Contractors Center Point

Construction Productivity Improves, as Companies Do More with Fewer People, FMI Survey Says

The early effect of the recession on the nonresidential construction sector included significant productivity improvement, FMI said in a new survey, “The 2012 U.S. Construction Industry FMI Productivity Report.” “Downsizing has resulted in retaining the most experienced and best-trained personnel who are the most capable of working more efficiently and harder,” FMI said. FMI warned, however, that the initial productivity spike has begun to wear off. While productivity continues to improve, FMI reports, the rate of improvement is slowing. FMI surveyed chief executive officers, chief financial officers, chief operating officers, presidents, executive vice presidents and vice presidents of larger contractors, including trade contractors and general contractors. One of the largest areas for improvement is planning at the field manager level, FMI said. Eighty percent of respondents reported they could save at least 5 percent of their annual field labor cost through better management.

The survey noted that the industry is undergoing significant changes in procedures, roles and responsibilities. “Emerging technologies, methodologies and practices, such as Building Information Modeling (BIM), Integrated Project Delivery (IPD), lean construction, and prefabrication, create opportunities for increased productivity,” FMI said. “Forty-two percent of respondents who have used prefabrication on projects have experienced improved productivity by 10 percent or more. Additionally, although only 35 percent of all respondents have employed integrated project delivery, 19 percent of them are reporting significant improvements in productivity.” FMI is the largest provider of management consulting and investment banking to the engineering and construction industry. Download a copy of the full report.

To learn more about this report or other matters impacting the construction industry, please contact the construction professionals of McKonly and Asbury, LLP.

How Do You Measure Productivity?

In the construction industry, productivity has traditionally been measured using accounting methods and techniques. How often have you analyzed a job or project by looking at the gross margin? Due to the nature of accounting principles used to manage company profitability, most measurements of job productivity are actually bookkeeping measurements of production. 

Current methods of productivity assessment focus on after the fact accounting and reporting. These methods have traditionally offered no real time information on projects in order to assess true productivity and to provide information to make quick changes to a project. In most cases, the use of traditional methods for analyzing productivity often fall short as they rely on measurements of output such as hours worked or quantity installed and not the outcome of the construction as accepted by the customer.

How is Your Company Embracing Social Media?

Does your company have a profile page on Facebook?  If not, it should.  Your competitors are likely on Facebook.  Facebook is not just for your kids.  Facebook has more than 750 million active users.  50% of those users log on Facebook any given day.  More than 30 billion pieces of web content (web links, news stories, etc.) are shared daily through Facebook.   We recently did a search of a few of our clients and construction industry contacts on Facebook, You Tube and Twitter.  We found that very few had a presence on these sites.  What we did find is that each of these websites contained many many links to other construction companies.  It’s a common discussion that backlogs in today’s climate are low so why not explore all available marketing resources.  Setting up pages on Facebook or Twitter, or uploading videos to You Tube is very inexpensive and information can be shared, sent and viewed by an almost unlimited audience.  

If you wondering how you can best use these resources, consider some of the following examples.  You can use You Tube to upload a commercial about your organization, or recently completely projects to show off your work.  You can share the links to these videos with your clients and other industry contacts, who in turn can share them with their contacts.  If you have a profile on Facebook and users “like” your Facebook page, you will instantly gain an audience.  You can use your Facebook page to highlight projects, provide information to your customers and advertise your projects to potential customers. 

Many of our clients and industry contacts serve the transportation departments in many states.  In a quick search on Facebook we found several transportation department profiles.  If your clients are active in social media, shouldn’t you be? 

For more information on this article and the benefits of social media, please contact the construction professionals of McKonly and Asbury, LLP

Make Ethics a Cornerstone of Your Construction Practice

In the wake of such corporate scandals such as Enron, the business world has heard the term “ethics” more than ever.  However, the current economic environment has made the concentration on ethical behavior in the workplace even more important, especially in the construction industry.  

The construction industry faces a long list of challenges related to ethical behavior including, but not limited to, bid shopping, payment issues, asset misappropriation, accounting fraud, bribery and corruption, intellectual property infringement, money laundering, espionage, and tax fraud. 

Most business owners make the mistake of thinking that “it can’t happen to me.”  However, according to Ethical Advocate, 43 percent of surveyed employees admitted to doing at least one unethical act in the workplace in the last year.  After observing an unethical action, 75 percent of observers did nothing about it unless they had a safe mechanism for doing so.  According to Jacob Blass, president of Ethical Advocate, the median loss in the construction industry is $330,000 per incident of fraud.  

Revenue Recognition: Financial and Project Management Must Come Together

In order to use the percentage of completion method of accounting for revenue recognition, contractors must have the ability to produce reasonably dependable estimates.  One of the biggest estimates is the estimated costs to complete.  Inaccuracies in these estimates can cause significant swings in revenue recognition and misstate monthly financial statements.  Management’s reliance on this inaccurate data can cause poor decisions.  In this economic climate contractors cannot afford to make mistakes that can be avoided. 

While the financial/accounting groups are the ones that perform the revenue recognition calculation, this is an “all hands on deck” process requiring the project manager’s knowledge of each project. Best practice is to develop standard policies and procedures to ensure that project information gets into the hands of the accounting group in a timely and efficient manner. 

ACCURATE COSTS TO DATE

The first step of getting good estimates to complete is having accurate project costs to date.  As invoices come in, project managers must accurately identify which project is using the goods or services and communicate to accounting.  In addition, project managers must be aware of goods/services performed near month.  Accounting may not know about the week of subcontractor’s services or large shipment of supplies received on-site, due to the invoices not arriving until a later date.  Significant costs incurred at month end must be communicated to accounting in order for them to be accrued and reflected in the project costs to date.

IRS increases Mileage Rate to 55.5 Cents Per Mile

In a move that many expected, the IRS announced today an increase in the mileage rate effective July 1^st.

This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011. 

The medical and moving rate will also increase to 23.5 cents. 

The IRS normally updates mileage rates once a year in the fall for the next calendar year, but with recent increases in fuel prices decided to make this mid-year adjustment. 

The announcement can be found at this link on the IRS website.

How Surety Underwriters look at The Work In Progress Report (WIP)

There seems to be some mixed messages being communicated in the bonding world regarding surety credit.  On one hand the surety underwriters are getting nervous about their clients balance sheets, suggesting they look elsewhere for surety credit.  On the other hand there are surety companies with capacity willing to take on struggling companies because the company has stabilized, are well managed and possess a backlog of work to move forward.  

The upside for sureties willing to take on a more risky client is that they will have gained a client that would have never moved if things were booming.  However, a company’s Work in Process (WIP) report becomes a crucial determining factor during both boom and bust markets for a company to obtain surety credit. 

The WIP report is perhaps the most important report a contractor has to manage the profitability of the jobs it has in the backlog.  Surety underwriters, on a per job basis, want to see the original contract amount, revised contract amount (takes into account any approved change orders), original estimated cost on a given project, and the original estimated gross profit.  

Buy Some Time By Learning How To Deal With Your Lender

We at McKonly and Asbury, LLP have seen over the past 12 to 18 months, a number of those in the construction community that are suffering from the poor economic conditions within the construction market. While backlog is down and jobs being bid are at a premium, construction company's, contractors, subcontractors and those servicing the construction market are doing everything they can to perserve cashflow in order to stay afloat. Because of this, many companies in the construction community are having problems satisfying bank loans, credits, vendors and other lenders. This is causing the primary lender to be nervous.

Here are some recommendations for persuading your lender to remain cool:

Don't deny reality. First, show your banker that you understand the problems. It's important to do this quickly. If your version isn't convincing, things may unravel fast. In all likelihood, the banker will push to liquidate your assets.

Taking the Mystery out of Surety Credit: How Surety Underwriters look at Working Capital

All seems calm at the moment but surety companies are bracing for losses in the next 3 years. While 2000-2004 were loser years, sureties have experienced record profitability from 2005 to present. The culmination was in 2008 where the industry as a whole had only a 10% loss ratio! Current looses are about 30% but still at a profitable level. The US trend seems to be that GC’s are requiring more bonds of their subcontractors and when private work returns many of those jobs will be bonded.  In light of the current economic conditions, sureties will begin to scrutinize operations closely and assess whether they can continue to offer credit for future projects.  

Bonds are typically looked at as unsecured credit.  The bank has first position liens on all collateral from hard assets to accounts receivable and contractor’s equipment.  Unlike traditional insurance that charges a premium commiserate with expected losses, the suretys 1-2% fee is a charge for underwriting.  They theoretically underwrite to a zero loss ratio and do not expect to ever have to pay a claim. 

Being privy to loss data from their vast base of contractors, patterns emerge and losses can be attributed to a few basic things:

• Cash Flow deficiency and insufficient Working Capital
• Working out of Territory
• Diversion of funds to “non-project” purposes
• Taking a job that’s over 2 times your largest job-to-date

Is a Hardening Insurance Market on Your Radar?

The tumultuous economic climate faced by the construction industry the past three years will likely continue throughout 2011. While the effects from the government stimulus in QE1 and QE2 provided modest relief to specific industry segments, construction industry unemployment is expected to remain at nearly 20%, bank credit continues to be restrictive, and state and local governments will curtail discretionary construction spending wherever possible.

Coinciding with this trend, the insurance industry has been in a consistent “rate softening” mode for more than a decade. Cumulative commercial industry pricing has now been lowered to year 2000 levels. However, this trend is beginning to change, starting with construction workers’ comp lines.

Over the past several years, industry underwriting results have shown signs of significant deterioration, particularly in workers’ comp lines. Insurance industry experts polled at the most recent IRMI Construction Risk Conference (November 2010) are projecting workers’ comp combined ratios in the 110-120% range for the 2010 year. This means for every premium dollar taken in, the insurance carrier sustains $1.10-1.20 in losses and expenses. What’s worse: The trend over the past three years has been deteriorating at an accelerated pace!

Among the factors driving these results is the significant reduction in payroll exposures and return audits. Further, the relatively low rate of return on predominately fixed income investments by insurance carriers has not had the leveling effect as in a traditionally stable economy. Finally, many of the reserve redundancies allowed by statutory accounting practices have been “rung out” due to the sustained economic downturn, and therefore will not be available to offset future combined ratio deficiencies.

Although no one can predict with certainty exactly when the marketplace will harden, the winds of change are blowing, with medical cost inflation on our doorstep, and workers’ comp is the most likely line to lead the charge. My recommendation: If you are in a position to negotiate a multiyear rate commitment at flat or slightly reduced rates in 2011, lock it up now!

The following post was first seen in the CFMA E-Spotlight Newsletter and is written by David R. Bradbury, Senior Vice President of Murray Risk Management and Insurance in Lancaster, Pennsylvania. Mr. Bradbury is also the Secretary of CFMA National. Mr. Bradbury can be reached at dbradbury@murrayins.com.