Part I of Surety Outlook 2017: Staying the Course addressed the economy, architectural billings and the state of the surety industry. While contractors are enjoying healthy backlogs and healthy profit margins, prudent contractors are studying the elements, properly manning and provisioning, and regularly charting their destinations to be disciplined and stay on course.
Manning and Provisioning
Being successful in reaching a desired location requires having the best people, backlog of work and supplies on board.
“A skilled worker, regardless of the job description, remains a treasure.” Due to the slower growth nature of the current business cycle, the continuing pressure of the skilled worker shortage will remain a huge challenge. With a substantial percentage of the workforce leaving the construction industry during the last recession, many post-recession businesses are struggling to find skilled workers. In addition, the construction industry has continued to lose the battle for a younger generation of skilled workers to more technology-based career opportunities. Coupled with the need for businesses to replace retiring baby boomers, the construction industry faces an uphill battle to repopulate its workforce.
To best prepare for the future, get the best people onboard. Great people accomplish great things together. Businesses that want to not only grow, but also flourish, must continually recruit and develop the talents of their current and future teams. Ultimately, this responsibility falls on HR departments, with a revamping of hiring practices to attract and cultivate talent and ensure the company’s vision and business goals are met.
For many businesses, there has been a complete shift in culture, with policies changing from the ground up. For others that already have policies in place, the increasing demand for skilled workers requires an improved method of finding the best candidate for the job. Therefore, hiring practices must remain a constant focus and integral part of any company, along with coaching and consulting from HR professionals.
Right Mix of Backlog
During the last few years, contractors have been running off undesirable thin margin work and reloading their backlogs with profitable projects. Having a laser focus on procuring the right mix of projects in a contractor’s backlog will have the most significant impact on future success. A formalized Project Hazard Analysis process should be performed on every potential job during project selection. A disciplined approach is necessary to evaluating the right project target size, scope, type (i.e., design-bid-build, design-build, best-value, P3, etc.), geographic location and risk exposures. At bid time, these factors should mirror an acceptable profit margin.
The construction industry is exploding with new cutting-edge realms of technology. Recently, there has been dynamic changes in using CAD, virtual and augmented reality for design, digital blueprint applications, aerial drones for mapping and surveying, smartphones and BIM for project management, field 3-D imaging, automated vehicles, machine guidance systems and robotics for production. Contractors that have the foresight and financial means to embraces and integrate the latest advanced automated equipment, methods and systems into the management and execution of their work will realize tremendous improvements in productivity, schedule performance and bottom-line results.
Maintaining adequate cash levels will be an increasing core value of successful contractors in the coming years. As many contractors are experiencing expanding backlogs, cash reserves become an even more critical component of supporting a successful operation. The amount of defaulted contractors triples during times of expansion. Often, many contractors do not have the cash flow or loss-paying power to keep up with their expanding backlogs.
Best-in-class cash flow management is made up of two key measures: cash flow from operations and bank lines of credit. Managing cash flow from operations begins with establishing cash acceleration controls, such as proactively negotiating preferred contract terms; preserving aggressive billing/collection procedures, including early negotiation of REAs and change orders; and setting beneficial payment and retainage schedules. Implementing these types of internal procedures that integrate project managers, controllers/accountants and management will ensure projects remain in the black and cash flow themselves through successful completion.
Even with implementing best-in-class controls, many contractors may not have the cash reserves to take advantage of project opportunities or withstand a large claim or loss. This underscores the importance of continuously increasing and maintaining an adequate operating bank line of credit. While some contractors wrongfully believe bank lines of credit will solve cash flows issues, bank lines should only be used as a secondary cash resource during trying times to resolve immediate issues (i.e., costs incurred by project delays or disputes) and to temporarily meet unforeseen expenses (i.e., equipment breakdowns). When establishing an operating bank line, a good rule to follow is to obtain a line of credit equal to 10 percent of the largest single-size job that will be undertaken (i.e., a $1 million bank line of credit will support a $10 million project).
Cash flow management is an ongoing process and should be proactively managed on a continuous basis. For contractors to proactively anticipate cash flow needs and successfully navigate through a potential catastrophic loss, it is recommended that cash flow projections be performed prior to undertaking a large project or backlog, then maintained throughout the year. These projections not only increase efficiency and bottom-line profits, but also become a very useful tool when negotiating preferred credit terms with a bank and surety.
Charting the Destination
“If you don’t know where you’re going, then any road will take you there.” A critical factor to achieve success for any contractor is to have a viable business planning process that includes the input from trusted advisors.
Preparation, implementation of strategies and measuring performance is critical to success. It doesn’t matter if the company is a multibillion-dollar corporation or a startup company just getting its feet off the ground. A current business plan serves as a roadmap not only internally, but for outside partners. Without a proper business plan, the company is essentially departing for an unknown destination without directions. In time, it may in fact make it to the target destination, but more times than not, will end up off target and lost, wasting precious time and resources.
For many companies, it is easier to ignore planning altogether. Often small businesses wrongly view the cost to develop a business plan as outweighing the immediate benefit. The value of putting together a comprehensive business plan cannot be over-emphasized. A business plan should evolve and be updated at least annually to ensure the company hasn’t drifted off course. It should show who the firm is, where it has been and where it’s going. Once a business plan has been developed and adopted, it should be communicated throughout the organization and shared with outside partners.
An important part of a business plan is that it provides a baseline for measuring success. Meeting or exceeding the goals set forth in the business plan will demonstrate efficient operations to outside partners, including banks and sureties. A great business plan will greatly enhance qualifying for the maximum and best credit terms available.
To be successful, businesses need to surround themselves with successful people. A circle of trusted advisors acts as a personal board of directors for the company. Trusted advisors will provide the knowledge and expertise necessary to navigate through the roughest of waters. Whether it’s a banker, accountant, lawyer, risk manager, insurance or surety broker, these professionals should be the first port of call when looking for a deeper understanding, a solution to a problem, or simply someone to bounce off of an idea, issue or opportunity.
Staying the Course
Innovation, discipline and grit are key elements to success. The climate and conditions of today’s market remains relatively fair, but in order to avoid headwinds and stay the course, business owners must continue to be diligent. As the captain of the ship, it is the construction executive’s responsibility to understand the elements of the current environment, properly man and provision for success, and set the destination for the company. Developing a plan to anticipate rough seas and arrant wind patterns is no easy task and success is never guaranteed. But it’s critical to be surrounded with an exceptional crew and team of trusted advisors that can be relied on to ensure that destination is reached.