Can you Hold Out Until Recovery?
Being Surety-Friendly, Today and Tomorrow

Recovery in the construction industry will come, and not so far down the road. The financial collapse, automotive catastrophe, and widespread layoffs, on top of the housing disaster, are leading to broad government intervention. Tax cuts and massive spending are taking place, and billions of dollars will go fairly quickly into hundreds of “shovel-ready” projects to reduce unemployment in the construction industry. The Administration has anticipated that over 675,000 jobs in construction will be saved or created as a result of the stimulus money earmarked for infrastructure construction. Some states have been utilizing federal money to fund existing projects, as opposed to new projects, but hopefully this is the exception, rather than the norm. The overall objective of the stimulus bill is an immediate reduction in unemployment resulting from a $140 billion shot-in-the-arm infusion of cash into the construction industry. Utilization of the $140 billion to fund existing projects, as opposed to new projects, was clearly not the intended purpose. At this juncture, state-by-state statistics on job creation resulting from the stimulus bill are nothing more than guesstimates.

Over the next year, the contracting pool will shrink, as some contractors fold. Of those that remain for a share of the new work, most will put their companies back on track to profitability. But some — especially those badly weakened by the downturn — will fail because they can’t qualify for bonding.

Take the example of Four Corners Framing and Carpentry. They barely held on through the recession, but now they’ll have a chance. The turnaround for them will be the government-funded Shoals Project, which would allow the company to put on ten crews.

But in the end, Four Corners won’t even bid the job. Why? Because it won’t be able to arrange a surety bond. After soldiering through the downturn — winning the war, you might say — Four Corners is about to lose the peace.

A huge infusion of government cash into the construction business may loosen the underwriters somewhat. But don’t expect surety confidence to reach pre-2001 levels again — two waves of construction defaults and the credit freeze have seen to that. Look for surety companies to ask for information not previously required and to analyze your business with greater scrutiny. The major components of your balance sheet and income statement are going to be analyzed quarterly, most specifically your Percentage of Completion work-in-progress projections. Those contractors which are highly leveraged with debt will have difficulty obtaining bonds under increased surety scrutiny. But, those contractors who have funded their balance sheets with cash over the last several years will have a greater likelihood of increasing their bonding limit.

Meanwhile, more owners require bonding for more projects. Contractors, who seek bonded work, today and tomorrow, must align their companies along surety-friendly lines. Not coincidentally, those are the same lines that help contractors weather recession storms. Here are three of the most important:

1. Bid for the job, not against your competition. There is fierce competition for the procurement of work in the marketplace. Desperate construction companies are bidding 20-30% less than anticipated for public works projects. Lack of work in the private sector is compelling builders and general contractors to compete for government work. Margins are very tight and there is little room for error.

Bottomline - don't start with the “market,” or what it will take to win the job. Rather, start with what you need to earn on the job and what it will cost you to complete it.

This seems obvious, but in lean times — and coming out of them — it’s tempting to grab for any work at all. A take-any-job approach can weaken a company badly, because repeated low-margin work leads to endless borrowing and debt repayment. Even when the recovery comes, a backlog of cheap work can prevent a contractor from taking on profitable jobs. Therefore, focus your bids on “fewer but better.”

Also, unanticipated costs can easily turn a profitable job into a break-even one. That means taking a job at near-cost is asking for a loser out of the gate. Not many contractors can turn in great work at low margins.

So it’s better to bid jobs at true cost, plus profit. That means strengthening your estimating capability — and your field management’s resolve to bill quickly and carefully.

2. Play to your strengths. When margins decline and competition increases, the grass in other pastures can look a lot greener. But taking a company into a new craft, or even a new subcraft, is difficult enough in good times. In lean times it can be the fastest way to lose money.

The same goes for new geography. Reaching far afield for work brings its own risks, among them hemorrhaging expenses and labor pools that may prove less reliable than the chamber of commerce advertised.

Neither of these moves is impossible, and one might be necessary to endure the recession. But don’t take the decision lightly and be sure you understand the risks and ramifications going in.

Decide in advance what kind of work offers your company a competitive advantage. Where can your expertise deliver the efficiencies that lead to profitability?

3. Streamline your cost structure and bolster cash flow. You’ve been doing that for years, right? But if there’s any fat left, it has to go. Discussing this prospect with your lender and your surety can help identify unnecessary costs. It is time to begin viewing your lenders, CPA's, and sureties as your business partners. Early involvement of your strategic partners can mitigate losses and keep your company afloat.

It’s an economic fact: Sometimes laying off ten people can save a company, and failing to do so can doom it. Don’t wait until you’re almost under water, when panic and emotion are running high, to make contingency plans — review your workforce and identify the key employees who must remain. You may find you have options, too — shifting to a 30-hour week for a time has saved more than one contractor from having to lay off workers.

Put compensation issues squarely on the table. Delayed raises, reduced bonuses, tighter benefits schedules — and cuts to executive perks — can help get a company through. A healthy transparency can bolster morale, but only if sacrifices are shared.

Bring overhead in line with the new realities. If volume and personnel are reduced, overhead must come down as well. But use a scalpel, not a cleaver. You don’t want to undermine the quality work for which you’ve earned a reputation.

Push this approach down through the company. The better managers and employees understand the dire need for economy, the more they will find new efficiencies and drive out waste.

Talk to your CPA's about new targeted incentives for construction companies which can accelerate deductions for tax purposes. Generate cash flow by carrying back 2008 losses 2 years (or 5 years if you qualify) to offset the more profitable 2006 and 2007 years and generate tax refunds.

Porter Keadle Moore, LLP is a founding member of ProfitCrew, an association of accountants and business advisors dedicated to helping construction companies build profitable businesses. For information, contact Adam Polakov at apolakov@pkm.com or visit www.pkm.com.