With contractors across the nation facing new challenges as we transition from a low-margin, job-lacking economy to today’s current growth market, a construction industry panel recently shed light on trends and best practices to keep on your radar. Featuring construction accounting leaders at Doeren Mayhew and speakers from Andrews Myers, BCH  & Associates, Frost Bank and Kiley Advisors, the panel highlighted three areas to watch:

  1. Beware of underbillings and profit fade, and brag on your backlog. By all accounts, underbillings are a bad asset to have on your balance sheet, indicating that you are either being overly aggressive when estimating profits on open jobs or are not able to bill in a timely manner. Bankers shy away from anything over a 10 percent variance between underbillings and overbillings. Profit fade is also a construction accounting red flag. Caused by anything from overaggressive estimating to faulty cost reporting, profit fade that shows up in your financials makes it difficult for bankers and bonding agents to trust your estimates for the current year. To give financial statements a boost, consider including a footnote showing a healthy backlog. Especially if you’ve had a rocky couple of years, this can help instill confidence in your banker or bonding agent.
  2. Be smart about your teams and terms. As you transition from the low-margin work of the past few years to the new surge in jobs, conduct your due diligence when putting together the project teams to go after this work. Use smart hiring practices with a keen eye on your experience modification to help keep workers’ compensation costs down. Ensure you have the right controls in place to check out the financial capabilities of your team and who they have working with them. Involve your legal counsel on the front end when assembling teams for RFPs. Keep in mind new legislation that limits your ability to change your bid or project team once submitted on some jobs.   Just as important as putting the right team together is making sure payments flow amongst them. Failing to insist on a firm date for payment from the start of the job causes problem for everyone else down the line. Use your contract terms to establish a scenario where the owner and the general contractor can insist on payment by a given date. Construction is one of the few industries that can dictate how and when you get paid – use this to your advantage to better manage cash flow.
  3. Stay current on your insurance acumen. Where insurance is concerned, keep your guard up or you’ll be taken advantage of. For starters, be sure your forms and contract verbiage are up to date. The insurance industry completely revamped its forms in 1987, yet many contractors continue to use antiquated, unenforceable wording. Major changes were also made in April of this year, so be sure your terminology is current. Trends to be aware of today include the industry’s focus on carving out coverage for concurrent and sole negligence coverage. Be careful in requiring this coverage, verifying that your own coverage is there and that your subcontractors’ coverage hasn’t been modified. Also, watch out for invisible exclusions. Insurance companies are gutting coverage by applying exclusions that never show up on your certificate of insurance. Be sure to specify in your insurance requirement that certain exclusions are prohibited.

For assistance navigating today’s construction challenges, contact Doeren Mayhew, with construction accounting professionals in Michigan, Houston and Ft. Lauderdale.