New legislation brings considerable impacts to the construction industry. One piece of legislation in particular, the Infrastructure Investment and Jobs Act (IIJA), a law enacted by Congress in November 2021, presents the largest long-term investment in infrastructure in U.S. history. The total investment of $1.2 trillion is intended to provide spending across numerous infrastructure programs — from roads, bridges and railways to high-speed internet access and power infrastructure.
The IIJA presents an abundance of opportunities for construction companies, but not without its own share of new challenges and complexities. For example, the U.S. has traditionally hosted an attractive procurement market, but as competition (including foreign competition) increases to capitalize on these new opportunities, more pressure will be placed on domestic supply chains and the labor market in a time that is already experiencing high inflation and low unemployment. Additionally, as the IIJA falls under the Build America, Buy America Act, there are other considerations to take into account, such as tax implications, insurance risk and other policy criteria like the demand for sustainable materials. These factors are a lot to manage in addition to the current day-to-day issues construction companies already face.
To ensure businesses are well positioned for the opportunities that the IIJA and similar regulations provide, finance executives at construction organizations need to invest in their own infrastructure first. This means adopting the advanced financial performance technology needed to best manage these projects for full vision into all aspects of their current business. Financial performance management technology enables construction companies to be ready for these new projects by empowering them to address the following considerations.
1. Cash Flow Forecasting & Cash Flow Management Are Critical
The IIJA and similar infrastructure funding will require finance executives at construction businesses to understand if they have the cash on hand to not only bid for these projects, but also to resource them correctly to account for the required labor and material costs. Strong cash flow planning and management are essential to ensure companies are equipped financially to handle the work upon winning the bid. To best manage this, they can consider and compare with similar projects they may have worked on previously and the type of cash flow needed then, and then use that data for current planning, addressing inflation and other external factors that may not have been previously encountered. Companies should look into some of the tax credits available as well, which can also be figured into cash flow.
2. Scenario Planning Paints a More Comprehensive Picture
Scenario planning should be a significant consideration as it helps construction businesses plan for “what-if” situations as they look for federal projects being released for bids. Beyond having knowledge of the cash flow available, organizations need to consider their project backlogs from the pandemic or any other projects that may have been put on hold for various reasons, as well as their current ongoing projects, and take into account where potential new federal projects may impact their overall businesses. Having this full picture of existing projects will help ensure organizations are able to meet the collective needs of all, including public and private projects if appropriate. Again, this comprehensive view should address factors such as labor, materials and equipment.
3. Frequent Re-Forecasting Drives Successful Business Management
Once a construction organization wins an IIJA-funded project, there will still be a period of economic uncertainty for the foreseeable future, from potential continued inflation to the ongoing labor shortage. And if or when the U.S. enters a recession, companies may need to start laying off employees. In the event of a workforce reduction, staffing will need to be taken into account from a project standpoint. (As readers of this article unfortunately well know, construction is typically one of the first industries to get hit during a recession, specifically for nonessential projects.) Being able to plan with confidence, including consistent re-forecasting, will help construction businesses better prepare for when those decisions must be made. This will not only help for a specific job but will also provide a better understanding of where costs and revenues will lie at the end of the quarter, at the end of the year — or on whatever frequency the business chooses to re-forecast.
Many construction companies are still conducting their financial planning using spreadsheets. However, to be best prepared for work awarded from regulations-driven opportunities like the IIJA, deep insights and flexibility are critical, and that’s not possible when planning with spreadsheets or pen and paper. What is needed is a financial performance management solution that provides the ability for construction businesses to understand and manage cash flow, produce what-if scenarios, and forecast and re-forecast. And that re-forecasting shouldn’t necessarily just be every quarter, but potentially every month — even every week — to be best prepared for successful business outcomes, particularly in today’s volatile economic climate.
With government dollars on the line, companies at the center of IIJA projects will be held to a higher standard of accountability. Having the right technology in place to fully manage the many complexities involved will help turn these regulatory projects into rewarding business opportunities.