The construction industry is rapidly expanding into areas unknown due to rapid globalization. View this in-depth presentation on management, money and millennials for the construction industry.
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An Executive’s Guide to Management, Money & Millennials for the Construction Industry
1. An Executive’s Guide to
Management, Money & Millennials
for the Construction Industry
2. Risk Management of Working
in New Markets
Presentation by
Susan L. McGreevy
Stinson Leonard Street LLP
3. 129365644_1.pptx
Doing Business Away From Home
• More businesses are spreading out and doing
business in new locations than ever.
• This is a natural part of “globalization” and
has been accelerated by technology. Lots of
industries are doing it, and doing it
successfully.
5. 129365644_1.pptx
Why Construction and
Development Are Different
• It deals with real property located in a specific
country, state, county and city. As a result,
mechanic’s lien laws are different.
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Why Construction and
Development Are Different
• It usually disturbs that property, and that
disturbance usually affects and is affected by
the specific soil characteristics, which vary
greatly all over the country.
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Why Construction and
Development Are Different
• It usually involves the use of chemicals,
solvents, fuels and other hazardous materials
that may be regulated – more or less – by the
state of the project.
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Why Construction and
Development Are Different
• It is also typical in construction for some
amount of money earned by a contractor to be
held back as retainage, and many states now
have laws regulating how much retainage can
be held, and when it has to be released.
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Why Construction and
Development Are Different
• It is also typical in construction for contractor
to not pay their subs and suppliers until they
are first paid. Many states now have laws
regulating when they have to be paid. And the
penalties can be steep (even criminal).
13. 129365644_1.pptx
Why Construction and
Development Are Different
• If public funds are involved, it is typical that
the contractors and designers will have to
meet goals to employ targeted firms and
workers – minorities, women, veterans, inner
city residents. And this varies all over the
place.
15. 129365644_1.pptx
Why Construction and
Development Are Different
Every one of the characteristics I have just listed
is regulated.
And more!
Most of them are regulated differently
depending on the particular jurisdiction.
16. 129365644_1.pptx
Why Construction and
Development Are Different
• Aside from all these issues of regulation,
there is the physical reality that development
and construction are tied to a place, and the
harder that place is for you to get to, the less
knowledge and control you will have over
what happens there.
17. 129365644_1.pptx
Question for Audience
How often do you work out of your home
base?
1. Not yet, but thinking about it
2. Rarely – we are very selective
3. Occasionally – when opportunity arises
4. Frequently – we consistently work in
multiple jurisdictions
18. 129365644_1.pptx
What’s the Worst That Can Happen?
Example #1:
• Kansas manufacturer typically sells
equipment to be installed in facilities of its
customers, average $3.5-4.5 million.
Business is down. Takes on a project to
design, build and install its equipment in a
new factory in Minnesota, for $15,000,000.
Many problems getting final close-out, due to:
19. 129365644_1.pptx
What’s the Worst That Can Happen?
Example #1:
• There were many issues integrating its
equipment with power, mechanical hook-ups,
etc., with the local subcontractors.
• And when these issues arose, there were
problems getting these subs to show up.
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What’s the Worst That Can Happen?
Example #1:
• Often, equipment shut down occur when
company's key employees weren’t in
Minnesota – having worked 4 10-hour days
and left to go home.
• This resulted in many irate emails from the
owner and demands for managers to drive up
on weekends.
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What’s the Worst That Can Happen?
Example #1:
• Owner has refused to pay the last $1.5 million
(retainage) because project was late, and the
owner says it was prevented from producing
products and making money.
• Manufacturer wants to file a lien to force the
owner to pay, but discovers that state law
required it to file a notice of commencement
when it started work, which didn’t happen.
22. 129365644_1.pptx
What Went Wrong?
Example #1:
• Manufacturer took work far away from its
home town. This meant that management was
not seeing the work on a daily basis, and had
to rely on the employees in charge of the job
for status reports.
23. 129365644_1.pptx
What Went Wrong?
Example #1:
• Manufacturer hired subcontractors it hadn’t
worked with before and didn’t know. These
particular ones had no loyalty to
manufacturer, and let him down in
responsiveness and quality of work.
24. 129365644_1.pptx
What Went Wrong?
Example #1:
• Manufacturer sent key employees from its
home office to oversee the job. These people
were living in hotel rooms, away from their
families. When issues came up at home, they
were often not at the jobsite. They tended to
leave early to come home and return late.
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What’s the Worst That Can Happen?
Example #2:
• Subcontractor from Kansas takes on
structural steel subcontract in Oklahoma.
Hires the only union steel erector in area,
allows erector to represent sub at progress
meetings.
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What’s the Worst That Can Happen?
Example #2:
• Sub didn’t learn until later that erector agreed
to schedule changes that sub, as fabricator,
couldn’t meet.
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What’s the Worst That Can Happen?
Example #2:
• Sub finds out from General Contractor that
erector has refused to perform changes unless
he gets paid in advance for them, which is not
what the sub’s contract says.
29. 129365644_1.pptx
What’s the Worst That Can Happen?
Example #2:
• Erector tells sub that if sub doesn’t like it, he
can find another erector. (there are no other
union erectors around).
• Sub has no choice but to do what erector
wants.
31. 129365644_1.pptx
What Went Wrong?
Example #2:
• Sub took work in an area where he wasn’t able
to attend meetings to represent himself, and
instead empowered someone else to make
decisions that were binding on him.
33. 129365644_1.pptx
What’s the Worst That Can Happen?
Example #3:
• A contractor from Minnesota takes on a
number of projects in Illinois. It doesn't
register as foreign corporation.
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What’s the Worst That Can Happen?
Example #3:
• Some years later, the contractor needs to sue
an owner for non-payment.
• Discovers he can’t sue until he registers as a
foreign corporation and pays all back
franchise fees. By then, the statute of
limitations has run.
35. 129365644_1.pptx
What Went Wrong?
Example #3:
• Contractor forgot to do his homework, and
state didn’t catch him either. Contractor
ended up having to pay bills that he should
have been able to pass on to the owner.
36. 129365644_1.pptx
What’s the Worst That Can Happen?
Example #4:
• Kansas company delivers steel to project in
Utah. Doesn't get paid. Wants to file a lien.
– Is told that he can’t file a lien.
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What Went Wrong?
Example #4:
• Company finds out that Utah requires anyone
who wants to have lien rights to file a notice
via a website, so that the owner can be aware
that he is on the job. Company hadn’t done
that, so no lien rights.
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What’s the Worst That Can Happen?
Example #5:
• Missouri HVAC sub takes work in Iowa for a
General Contractor. Owner runs out of
money. Sub files lien.
– Finds that he will get nothing.
39. 129365644_1.pptx
What Went Wrong?
Example #5:
• HVAC sub discovers that in Iowa, the first to
file a lien gets the first proceeds of a lien
foreclosure. All of the money went to firms
who filed before he did.
40. 129365644_1.pptx
What’s the Common Thread Here?
What all of these examples illustrate are just
some of the things you have to think about in
making the decision to take work far away from
your home base. Things like:
41. 129365644_1.pptx
What Could Be Different in a New
Location?
The Labor market
• How strong are unions in the new town?
• What work is claimed by which unions?
• Will the local allow you to bring your own
union employees in?
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What Could Be Different in a New
Location?
Subcontractor/supplier market
• How do you gauge the reputations of subs you
get prices from?
• Will you get their full attention, or come in
last in the event they overbooked?
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What Could Be Different in a New
Location?
How do you monitor project?
You aren't going to be driving by every day –
video cam? Photos? Trusted employee?
44. 129365644_1.pptx
What Could Be Different in a New
Location?
Staffing
• Are you going to have your own employees on
site all the time?
• Who is your back up if one of your people
can't get there?
• If you rely on a local sub or locally hired
employee, what is their loyalty to you, how
well do you know them?
45. 129365644_1.pptx
What Could Be Different in a New
Location?
Local Laws – Taxes
• What are state and local taxes?
• Who do you register with and how do you pay
them?
• You have to include all of these costs in your
bid, so this has to be done up front.
46. What Could Be Different in a New Location?
Local Laws – Taxes
• Allocation and apportionment
factors
• Uniform Division of Income for Tax
Purposes Act (UDITPA)
• Other multistate compact
– Industry specific apportionment
formulas
– Specific exclusion of income
items
– Specific exclusion of cost items
• Credits and tax incentives
• Income tax – C corporation
• Income tax – S corporation
• Composite returns for S
– allowed or not?
• Estimated tax for s
– Required or not?
• Withholding on non-resident S
shareholders?
• Payment on income or distributions
• S corporation treatment
• C corporation treatment
– Recognize Federal S election
– State S election required?
• Income tax – Partnerships, LLC
• Income tax - Individual
• State construction related credits
4650
47. What Could Be Different in a New Location?
Local Laws – Taxes
• Franchise tax
– Taxable basis
• State licenses – GC & Specialty
– Reciprocity states
– Equity requirement
– Financial statement requirements
• Local licenses
• Per capita share tax /Equity tax,
• State sales and use tax
– Grandfathering of rate changes
– Government provided materials –
sales tax
– Taxable services
• Local sales and use tax
• Fuel tax
• Property tax
– Personal property
– Real property
• Local sales and use tax
• Intangibles tax
• Employment taxes
• Business Privilege taxes
• Impact Fees
51
48. 129365644_1.pptx
What Could Be Different in a New
Location?
Local Laws – MBE/WBE Certification
• If you have goals to achieve in the locale, who
does the certifying? What are their criteria?
• How can you verify that firms you are
considering are certified?
49. 129365644_1.pptx
What Could Be Different in a New
Location?
Local Laws – Prevailing Wages
• What kind of work falls within the
requirement?
• How do you register and get the right rates?
• Who audits?
50. 129365644_1.pptx
What Could Be Different in a New
Location?
Local Laws – Public Projects
• All states have their own procurement codes,
with their own procedures for claims. Some
have sovereign immunity to suit, short
timelines, etc.
51. 129365644_1.pptx
What Could Be Different in a New
Location?
Local Laws – Lien Laws
• Nothing varies as much from state to state.
• May be required to give pre-construction notice,
make filings etc.
• May require pre-filing notice (such as Missouri)
• May only allow General Contractors, or 1st/2nd
tier subs, may allow everyone
• May allow designers, may not.
52. 129365644_1.pptx
What Could Be Different in a New
Location?
Local Laws – Prompt Pay Laws
• Many states now have these, and the penalty
for non-compliance can be steep – in Kansas,
a successful contractor, sub or supplier can
get 18% interest and attorney’s fees.
53. 129365644_1.pptx
What Could Be Different in a New
Location?
Local Laws – Retainage Laws
• As with the Prompt Pay laws, this is a new
concept and not all states have them, but if
the state has one (such as Missouri), it can be
complicated to know how to keep and release
retainage.
54. 129365644_1.pptx
What Could Be Different in a New
Location?
Local Laws – Indemnification Laws
• More states have passed laws (or the courts
have ruled) that restrict what language can be
put in a contract to require one side to pay for
damages caused by the other side.
55. 129365644_1.pptx
What Could Be Different in a New
Location?
Local Laws – Choice of Law, Location of
Lawsuits
• Some states will not allow you to put a clause
in a construction contract that requires
lawsuits to be brought in other states.
56. 129365644_1.pptx
What Could Be Different in a New
Location?
Local Laws – Licensing
• Does the company become licensed or individuals?
• Do those individuals then have to be on the site at all
times?
• In Arkansas (and many other states) it is a
misdemeanor to practice construction without a
license. Contractor is required to submit financial
statements with its application. Are these available to
the public?
57. 129365644_1.pptx
What Could Be Different in a New
Location?
Local Laws – Permitting
• Who has to pull permits?
• Are there reclamation or completion bonds
required by local authorities, and who has to
provide them?
58. 129365644_1.pptx
What Could Be Different in a New
Location?
Local Laws – Tax-Increment Financing
• If public funds or tax relief is involved, what
strings are attached?
– Does this mean that you must pay prevailing
wages?
– Does this mean that you must have MBE/WBE
participation?
59. 129365644_1.pptx
What Could Be Different in a New
Location?
Many of these issues vary not just from state to
state, but from county to county and city to city.
60. 129365644_1.pptx
What Should You Do?
Check out the laws in a community before taking on the
work.
• If it is public work, the agency should be able to give you
access to the regulations in advance.
• If it is private work, often a state’s websites will give
information about what laws you have to comply with.
• There are books and websites with information too
(although they frequently are not up-to-date, and leave a
lot out).
61. 129365644_1.pptx
What Should You Do?
• Think through potential issues, and have a
game plan for them.
– How will you pick people who will run a project for
you far away?
– Can you put a contingency in your number for the
unknowns?
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What Should You Do?
• Talk to people who regularly work there.
– They may share information about subs,
suppliers, local conditions, etc.
63. 129365644_1.pptx
What Should You Do?
• Talk to your surety.
• Talk to you banker.
– These folks may care a lot about you taking
on more risk, and will want to know that
you have considered the move carefully.
64. 129365644_1.pptx
What Should You Do?
• Talk to your accountant.
• Talk to your lawyer.
• Talk to your insurer.
– All of them can help you get in compliance
and be protected.
66. Read More About This Topic
Read Susan McGreevy’s Building Profits article from the May/June
2016 edition of Building Profits magazine: “Doing Business Away
from Home: Have You Done Your Homework?”
Read More About This Topic
69
67. Susan McGreevy, Partner
Kansas City construction attorney Susan McGreevy's
practice consists primarily of advising construction
companies, sureties, design professionals, and owners
in their day-to-day business ventures. This includes the
drafting and negotiation of all types of agreements,
resolution of disputes, trying lawsuits and arbitrations,
strategic and succession planning, and representing
sureties in bond claims and litigation, as well as serving
as an arbitrator and mediator.
816.691.3480
susan.mcgreevy@stinson.com
1201 Walnut, Suite 2900 | Kansas City, MO 64106
69. Financial Toolbox
Today’s CFOs & CEOs
must be
Renaissance men or
women
as they must always be
evolving, learning, and forward
thinking
70. CBIZ & MHM
CFOs & CEO’s:
Cannot be inhibited by organizational charts
Must work across inter- and intra-organizational boundaries
Required to inform, discipline, and motivate managers, employers,
customers, suppliers, and regulators
Maintain technical knowledge and tools in their business toolbox that
can be take out and used at any time
How these roles will evolve in the future
is uncertain, but they are more likely to
broaden than to shrink
Best when work as a Team
Financial Toolbox
72. Cash flow & Working capital management
Financial analysis and benchmarking
Personnel retention strategies
Prepare for the future - Technology
Fill it
UP
Financial Toolbox
73. Financial Toolbox -
Cash Flow & Working Capital
Management
Working capital management:
designed to monitor and utilize the two components of working
capital:
current assets
current liabilities
ensures the most financially efficient operation of the company
Primary purpose – To maintain sufficient cash flow to meet
its short-term operating costs and short-term debt obligations
77. Financial Toolbox -
Cash Flow & Working Capital
Management
Companies that are focused only on external financing may be
overlooking a hidden source of cash - their own balance sheet!
Maintain competitiveness
Fuel growth strategies
External financing – challenges & expensive
Cash is Critical:
78. How much Cash is
trapped in your
balance sheet?
Financial Toolbox -
Cash Flow & Working Capital
Management
79. Financial Toolbox -
Cash Flow & Working Capital
Management
Cash
Accounts
payable / Job
costs
Unbilled jobs
in progress
(wip)
Accounts
receivable
The Cash Flow Cycle:
Cash Flow equals cash receipts minus cash payments over a given period of time
81. From back office
To center stage
Financial Toolbox -
Cash Flow & Working Capital
Management
Optimizing Accounts Payable:
82. Activities to Optimize Accounts Payable:
Supplier & Subcontractor selection and approval process
Negotiate favorable terms
Contract review process / schedule of values
Committed costs in system by vendor/contract
Procurement process
Issue P.O.’s and track in system against committed costs
Invoice processing
Define how to handle inaccurate vendor invoices
Payment process
Select method of payment – minimize bank fees
Pay with credit card when possible
Be wary of contractor discounts for prompt payment
Utilize pay when paid provisions, when allowed
Hold retention, if appropriate
Financial Toolbox -
Cash Flow & Working Capital
Management
84. Financial Toolbox -
Cash Flow & Working Capital
Management
Use Schedule of Values to Optimize Work in
Progress:
Identify phases of work to break out separately for billing
categories
No lump sum billings
Mobilization, submittals, detailing, etc.
Place as much costs in early phases of project in order to
front load the values
Record job costs to appropriate phases
Provides an easy format to bill against
Provides a format for which project owner / GC can verify
progress
85. Financial Toolbox -
Cash Flow & Working Capital
Management
Effective Schedule of Value preparation is the
single largest impact a Project Manager can
have on cash flow
Goal should be to get paid for overhead/profit as
quickly as possible
86. It is better
to receive
than to lend
Financial Toolbox -
Cash Flow & Working Capital
Management
Optimizing Accounts Receivable:
87. Activities to Optimize Accounts Receivable:
Customer credit approval
Commit to approving or rejecting credit applications
Billing process
Timely submission - through end of billing period
Prepare from schedule of values
Review billing with client / owner/ owner’s rep
Collection process
Review aging reports regularly
Include payment terms in contracts
Most important process or you become the lender!
Financial Toolbox -
Cash Flow & Working Capital
Management
88. Collections are the
PM’s responsibility,
not accounting!
Financial Toolbox -
Cash Flow & Working Capital
Management
89. Collection of receivables are usually
held up due to:
Billings require revisions (disputed POC)
No lien releases
Lack of documentation
Late bills
Damage to owner or other subcontractor
Insurance/bonding requirements
Evidence work won’t finish by contract
completion date and retention won’t cover
losses to be incurred
Financial Toolbox -
Cash Flow & Working Capital
Management
90. Collection Strategies:
Appoint an internal “bird dog”
Include DSO as performance metric for Project Managers
Charge PM’s interest on negative cash position
Reduce PM’s bonus by outstanding receivables
Set alarm in AR system to notify management
Determine if work should be slowed or halted
Determine when to file lien
Determine when to file against payment bond
Financial Toolbox -
Cash Flow & Working Capital
Management
91. Recovery of Past Due Receivables
Financial Toolbox -
Cash Flow & Working Capital
Management
Days Past Due Percent Recovered
30 days 97%
90 Days 90%
120 Days 80%
180 Days 67%
1 Years 45%
2 Years 23%
3 Years 12%
Remember: Old Receivables just get Older!!!!
95. Financial Toolbox -
Cash Flow & Working Capital
Management
On Your
Way to
Obtaining
Cash
Fitness!
96. Financial analysis
Personnel retention strategies
Prepare for the future -
Technology
Financial Toolbox
Cash flow and
Working Capital
Management
97. Historically, CFOs have relied
upon traditional financial
statements to guide their
decision-making
Today, the prevalence of more
sophisticated accounting
systems and the demand for
more information more quickly
has given rise to the need for
different kinds of reporting
Financial Toolbox -
Financial Analysis Tools
99. A financial dashboard – one page report
Snapshot of key data – financial & operational
Three sections:
Liquidity
Productivity
Profitability
Not a mini-P&L
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Flash Reports:
100. Prepare along with budget
Defines the expectations of a budget
Dynamic and adopt to changing conditions
Updated with actual data – changed with better info
Prepare projected balance sheet – key tool for lenders
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Projections:
101. Changes in IS and BS expressed in $$ and % of sales or total
assets
Changes over multiple year period
Identifies “slippage” or small changes
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Fluctation (Flux) Analysis
Example:
2% increase (% of sales) in
COGS equipment rental over a 4
year period
$50 mm Company - $1 million in
slippage
102. Continuous process of measuring products, services, and
practices against standards set by industry leaders
Determines what and where improvements are called for
Analyzes how other organizations achieve high performance
levels
Use this information to improve performance
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
103. In the current market, your Company’s financial health will be
examined more than ever…
Bankers Vendors Govt Agencies
Sureties Customers
With so many eyes on your
company’s financials, it
becomes increasingly
important to know how you
stack up against the
competition.
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
104. Four broad ratio categories:
• Liquidity
• Profitability
• Leverage
• Efficiency
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
105. 129365644_1.pptx
Ratio Formula Interpretation
Current Ratio – the extent current
assets are available to satisfy current
liabilities
Current Assets
÷
Current Liabilities
Generally, 1.0 is a minimum current
ratio , which indicates that current
assets at least equal current liabilities
Quick Ratio – the liquid assets that are
available to satisfy current liabilities
Current Assets less Inventory and
Prepaid Expenses
÷
Current Liabilities
A quick ratio of 1.0 is generally
considered a liquid position
Working Capital Turnover Ratio – the
amount of revenue supported by each
$1 of net working capital
Revenue
÷
Current Assets minus Current
Liabilities
A ratio exceeding 30.0 may indicate a
need for increased working capital to
support future revenue
Liquidity - Ability to meet short-term financial obligations on time
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
106. 129365644_1.pptx
Ratio Formula Interpretation
Return on Assets Ratio – the profits
generated by the assets
Net Earnings before Taxes
÷
Total Assets
A higher ratio reflects a more effective
use of Company assets
Return on Equity Ratio – the profit
generated by the net assets, which
reflects stockholders’ return on
investment
Net Earnings before Taxes
÷
Total Net Worth
A very high ratio may indicate an
undercapitalized situation or,
conversely, a very profitable company
Time Interest Earned Ratio– a
Company’s ability to pay interest
expense from operations
Net Earnings before Tax plus
Interest Expense
÷
Interest Expense
A low ratio may indicate an over-
leveraged situation and a need for
more permanent equity
Profitability - A Company’s ability to generate earnings
Financial Tools – Benchmarking / Ratio Analysis
Financial Toolbox -
Financial Analysis Tools
107. 129365644_1.pptx
Ratio Formula Interpretation
Debt to Equity Ratio – the relationship
between creditors and owners
Total Liabilities
÷
Total Net Worth
Generally, a ratio of 3.0 or lower is
considered acceptable
Revenue to Equity Ratio – the level of
revenue supported by each $1 of equity
Revenue
÷
Total Net Worth
Generally, a ratio of 15.0 or less is
considered acceptable
Fixed Asset to Net Worth – the extent
an owner’s cash is frozen in the form of
fixed assets
Net Fixed Assets
÷
Total Net Worth
Generally, a ratio of 0.75 or higher is
undesirable as a higher ratio may
indicate a lack of funds for current
operations
Leverage - A Company’s reliance on debt to finance operations
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
108. Create a financial benchmark worksheet
Financial ratio to be measured
Formula
Interpretation
Actual calculation – ratio results
Compare to “best in class”
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
109. SIC NAICS____
• Industrial & 1541, 1542 236210, 236220
Nonresidential
• Heavy & Highway 1611, 1622, 237110 to 237990
1623, 1629
• Specialty Trades 1711-1799 238110 to 238990
Website: www.naics.com
Contractor Classifications
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
110. 129365644_1.pptx
Identify Data Sources
RMA (Risk Management Associates, formally Robert
Morris Associates)
www.rmahq.org
PAS (Personnel Administrative Services)
www.pas1.com
FMI (for customized benchmarking)
www.fminet.com
Trade Associations
Industry Focus Groups
Sureties
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
112. Best in Class – Definition Per CFMA
Best in class companies refer to the top 25% of all
survey respondents, based upon a composite ranking
of the following ratios:
1. Return on Assets
2. Return on Equity
3. Debt to Equity
4. Fixed Asset to Net Worth
5. Working Capital Turnover
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
113. 129365644_1.pptx
Ratio Formula Interpretation
Backlog to Equity – indicates
relationship of signed or committed
work to total stockholders’ equity
Backlog
÷
Equity
Generally, a ratio of 20 or less is
considered acceptable. A higher
ratio may indicate the need for
additional permanent equity
Underbillings to Equity – indicates
the level of unbilled contract volume
being financed by the stockholders.
Underbillings
÷
Equity
Usually stated as a percentage; a
ratio of 30% or less is considered
acceptable
Backlog to Working Capital – the
relationship between signed or
committed work and working capital
Backlog
÷
Working Capital
A higher ratio may indicate a need
for an increase in permanent
working capital
Days in Accounts Receivable –
indicates the number of days to
collect accounts receivable
Net Receivables x 360
÷
Revenue
A lower ratio indicates a faster
collection of receivables, i.e., more
liquidity
Don’t Forget the Sureties – Efficiency Ratios:
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
114. 129365644_1.pptx
Other Potential Warning Indicators
• Cash to overbillings < 1 to 1
• Average age of receivables > 60 days
• Underbillings to equity > 20 %
• Fixed assets to equity > 1 to 1
• Average age of payables > 45 days
• Debt to equity > 3 to 1
• Revenue to working capital > 20 to 1
• Interest bearing debt to equity > 80 %
• Overhead to equity > 1 to 1
• Job profit fade/slippage > 10%
Financial Toolbox -
Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
115. Key employee retention
strategies
Prepare for the future -
Technology
Financial Toolbox
Cash Flow &
Working Capital
Management
Financial analysis
tools
116. Financial Toolbox -
Key Employee Retention Strategies
How many business owners or executives take an extended
vacation – more than a month at a time?
117. Financial Toolbox -
Key Employee Retention Strategies
How many sophisticated buyers will seriously consider acquiring a
company that lacks a good management team?
118. Financial Toolbox -
Key Employee Retention Strategies
No matter what language you speak the answer is
NONE
Никто
Keiner
119. These scenarios highlight a Company’s need for Key
Employees who:
Provide motivation to others
Provide management skills within their departments
Provide leadership to fellow employees
Would stay with the Company after the current owner has departed
Financial Toolbox -
Key Employee Retention Strategies
120. Key Employees are often cited as one of the
most significant value drivers within a
successful Company:
Help build profits
Help build up the value of the Company
May increase Company morale
May provide a challenging and dynamic work
environment
Financial Toolbox -
Key Employee Retention Strategies
121. Who are your Key Employees?
KEY Employees act and think more like
the owner does
Basically, they behave like OWNERS!
Financial Toolbox -
Key Employee Retention Strategies
122. CBIZ & MHM
Financial Toolbox -
Key Employee Retention Strategies
Key Employees
Are known within the industry
Focus of recruiting efforts by competitors
Want tangible recognition and appreciation
So, how does a Company encourage high-caliber talent to stay the
course?
Most common response –
Why don’t we just pay the Key Employees a
higher salary?
123. Financial Toolbox -
Key Employee Retention Strategies
Most common response –
Not always the Best Response!
A higher salary:
Does not stop competitors from offering even
higher pay or a better opportunity
Does not encourage a leadership mentality
Does not invoke loyalty
124. Financial Toolbox -
Key Employee Retention Strategies
A better response –
A properly designed Key Employee incentive/retention plan
Benefits:
Encourages a leadership mentality and loyalty
Increases productivity
Allows the plan participants to be hand-picked
Plans are subject to minimal IRS intervention
Carry no minimum or maximum contribution
mandates
125. For both the Company and the Key Employee, a well-designed Key
Employee incentive/retention plan is a
Financial Toolbox -
Key Employee Retention Strategies
126. Financial Toolbox -
Key Employee Retention Strategies
A properly designed plan must include 4 variables:
1. Substantial financial awards to Key Employees
2. Financial / performance benchmark attainment
3. Deferred benefit payout
4. Communication in writing
127. 1. Substantial Financial Reward
Substantial to positively impact and motivate
behavior
As much as one month’s salary and up to 25%
(or higher) of the Key Employee’s base pay
Remember – this is an incentive / retention plan
NOT a seasonal bonus paid to all employees
Financial Toolbox -
Key Employee Retention Strategies
128. Financial Toolbox -
Key Employee Retention Strategies
2. Financial / Performance Benchmark Attainment
Financial and/or performance benchmark that must be achieved in order
to earn an award
Benchmarks:
Easily identifiable
Translate to an increase in bottom-line profit
Obligation to fund the award only exists when reach profitability targets
129. Financial Toolbox -
Key Employee Retention Strategies
3. Deferred Benefit Payout
A portion of (if not all) of the annual
reward must be deferred for future
benefit payout – at least 50%
This where the retention feature is
achieved
Payout age and/or years of
participation can be individualized
Owner determines:
Required years of participation
Vesting prior to payout
130. Financial Toolbox -
Key Employee Retention Strategies
4. Communication
The plan must be communicated via a written plan summary for each
chosen Key Employee
The Key Employee must understand:
1. Motivation behind the offer
2. Why they were selected to participant
3. How the plan is going to operate
4. What they might expect in projected benefits once benchmarks are
achieved
131. Types of Incentive / Retention plans
CASH OR EQUITY-BASED
Financial Toolbox -
Key Employee Retention Strategies
132. Equity- Based (Stock) Plans
Pros:
Provides opportunity for stock ownership
Stock ties the Key Employee to Company
Personal investment and commitment
Incentive for increasing company value
Cons / Issues:
Smallest of ownership carries “rights” of ownership
Willingness to bring new owner into confidences
Determination of proper timing
Key Employee should be a proven commodity
Stock repurchase agreement
Determination of type of stock
Financial Toolbox -
Key Employee Retention Strategies
134. Equity- Based (Stock) Plans
Non-qualified stock bonus
Financial Toolbox -
Key Employee Retention Strategies
Key Employee receives stock at no cost
FMV of stock is determined and taxable to Key
Employee as ordinary income – W2 income
Company receives a deduction
135. Equity- Based (Stock) Plans
Restricted Stock Bonus Plan
Financial Toolbox -
Key Employee Retention Strategies
Stock bonus awarded but no possession until:
Vesting period
Performance goal achieved
All basic rights of ownership at time of award
Election to be taxed when awarded – 83(b).
Ordinary tax on value when received award
Capital gains on any future increases in value
136. Equity- Based (Stock) Plans
Key Employee Purchase
Financial Toolbox -
Key Employee Retention Strategies
May bonus cash to allow purchase
If stock is purchased below FMV:
Key Employee is taxed on difference
Company receives offsetting deduction
137. Cash Based Incentive Plans
Pros:
Most prevalent in privately owned companies
No transfer of ownership
Cons / Issues:
No personal investment by Key Employee
Not as motivating as stock ownership
Less incentive for increasing company value
Financial Toolbox -
Key Employee Retention Strategies
139. Cash Based Plans
Non-Qualified Deferred Compensation Plan
Financial Toolbox -
Key Employee Retention Strategies
Promise to pay benefits in the future for current & past services
Vesting schedule (“golden handcuffs”)
Deferred compensation based on benefit formula
Company must meet its profitability objective for benefit
formula to be achieved
No obligation to fund if Company is not profitable
Forfeiture provisions
Payment schedules – lump sum or multiple year
140. Cash Based Plans
Non-Qualified Deferred Compensation Plan (cont)
Financial Toolbox -
Key Employee Retention Strategies
Not taxable until date funds are withdrawn from plan (FICA)
Liability accrued and expense recorded for GAAP
No tax deduction until amounts are paid from plan
Funding
Ensure cash is available when needed
Tax restrictions prohibit formally funding a plan
141. Cash Based Plans
Phantom Stock & Stock Appreciation Rights
Financial Toolbox -
Key Employee Retention Strategies
Key Employee receives something that:
Looks like stock
Grows in value like stock
Can be turned in to cash just like stock
But is NOT stock
No actual ownership changes
NO
142. Cash Based Plans
Phantom Stock Plan
Financial Toolbox -
Key Employee Retention Strategies
Phantom stock shares allocated to Key Employee
Phantom stock share value increases /decreases in relation to true
company stock
Upon termination of Key Employee, “buy-back” phantoms shares at
value of true stock
Amount paid is deductible to the Company
143. Cash Based Plans
Stock Appreciation Rights Plan
Financial Toolbox -
Key Employee Retention Strategies
SAR units allocated to Key Employee
Only receive appreciation of the true stock
144. CBIZ & MHM
Phantom Stock vs. SAR
Phantom
Stock
Stock
Appreciation
Plan Rights Plan
Award of 1000 shares when
FMV is $10 $10,000 $10,000
At retirment, and fully vested,
FMV is $25 $25,000 $25,000
Amount of Payout to Key
Employee $25,000 $15,000
Financial Toolbox -
Key Employee Retention Strategies
145. Cash Based Plans
Supplemental Executive Retirement Plan
Financial Toolbox -
Key Employee Retention Strategies
Provides supplemental retirement income to Key Employees
100% Company funded with no option for salary deferral
Supplemental retirement income is paid from current cash flow of
Company
Life insurance – untimely death
Benefits taxable when received / deductible when paid
146. Summary
Financial Toolbox -
Key Employee Retention Strategies
No matter what type of incentive plan you institute, it must meet the
following criteria:
As Key employee attains goals, the Company value should increase
The plan “handcuffs” the Key Employee to the Company
Plan objectives are meaningful, realistic, and well-communicated
Benefits are substantial
Guidelines on how to achieve the benefit are specific
147. Prepare for the future - Technology
Financial Toolbox
Cash Flow &
Working Capital
Management
Financial analysis
& Benchmarking
Key employee
retention strategies
148. Financial Toolbox -
Prepare for the Future - Technology
Unlike other industries, Construction sector has been slow to adopt
new technologies….
But this is about to change very soon, and very dramatically!
149. Financial Toolbox -
Prepare for the Future - Technology
Where Technology is Revolutionizing the Construction Industry:
The Office: Keeping Paperwork in Order
Apps to share information between office and job sites
Utilization of Optical Character Recognition (OCR)
Software – In the cloud
Building Information Model (BIM)
Comprehensive 3D file
Incorporates all components that make up a building
Integrative design process from the inceptions
At the Jobsite: Monitoring productivity
Drones – monitor productivity, safety, and security
Apps to share live construction drawings
150. Financial Toolbox -
Prepare for the Future - Technology
Where Technology is Revolutionizing the Construction Industry:
Autonomous Trucks: driverless solutions
Bulldozers to dump trucks remotely controlled
Materials: revolutionary or recycled
3D printing – printing complex, artistic structures
Robotics
Automated robots used to construct beams, lay bricks, paint, dig,
drill, etc.
Ability to perform construction remotely and unmanned
Equipment: Wearing your Tech
Hard hats turning to Smart Helmets
151. Actually, the Future is Here –
Embrace it!
Financial Toolbox -
Prepare for the Future - Technology
153. 129365644_1.pptx
Please contact Joyce with any questions at:
816.945.5121 or jfarris@cbiz.com
Joyce Farris, CPA, CGMA
Shareholder, Mayer Hoffman McCann
Managing Director, CBIZ MHM, LLC
Joyce, who has more than 30 years of accounting experience, serves as a CBIZ MHM, LLC
Managing Director and Mayer Hoffman McCann P.C. Shareholder in the Kansas City office. Joyce
is responsible for managing the entire client relationship as she coordinates the attest work with
tax and consulting services. The majority of her clients are entrepreneurial-owned and privately-
owned companies in the construction, real estate, and whole-sale distribution industries.
Joyce’s primary responsibility is to manage and direct the firm’s regional Construction Industry
Services Group. From the day she started with the Firm, Joyce has been involved with clients in
the construction industry from performing audits and preparing tax returns to consulting on
mergers and acquisitions and transition planning. Joyce serves a variety of construction clients
including general contractors, heavy/civil contractors, specialty contractors, engineering firms,
landscape architectural/land planning firms, home builders and real-estate developers. Her
clients have local, national, and international operations.
During her career, Joyce took a leave from the Firm to pursue an opportunity as a CFO in private
industry. This unique experience has provided Joyce with an in-depth knowledge of and respect
for the issues affecting her clients and their respective COOs and CFOs.
154. Millennials in Hardhats:
Attracting, Engaging and Incentivizing
Ray Buyle, D.B.I.A – Associate Professor
K-State School of Architectural Engineering & Construction Science
Richard Bruce, Ph.D – Education & Training Director
The Builders’ Association