Eleven leaders in construction finance share insights on working capital, P3s, equipment financing, collaboration, compliance and technology to improve a construction company's financial health and manage risk.

How can contractors get a clear picture of working capital?

Larry D. MayPartnerCarr, Riggs & Ingram

Working capital is one of the most important components most surety companies use to determine a contractor’s bonding capacity. However, surety companies discount a contractor’s working capital to create a clear picture of items that will become cash.

Generally, sureties exclude prepaid expenses, employee and related-party receivables, old accounts receivable and claims receivable. They also discount the value of assets such as marketable securities, depending on investment type and market conditions. Investments in government bonds may not be discounted at all while publicly traded equity securities may be discounted up to 40 percent. Some non-current assets, such as cash surrender value of life insurance, typically are added back to working capital.

Of course, surety companies change their perspective each year depending on the market. The point is to create a snapshot that maximizes planning opportunities to satisfy the contractor’s surety and banker, but minimizes taxes.

Is there a place for mid-sized and local contractors at the P3 table?

Jack A. CallahanPartner, Construction Industry Practice LeaderCohnReznick LLP

To date, most of the P3 projects executed in the United States involve large civil infrastructure projects, and large national and international construction firms have dominated these projects.

However, in addition to civil infrastructure projects, there is a significant need for new or renovated “social” infrastructure, such as student housing, conference centers, courthouses and stadiums, many of which can utilize tax credits. A growing number of P3s are targeting these social infrastructure projects, which typically fall well within the skill set of local contractors. Before jumping into a partnership, contractors should make sure they understand all of the risks, such as the ability to procure long-term financing or financial backing to cover higher upfront costs and maintain the standards of transparency. P3s can provide a profitable avenue for growth, or they can deteriorate quickly due to misaligned expectations. Take the time to thoroughly plot the risks, exposures and opportunities inherent in these deals.

How can construction equipment financing enhance working and growth capital?

Eric DuschChief Commercial Officer, Equipment FinanceGE Capital, Corporate Finance

Financing with a loan or lease often provides the most financial and operational flexibility.While a loan requires taking on debt, financing equipment in this way allows the company to maintain valuable cash reserves. Equipment financing is a powerful working capital solution, particularly for service companies that don’t have inventory to borrow against. With a secured term loan or a sale leaseback, a lender can help a company restructure its balance sheet to unlock equity for working capital.

Equipment financing also can provide greater operational flexibility than ownership of an asset. At the end of the lease, the company might choose to purchase the equipment, renew the lease or return the asset to the lessor.

It can be tempting to use cash and pay down debt when cash flows are improving, but the better strategy might be to take on debt when you can get it, not when you need it. Equipment financing with a specialty lender is a valuable tool to keep cash on hand.

How can contractors manage the complexities of compliance?

Jon WittyVice President and General ManagerSage Construction and Real Estate

Today’s litigious environment—combined with greater scrutiny by government agencies, insurance companies and project owners—is making it more important for contractors to have the ability to protect and defend their companies.

The good news is that there are more applications available to help capture and document issues at the jobsite, as well as manage compliance processes. The ability to create electronic daily reports with pictures makes the collection of data much easier and consistent.With iPads on the jobsite, contractors have more documented proof on hand to defend their case. Mobile apps also make it easier to handle daily time entry and approval, which is key for meeting certified payroll requirements.

Keeping on top of compliance requirements is paper intensive. By automating processes such as lien waiver tracking, contractors can assure proper procedures are followed and can be instantly alerted when a compliance problem occurs.

What is the potential financial ROI for contractors that automate collection of labor time and attendance information?Jason DavisProduct Manager, ProContractorViewpoint Construction Software

Today’s technology simplifies collaboration and sharing of data across estimating, project management and accounting. Plus, innovations like the iPad help contractors realize the power (and ROI) of linking those in the field with the team at the office.

By using an all-in-one software solution, E.R. Lewis Construction Company of Greenville, N.C., saved approximately $60,000 a year in payroll processing alone by preventing redundancy and errors with duplicate data entry. Further ROI can be achieved by submitting timesheets from the field on a daily basis.E.R. Lewis executives and project managers can view details of any project in real time and make adjustments that might be necessary to stay on track and on budget.

When everyone shares the same up-to-date data when communicating, the ROI permeates across project execution and team productivity. Automated data collection also speeds up payroll and allows contractors to remain lean as they continue to grow.

What are the best ways to assess whether a company is financially and operationally ready to invest in a new technology?

Fred OdeCEO/ChairmanFoundation Software

Companies must have the people and processes in place before they can introduce the right products. For example, Company A has a generic accounting system in place, but it isn’t doing any sort of job costing, and the people in the field are resistant to change. Introducing a new product will most likely fail because neither the people nor the processes are in place.

Company B, on the other hand, is using a generic accounting software package, but is doing sophisticated job costing in spreadsheets. Additionally, its employees are on board with implementing new accounting software. With both people and processes in place, it makes sense for Company B to implement a new product.With technology, it can be challenging to place a monetary value on benefits like more timely and accurate information. As long as a business has done its due diligence—which includes defining a budget and setting a realistic plan for implementation—it’s both operationally and financially ready for a new technology initiative.

Gord RawlinsPresidentCMiC

First, establish your basic business goals. Not all new technology is relevant to the business. Second, consider the timing and training involved in adopting the new technology. Less operational disruption will positively impact the bottom line. A business impact analysis (BIA) survey should be conducted to identify the potential risks for implementation and integration. If possible, any significant interruption should be assessed in terms of financial impact. These costs should be compared with the costs for possible recovery strategies. Although there is risk involved, organizations need to stay in tune with the latest technology trends to keep up with customer demands.

Finally, assess the productivity improvements this technology may have on your company and weigh them against the costs and ROI. Consider and plan all the requirements you need to achieve your goal. Transformation is a process, rather than the endgame or just a financial and operational responsibility.

Derek LeaverCEOCOINS

Many companies embark on a new technology implementation without considering whether they are ready and without truly identifying what outcomes (other than just faster/cheaper) they should be benefiting from as a result of their investment. Making that readiness assessment upfront can have a significant impact on the success of the project.

The assessment should consider key areas such as vision, sponsorship and leadership, desire/willingness, business case, project approach, ability to change,departmental capacity and IT capacity for the project. When looking at departmental capacity, ask stakeholders to consider whether the organization is able to perform all the tasks required by the project in areas other than IT, including the ability to make decisions within the tight time constraints typical to project environments.

As the company embarks on a new technology, ask questions regarding how it is deployed and the options available for purchasing or licensing it.

How does the financial impact of moving to the cloud vary for small, medium and large contractors?

Bassem HamdyChief Marketing OfficerHIKUU Construction Cloud

Cloud services benefit from seamless scalability that allows vendors to implement them effectively regardless of a firm’s size or budget. This means businesses will be charged only for the technology they need instead of having to settle for one-size-fits-all solutions that can either be inefficient or wasteful depending on the company’s context. Moving to the cloud adds new factors into the ROI equation. Users can see exactly what the system is costing through the transparency of a cloud provider’s interface.

Technological leaps in cloud services have given businesses of all sizes an edge.Decision-makers are taking advantage of these systems in many capacities, reaping financial benefits and competing head-on with other firms in their field. Team leaders who expect growth in the future also can easily adjust their subscriptions to account for more traffic, adding on applications and features as they see fit. Businesses can channel extra funds into areas of their companies that drive innovation and attract new clients.

How can contractors achieve optimal construction compliance through collaboration?

Rob HumphreysVice President, Product ManagementViewpoint Construction Software

While use of collaboration tools grows steadily in North America, the UK government will require contractors to implement fully collaborative 3-D BIM with all project and asset information by2016.

All stakeholders on a project benefit from collaboration because they have one “version of the truth;” everyone views and shares the same data and updates. From a financial standpoint, everyone sees the real-time data of performance, becomes aware of the true costs and can maintain definitive metrics on performance across all disciplines. Perhaps the biggest benefits revolve around reviews, approvals and maintaining an auditable record. Collaboration tools allow you to manage interdependent tasks across multiple organizations and users. They also provide the project owner with a real-time status of key work processes so that inefficient processes can be remedied and the necessary input from participants can be sourced. Auditable records can be used for documented compliance and regulatory purposes.

Are there new sources of debt financing?

Henry W. Nozko, Jr.PresidentACSTAR Insurance Company

Sources of debt financing are slowly returning to the scene for construction contractors. Two sources available are bank debt and/or institutional long term debt such as long term loans available from institutions such as the Teachers Insurance and Annuity Association – College Retirement Equities Fund (TIAA-CREF). The differences are significant. Bank debt is generally of shorter duration, usually up to seven year terms vs. institutional debt can extend several years beyond what is available from banks, lowering monthly or quarterly principal payments over a longer period of time.

However, there are usually more covenants in longer term institutional debt vs. shorter term bank debt. For example, bank debt usually concentrates on coverage ratios and therefore the loan documents are simpler and less onerous. Long term institutional debt generally includes more restrictive covenants than are usually contained in bank debt. Longer term institutional debt might include limitations on capital expenditures, changes in the business, allowable investments, disposal on assets, and management changes, and restrictions on mergers or acquisitions, etc.

Consider bank debt whenever possible because the restrictions of bank debt are usually less cumbersome to the operations of the company and banks are usually more flexible if and when it becomes necessary to modify loan terms and conditions.