A Surety’s Winning Hand
By Carl Oliveri of Grassi
In the high-stakes construction world, a surety must have a deep understanding and real-time knowledge of the trends and issues the industry is grappling with and how those issues impact the contractor base you may be underwriting. While I hate to make a poker analogy, it is hard not to, especially when the surety’s winning hand requires a combination of critical elements working together harmoniously. This article explores construction’s “royal flush”: Cash, Compliance, Labor, Succession Planning, and Technology.
Cash is KING
One of the first things I learned coming into the construction industry as an advisor is that contractors do not go out of business due to lack of work; it’s due to lack of cash. Yes, as cliché as it sounds, cash is king. Unsurprisingly, successful construction companies have a strong culture of cash-flow management; it is their lifeblood. Without proper cash flow, projects can halt, leaving the company vulnerable to financial ruin and potentially putting the surety in a position where it may need to step in and complete bonded projects. The surety should understand the steps a contractor takes to maintain a healthy cash flow. This includes, but is not limited to, the following:
- Understand the contractors’ billings-collections process and how disbursements flow from this. While some costs, such as payroll, are paid as incurred, other job costs can be negotiated to the terms the contractor is under so that the company is never stretched on any given project.
- Ask if the company prepares financial management tools, such as project-centric cash flow reports, budgets, and other forecasts, designed to help identify cash peaks and valleys. Best practices suggest a 13-week look forward on a global and project basis.
- Inquire about other sources of liquidity to which the contractor may have access. Bank lines of credit are the most common avenue. Other avenues could include ownership’s ability to infuse additional capital. After all, why would the surety go all in if the owner won’t?
Compliance is QUEEN
Compliance is a broad term covering several areas. On its face, most associate compliance with OSHA issues, M/WBE goals, safety, and other operational matters falling under this term’s umbrella. However, compliance extends to the office when we talk about financial reporting and filing income, sales, and/or payroll tax returns; these reports/returns are governed by regulatory bodies and should be compliant. As a surety, while it is essential to know a contractor is compliant on the job site, it is just as important to understand that issued financial statements are in line with evolving generally accepted accounting principle (GAAP) standards. For example, it has been a few years since the adoption of ASC 606 Revenues From Customers With Contracts; while some may argue that the impact on some contractors was nil, there are issued statements that omit the updated disclosures and language under the standard, which are technically not GAAP compliant.
Like any good king who needs a strong queen, understanding the compliance matters impacting a contractor will solidify your hand.
Labor is Your JACK/JILL (of Trades)
One of the pervasive issues across the construction industry is the need for skilled labor; these Jacks/Jills of the construction trade are the resources we cannot replace with robots or AI. Even though labor matters are a non-financial risk to the contractor’s long-term viability, the surety should take time to discuss the contractor’s strategies for attracting and retaining top talent. This provides an opportunity to share best practices regarding incentive compensation plans, and other perks contractors may offer and identify different labor pools from which to pull. This can also provide insight into the contractor’s strategic plans or expose if no plan exists. For the surety, understanding how the contractor will continue to perpetuate a skilled and adaptable workforce that will improve efficiency and deliver higher-quality projects is part of the winning hand.
10 For Succession
A 10 goes hand in hand with the Jack, so it shouldn’t be surprising that the next “card” is succession planning. This is a powerful and important tool for ensuring the long-term success of a construction company. A strong succession plan identifies and develops future leaders, minimizing disruption when key personnel retire or leave the company. Key elements of a succession plan include identifying critical roles, assessing potential successors, and providing targeted training and mentoring. By implementing a comprehensive succession plan, construction companies can ensure a smooth leadership transition and maintain continuity in their operations, eliminating uncertainty for the surety and getting one step closer to the flush.
Technology is the ACE
Historically, technology is one of the more under-looked initiatives for most contractors because of a low or unquantifiable return on investment. However, to win in the modern construction poker game, contractors must adopt technologies that will help them build faster, on budget, and innovatively. The Ace should blend technologies that have been around for some time and incorporate more cutting-edge concepts, such as AI, which is changing how projects are designed, executed, and monitored. By effectively integrating these technologies into their operations, construction companies can improve accuracy, reduce waste, and enhance safety. While implementing new technologies requires careful planning, training, and investment to ensure a successful adoption, the Ace completes the hand.
In closing, while we all enjoy a good poker game, whether on our mobile devices or with friends, building and underwriting that risk in today’s environment shouldn’t be entirely left to the “dealer.” Understanding what makes up a contractor’s “royal flush” will help the surety to determine when it should go “all in.”
Carl Oliveri is the Construction Practice Leader and a partner at Grassi. He possesses over 25 years of experience advising owners and executives within the construction industry, particularly in regards to project-centric and companywide financial modeling, operational strategy development, financial statement attest services and income tax method analysis. Oliveri is a participant on the NASBP CPA Advisory Council. He can be reached at [email protected] or 212.223.5047.