Contractors Center Point

Lease Versus Own - Which is Best For You

The following post was first seen on the Construction Financial Management Association February 2012 Update email. The post was written by Steve Usselman, Senior Vice President, Enterprise Fleet Management. Steve can be reached at steve.usselmann@efleets.com.

In any economy, smart business owners look for ways to ensure that their companies are running at peak efficiency. This has been even more evident in the past few years, as many companies have placed an increased importance on controlling costs. For many contractors, a vehicle fleet represents one of their largest costs, requiring a considerable amount of money, time, and resources. But, with sound planning and effective fleet management, controlling the costs of a commercial fleet is something that all contractors can accomplish.

One way to control fleet costs is to look into the different ways to acquire vehicles. Leasing cars, vans, and light duty trucks under a tailored fleet management program offers an alternative to an outright or financed purchase.

Leasing Can Increase Cash Flow
One option is to fund vehicles through a full-service fleet management company. This can make it possible to establish a separate line of credit and avoid tapping lines of credit at a bank to fund rapidly depreciating assets, such as a fleet of vehicles. Also, while traditional forms of financing or outright purchase generally require a complete payback of principal, most leases do not require a complete payback of the principal balance of the vehicle, which could have a positive impact on cash flow, depending on an individual company's cost of capital.

Cycling Extends Cost Savings
While saving money through the acquisition of vehicles is one way to cutting costs, contractors must also consider long-term decisions, such as how to save money on the back end of a vehicle’s life cycle. The goal is to minimize the net depreciation and operating costs of the vehicle by managing its life cycle. Many fleet services companies have vehicle replacement cycling systems that ensure vehicles are replaced at appropriate intervals to achieve optimum performance and resale value, and remarketing professionals who can help business owners take the guesswork out of this process.

No matter which method of vehicle funding your company chooses, there are many other benefits of fleet management – including saving time, decreasing management responsibilities, and making it easier to monitor fleet operation.

To understand more about lease versus own options or to consult professionals on other finance related matters, please contact the construction professionals of McKonly and Asbury, LLP.

Firm Billings Continue Rise in December

December marks the second straight month that the AIA’s Architecture Billings Index (ABI) increased, and the first two-month gain since February and March of 2011. At 52.0 (the same score as the previous month), the billings figures were strong enough to generate growth in most regions of the country and in most major construction sectors. Architecture firms in the Northeast, Midwest, and South all reported average billings scores of more than 50 for December, the threshold that indicates an aggregate increase in firm billings.

Likewise, firms specializing in residential, commercial/industrial, as well as institutional projects all reported gains with their preliminary December scores. That leaves only mixed-practice firms (ones without a majority of their billings in any single major construction sector) reporting declines in December. For institutional firms, December saw the first ABI score above 50 since January 2011, and the highest reading since mid-year 2008.

While the ABI numbers point to continued growth in the months ahead, they seem eerily similar to the pattern established in late 2010. In that case, strong ABI numbers in the fourth quarter of 2010 were followed by modest gains in the first quarter of 2011 before diving downward again in the second quarter of the year.

Economic growth strengthening

The national economy has been moving towards a modest upswing. According to a report by the Federal Reserve Board, most of the 12 Federal Reserve districts report economic activity expanding at a moderate pace from late November through December. Activity remained sluggish for residential real estate markets in most districts, and commercial real estate markets remained somewhat soft overall, but showed signs of ongoing improvement in several districts.

The general improvement in the economy was reflected in the December employment report. The national unemployment rate fell to 8.5 percent, the lowest reading since early 2009. Conversely, this number might overstate the underlying improvements in the employment situation, since in recent months the overall labor force has shrunk, lowering the unemployment rate.

However, the separate U.S. Department of Labor payroll report does indicate that payroll jobs have been increasing at a healthier pace recently. National payrolls increased by 1.3 million in 2011, and by over 400,000 in the fourth quarter. Construction payrolls increased in December, but were down very slightly for the entire year.

This general improvement in economic conditions is helping the consumer outlook. This past year ended with four straight monthly increases in consumer sentiment, according to the University of Michigan, and the preliminary January rate shows healthy growth over the December reading. Retail spending (even with some moderation in growth toward the end of the year) increased 7.7 percent in 2011 over 2010 levels, the strongest rate of increase since 1999.

Design fees still under pressure

While firms might be seeing the beginning of an upturn in revenue, most report that design fees as a share of construction costs are still suppressed. For well over 60 percent of firms, 2011 project fees as a share of construction costs are below the rates for pre-recession projects in 2007. Most other firms indicate that design fees are about the same. Fewer than one in 10 report that fees were higher in 2011. This trend is true in comparable proportions for firms of all sizes and in all construction sectors.

As a result, most architecture firms are reporting that profitability as a percent of gross revenue was lower last year than in 2007. Over half (51.5 percent) of all firms report that profitability was significantly lower in 2011, while an additional 17.1 percent report profitability to be only somewhat lower. Still, almost 11 percent of firms report that profitability was somewhat higher in 2011, and an additional 7 percent report that profitability was significantly higher.

To learn more about the Architectural Billing index please contact the construction professionals of McKonly and Asbury, LLP or visit the American Institute of Architects at www.aia.org.

 

 

Construction Backlog Declines in Fourth Quarter But Remains Up Over Prior Year

On February 14th, 2012, Associated Builders and Contractors (ABC) released its Construction Backlog Indicator (CBI) for the fourth quarter of 2011. CBI declined 3.2 percent from the previous quarter from 8.1 months to 7.8 months, but is still up 10.9 percent compared to the fourth quarter of 2010. CBI is a forward-looking economic indicator that measures the amount of nonresidential construction work under contract to be completed in the future.

Regional Highlights

• Construction backlog expanded in the Northeast from the third quarter to the fourth quarter, but declined in the South and West, and was essentially unchanged in the Middle States.
• Construction backlog is higher in every region of the nation compared to one year ago.
• Companies in the South, some of which are located in high-growth states such as Louisiana, Oklahoma and Texas, reported the lengthiest backlog at 8.9 months, up 14.7 percent from the fourth quarter of 2010. 

 

 

 

 

 

 

 

 

 

 

 

Industry Highlights

• All industry segments monitored by ABC’s CBI declined in average construction backlog from the third quarter to the fourth quarter, but backlog is up on a year-over-year basis in both the commercial/institutional and infrastructure categories.
• Construction backlog in the commercial/institutional segment fell from 8.4 months in the third quarter of 2011 to 7.8 months in the fourth quarter, but remains 11.4 percent above the level reported one year ago.
• Heavy industrial is the only segment in which construction backlog declined from the same time one year ago. Backlog for this segment fell from 6.6 months in the fourth quarter of 2010 to 5.7 months in the fourth quarter of 2011.

Highlights by Company Size

• During the fourth quarter, construction backlog for firms with annual revenue exceeding $100 million declined 3 percent. However, firms in this category continue to report the largest construction backlog among all revenue categories.
• Construction backlog for firms with less than $30 million in annual revenue remained at roughly the same level between the third and fourth quarter, but is up 14.1 percent year over year.
• Construction backlog for firms with annual revenue ranging from $30 million to $50 million increased from 7.3 months to 7.4 months during the fourth quarter.
• In the $50 million to $100 million revenue category, construction backlog declined from 9.7 months to 8.9 months during the fourth quarter, but is still 4.2 percent higher than the fourth quarter of 2010.

The Construction Backlog Indicator (CBI) is a forward-looking national economic indicator that reflects the amount of work that will be performed by commercial and industrial contractors in the months ahead. This new, national economic data set is the only reliable leading economic indicator offering this level of specificity focused on the U.S. commercial and institutional, industrial, and infrastructure construction industries. To learn more about the CBI Index, please visit www.abc.org or contact the construction professionals of McKonly and Asbury, LLP.

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.