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The ViewPoints Construction Services Blog is published by RubinBrown's Construction Services Group as a value-added approach keeping clients and contacts informed about current, relevant topics affecting the construction industry.



08/02/2018

Construction Spending On The Rise


Construction spending totaled $648.8 billion in the second half of 2017, which is a 12 percent increase from the first half of 2017 and a 2 percent increase from the second half of 2016.

 

Overall, since the first quarter of 2012 through 2017, construction spending has steadily increased.


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The American Institute of Architects (AIA) is estimating 4% growth for non-residential construction spending in both 2018 and 2019.


The AIA’s forecast cited natural disasters, tax reform, infrastructure focused legislature, and business confidence levels as reasons for growth in the engineering and construction (E&C) arena.


Additionally, employment can be a strong indicator of industry health. Per the 2018 Associated General Contractors of America (AGC) 2018 Construction Outlook National Survey, 26% of construction firms surveyed expect to increase employee count by 11 to 25%.

 

 

 

 

07/30/2018

Increased Number of M&A Activity Through 2018


More than 20% of all M&A activity in the engineering and construction industry in 2017 had a public company buyer, which is the highest level since 2011. The activity has continued into 2018 with Granite Construction and Layne Christensen Company announcing a $565 million M&A deal.


Given the world’s growing population and aging roads and bridges, the need for construction firms with a focus on infrastructure continues to grow. Reports indicate that, “the world will need to spend $94 trillion on infrastructure by 2040 to meet demand.” Based on this forecasted demand, M&A activity should continue to increase in the infrastructure niche.


GCs have not historically been attractive acquisition targets in the M&A environment. However, as GCs are looking to diversify their revenue streams and integrate business lines, the acquisition of a specialty contractor could make sense.


RubinBrown is seeing more of this throughout the country, which is helping GC’s increase margins by self-performing certain work while diversifying their revenue stream.

 

 

 

 

07/09/2018

Recruiting And Talent Retention In The Construction Industry


With the experienced worker shortage alive and well in the construction industry, recruiting and talent retention feels more important than ever! RubinBrown has identified a few strategies that construction firms should consider when it comes to improving talent retention and team member development.


Ownership

You may have heard the saying “think like an owner,” which is important, but to take it a little further, we’re suggesting that you build your team with team members that take ownership of work assigned to them.


Team members that take ownership of projects or jobs assigned to them and who stick with the project until completion are a joy to work with and good role models to have within your organization.


Communication

Surprises late in a project are rarely good, so your team members must communicate engagement status often to avoid surprises. Encourage your team to think at the end of every day, “What did I do today and who needs to know about it” and then send out status updates accordingly.  


Service Oriented

We’re all in the business of serving others. Someone that has a service-oriented mindset is much more likely to be a good representative of your firm and keep your clients happy!

 

 

 

07/02/2018

The Importance of Mentoring


Construction-Mentoring-Image.jpgThe goal of mentoring is to transfer as much knowledge from your experienced team members to your new team members. Competition is alive and well in the construction industry, so this is easier said than done.


Oftentimes the experienced team members might be threatened by newer team members and not want to share tips or information that will help the younger team members be successful. This attitude is not healthy in your organization and must be addressed when encountered.


A mentoring program should be structured with experienced team members mentoring new team members. Informal mentoring meetings should occur as often as necessary, but a formal meeting should occur at least twice a year.


The formal meetings should be documented with mentoring notes or an evaluation summary. These mentoring notes can be used to follow up on areas identified for improvement.

 

 

 

06/26/2018

Fraud In the Construction Industry


Here’s a statistic that will keep you up at night…a typical case of fraud within the construction industry has a median loss of $245,000.

 

The threat of fraud can never be wholly removed; however, companies should take steps to identify likely fraud schemes they might face. Below are a number of schemes frequently used to defraud construction companies.

 

Construction-Fraud-Image.jpgBilling Schemes

Reports indicate that billing schemes account for 35% of the fraudulent activity within construction companies.

 

The schemes can be payments to fictitious vendors, overpayment to vendors (often through collusion with an internal employee) and purchase of personal items with company funds.

 


Theft

The construction industry is particularly susceptible to theft of materials due to the location of jobs and the difficulty of tracking construction materials. Job sites can be in remote areas or some distance from the corporate headquarters and subject to less supervision.

 

Additionally, materials on job sites are hard to track and measure during the construction process. Items lying around a job site like lumber, concrete, copper pipe, wire and cable can create an opportunity for thieves if proper controls are not in place.

 

Misuse of Company Equipment

Similar to theft of materials, misuse of company equipment can also become an issue if there is a lack of controls present. For instance, an employee could operate a side business using a company’s idle equipment.

 

Bid Rigging & Corruption

Contractors are subject to the risk of bid rigging and other forms of corruption. In the ACFE study nearly 47% of the fraud cases examined in the construction industry had an element of corruption.

 

Whether it was bribery, kickbacks or quid pro quo situations, the bid process can be riddled with opportunity for this type of fraud.

 

Other Fraud

The construction industry is subject to the same fraudulent activities faced by every other industry. These include payroll fraud through fictitious employees, check tampering and fraudulent expense reports.

 

 

 

 

06/19/2018

The Importance of Internal Controls


To help prevent fraud in your construction company, RubinBrown recommends that you design a control structure that will reduce the opportunity for fraud and increase the chances fraud will be detected. Although there are no guarantees related to fraud, the foundation to a strong internal control environment is proper segregation of duties.


Here are some other simple yet effective internal controls you can implement with relative ease:

  • Check all estimates for accuracy of calculations, labor rates and correspondence with drawings.
  • Compare job cost estimates with actual costs. Require approvals for cost adjustments or transfers of costs between jobs.
  • Require that materials estimates above a specified amount include quotes from two or more vendors.
  • Make purchases only with pre-numbered purchase orders, and match them to both receiving reports and invoices before payment is made.
  • Check vendor invoices against estimates to ensure proper discounts and pricing.
  • Always refer to specific job numbers, phase codes or work order numbers in onsite communications.
  • Obtain ink or electronic signatures on change orders before work begins, and revise contract values accordingly.
  • Allocate equipment usage to contracts weekly and record equipment maintenance expense in the ledger as they occur.
  • Review all billings for timeliness, accuracy, conformity with contract terms and correct customer information.
  • Reconcile contract billings with general ledgers monthly, and calculate underbillings and overbillings.
  • Prepare and review financial statements monthly and reconcile them to supporting ledgers, bank statements and loan schedules. Per the ACFE report, management’s review of financial data took place in 62% of the cases examined and caught the fraud 16% of the time. The average loss detected by management’s review was $125,000 and lasted 18 months.

 

 

 

06/05/2018

Succession Planning: Part Two


Previously, RubinBrown's Construction Services shared the important steps a construction company should take to begin a succession plan for their company. After building value and communicating objectives to your fellow leaders, you are ready for the next steps in the process.

 

Groom A Successor
Once the goals have been discussed and agreed upon, choosing and grooming a successor follows.

 

This is an important piece of the succession plan because it is the successor who is able to utilize the owner’s intangible assets. The owner has knowledge, skills, and relationships that other employees may not possess.

 

When evaluating successors, it is essential to identify and quantify the right qualities for each position. Both hard and soft skills should be evaluated, as well as behavior.

 

A successor’s behavior, such as natural leadership and ability to work with others, plays an important role in selecting a successor. Another important quality is the successor’s desire.

 

Attaining ambition comes from giving them adequate training and development, necessary leadership experience and quality mentorship.

 

Transfer Ownership
The next and most complex step is to decide how to transfer ownership. Contributing to the complexity is the multitude of ways ownership can be transferred.

 

Gifting stock is an effective way of passing stock to successor individuals and in turn, reducing the estate of the original stock owner. And while gifting stock can seem self-explanatory, many considerations need to be taken into account. These considerations include the annual gift exclusion, future appreciation of the stock, and voting versus non-voting stock.


An alternative to gifting is a stock redemption. To qualify for a Section 303 stock redemption, the deceased must have corporate stock that makes up 35% or more of their adjusted gross estate.

 

Therefore, this is a good option for families where a corporation constitutes the majority of the family’s wealth. Under this code section, a corporation may redeem its stock from the estate on a tax-favored basis in an amount equal to the decedent’s estate taxes and administrative expenses. In many instances, the redemption may be part of a buy/sell agreement.

 

Buy/sell agreements are also an effective method to transfer ownership. With a buy/sell agreement, the price of the stock is based on a predetermined valuation.

 

An ESOP is another succession planning opportunity that requires annual valuations. An employee stock ownership plan, or ESOP, allows owners to sell up to 100% of their stock to a defined benefit plan that is owned by its own employees. Therefore, the employees of the business become shareholders in the company.

 

Another choice is stock recapitalization. Both common and preferred stock can be recapitalized, but the benefits of each vary. Common stock recapitalization enables a shift in voting power to successors that will operate the company.

 

Preferred stock recapitalization can shift future increases in corporate value to those who own common stock and freeze the value of the estate of a principal stockholder, so the subsequent increases in value go to the common stock held by their heirs. As you can see, this option provides a lot of flexibility for estate planning.

 

Estate Planning
Estate planning is the last step in the process. However, this step should be considered throughout the planning process. Make sure you can clearly answer the following questions:

 

  • What do I want to leave to my family?
  • Do I have the financial capacity to retire?
  • What are the tax consequences of my succession plan and beyond?

 

 

 

06/12/2018

Succession Planning: Part One


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People do not want to talk about their incapacitation, retirement, or death. To talk about your successor means you have to relinquish control, plan for a sale of a business that you have overseen, and inherently trust another with one of your most valuable assets.


Strong management succession will increase the business’ value, in addition to providing other benefits.


Building Value

Building value in your construction company is important. In most other areas of the business there are formal processes and plans that are followed to reduce cost and uncertainties and build value.


The first step of the process is to identify key decision-makers and succession planning goals and objectives. Gather information such as:

  • Who are the current owners?
  • What top management will be involved in the planning?
  • Who are the outside advisors that should be consulted?
  • What is the transition timeline?
  • What do you want your legacy and the company’s legacy to be?


Management may have expectations of future ownership or different roles within the company. Will continuity among advisors provide stability during the transition process or is it time to seek other counsel that aligns with the vision of the new ownership group? These questions are not easily answered. Nor is there a common right answer for these questions.


Every organization and succession plan just like every set of blueprints is different and should be handled accordingly.


Communicating Objectives

The next step of communicating the objectives with key members of the organization is vital.


  • Will management be on board with the goals of the succession plan?
  • Are the family members on board with changes of control among generations?


A misstep in communication could cause costly disruptions such as power struggles between key employees or family members and stress for external players, including suppliers, customers, lenders and advisors.


If the succession plan contemplates transfer to a third party buyer, how do you keep key stakeholders incentivized throughout the transition?