Uncertainty as a Way of Life
Planning in the Roadbuilding Business in 2011
By J. Brian Barksdale
The outlook for the construction industry in this New Year and the word “uncertainty” are synonymous. It seems that from an economic and business perspective (at least), none of us are really sure of anything anymore. Although officials claim the recession officially ended many months ago, economic challenges have not subsided for many people in the United States – not to mention globally. As far as the roadbuilding industry is concerned, there are many unresolved issues with the potential for positive change.
As always, businesses need to plan for what is known now while also preparing daily for potential changes. It has been obvious over the past few years that the companies that were “light on their feet” and able to quickly make revisions to their business structure have been the most successful at navigating the economic downturn.
With this backdrop of continuing uncertainty, roadbuilding contractors should remain focused on several significant areas in order to prosper in the current economy:
overall financial stability,
surety and banking relationships, and
awareness of new legislation.
Most companies have cut costs over the past couple of years. Reductions in labor force, slashed overhead expenses, stringent reviews of material costs and lean business practices are standard and should continue as construction companies try to match their work forces to the available contracts.
Other areas, however, need to be emphasized, — such as making every attempt to reduce the heavy loads of debt that many companies face. Companies have announced bankruptcy while showing profits on their financial statements – simply because they didn’t have positive cash flow to keep their debts current. Even with historically low interest rates on borrowings, highly-leveraged companies are struggling during this downturn. Any steps to improve a company’s cash flow situation are positive – and becoming imperative – in today’s lean economy. To improve financial stability, consider these options:
Some businesses still have idle assets that may be sold with proceeds used to pay off debts, or loans that may be extended or restructured.
In certain instances, business owners should consider injections of personal capital in order to strengthen company balance sheets, particularly when low profit levels are dramatically draining the company’s equity. If owners do not have the ability to personally infuse the company with cash, securing outside investors is an option. This decision may result in diluting their ownership in the company. While not preferable, it is sometimes the only practical solution to improve a contractor’s financial stability.
With the increased competition caused by lower levels of available work, essentially all contractors are deciding whether to take contracts at low or zero profits just to cover overhead and keep valuable workers on the payroll. I have one client who has refused to do so, citing the fact 30 years of experience and no needs for “practice.” As 2011 progresses, contractors should continue to re-evaluate their position on this issue, and consider the question of whether being stuck with very low margin work is worse than lower volumes of work. Those companies with relatively clean slates may be in a better position to take new more profitable contracts as they become available.
Surety and banking relationships
Roadbuilders need to routinely work with their bankers and surety companies to maintain strong relationships. As the economy improves, many companies may find their attempts to grow and improve operations hampered or derailed entirely by an inability to borrow funds for working capital or equipment purchases. For example, even as significant, potentially profitable contracts surface, companies without the equity or borrowing ability to do the job will not be able to complete the work. As we emerge from this downturn, borrowing money may have never been more difficult with the tremendous scrutiny our financial institutions are confronting each day from regulators and shareholders.
The same philosophy applies to surety bonds. Bonding capacity is often a critical component of a construction company’s ability to secure new work, especially in the governmental arena. Although many contractors began the economic downturn with significant backlogs of jobs that have carried them to this point, that work is now dwindling. Given the reduced tax revenues that most governments have been facing, the letting of new public contracts has slowed or stopped in many areas of the country. So while it may be tempting to ignore the current need for bonding, the need will resume as conditions improve or as more government stimulus projects are created.
Corporate management should pay careful attention to maintaining strong relationships with their bankers and surety agents. Providing timely, accurate financial data is a key element to this process. As is so often the case, communication is critical; banks and surety companies do not like surprises. Companies should schedule regular meetings with their lenders and provide them with all of the business’ current financial information in order to prevent problems, as well as to secure financing and bonds as conditions improve. Consideration should also be given to establishing “back-up” relationships with other banks and surety companies so that additional options are available if and when needed.
Be aware of new legislation
So much has occurred in the past couple of years on the legislative front with a tremendous number of laws created or revised during this downturn and political cycle. Many changes have been made to income tax laws, business incentives and health care requirements. While every change does not impact all companies, there are definitely effects on every business from some aspect of the legislation.
The mantra of many contractors right now is that they only wish they needed to worry about income taxes. While this sentiment is not completely off base, remember that a significant amount of tax legislation has passed in the past year that provides business incentives, as well as tax breaks. Also remember that some of the legislation contained more stringent rules for compliance with certain areas of the tax code. Some of the recent changes include:
an enhancement of the property expensing election under Section 179, allowing a business to take direct write-offs of larger amounts of fixed assets purchases, including some leasehold improvements;
a lengthening of the period for the carryback of general business credits from one year to five years for qualifying small businesses;
increased deductions for start-up expenditures for newly created businesses; and
new or enhanced requirements for information reporting to the IRS, including changes to Form 1099 requirements and enhanced penalties for failing to comply with accurate and complete reporting of applicable payments.
The Small Business Jobs Act that went into effect September 2010 also offers a variety of other programs in addition to tax law changes. For example, Small Business Administration (SBA) 504 program loans have higher maximum limits for small businesses that may prove helpful for many contractors. For qualifying businesses that can meet job creation and retention goals, as well as collateral requirements, the SBA can also provide funding for refinancing of existing loans. The act also contains provisions for smaller businesses to gain access to federal contracts, which may help to expand possibilities for such companies to compete for that work.
Construction companies should not ignore the impact of health care reform on their business moving forward. Many have delayed reviewing those provisions based on the idea that so many of the requirements occur years in the future. Although there is a phase-in of many health care items, some changes in minimum health care coverage take effect in 2011. Businesses should be leveraging assistance from health insurance providers and other professionals to be sure they are in full compliance with the current law, as well planning for upcoming mandated revisions.
It seems that uncertainty will continue to rule the days of 2011. However, construction companies should not allow that uncertainty to paralyze or prevent critical decisions designed to improve business results. Many companies seem to already be implementing this advice since a recent survey by the Construction Marketing Association reported that 65 percent of contractors and construction-related businesses expect to increase their marketing activities and budgets for 2011. Remember that the failure to make a decision is actually a decision, so act proactively and hope for the best while preparing for the worst.
I wish everyone a successful and prosperous New Year. Maybe if everyone eats turnip greens and black-eyed peas on New Year’s Day (a long-standing Southern tradition intended to improve one’s luck and financial fortune), 2011 will be much better than 2010. I sure hope so!
J. Brian Barksdale is a partner with Carr Riggs & Ingram LLC, a company ranked 34th nationally and 4th regionally for the South in Accounting Today’s top 100 national firm listing, with hundreds of construction company clients.v