There’s one word that has been popping up for a while now. Inflation. Inflation is the rise of materials, labor, and equipment. Not only does it raise costs, but it also heavily impacts the bidding process and cash flow on your projects. What numbers worked then don’t work now, and being adaptable to inflation is critical for your business, especially construction inflation.
Inflation is also impacting your team and their families. As a business owner, team leader, or even if you are just leading yourself, it is a mistake to underestimate the impact this can have on your team or individual performance.
Key Drivers of Construction Inflation
- Material Costs: Volatility of prices for steel, lumber, concrete, and copper.
- Labor Costs: Skilled labor shortages and state minimums driving up wages.
- Regulatory Changes: Compliance with new regulations increasing expenses.
- Energy Prices: Higher fuel and energy costs affect operations.
Think about the impact these things can have on someone’s ability to do their job? For sure, it does not make their job easier, and it is likely making it harder. This could lead to someone feeling less confident, insecure, or unhappy. These are traits that could potentially lead to mistakes.
Why Inflation Matters for Bidding
Accurate bidding is essential for profitability, and construction inflation directly impacts the bidding process:
- Cost Estimation: fluctuating prices make accurate cost prediction challenging.
- Contract Clauses: Price escalation clauses can mitigate risks but deter clients.
- Competitive Edge: Effective inflation management offers a bidding advantage.
- Profit Margins: Accurate inflation projects are critical to maintaining margins.
What is my recommendation on how to combat Inflation?
This isn’t to scare you away or start prepping for the worst. My advice here is to educate yourself on these factors and how they are impacting your business, your business processes, systems and you team. Collectively create the plan, for when things do hit the fan, as we all know, proactive is better than reactive.
- Market Analysis: Stay up to date on material and labor forecasts.
- Supplier Relationships: Understand and secure pricing and material availability. Make sure you have a plan for backup suppliers, and create a wider network to lean on.
- Create a strong Contract: include price adjustment provisions to protect your margins, negotiate terms, and provide clear reasons for any adjustments you need.
- Advanced Procurement: Buy materials early at fixed prices or negotiate on higher quantities that could give price breaks. Do what you can to avoid rapid cost spikes.
- Efficient Team and Cash Flow Management: Complete projects on time, understand where the money is going each week. Take time to map out the possibilities and make adjustments that are efficient to the project and business.
- Do not be afraid to say “NO” to a project: This is not the time to try and thread a needle to take on additional risk. Go into every project eyes wide open.
Know your strategy. Understanding what the market is doing and establishing solid relationships could not be more important as we move through high material costs, labor shortages, and as continuous changes impact the construction industry as a whole.
Been pondering the question “What is retainage in construction?” without an answer? Read on.
What is retainage?
Retainage is a common word all subcontractors and construction-related businesses need to be aware of AND account for in their cash flow statements. The meaning comes from the words root, retain, or to hold. With contracted work, it is very common for the project owner or their bank to hold retainage back from the GC’s contract and, therefore, for the GC to withhold or not pay out a percentage of the contracted price until specific milestones are met, or the project is fully completed. When you think about the uncertainty in construction work from labor challenges, material shortages, and weather delays, this makes perfect sense as to why a portion of funds, retainage, would be held until the end of the project. This “security deposit,” if you will, ensures the contractor completes the work in its entirety and does it to the satisfaction of the GC and the overall scope of work outlined for the finished project. Generally, retainage ranges from 5-10% of the project’s contracted price. Oftentimes, payments are paid to the subcontractors in progress payments, of which retainage can be held out from each payment, OR one lump sum is held until the end of project completion. The GC and the subcontractor will agree upon the exact percentage ahead of time, and that amount will be stated in the contract.
This covers the basics of “what retainage is in construction.” However, it is important to mention that there are some legal considerations based on state regulations for retainage rules. In the state of New Mexico, withholding retainage is not allowed, whereas in Texas, there must be a 10% retainage on all private construction projects. In the state of Florida, with regard to any contract for construction services,” a public business can only withhold a maximum of 5% of the payments as retainage. When determining what retainage to establish, be sure to check out your state’s laws. If contracts violate the local and state laws, then the contracted amounts can risk becoming invalid. Paying close attention to how retainage is designated within your contracts is extremely important. There have been a lot of lawsuits and manipulation when it comes to contractors and developers underpaying for work being done.
How can retainage in construction affect my cash flow?
Retainage is common practice and therefore, contractors are aware roughly 5-10% of their payments will not be received until a later time. However, when not properly accounted for in their financial statements, this can create working capital challenges. For example, a plumbing contractor may finish work on their building, but the project will not be completed for another 6 months (sometimes even years!!), leaving 10% of their full contract value payments not hitting their bank accounts for a significant amount of time. Consider this: 10% of the contract may be as much as 50% or more of the actual profit from this job. Meanwhile, the plumbing contractor needs to move on to other projects and oftentimes, they are short on cash, waiting on the retainage from prior projects to come in. This is why understanding the query “what is retainage in construction” while utilizing a cash flow template that is well structured in timing the inflow and outflow of cash on a weekly basis is imperative. Retainage must be accounted for on each project within cash flow statements. Let’s review how to properly account for retainage in your financials.
Incorporating retainage into your cash flow statement
When you have the cash flow of every project estimated and scheduled, you have a solid foundation on which to build your business’s profitability. When inputting data into your cash flow tracker, look for a tool that will auto-calculate each of your pay apps net of retainage. Otherwise, deduct your retainage percentage from every expected pay app when you are accounting for how much cash will actually be coming into your bank account. Your cash flow tool should have a function for when you will actually be paid by your customer. Contractors include the full amount they are invoicing each month, including the retainage amount, but it is then deducted when determining the amount to be paid in cash for that invoice. In other words, it is earned at the time you invoice but then held till it is due when you meet the milestones. You GET retainage when you submit a FINAL invoice for retainage at the end of the project AFTER the project has met the requirements to invoice retainage per the contract. The moral of the story, proper recording is key! Your cash flow tool needs to have the functionality to show when that money is coming into the business. Or you can just use the one that we created and have on our website for you (https://mobilizationfunding.com/cashflow/). Our tool keeps track of the percentage of retainage you enter and when you expect the retainage to be paid. It is important to update the dates you actually receive the funds. If the retainage payments are delayed, other project cash flows may also need to be re-estimated, especially if you are relying on the funds to get started on other projects.
If your company has more than a few employees, your revenue is growing, and you are juggling multiple jobs, it’s probably time to hire your own construction accountant, preferably a Certified Public Accountant. A good accountant often pays for themselves in a relatively short amount of time. After all, finances need to be current and accurate in order for you to stay on top of your accounts and plan for growth.
Hiring an accountant can save you time
Hesitant? Consider how much time you currently spend per week on payroll, sending out checks and keeping your accounts in order. What else could you be doing with that time? And how many times has something slipped through the cracks—like a late payment to a vendor or the IRS? Even once is enough to prove why hiring a CPA is a good idea.
A construction accountant can organize your company’s financial documents
No matter the industry, there are a handful of basic financial records that your company should maintain and pay attention to in order to operate efficiently. These barometers will reveal whether your company is making a profit or operating at a loss.
If you don’t know where your company’s financial information — like monthly accounts payable, accounts receivable, quarterly Balance Sheets, Profit and Loss Statements and other standard financial reports — are kept, or if they’re out-of-date or not organized, the right accountant may be your company’s new MVP.
Beyond creating an orderly archive of financial documents, a bookkeeper or CPA can dig into those numbers to identify strategies that can improve your company’s profit margin, eliminate debt, invest in future growth opportunities through strategies like increasing your prices, reducing overhead, or making other changes to your day-to-day operations.
Pay your taxes correctly and on time
Filing and paying taxes in a timely, consistent manner is an unavoidable piece of running a legitimate business. And the risks of incorrectly processing that paperwork are numerous and costly. Failure to do so can result in expensive fees by the IRS, plus automatic draws from your account to repay any unpaid taxes. An accountant will keep you in the IRS’ good graces.
Avoid costly overdraft and other avoidable bank fees
Bank and overdraft fees is not only a slow leak on your company’s bottom line — they’re also a tell-tale sign of financial problems. These fees and the underlying issues causing them (lack of organization, communication problems, etc.) will likely prevent you from qualifying for lines of credit or low-interest loans in the future. If this is a reoccurring issue, consider it a clear sign that you need help managing your cash flow.
An accountant can improve your business growth strategy
Are you passing up on growth opportunities due to a lack of capital? If your business has been approached to take on larger or more lucrative projects but you have turned them down due to financial uncertainty or issues with debt, it is likely time to find a financial expert who can help you to better direct your company to the right track.
How to find the right construction accountant
If you are reading this article, then by now you know it is time to take action. The next step is finding the right person for your business. Here are a few pointers:
1. Research candidates online. There are many websites dedicated to connecting employers and job seekers, such as ZipRecruiter.com, Glassdoor.com or even LinkedIn. Simply enter your qualifications (feel free to compare the requirements of similar businesses) and connect with local applicants.
2. Enlist help from a staffing agency. A temporary staffing agency in your area can place an experienced person with the right qualifications for a temporary amount of time, permanently, or a temp-to-permanent arrangement. While they charge a premium rate, this may be the best option for a business owner who doesn’t have time to weed through applications, order background checks or conduct initial interviews.
3. Reach out to trade associations. Your local chapter of the Associated Builders & Contractors (ABC) or similar agency like the Construction Financial Management Association may be able to connect you with viable candidates who is familiar the construction industry and would best fit your needs.
The bottom line: Your commercial construction business needs, and you deserve, a financial expert’s help.
You should be doing what you do best: focusing on growing your company and properly completing your jobs on time and on budget. Company owners are often reluctant to let go of finances, but the truth is that construction accountants understand your industry and are trained to look for inefficiencies, find other lending options, and help you to more efficiently run your company. Just remember that as the business owner, you should continue to review your financial position with your accountant on a regular basis.
Is your business getting ready to bid on your next big project? Contact us today for a free business consultation or click here to learn about how a financial capability letter could help give you a leg up on the competition.
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The devastation caused when Hurricane Harvey hit the Gulf Coast on August 25 was staggering. More than one million people were displaced and roughly 200,000 homes were damaged in a 300-mile span.
The cleanup and recovery will be a long one for the region, but within a few months, contractors working for the Texas Department of Transportation cleared 10 million cubic feet of debris from the state’s highways.
(more…)
The front door of one of the most historical sites in the country is undergoing a major renovation. The Independence Visitor Center, in Philadelphia, welcomes millions of people from around the country and around the world who want to see where the Declaration of Independence and the United States Constitution were signed.
Tampa International Airport (TIA) is nearly finished with the first phase of its roughly $2.3 billion expansion. The first phase has included the construction of one of the largest car rental facilities in the country (2.6 million square feet), and a 1.4 mile people mover track, plus renovations to each of the four existing airsides and a major remodel of the main terminal.
If you own a construction company, you might feel pretty safe from hackers. Your company may not have a website, physical office location or a big staff. But unless you operate on a paper-only basis, you could be susceptible to hackers who want to exploit information and steal dollars from you, your company, employees, and clients.
Why would anyone want to hack your company when there are so many others out there? Because they can.
Hackers around the world are constantly looking for ways to steal money and information from American businesses of all sizes. They’ve captured thousands of credit card numbers through major retailers like Target. They’ve gained access and exploited information from all types of organizations, ranging from Fortune 500 corporations to public utilities and small private companies. They find ways to get everyday people to download corrupted files or programs or even emails that give them access to the information on your computer.
While it may seem unlikely, construction companies like yours have plenty of things that hackers want access to, like bank account information, credit cards, incoming receivables, employee records and personal information. But hacking is preventable. Many individuals fall prey to phishing scams where hackers are able to take control of a computer and force you to pay them so that you can access it again.
Here are a few easy steps you can take to minimize the chances of being hacked.
Update your passwords regularly
Do you use the same username and/or password for everything? If so, those accounts may be compromised already. Hackers, knowing that most people use the same log-in information, then use those same credentials to gain access to accounts on hundreds of different websites.
Large companies like Adobe (whose products include Photoshop or Acrobat) have been subject to hackers who stole username and password information from more than 150 million accounts.
While it is less convenient, your information will be exponentially more secure from hackers if you always use different passwords for your online accounts. For the most sensitive accounts like your email, online banking accounts and computer log-ins, you should change the password every three months and require your employees to do the same.
Bonus Tip: Use a service like 1Password so you don’t have to remember all those passwords.
Add extra security
For many online banking and email accounts, you can choose to add another layer of protection to your account called two-step verification. Two-step verification means that the website or bank will alert you if anyone attempts to log into your account from an unrecognized computer. It will also force whoever is logging into that account to input a code that is sent directly to your mobile phone.
Don’t log into unsecure networks
One of the most common ways for your computer and network to be compromised is to access free public WiFi networks like those at airports, coffee shops, or even the library. Because the networks have less protection, hackers can use them to gain access to your computer or accounts. If you need to use those networks, be careful about accessing sensitive information or logging into other secure accounts.
Secure YOUR network
Your own WiFi network is just as vulnerable as your local coffee shop’s if it is left unsecured. And if you’re thinking hackers won’t look for your network, think again. Hackers actually drive around in cars outfitted with antennas just to find unsecured networks. It’s called war-driving.
Cool name. Bad practice.
Protect your WiFi by updating its encryption standard and setting a password that is obscure. Don’t set the password, for example, to your business name plus the year. Hackers will crack that in no time.
Work with a cybersecurity partner
Construction is a group effort industry, so don’t stop that philosophy at the job site. Working with a cybersecurity partner, preferably a local business that can meet with you and answer your questions, can help you secure your data and protect your business.
Train your employees
Your employees already know to secure the shop for the night, but are they locking up their data? Implement a cybersecurity training program for your employees and ensure that those policies and best practices are followed.
Bonus Tip: Not sure what that policy would look like? This is a great place to start with a cybersecurity partner.
For additional resources about how to secure your business online, visit the National Cyber Security Alliance’s Stay Safe Online website.
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A natural disaster can put your whole life at risk. For business owners, there is even more to worry about and prepare for. A natural disaster like Hurricane Harvey in Houston, or the recent wildfires of California can lay ruin to your company.
You may think it would never happen to you, but one in three small business owners have been impacted by a natural disaster at some point or another. And worse yet, researchers at the Institute for Business and Home Safety found that one in four small businesses never reopen after they are impacted by a natural disaster.
Here are a few basic ways to protect your business in case disaster strikes:
1. Insurance. Insurance. Insurance.
Especially in the commercial construction sector, it can feel like you need insurance for everything. But consider that on average, a small business loses $3,000 per day once they close due to a major storm. How long could you stay afloat in a situation like that? Disaster Insurance, Business Owner’s Policies (BOP), or Business Interruption Insurance can be the key to saving your business if the worst happens.
When purchasing insurance for new equipment or for your business property, be sure to ask and understand what is covered and what isn’t in case of a disaster. Take some time to reach out to your current insurance provider to ask: “If my area gets hit with a natural disaster like a hurricane, flood, tornado, earthquake or wildfire, am I covered?” Then make sure the language in your contract is consistent with the answer you receive. This will allow you to be aware of any gaps in your insurance coverage so that you can fill them with additional insurance or set up your own funding methods to protect those assets.
2. Invest in a generator.
One relatively easy way to get your business back up and running after a disaster is to have a generator. After all, just because the grid is down doesn’t mean your office should be. Most businesses can’t operate for long without computer access. In case of a longer-term outage, your team will need access to things like overhead lights, power outlets, printers and a working coffee machine. According to one study, just 29% of small business owners have made the investment.
This is one item you should never buy just before an approaching disaster, since you likely won’t be able to find one anyway, and if you do you’ll probably pay double or triple for it. Plan ahead and do you research while the skies are clear. Find the right generator for you needs and purchase it as soon as you can. Another option is to make sure your employees have the tools and access they need to work remotely.
3. Secure key documents.
What documents does your business need to operate? If all of your work history, contracts, insurance agreements, Rolodex, employee and company information is saved in a file on your office computer, or locked away in a filing cabinet in your office, you need a backup.
This can be in the form of a storage company that can store your physical documents, like Iron Mountain—just make sure the facility is at least 50 miles away—or data centers for your electronic files with a company like Flexential.
4. Develop a thorough plan, and communicate it.
If a storm is coming or your job site is at risk of a natural disaster, ensure you are on the same page as the property owner or general contractor. Know when you would tell your employees to go home and make preparations or what to do in case your area is evacuated. In those cases, how should your team handle any equipment, materials or supplies at the job site? Who is responsible for taking and storing photographs of the site before a storm or natural disaster hits?
In areas where there is risk of tornadoes, flash floods or fast-moving wildfires, you should have a set plan in place for your employees to protect themselves on the job site.
In addition to the owner or GC, if your work schedule is interrupted by a natural disaster, you will likely need to contact vendors, suppliers, subs, your bank or lending partners. Be straightforward if this may impact your ability to make a payment on time or your ability to pick up a delivery. Honesty, initiative and responsiveness go a long way in these instances.
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Commercial construction bidding can be a stressful and frustrating process. It takes time, energy, and doesn’t always pan out in your favor. But, sitting out the race also means turning your back on tremendous growth opportunities. Here are some common mistakes contractors should avoid when bidding on new projects.
You aren’t qualified
That doesn’t mean you aren’t CAPABLE of the work, but it does mean you will need to put in extra effort to show a General Contractor that you understand the full scope of this project, and how your previous expertise will inform your execution strategy.
You don’t have the relationship
Construction is all about relationships. If you are trying to land your first big job, it pays to invest extra time and energy into building a relationship with the General Contractor. Let them know you are willing to work on smaller, additional projects on the site, or to collaborate on any problems that occur. Be a person they can turn to in a pinch, and eventually you will be the person they turn to for opportunities, too.
Casting too wide a net
Look for the best opportunities for your business and focus on your strengths. It’s better to focus on jobs that you are confident and comfortable in rather than trying to overexert your company’s capabilities. Over time, this will allow you to find the sweet spot with your bids.
Pro Tip: ConstructConnect has a searchable database that can help you find actively bidding commercial construction projects in your area.
Waiting for the bid to be announced
Business owners should always be on the hunt for new job opportunities. Talk to your General Contractor or reach out to contacts in your network. Ask if they know of any future jobs that could be good leads for your company, and if they’d be willing to put in a word for you once the bid is submitted. This will help narrow and improve your bid and project pipeline.
Wasting time on “iffy” projects
Drawing up a bid proposal can be grueling process, so be sure to regularly evaluate the quality of the potential job. If it’s not a good fit, it is often best to walk away and look for something else.
Skipping pre-bid meeting and site visits
Creating a good bid proposal requires precise estimations and detailed planning, so take advantage of any opportunity to research and learn about the job. This can also help you build rapport with the GC or project owner, and is an opportunity to ask questions about allowed material substitutions, bonding or wage rate requirements, and double-check that you’re interpreting the plans correctly.
When it comes to construction bidding, don’t go it alone
Always have additional eyes reviewing your bid. Not only should you ask your business partners or an outside agency to look out for typos, but also to check your math and verify that everything adds up properly. A reviewer can help make sure you didn’t miss any important components that could mean the difference between winning and losing the bid, but also can protect you from submitting a bid that is too low for the job, which can result in lost money and unnecessary debt.
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Are you still walking around a job site with a clipboard and several coffee-stained checklists? Or dealing with fax machines and frantically rushing to the office to print out documents? Good news! The answer to increasing your productivity is right in your pocket.
If you have a smartphone or are willing to invest in one, you can transform your business operations from an organizational nightmare to a well-oiled machine. Developers have created a seemingly endless number of apps and programs designed to make you more productive.
Here are four types of apps and programs we recommend that can help shore up your workflows:
Apps for Equipment Rentals and Tools
Many large companies in the last several years have released their own apps to make it easier for you to use their products or services. United Rentals has a free UR Jobsite app that allows its customers to access their account information and remove or extend their rental terms, or even shop for used equipment they are selling.
Tool manufacturer Dewalt has a handful of apps, including one that will track the tool battery life and another that can handle job site calculations, from stairs landing height to volume conversions.
Even retailers have apps to simplify new tools and equipment purchases. Most national retailers, like Lee’s Tools, Home Depot and Lowes all allow in-app purchasing.
Apps for Document Signing
There are tons of apps for Apple or Android devices that allow you to sign work forms and other documents on the go. Some of the most popular include Doc U Sign, Adobe Fill & Sign and Sign Easy.
Financial and Accounting Apps
Even many smaller credit unions now have apps that allow you to keep tabs on your current accounts. This can help you track whether or not a wire transfer went through, if one of your vendor processed a big check, or if there is any unusual activity on your account.
Does your payroll or accounting company have an app? Many do, and they can make your life much easier. Paychex, for example, has a handful of different mobile platform options, including one allowing employees to punch in and out for the day on an iPad or tablet on the job site.
Intuit also has a payroll on-the-go option that even has a free direct-deposit feature; business owners can review and edit all the payroll information from their phone or tablet and then authorize the direct deposits.
Any contractor knows that keeping on top of invoices is key in keeping the business running smoothly. There are several app options for this, like Invoice2Go or Invoice by Wave, that can help to draft, track and archive invoices to make it easier to manage cash flow.
There are even some smaller apps, like MileWiz. This automatic driving log removes the worry and work of actively recording mileage on your vehicles for tax purposes or driver reimbursements.
It has been about a decade since the first iPhone was released and now over 200 million Americans have smartphones. There are tens of thousands of apps that allow people to do all sorts of things, from accounting to taking current pictures and videos on the job site. Chances are, your competitors have them and are using them to improve efficiency in their own company. Are you?
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