

Contractor Classifications

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Identify Data Sources

RMA (Risk Management Associates, formally Robert Morris Associates)

www.rmahq.org PAS (Personnel Administrative Services)

www.pas1.com FMI (for customized benchmarking)

www.fminet.com Trade Associations Industry Focus Groups Sureties CFMA

www.financialbenchmarker.com

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Financial Benchmarking Resources

www.financialbenchmarker.com

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Compare Against Best-in-Class

Average vs. best-in-class Average is just average Best-in-class is a goal worth achieving Top 25 percent of most profitable firms Set strategic goals

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Identify Areas for Improvement

Create a financial benchmark worksheet Financial ratio to be measured Formula Best-in-class/benchmark ratio results Your company’s ratio results Comments/action plan

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Analytical Review and Reasonableness

Resources are available Puts company in best position to succeed Should be part of year end engagement Great opportunity to impress credit grantors

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Potential Warning Indicators Cash to overbillings < 1 to 1 Average age of receivables > 60 days Underbillings to equity > 20 % Fixed assets to equity > 1 to 1 Average age of payables > 45 days Debt to equity > 3 to 1 Revenue to working capital > 20 to 1 Interest bearing debt to equity > 80 % Annual principal debt service > depreciation

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Potential Warning Indicators (cont.)

Overhead to equity > 1 to 1 Annual revenue increase > 50% Job profit fade/slippage > 10% No cash No interest income Current ratio deterioration Losses for 2 or more consecutive years Backlog to trailing 12 months revenue Largest job > 150% of previous largest job

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Potential Warning Indicators (cont.)

Overhead increase % > Revenue increase % Accts. receivable from officers or related parties Real estate development activities Purchase of restaurant and/or golf course

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Questions?

Q&A

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Join us for these courses: 7/24: Second Quarter Accounting Update 8/14: Revenue Recognition for the Construction Industry 8/26: Revenue Recognition for the Construction Industry

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