Contractors Center Point

Managing Working Capital Can Help Improve Cash Flow

Cash Is King. I am sure you have heard that saying before. But in business it is very true. Understanding the sources and uses of cash can help any business ensure that cash is available to buy necessary equipment, hire personnel and cover operational start up expenses just to name a few examples. The following post will give a number of tips that can be used to understand and manage cash flow in order to maintain strong working capital for future project.

1. Understand What Drives Your Cash Flow - Reviewing balance sheets and income statements are very important but reviewing and understanding your cash flow report will help your construction business better understand the sources and uses of cash during specific time periods. This will help in better understanding how your cash flow is being used and whether your construction business is building or draining cash.

2. Actively Management Cash Payments - Take advantage of discounted payment terms if cash flow allows. 2% discounts if paid in 10 days can reap serious cash flow rewards over a one year period. If cash flow is tight, consider bartering for services or delaying payments as long as the payments are within terms. Use of credit cards is an option but must be done with caution as failure to pay the credit card bills timely will continue to drain cash flow.

3. Manage Monthly Expenses - Review recurring expenses to ensure they are needed or can be reduced. Manage peaks in workload through the use of LEAN office services, outsourcing or using temps. Consider changes in lease agreements for vehicles and equipment and review regularly monthly service plans on cell phones, internet, etc.

4. Have Other Sources of Financing Available - In the event that cash on hand does not cover investment needs for equipment, etc., ensure that other sources of financing are available to help with short term cash flow needs. Other sources of financing could be lines of credit with financial institutions or ready ability to borrow with other lending facilities.

5. Collect Receivables Timely - Ensure that clients stay within payment terms will ensure that you are not financing their project. Offer discounts where necessary to collect cash faster. Ask for partial payments up front or larger initial payments on projects. Offer different payment options such as credit cards. There is no risk to you of the customer overdrawing their account or delay caused by mail service from checks.

6. Review Collection Process - Look for ways to better improve the collection process. Understand customer perferences for billing. Can the bill be emailed versus mailed? Is all contact information for the customer up to date to ensure timely receipt of the bill. Ensure that all required information per the customer is on the bill to eliminate confusion and delay on payment.

7. When Necessary, Send Late Receivables to Collection - Don't wait until it is to late on delinquent receivables to collect, use a reputable collection agency to step in an collect receivables when they meet the credit term limits. This will let customers know that late payment is not acceptable.

Using these tips to better manage cash flow will help improve working capital within your construction company. To learn more about this post, please contact the construction professionals of McKonly and Asbury, LLP.

 

Construction Financial Management Association Posts Updated Construction Indicators

Construction Financial Management Association (CFMA) has posted updated construction financial indicators for activity through March 2013. CFMA tracks the big five construction indicators from sources such as McGraw Hill, FMI Management and Consulting, American Institute of Architects (AIA) and Associated Builders and Contractors (ABC). A summary of the updated industry indicators is as follows:

CFMA Confindex - Increase of 15 points to 129 - A number of macroeconomic indicators suggest that despite US Economic growth, construction growth is firming.

Architectural Billing index - Increase of 12 point to 64.8 - With increasing demand for design services the ABI continues to strengthen.

FMI Construction Outlook Report - Holding steady at 8% growth for 2013 - Although the strength of individual markets is shifting, the forecast for total construction put-in-place for 2013 continues to show an increase of 8% over 2012 levels.

McGraw-Hill Construction Industry Confidence index - 64% in Fourth Quarter of 2012 - For the first time since 2008, signs suggest the the market is gradually recovering.

ABC Backlog indicator - Increase of 3.5% since November 2012 - ABC continues to report strengthening in its backlog indicator report.

To learn more about these reports, please visit www.cfma.org and search under Industry News and Advocacy or contact the construction professionals of McKonly and Asbury, LLP. 

 

 

FMI Releases Q1-2013 Construction Outlook Report

FMI, the largest provider of management consulting and investment banking services* to the engineering and construction industry released today its Q1-2013 Construction Outlook. Although the strength of individual markets is shifting, the forecast for total construction-put-in-place for 2013 continues to show an increase of 8% over 2012 levels. The $918,897 million estimate is a solid improvement, but FMI does not expect to return to the days of annual construction above the trillion-dollar mark until 2015.

The star of the show is residential buildings with a 23% rise in single-family buildings. While much of business sector is still in wait-and-see mode, some industries are breaking the mold and planning for growth. Commercial, lodging and office construction are starting to pick up.

The rich shale regions of the country are seeing a lot of construction activity. With oil and gas exploration booming, these regions are in need of housing, as well as the construction of roads, rail and pipelines to move the product from the fields to refining and distribution sites.

In addition, the potential for greater energy independence and lower energy prices is helping to make the U.S. more competitive in the global market and enticing more manufacturing to relocate in the U.S.

Residential Construction — Single-family housing put in place grew 19% in 2012, and FMI expects another 23% growth to reach $161 billion by the end of 2013. Multifamily construction improved a whopping 47% in 2012, with FMI looking for another 31% in 2013.

Nonresidential Construction Trends and Forecasts by Sector:

Lodging — After three years of steep declines, the market for lodging construction came back a strong 25% in 2012 and FMI expects another 10% growth in con­struction put in place for 2013.

Office — Office construction is finally showing a solid but slow turnaround with 5% growth in 2012 and another 5% increase expected in 2013.

Commercial — Commercial construction is the third largest nonresidential construction market behind education construction and manufacturing construction. That is why it is good to see that it continues into its third year of good growth, moving up 8% in 2012 and looking for another 7% to reach $50.3 billion in 2013.

Health care — Health care construction was moderate in 2012, growing only 3%, but FMI expects it to pick up in 2013 to 8% to $44.2 billion construction put in place for the year.

Manufacturing — Manufacturing construction increased 17% in 2012. It will continue with another 6% increase for 2013 through 2014.

Power-related — Construction for the power market grew 9% in 2012 and will continue to grow between 8% and 9% through 2017.

Construction Spending and Growth Continues to Rise

The PNC Financial Group recently reported that construction spending rose 1.2 percent in February, according to the Census Bureau, erasing some of January’s 2.1 percent decline (unrevised). Growth in December was revised down sharply, from 1.1 percent to 0.1 percent. Construction spending has increased in ten of the past eleven months, and in February was up 7.9 percent from one year earlier.

Spending rose in the three major categories from January to February. Private residential construction spending was up 2.2 percent, while private non-residential spending was up 0.4 percent. Public construction spending rose 0.9 percent in February. Private residential construction spending is leading the economy, and was up 20.1 percent in February from one year earlier as the homebuilding recovery continues. Private non-residential spending was up 6.1 percent year-over-year, while public spending was down 1.5 percent.

Residential building has been running ahead of overall construction over the past year. Many areas of the country have worked off the excess supplies of homes that developed during the housing boom. With prices down substantially from a few years ago, an improving labor market, very low mortgage rates, and gradually easing lending standards, residential construction activity has steadily improved over the past two years.

Conditions in the rest of the construction industry are more mixed (see Chart 1). There has been more modest growth in non-residential private construction recently. Office-using employment has been increasing for three years, but is still down by almost 600,000 from its peak in the summer of 2007, limiting the need for new office space. The drop in consumer spending during the recession and the increasing importance of internet-based retailing has weighed on the recovery in construction of retail space. And spending cuts at all levels of government have hit public construction, with spending down 16 percent from its peak four years ago.

Construction employment has increased by more than 280,000 since industry payrolls bottomed out in early 2011, but is still down by almost 2 million from its peak in 2006. The labor market recovery will remain disappointing until there is stronger growth in construction employment. The industry should continue to improve throughout 2013 and into 2014. Residential construction will continue to lead the industry this year. Excess supply continues to diminish, and housing starts are still running well below long-run demand given demographics. Non-residential construction will also continue to improve, but at a slower pace given the surfeit of commercial space in many markets. Private construction will remain a drag in 2013 given tight budgets and especially federal spending cuts from the sequester.

Lean Construction Methods Let Tower Rise Fast in Downtown Orlando

That new apartment tower going up near the county courthouse in downtown Orlando is growing so quickly, it's as if Jack buried a bean there and a concrete stalk sprouted.

The SkyHouse high-rise will top out in just a few weeks at 23 floors. If it stays on track, the building's 320 units will open to renters in October, only 13 months after the first dirt was shoveled aside. It takes that long just to build some custom homes.

The tower's builder, Batson-Cook Co., isn't pushing workers to rush; the job has gone quickly because of something called the "Lean" method, which is dedicated to ridding the construction process of waste, especially wasted time. Work schedules have been drawn so that nobody is left waiting on someone else.

"There are a lot of people who say you can't do that," said Randy Thompson, Batson-Cook executive vice president. "Well, you can, and it works great."

At a height of 249 feet, 8 inches, SkyHouse will become downtown's 11th-tallest building, according to the building-data service Emporis GmbH. People who live or work near the city center have marveled at how quickly the tower at Rosalind Avenue and Livingston Street has risen since the start of construction in September; the structure already sports a lot of its glass skin.

Of course, there hasn't been anything to compare it with in quite a while: the $63 million SkyHouse is the first downtown high-rise to be built since before the Great Recession.

In the years since then, a revamped approach to construction -- the Lean method -- has been taking root in the nation and is now apparent in Orlando, at both SkyHouse and another big local project. Boiled down, it's about being better, faster and cheaper.

Georgia-based Batson-Cook, owned since 2008 by a big Japanese company, Kajima, is adhering to concepts drawn generally from automobile manufacturing and specifically from Toyota Motor Corp.'s obsession with eliminating "muda" -- or waste of motion, material and time -- using the "Lean" method.

A more conventional approach was used to build SkyHouse's foundation, which consists of 300 piers, each made by drilling a 75-foot-deep hole and filling it with concrete.

But the tower's rapid rise from those piers is the result of well-oiled pattern of repetition made possible by dividing the job into smaller-than-ordinary bites.

The typical way to construct such a tower would have been to complete each 15,000-square-foot floor before starting on the next one, said Curt Rigney, a Batson-Cook project executive. Workers would erect floor forms, lay out reinforcement steel, and set up the initial wiring and plumbing fittings, which would take four days to complete. The floor's concrete would be poured and finished on the fifth day.

The waste in that, Rigney said, is that the concrete finishers are idle for the first four days, while the forms, steel and utilities crews are idle on the fifth day.

At SkyHouse, each floor is divided into three sections of 5,000 square feet each. Starting early each day, the forms, steel and utilities workers prepare one of the sections for a concrete pour that occurs late in the afternoon, when about 17 concrete trucks snake their way to the job along city streets.

With that approach, "workers do the same thing every day at the same time," Rigney said.

It's more complex than that; several sections are in various stages of progress on any given day. But the result is that the basic structure of each floor is completed in three days, not five.

By taking smaller bites of work, crews are in constant motion and constantly on each other's heels. "Waiting is 'muda,'*" Rigney said.

Ideally, another result of such tight turnover is improved quality. Because the job is an endless loop, in which every crew is quickly followed by another crew, it becomes clear who ran late and made a mess, and whose work was on time and spot-on.

"This is pretty intense," said Tim Archbold, a 25-year construction worker, who operated an enormous boom Thursday evening that belched out a 5,000-square-foot, 7-inch-deep layer of concrete, covering a dense maze of steel bars, cables, wiring and plumbing that wasn't here 12 hours earlier.

Carl Giovenco, a Batson-Cook project manager, watched the rubber-booted ballet of a few dozen workers lay down that 170 cubic yards of concrete. There was little talking, much less shouting.

"This is going off without a hitch," he said.

This post was written by the Orlando Sentinel and first seen in the Engineering News Record (ENR) Daily Wire on Tuesday March 12th. LEAN concepts continue to drive efficencies in many industries with construction being no exception. To learn more about the many concepts of LEAN, visit the LEAN Accountants Blog of McKonly and Asbury LLP at www.leanaccountants.com.

FASB Makes Final Decisions on Revenue Recognition - How Does This Impact Construction?

In the July 2012 addition of the ABC Spokesman, I reported to you the new proposed revenue recognition guidance and how it will impact the construction industry. Since then, the Financial Accounting Standards Board (FASB) and interested parties in this proposed  revenue recognition guidance have met to discuss this new proposed standard and to try to finalize the guidance for all industries. On February 20, 2013, the FASB and its interested parties concluded there discussions to produce what is believed to be final revenue recognition guidance. The new standard titled “Revenue From Contracts With Customers” is the outcome of these meetings and deliberations.

While the original and reissued exposure draft outlined numerous accounting changes for the construction industry, the proposed new guidance appears to provide a revenue recognition model that will produce results similar to results from the current model for many construction-type contracts. The new guidance will continue to recognize the use of percentage-of-completion accounting and other currently used accounting methods  familar to those in the construction industry with some changes. Overall the final outcome of this project appears to be positive for the construction industry.

While most of the new proposed guidance is consistent with the current model, there were some changes that are different and will require additional analysis in order to meet the new standard. The following is a summary of the key changes between the new revenue recognition model and that initially proposed:

• Collectibility (bad debt): Impairments from customer receivables will need to be presented     prominently as an expense in the statement of comprehensive income.
• Uninstalled materials and inefficient costs: Clarifying language will be provided to assist in determining how uninstalled materials and inefficient costs will impact a cost-to-cost measurement model of satisfying a performance obligation over time.
• Variable consideration (claims, awards, etc.): Construction entities will recognize revenue only up to the amount that should not be subject to significant future reversals. This constraint would be applied to the measurement of the transaction price (i.e., contract revenue).
• Onerous performance obligations (loss provisions): Existing guidance relating to the accounting for loss contracts will be retained.
• Transition method: A company has two options for transition (1.) Retrospective basis, or (2)
       Practical expedient approach. The practical expedient approach would permit an entity to:
  • Apply the standard to all existing contracts as of the applicable effective date (by recognizing the cumulative effect in opening retained earnings rather than restating comparative years) and to new contracts going forward; and
  • Disclose and explain the impact of adoption through this practical expedient on all relevant financial statement line items in the period of adoption.

This proposed standard will be effective for annual reporting periods beginning on or after January 1, 2017 for public entities and delayed one year to January 1, 2018 for non-public entities. The FASB will not permit early adoption of this proposed new standard. The finalized  standard is expected to be released in the second quarter of 2013.

To learn more about this new proposed standard contact the construction professionals of McKonly and Asbury, LLP.

Housing Starts And Permits Up In February As Homebuilding Recovery Continues

Housing starts rose 0.8 percent to 917,000 at a seasonally-adjusted annualized rate in February, up from 910,000 in January (revised up from 890,000). Single-family starts rose to 618,000 from 615,000 (revised up from 613,000). Multifamily starts, covering apartments and condominiums, rose to 299,000 from 295,000 in January (revised up from 277,000). Housing starts increased in the Midwest and Northeast in February, but fell in the South and West. On a year-ago basis starts were up 28 percent in February, This includes a 63 percent increase in the West, with gains of 56 percent in the Northeast, 33 percent in the Midwest, and 10 percent in the South.

Housing permits also rose in February to 946,000 at a seasonally-adjusted annualized rate, up from 904,000 in January (revised down from 925,000), an increase of 4.6 percent. This was the most permits since June 2008. Single-family permits rose to 600,000 from 584,000 (unrevised), while multifamily permits rose to 346,000 from 320,000 (revised down from 341,000). Permits were up 34 percent year-over-year in February.

The National Association of Home Builders’ housing market index fell from 46 in February to 44 in March. After increasing steadily since late 2011, the index has declined for two straight months. The index fell in the Northeast, South and West in March, but rose in the Midwest. Although the overall index fell in March, two of the three subcomponents rose: expected sales over the next six months and traffic of potential buyers. However, there was a big four point drop in the present single-family sales component.

The homebuilding recovery continues. After falling by about 75 percent from their peak in 2006 to their trough in 2009, starts and permits have gradually moved higher, although they are still more than 50 percent below their levels at the height of the housing boom. Demand for housing has picked up as the labor market has improved and price declines and extremely low mortgage rates have made housing highly affordable. A gradual loosening of mortgage credit is also boosting demand. Excess supplies of single-family homes have dwindled with stronger demand, leading to gains in construction. On the apartment side the shift away from homeownership has led to stronger demand and higher rents, leading to a recovery in multifamily building.

These trends will continue in 2013 as the Federal Reserve works to keep interest rates very low and the job market further recovers. Even with its recent decline, the NAHB index points to further near-term growth in single-family construction (see Chart). PNC is forecasting a 23 percent increase in housing starts this year, following a 28 percent gain in 2012, including a 16 percent rise in single-family starts in 2013. The improvement in homebuilding will add to economic and job growth this year. However, starts will not return to the unsustainable levels of the previous decade, as homebuilders, lenders, regulators and policymakers have all learned their lessons. In fact, one concern now is a lack of capacity, with prices of building materials moving higher as demand has picked up and some homebuilders reporting difficulty in hiring construction workers These factors were noted in the press release for the NAHB housing market index. The NAHB also cited tight credit and appraisals as factors weighing on new home sales.

Alert: Employers Required to Use Revised USCIS Form I-9

The U.S. Citizenship and Immigration Services has revised the Employment Eligibility Verification Form I-9, which all employers are required to complete for each employee hired in the United States. “The revisions to Form I-9 contain formatting changes and the inclusion of additional data fields,” according to the Department of Homeland Security Notice published on March 8, 2013, in the Federal Register. “Employers are required to use the Form I-9 to verify the identity and employment authorization eligibility of their employees.” Employers must use the new version of the form for all new hires and re-verifications, effective immediately. Employers may continue to use previously accepted versions (rev. 02/02/09)N and (rev. 08/07/09)Y until May 7, 2013. After May 7, 2013, employers must only use the new version.

U.S. Construction Spending Fell 2.1% in January

Spending on U.S. construction projects fell in January by the largest amount in 18 months as home construction stalled and spending on government projects fell to the lowest level in more than six years.

The dip was viewed as a temporary setback with construction expected to keep moving higher this year.

Construction spending fell 2.1 percent in January compared with December, when spending had risen 1.1 percent. It was the biggest one-month decline since July 2011, the Commerce Department said Friday.

Residential construction, which has been leading the rebound in building, stalled in January with no gain in activity following a 1.7 percent rise in December.

Non-residential building dropped 5.1 percent while public construction was down 1 percent, pushing activity in the government sector to the lowest point since November 2006.

For all of last year, construction spending totaled $855.4 billion, an increase of 9.9 percent from 2011. It was the first annual gain after five straight years of decline. But construction still well below healthy levels.

Construction activity in 2012 is 26.7 percent below the all-time high of $1.17 trillion set in 2007 at the peak of the housing boom.

The housing market began recovering last year after a deep, six-year slump. Steady hiring and nearly record-low mortgage rates have encouraged more Americans to buy homes. More people are also moving out on their own after living with friends and relatives in the recession. That's driving a big gain in apartment construction and also pushing up rents.

Sales of previously occupied homes ticked up in January after rising to their highest level in five years in 2012. And new home sales jumped 16 percent last month from December to the highest level since July 2008 while home prices rose by the most in more than six years in the 12 months ending in December.

Rising home prices encourage more people to buy before prices rise further.

Builders, meanwhile, started work on the most new homes in 4 1/2 years in December. Last year was the best year for residential construction since 2008, just after the recession started.

New SBA Surety Bond Limits

The SBA has increased the single limits for its very successful surety bond program. Essentially - the SBA helps contractors obtain surety credit by guaranteeing the bond for Insurance Company should there be a loss.  This mitigates the insurance companies risk and allows for less stringent underwriting.  It’s been popular over the past few years as balance sheets of construction companies have taken some direct hits.  Here are a few highlights:

Previous maximum - $2,000,000.00

New maximum - $6,500,000.00.  They will go up to $10,000,000.00 but must be performed for a Federal Government Agency

Project Size

Up to 2x the largest completed project ($6.5M - $10M maximum per individual project)

15 to 20x available working capital (for all projects)

 - Lines of Credit are included as working capital
 - Contractors with negative working capital may also be eligible using additional tools (like escrow)

Business Size

Allowable business sizes based on total sales and the number of employees is determined by NAICS code. This varies depending on the type of business. Total sales can be as high as $33.5M in many cases.

SBA Paperwork the SBA has greatly reduced the amount of paperwork needed to utilize the program.

To learn more about this program please contact Greg Marco of McConkey Insurance and Benefits at email gmarco@ekmcconkey.com, telephone 717-755-9266 or contact the construction professionals of McKonly and Asbury, LLP.