Lessons learned from the construction industry

BY ROGER T. GINGRICH

There is less work available and, at the same time, increased competition. As a result you have more people bidding on that work, which makes it more competitive. As banks have tightened up, there is less money to finance projects. If companies want to put an expansion on their building, they can’t go to the bank and get the loan. The owner can’t get money to fund the project, so that project gets put on hold. On top of that, many contractors are being challenged by their banks to get the working capital lines of credit they need to fund the
construction of these projects.
We always advise to bid the job, not the competition. There is some crazy bidding going on because the competition is forcing contractors to bid jobs at break-even rates, or less. Contractors know that if they don’t get any work, they don’t have any revenue coming in. But if they bid tight, they leave themselves very little margin for error and don’t realize they may be making their situation worse because, even though they are working, they are losing more money. In the construction world, it doesn’t take much for one thing to go wrong on a job that takes the profitability down pretty quick. Bidding tight to beat the competition is how a lot of contractors get hurt.
On the flip side, if a contractor doesn’t get enough work, they’re not going to be able to survive. That becomes one of the biggest juggling acts. It’s a balance between bidding competitively with bidding responsibly on these jobs. There needs to be enough margin to add profit that will cover overhead costs and in order to survive in a tough market.

Competing in a
difficult economy
A company can’t be run today the way it ran two years ago when volume and margins were up. When times are difficult, the first place to look is at payroll. Decreased volume may require decreasing staff levels or
converting some employees from
full-time to part-time.
Contractors need to take a good look at the benefits they offer. When times get challenging, benefit packages may need to be modified. A company is costing itself money if it’s not shopping around every year for health insurance. Continually accepting the 20% increases in health insurance costs is like leaving money on the table.
Also look at occupancy costs. Is there the ability to go back to the landlord or building owner and work something out to reduce monthly rent? One school of thought says to cut overhead when times are bad. But, marketing costs may be the one area to spend more to help get work or set a company up to get work when the projects come back into the economy.

Working with a team of advisors
If contractors are getting into jobs where the margins are already tight, they should make sure their contracts have been reviewed, they understand the language in the contract, know the process of how to document claims, and how they will resolve issues and disputes. Advisers can scrutinize the economics and risk-shifting provisions and make sure a contractor isn’t getting into a project in which
all the risk is on the contractor and yet there is no reward.
Working with agents can keep bonding programs in place, working with banks can keep the line of credit in place, and working with a CPA can bring that all together by putting together the financial statements that get the line of credit and maximize the bonding programs needed. Working with a CPA can ensure a contractor has the right systems and controls in place to determine profitability and manage overhead.

Looking to the future
Businesses should always have a plan in place in case of a downturn in the economy. Think ahead to know you have the right procedures in place to be as far ahead of the curve as you can be, as far as cutting costs and acquiring business. You should always be thinking up to three or four years ahead. Make sure you are maintaining your banking and bonding relationships. Don’t be a stranger, because the fewer surprises they receive, the better. Last, make sure you work closely with your advisers in times like these. BXM

Roger T. Gingerich, CPA/ABV, CVA, is the partner-in-charge of the real estate and construction group at Skoda Minotti. Reach him at 440-449-6800 or rgingerich@skodaminotti.com.