How To Profit During Tough Times: Strategies for Helping Contractors Get the Most out of Their BusinessJanuary 03, 2011
By Luke Ebersold, Partner, BlumShapiro and
Frederick Hughes, Partner, BlumShapiro
These past 12 months have proven to be challenging for many contractors, not to mention much uncertainty and concern as to what 2010 will bring. As the construction industry continues to shed more jobs, securing new credit from banks has become increasingly difficult, and lower margins on new contracts are being realized. It has not been an easy time for the industry, to say the least.
However, during tough economic times like these, it is important to keep a focus on areas where improvements can be made involving a company's business processes, policies and even profits.
As contractors soldier on through these difficult times, there are several items that should be considered in order to help maintain viability and profitability.
Allocation of Overhead - In order to estimate jobs accurately, contractors need to have a proper understanding of the costs that are associated with their contracts. While direct costs like materials and labor are easy to identify, there are several other indirect costs that should be included when preparing cost estimates. These costs include, but are not limited to:
- Estimating expenses
- Small tools
Developing a methodology for capturing and allocating these costs on contracts may prevent them from being overlooked, which will indeed help in the short and long term. Once a methodology is established, it should be reviewed periodically and adjusted as needed. Without an accurate overhead allocation, it's always possible a contractor is not bidding jobs high enough to cover all costs, which can result in money left on the table or an unrealistic estimate of the profit that will be earned on the job.
Cash Flow by Job - Contractors should consider setting up a cash flow schedule for each job. It should include:
- Contract value
- Estimated total costs
- Total billings
- Total costs
- Current receivables and payables balances
Tracking the cash flow on a job-by-job basis will allow a contractor to identify jobs with good cashflow and stress the need to bill and collect receivables as quickly as possible.
Workers' Compensation Insurance - If a company maintains safety programs, there may be eligibility for credits on the workers' compensation policy. These credits include the Drug-Free Workplace Credit, Safety Credit and the Contractors Premium Credit. Additionally, workers' compensation policies should always be checked to ensure that employee job classifications are correct. Lastly, companies should always check the accuracy of the National Council on Compensation Insurance (NCCI) Mod Factor Rating, which directly affects insurance premiums.
Leasing vs. Buying - If a company is considering equipment purchases for 2010, the question of "buying vs. leasing" should be asked. Some advantages to leasing include lower up-front costs, more flexibility on equipment upgrades and tax-deductible lease payments. One disadvantage, though, is that the total of the lease payments can exceed the actual cost of the equipment. This should be taken into consideration.
Advantages to purchasing equipment include the use of accelerated depreciation methods and the ability to own the equipment indefinitely. This is ideal if the equipment will be used over a long-term period. The primary disadvantage of purchasing equipment is the initial down payment and the potential need for bank financing.
Tax Optimization - The key here is to utilize every tax benefit that is available – this will naturally improve cash flows. Here are some excellent examples of the deductions that exist:
- Deductions for energy-efficient construction or renovations (especially government projects)
- An extended carryback period for net operating losses
- Bonus depreciation for investment in equipment and expensing capital assets up to $134,000 of fixed asset costs (subject to certain limits)
Additionally, contractors should consult their tax advisors and consider whether or not it is beneficial to defer taxable income given the possibility of increased tax rates in 2011.
Billing and Collections - One essential element to this whole process is reviewing a company's schedule of values with project managers to identify items where gross profit can be loaded into activities that will happen earlier in the job. Companies should also review the controls in place surrounding billing processes to ensure that customers are being billed as aggressively as possible, which includes billing change orders and retainage on completed contracts. It is also important to remember to make sure that change orders are communicated in a timely manner to owners in order to expedite approval. Lastly, companies should consider holding weekly or monthly collection meetings with the project team to discuss any collection issues and follow up on past due receivables promptly.
ARC Loan Program for Small Businesses - Finally, as part of President Obama's American Recovery and Reinvestment Act of 2009, the U.S. Small Business Association (SBA) has established a loan program to provide capital to small businesses. Loans under this program are available to assist small businesses with their existing debt service payments so that the company can use cash flows to invest in the business and retain jobs. The maximum loan amount is $35,000; the first payment is deferred for 12 months and is interest-free over its five-year term. These loans are available from SBA-approved lenders and are available through September 30, 2010 or until the appropriated funds runs out.
In uncertain economic times, it is always beneficial to have processes in place that ensure maximum cash flow capabilities and help to keep a company vital. Following these steps is an excellent starting point to help make 2010 a good year.
BlumShapiro offers traditional services including accounting, audit/review, tax and business advisory services to meet the unique needs of construction clients. Our Construction Industry Group includes six partners and 20 staff members who have developed expertise over many years.