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Market Update: Ongoing Challenges for Construction Accounting And Financial Management

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The 4 Biggest Construction Financial Management Concerns Addressed

In the summer of 2020, contrary to all the economists’ predictions, industry employment rebounded.

According to the Associated Builders and Contractors’ analysis of the Bureau of Labor and Statistics, the rebound consisted of the addition of 591,00 jobs, a recovery of approximately 56% of the jobs lost at the beginning of the pandemic.

While this amazing amount of recovery took place so soon after the beginning of the pandemic, it’s been nearly 18 months since then, and the recovery remains incomplete. Not only has employment not finally achieved— to say nothing of surpassing— its pre-pandemic level, the economic mood in our nation remains uncertain as the pandemic continues.

As CLB Trusted Advisors continue to guide our members in the midst of ongoing economic uncertainty, we are repeatedly asked to help address the same core of issues. Our members’ top concerns are: the shortage of skilled workers, risk reduction, cash flow management, and rising construction costs.

Shortage of Skilled Workers

CLB’s construction clients have been affected very differently from one another, based on their location. During the lock-down, construction was deemed ’non-essential’ in some parts of the country. That caused the industry to be hit very hard, causing massive delays in building in those areas— delays of several months. Many builders were also required to furlough their employees through that period.

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One saving grace of the time were the Paycheck Protection Program loans that many of our clients were able to obtain. These not only rescued individual businesses, but likely saved the construction industry as a whole. The US Small Business Administration’s most recent report indicates that 12.38% of all PPP loans were taken by the construction industry, giving that industry 3rd place ranking in loan recipients for the program. These loans made it possible for many small builders to retain their employees. The terms of the loans continue to be a good thing for builders: some of the loans will be partially forgiven, and the portions that aren’t, may be paid off over two years.

The current employment climate sees contractors facing intense competition when it comes to hiring skilled laborers who are looking to get back into the workforce. As a result of this fierce competition, desirable monetary compensation isn’t enough to attract your perfect hire: it’s crucial to create an excellent workplace culture, to foster employee engagement, and develop excellent processes and systems, so you can land your next best-fit team member, a brilliant professional who is also looking for a best-fit career move. For the greatest odds at success, great builders focus on maintaining their own sterling reputation and are not negligent when it comes to their recruitment efforts. Because personnel turnover is costly, using all the same energy and creativity for recruitment that go into marketing is a solid choice.

Risk Reduction

An economic crisis is an opportunity: an opportunity to assess your business practices, an opportunity to ask tough questions about how to manage your long-term viability, an opportunity to manage—and reduce— your company’s risks.

The grit and resilience for which contractors, and great business owners, are known, enables them to run by gut or by instinct in ‘normal’ times. However, when times are uncertain and emotions are running high, it is not the time to make reflexive decisions, but rather to ‘stick to the script’— to stubbornly stick to the strategic plan— and provide the company with stability and calm that are not coming from outside. The great business leader must proceed with caution and calm, making careful but flexible plans, and seeking the counsel of trusted and wise advisors.

For the sake of your workers in uncertain times: open, transparent communication about those uncertainties is a must. Any causes of corporate discomfort must be faced courageously in order to provide for the ongoing needs of your people.

Cashflow Management, or How to Get Paid

It’s a well-known fact of the construction business: contractors struggle to get paid on time. And when cashflow backs up, it causes difficulties and delays throughout the entire chain of subcontractors and vendors, contributing to missed bids on new jobs and necessitating short-term loan procurement.

So, how can you manage your cash flow and ensure that you get paid on time in this volatile economic climate? An airtight contract, flawless documentation, and enforceable liens are three keys.

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A perfect contract, which is thoroughly negotiated and includes interest penalties is your best friend when it comes to payday. Recently, owners have offered earlier payments in these contracts is the contractor is willing to give a discount, but given the state of financial margins for contractors, that may not be the most appealing solution. Flawless documentation includes providing as much data as possible to support your invoices, ensuring that the contract’s provisions are reflected in the invoice. Invoices and all their accompanying paperwork must be submitted promptly. Enforceable liens are an unpleasant aspect of the cashflow management problem, but should be an option on the table: if payment for work done is not forthcoming, the threat of property seizure should be on the table.

Rising Costs

In normal, less-uncertain times, construction costs can be fairly counted on to increase incrementally. But the pandemic created abnormal, very uncertain times, and construction costs in 2020 and 2021 have been nearly unpredictable since. And while many companies already had contingency plans in place, the new focus on providing PPE and new eyes on the industry’s dependence upon China are earning contingency plans another careful look.

One solution to the problem of construction being dependent upon Chinese manufacturing envisions bringing those manufacturing jobs back to American shores. While American-made materials would not suffer from the shipping and importing delays of those originating in Asia, they would not solve the problem of rising costs, as American labor is more pricey. And Americans may not welcome manufacturing coming here— regardless of the job creation factor— as the risk and pollution negatives may outweigh the positives. Looking to alternative sources of foreign-materials-manufacturing isn’t a fool-proof solution either, as European and South American sources of building materials also suffered in the pandemic.

The greatest consternation from construction companies over rising costs is not related either to materials or labor: it’s insurance. Construction companies are having to buy ever-more insurance to cover themselves against the ever-growing number of risks.

While we’ve addressed some of our clients’ chief and pressing concerns here, it’s by no means an exhaustive list of the responses to uncertainties that CLB has provided to our clients in the last year and a half. For more help with the construction financial management concerns of your business, turn to CLB Trusted Advisors for guidance.

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