Managing Construction Finance: 4 Key Challenges
By Brian Sauers, CPA and Anthony Cicotta, CPA
Construction industry players face a specific set of challenges in their quest to develop a business that can maintain profitability year after year. Projects can take months (or years) to complete, and some factors – like weather – play an outsized role.
Still, business owners can take steps to manage internal processes as effectively as possible, and plan around known variables.
The seasonality of construction work is a given challenge, one that weighs heavily on construction finance. Managing swings in cash flow throughout the year is critical to a firm’s capacity to absorb losses over the winter months, and becomes even more important if bad weather throws a wrench into a project’s timetable.
Responsible cash management starts with good data: What overhead requirements does a firm need to anticipate for the lean months? What seasonal employee layoffs make sense? As you might expect, Davie Kaplan counsels a conservative approach to protect funds for basic operations.
Especially on the heels of a strong year, it’s also critical to plan ahead for the possibility of a large tax liability. Nothing takes the shine off a string of successful projects like a struggle to pay the tax bill! And a post-tax cash crunch can affect a firm’s capacity as it moves into the next busy season.
Bidding with Accuracy
It’s important to maintain steady bid activity to build the firm’s backlog. A successful project bid is not just one that earns the job for the contractor – it’s one developed on the basis of costs defined both clearly and realistically.
A good framework to identify and track different cost variables is the starting point for an accurate bid. The construction business with such a framework in place can assemble a bid efficiently and submit it with confidence; if the bid wins the work, there’s reasonable assurance in place for a profitable project.
An accurate costing framework also pays dividends when it comes to day-to-day cost control. Good real-time data for both materials and labor allows management to keep track of costs and make timely adjustments to keep a project out of the red.
Estimating Revenue Appropriately
When it’s time to prepare financial statements, construction firms need to navigate how to estimate revenue for projects at various states of completion. The goal is to avoid large gains or fades on jobs.
There’s always an element of subjectivity to such estimates, so it’s important to recognize different motivations, depending on the intended use for the financial statements. We typically think in terms of minimizing tax exposure in any given year; there are also scenarios where looking ahead, it makes sense to take on a larger tax liability, such as a potential sale of the company or anticipated increases to tax rates.
Especially if a firm is engaged in one or more multi-year projects, it needs a tax strategy specific to the construction industry – a big-picture plan that will capture all available tax advantages.
Investing in Major Equipment Wisely
Construction involves major expenditures for capital equipment. A job’s location can drive the decision about how to pay for necessary new equipment, or the likely need for specialized equipment on similar jobs in the future.
The business owner may need to spend significant money on equipment before realizing any revenue for the job, which can pose cash constraints. Or there could be a tax reason to acquire – and pay for – equipment at year’s end.
In addition, the business owner needs to determine whether it makes the most sense to finance the new equipment, buy it outright, or lease it for the duration of a project. For investments that range well into six figures, it’s important to examine all the options and understand how they affect the bottom line.
Count on Experienced Construction Finance Advice from Davie Kaplan
Davie Kaplan can help you handle construction finance challenges – and develop a business model that holds up to seasonality and other risks. Our expert team of CPAs has been serving the construction industry and other businesses in the Rochester, NY area since 1934. We offer deep, industry-specific experience and a local touch, and we’re equipped to help clients of all sizes.
Contact us here or call (585) 454-4161 to schedule a no-obligation consultation; if you have contracts with government agencies, we’ll help you assess whether you can benefit from a 179D (commercial building energy efficient) deduction.