Managing Your Construction Firm in Uncertain Times: Top CFO Insights
Tough times don’t last, but tough companies do. What strategies are you employing to ensure your company succeeds amid turbulent economic times? During the recent construction CFO panel at the AICPA & CIMA Construction & Real Estate Conference, top construction CFOs weighed in on what they are doing now to help ensure they are prepared to face whatever economic uncertainties lie ahead.
Risk Management Process
In times of economic uncertainty, you can almost guarantee you will face higher levels of scrutiny from banks and sureties as they look to reduce their risk exposure. You need to be doing the same.
Do you have a risk management control system in place? If not, now is the time to implement one. Whether your company calls it a “fit funnel” or “circles of risk,” developing and following a formalized risk management strategy for taking on new projects is crucial to maintaining tolerable risk levels—especially in unpredictable economic times.
Before taking on a new project, start by asking yourself and your team the following questions:
- Is this project in our niche?
- Size – Is this project within or beyond our realistic capacity? Is this project significantly larger than anything we’ve ever done before?
- Location – Are we familiar with and comfortable with the environment and all of its potential conditions?
- Scope – Is this work within our areas of true expertise? Does it fit our core job profile?
- Is this project with a developer and/or subcontractor that I have worked with before? New and unfamiliar relationships present a lot of unknowns.
Maybe your personal “fit funnel” lets you accept one of these risks, but not two. Maybe you assign them a hierarchy of tolerance. Decide what level of risk your company is able to realistically accept. Be confident in your “knowns,” so you can roll with the unknowns.
Scrutinize Your Backlog
You have work lined up and your backlog looks good on paper. Does it hold up to serious scrutiny? To fully be confident in your secured work, you need to take the time to ask the questions to accurately predict your projects and their related cash flows. Will you need to float your general and administrative expenses for a few months? Will you even be able to if you need to? These are some tough questions you need to understand the answers to in order to be prepared to weather any economic storms.
- What is your realistic capacity?
- How much can your “A-Team” take on?
- Are you risking quality or reputation if you push forward?
- How likely is this job to go?
- Is the contract signed or verbal?
- What is the funding source? Will there be issues there?
- Will the job go on time? If not, are you able to float your costs? For how long?
Strategize and Re-strategize
What worked for you in an economic boom will not necessarily work for you in a downturn or recession. You need to adapt to the changing economic landscape and be willing to adjust your contract and bid strategies.
If anything about the economic environment right now is certain, it is that costs are rising, albeit at unpredictable rates. Securing materials is more difficult and more expensive than in recent memory. Construction labor costs were up 4.7% year over year through Q3 2022 (Employment Cost Index) and many economists are predicting similar cost increases in 2023. Here are some examples of what other CFOs are doing to respond:
- Expirations on bids - bids only good for 3 months
- Limiting or eliminating liquidated damages
- Diversifying types of contracts – leaning away from fixed price or including escalators
- Using Consumer Price Index for all materials
- Using Employment Cost Index for labor
The panel also recommends being proactive and talking to the customer early and often on any overruns, delays, or price increases. The customer has a vested interest in their contractor staying in business and completing the work. Use your personal “fit funnel” to make sure you are working with the ones that are willing to flex with you on any bumps in the road.
Know Your Numbers
Gather your financial data and understand what it means. Determine your monthly general and administrative costs and prepare a cash flow analysis. After you are confident in your backlog of work, calculate your profit in backlog. Remember the old adage: "Cash is king." Make sure you have enough cash on hand to cover your expenses ahead. Jobs delays are almost inevitable in this environment, one panelist recommends having a plan in place to be able to float 3 to 6 months of G&A costs.
RELATED ARTICLE: Go Beyond the Operating Cash Flow Model
RELATED ARTICLE: Preparing for Economic Uncertainty with a Fractional CFO
Preparing For the Worst Sets You Up for the Turnaround
Remember, economic uncertainty is not permanent. Business planning is an important mental process that focuses on the what-ifs more than the numbers. If the worst happens, how will you stay in business and meet your commitments? When you have a plan for that, you’ll be prepared to respond no matter what happens.
Putting action plans in place now, while preparing for an economic decline, allows you to be prepared to take advantage of the eventual economic upswing.
Anna Carlson, CPA
Anna Carlson is a manager on the construction, real estate, and engineering team, helping clients with audit and attest engagements. She has been with Redpath and Company since 2014.
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