Ronald J. Eagar
With 2023 well underway, there is still a lot of noise in the world today that detours business owners from charting a confident course through this new year.
For construction contractors, who are now feeling the real COVID-19 impact that most other industries experienced in 2020, that noise revolves around the replacement of dwindling backlogs, material price increases, continued labor concerns, and the effect of interest rate hikes on capital expenditures. With no plans for additional governmental assistance programs, the potential to see a wave of contractor failures is real — and has already started.
While it is easy in the doom and gloom that comes with the shorter days and longer nights of winter to discuss inflationary concerns or debate if a recession is looming or already here, it is more productive to focus on the strategic planning techniques contractors can employ to capitalize on the opportunities we believe will emerge this year, like the first flowers of spring. Here are the first five of our Top 10 Contractor Strategies for 2023:
- Purchasing & Procurement. Take inventory regarding how you have been dealing with the price fluctuation of construction materials. To mitigate price fluctuation, consider purchasing and storing stock items in advance and in bulk, or secure a purchasing agreement for stock items in an effort to lock in prices and minimize the overall cost. Review if change orders are being accepted for increased costs of construction materials or altered lead times for purchasing materials.
- Revisit Your Prequalification Process. With so much talk in the industry about other construction contractors in distress and fear of failure, this is a good time to revisit and update your subcontractor prequalification process. When the contractor’s prequalification program relies on year-end information, the issue becomes the reliability of outdated financial statements on which you are making decisions. In addition, 2021 saw the end of government grant programs, such as PPP and ERC, so results may have been skewed. Asking for updated financial information, whether CPA-prepared or not, could give the qualifying contractor greater insight into the current financial health of a subcontractor before it is too late. Don’t be afraid to be more critical in your analysis and ask questions.
- Operations & Disaster Planning. Take note of increased costs this year due to inflation. If you implement innovations to streamline operations, you may be eligible for R&D credits to help reduce any tax bite coming your way. In the event of future disasters or slowdowns, have a plan in place and make sure your team knows the proper procedures to execute during a business crisis.
- Project Performance Management. This is an ongoing review of the efficiency of your projects. It is essential to have a formal policy in place for communicating, reviewing and documenting actual job performance in relation to the final buyout budget. Management should review job costing and profitability on a regular basis and make necessary changes in estimating and project management.
- Internal Controls & Auditing. Reflect on whether your business has sufficient internal controls in place to deter the opportunity for someone to commit fraud, including your remote employees. Ensure job costs are being posted to the correct project. Also, review how journal entries are originated, approved and posted within your accounting environment.
Every market condition presents opportunities, and this one is no different. So, keep your eyes open. These may come in the form of labor or other talent, new customers as you step up and fill a market void or accelerated investments in technology. Whatever it is, be open to it.
Your service providers and advisors are key sources of innovative ideas and strategies. Stay engaged in a continuous dialogue with them to understand what they are seeing across the industry. For example, a conversation with your bonding agent could reveal problems other contractors are experiencing and help you avoid them through proper planning. Keep in close contact with your audit and tax professionals, as their insights into your financial condition can yield valuable recommendations for greater efficiencies and cost savings. This discussion should extend to the bank, making sure they are on board with any upcoming requests that will require your credit providers’ backing. Leave no room for surprises.
In the next issue of SMACNews, we will reveal another five contractor strategies for 2023. If you have any questions, contact Ronald Eagar, construction partner at Grassi Advisors & Accountants, at firstname.lastname@example.org.