Q: What’s the biggest piece of advice you would give company owners about how to work effectively with their construction financial managers, CFOs or accountants?
Elaine Ervin - CPA, Partner - Moss Adams LLP
Make sure you both understand each other’s jobs, and communicate project details effectively. If the CFO doesn’t have an adequate understanding of the budget-to-actual-contract performance, it’s impossible to estimate or report financials accurately or aggressively manage cash flow. Job performance is based on projections that are inherently subject to change, so it’s vital to communicate all changes, no matter how big or small. While a supplier delay or small labor cost increase may seem minor, it can influence decisions made by the finance team, and knowing about major changes can determine whether you’re able to collect on a change order. A lack of project knowledge could result in unnecessary payments, poor cash management or inaccurate financial reporting that will directly affect the bottom line.
Q: What are the most important financial and accounting concerns for contractors who have just begun to experience a heavier workload?
Joseph Natarelli - CPA, Partner in Charge - Marcum LLP
Congratulations! Work has picked up, and you are growing again. Now, here are the few things you must make sure are in place so that no opportunity for growth is wasted. First, make sure that you have sufficient labor capacity to successfully complete the work you’ve won. Second, confirm that you have sufficient financing available to fund the increased workload. And lastly, make sure that you have an adequate bonding line to cover the work. Once you’ve done those three things, you are good to go. I often see contractors entering into joint ventures when they, alone, cannot meet those three goals. This can be a good strategy as long as you know that together you do satisfy all three.
Jay Rammes - CPA and Director, Construction Practice - Barnes Dennig & Co. Ltd.
First, while the past recession was difficult in many respects, it was valuable to help contractors truly understand what it costs to run a business. Contractors were forced to eliminate useless expenses. They were forced to do more with less. Don’t lose sight of those times. As you begin to find more work, keep control of your costs and what it takes to run your business. It is easy to go back to old ways. Resist that, and set targeted gross margin and net income goals based on these new, tighter cost structures. Secondly, and not least, bigger is not better. Know what type contract you are best at, by size, geography, etc. If you are successful at $1 million contracts, you will not necessarily be 10 times better at a $10 million contract. Jobs outside your sweet spot are much more difficult to control and can quickly lead to substantial risk and losses.
Q: What is the best piece of advice you can give a contractor about obtaining adequate bonding?
Leslie Guajardo - CPA, CCIFP and Partner - Padgett, Stratemann & Co.
First, the contractor should communicate fully with the bonding agent and surety underwriter and develop a strong relationship with both. The more these advisors know, the more they will be willing to do for the contractor. As part of this flow of information, contractors should keep their bonding agents informed of upcoming projects they want to bid on and current projects in progress. Good contractors meet with their agent and underwriter at least quarterly and take them to see projects in progress and possible future projects. Second, contractors should make their balance sheet look as positive as possible. This can be accomplished by conserving as much cash as possible, having an adequate line of credit, disposing of any idle equipment and overbilling when possible to make sure certain receivables are kept current. Strong working capital (current assets less current liabilities) and healthy equity will go a long way in helping a contractor obtain the bonding capacity that is necessary.
Q: What surety predictions do you have for the remainder of 2013?
Mike Murphy - Executive Vice President and Construction Practice Leader - HUB Northwest
Overall surety industry results for 2012 remained quite profitable, and available industry capacity remains robust. While claim frequency has increased for the larger national sureties, severity has not yet impaired their results. Thus, most healthy contractors in the $50 million-plus revenue range should continue to see very reasonable underwriting criteria applied to their businesses by their surety partners. In fact, competition is fierce for larger contractors with ample capacity, highly competitive rate options and the opportunity to reduce or eliminate personal indemnity very much on the table. For smaller contractors, particularly subcontractors and specialty contractors with regional sureties, be very cognizant of your surety’s recent results, as losses incurred by certain markets or on certain classes of business could lead to tightening capacity and underwriting requirements.
Q: Do you foresee any changes in the surety industry that will impact contractors?
Tim Mikolajewski - President, Liberty Mutual Surety; Chair, The Surety & Fidelity Association of America’s Board of Directors
The surety industry is not changing significantly but rather continues to see an evolution in the underwriting and risk-evaluation process. As contractors have grown more sophisticated over the past 20 years, so has the surety industry. The result is an industry that has stable and consistent capacity for contractors at the emerging, small, middle and large market levels. Responsible underwriting, together with deeper relationships with contractors, agents and brokers, has mitigated bonded defaults and surety losses despite the prolonged construction recession. Contractors with sound business plans and execution, who communicate regularly and openly with their agents, brokers and surety underwriters, should find good responsive capacity necessary to bid and obtain bonded work both currently and over time.
Q: What are the most important steps contractors can take to protect their balance sheets?
Larry May - CPA, CVA and Construction Partner - Carr,