ASA President’s Letter

December 2018

 

Dear ASA Members,

In last month’s President’s Letter, I talked about how important, and valuable, participation in ASA is to get the most out of your membership. As the education program for SUBExcel 2019 comes together, it is becoming more and more evident to me that the quality of the speakers and the focus of the education sessions and workshops will make your participation worth it.

SUBExcel 2019 will take place March 6-9, 2019, at the Renaissance Nashville Hotel in Nashville, Tenn. Register online, make your hotel reservations, review the program, and learn about our speakers at www.subexcel.com. The early-bird deadline ends Feb. 1, 2019, and the hotel cutoff date is Feb. 6.

The theme of SUBExcel 2019 is “Technology—for Millennials to Dinosaurs.” Education workshops will examine technology topics and how companies can bridge the gap between “early adopters” and “resisters” of technology to create a cohesive workforce. Just take a look at the workshops related to technology that we have scheduled so far:

  • “Unique Technology Solutions—A Game Changer for the Subcontractor” by Brian Moore, Kahua, Alpharetta, Ga.
    This workshop examines unique and available technology solutions and how to leverage them. Brian Moore will discuss how to finally solve the data ownership issue, and he will explain how subcontractors drive change versus change being driven on them by general contractors.
  • “Reality Capture for Existing Conditions—Save Time, Lower Risk” by David F. Dengler and Garrett Maldoon, Kelar Pacific, San Diego, Calif.
    David Dengler and Garrett Maldoon will discuss new technologies including 3D LiDAR scanning and UAV/UAS drone photogrammetry, which deliver the real existing conditions to your computer faster and safer than traditional methods.
  • “5 Questions You Never Ask a Technology Partner But Need To” by Steve Antill, Foundation Software, Strongsville, Ohio
    Steve Antill will break down how to properly map your software search, involve all the right team members and understand how to determine the right technology for your construction business.

The education program will also include workshops on additional topics:

  • “The Impact of the A/E Fiduciary Duty on Construction” by Ujjval K. Vyas, Ph.D., J.D., Alberti Group, Chicago, Ill.
  • “Using Preliminary Notices and Mechanic’s Liens to Make Yourself a Payment Priority” by Jerry Bailey, NCS, Cleveland, Ohio
  • “The Human Side of Construction™” by Martha-Ann Marley, M.A. Surety, Mooresville, N.C.

I know that it’s still early and there’s plenty more to come! But already, I’m excited about how the program is coming together, and I hope you are, too!

Best Regards,

 

Courtney Little

2018-19 President

American Subcontractors Association

 

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Contractor Community

December 2018

 

ASA Names Government Relations Expert Mike Oscar as Chief Advocacy Officer

ASA has named Mike Oscar, managing partner, Gray & Oscar, LLC, a government relations consulting firm with offices in Alexandria, Va., and Philadelphia, Pa., as its Chief Advocacy Officer, effective Dec. 5. Oscar will lead ASA’s government and industry advocacy programs, including federal legislation, government regulations, and industry collaboration and coalitions. He will also work closely with ASA chapters to establish and maintain effective grassroots advocacy programs.

“The ASA Search Committee—composed of ASA Executive Committee members—conducted an exhaustive, six-month search for the right person to direct the Association’s advocacy initiatives into the future,” said 2018-19 ASA President Courtney Little, president and general counsel, ACE Glass Construction, Little Rock, Ark. “Certainly, Oscar has big shoes to fill, and the ASA Executive Officers and Board of Directors are confident that Oscar and his team will successfully execute our strategic legislative action plan and accomplish our advocacy goals, including cultivating and establishing new industry alliances.”

Oscar has nearly 20 years of experience in government affairs and 12 years of service on Congressional staff. During his tenure on Capitol Hill, Oscar worked in both Republican and Democratic offices in the U.S. House and Senate, giving him rare institutional knowledge of both chambers and caucuses. His bipartisan experience in Congress has equipped him with a unique set of contacts and networks to access on behalf of ASA. In both public and private practice, Oscar has been deeply involved in key construction subcontractor issues, including prompt payment, the mechanic’s lien law, government procurement, funding for apprenticeship training programs, public-private partnerships, and worker misclassification. His regulatory experience spans multiple federal and state agencies, including the Environmental Protection Agency (lead paint remediation), International Trade Commission (tariff), Occupational Safety and Health Administration (workforce safety and silica and beryllium exposure limits), and the U.S. Department of Labor (bid solicitations, worker misclassification, overtime regulations and National Labor Relations Board rulings), Commerce (economic development), and Agriculture (risk management and international trade). As a representative for a national construction trade association, Oscar successfully spearheaded an effort to secure a U.S. Court of International Trade decision regarding aluminum extrusions for curtainwall units.

At Gray & Oscar, Oscar has represented major construction trade associations for over a decade. The team at Gray & Oscar includes government relations experts with broad and extensive background in local, state and federal government, as well as judicial and executive branch and political and non-profit campaign experience.

Oscar has a successful track-record on implementing ASA priorities at the state level. In Pennsylvania, Oscar was instrumental in developing a bipartisan coalition of lawmakers to implement the state’s prompt pay law, as well as an update to the mechanic’s lien law. The Pennsylvania Prompt Pay law was enacted under divided government with overwhelming bipartisan majorities.

“It’s truly an exciting time for ASA as we chart a new path and look to the future,” said ASA Chief Operating Officer Richard Bright. “We now have an entire team devoted not only to our advocacy and industry initiatives, but also our growing Chapter Network. Oscar and his team will be a tremendous resource and advocacy coach for our 30-plus chapters across the country and will work closely with our chapters to establish and maintain effective grassroots advocacy programs.”

 

ASA Taps Verbalocity Founder Clint Swindall as SUBExcel 2019 Keynote Speaker

ASA has selected Verbalocity founder Clint Swindall as its keynote speaker for SUBExcel 2019 in Nashville. Swindall will share his inspiring and educational message of employee engagement in the opening general session, “The Power of Personal Engagement—Our Daily Contribution to a Culture of Employee Engagement,” from 9:00 a.m. to 10:30 a.m. on Thursday, March 7, 2019.

SUBExcel 2019, themed “Technology—for Millennials to Dinosaurs,” will take place March 6-9, 2019, at the Renaissance Nashville Hotel in Nashville, Tenn. Register online, make your hotel reservations, explore the program, and read about the speakers at www.subexcel.com. The early-bird deadline ends Feb. 1, 2019, and the hotel cutoff date is Feb. 6.

The engagement of employees continues to be a top priority for business leaders—and for good reason, Swindall says. Research indicates a highly engaged workforce can increase productivity, profitability, and innovation, while reducing costs associated with attracting and retaining new employees. In a nutshell, engaged employees are good for business, Swindall explains. With research also showing that less than one-third of employees are truly engaged, an ongoing effort must be made to build a culture to overcome employee disengagement. “While we work to engage employees, we must first consider our own level of engagement,” he says. “Every day we walk through the doors of our office we are either adding to or taking away from the culture of the organization. There is no middle ground. Our personal engagement is our daily contribution to a culture of employee engagement.”

In his keynote presentation, Swindall will take a look at personal engagement and the impact it has on the engagement of those around us. “Often our biggest obstacle to building a strong culture of employee engagement is standing in our shoes,” he says. Swindall will identify some simple steps to focus on personal leadership and discuss how small adjustments can positively impact the engagement of those around us.

Swindall is the president and CEO of Verbalocity, Inc., a personal development company with a focus on leadership enhancement. These solutions include leadership development programs, training, speaking and general consulting. The SUBExcel 2019 keynote speaker is sponsored by Commerce Bank.

 

Free Jan. 8, 2019, ASA Webinar Examines Work-In-Progress Reporting

Inaccurate, overly optimistic or overly conservative WIP reporting can have negative repercussions, including tax penalties, added costs for lines of credit, increased bonding rates, and unpleasant surprises to a contractor’s bottom line. In the Jan. 8, 2019, ASA webinar, “Work-In-Progress Reporting,” presenter Stephen Blankenship, Ennis Electric, Manassas, Va., will discuss challenges and techniques for obtaining high quality data from operations personnel for use in decision-making by all the parties that have a financial stake in the success of the company. This webinar will take place from noon to 1:30 p.m. Eastern time. Registration is complimentary. Register online directly at GoToWebinar.

 

Some S Corporations May Want to Convert to C Corporations, IRS Says

After last year’s tax reform legislation, some S corporations may choose to revoke their S election to be a C corporation because of the new, flat 21 percent C corporation tax rate, the Internal Revenue Service said in a Nov. 20 “Tax Tip.” Before taking any action, S corporations should consult their tax advisors.

S Corporations and C Corporations are among the types of business structures. A C corporation is taxed on its earnings, and then the shareholder is taxed when earnings are distributed as dividends. S corporations elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the pass-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level. The Tax Cuts and Jobs Act includes two changes that affect a corporation’s revocation of an S election to be a C corporation:

  • The corporation should report net adjustments attributable to the revocation over six years. For more information see Revenue Procedure 2018-44.
  • Distributions of cash following the post-termination transition period may be treated as coming out of the corporation’s accumulated adjustments account and accumulated earnings and profits proportionally resulting in part of the distributions being non-dividend distributions from the C corporation. The non-dividend distributions may not be subject to tax at the shareholder level if the shareholder has sufficient stock basis. Additional guidance will be coming.

These law changes only apply to a C corporation that:

  • Was an S corporation on Dec. 21, 2017,
  • Revokes its S corporation election after Dec. 21, 2017, but before Dec. 22, 2019, and
  • Has the same owners of stock in identical proportions on the date of revocation and on Dec. 22, 2017.

For more information, see the Corporate Methods of Accounting topic on the Tax Reform – Businesses page.

 

Interest Rates Increase for the First Quarter of 2019

The Internal Revenue Service announced that interest rates will increase for the calendar quarter beginning Jan. 1, 2019.  The rates will be:

  • 6 percent for overpayments [5 percent in the case of a corporation];
  • 3.5 percent for the portion of a corporate overpayment exceeding $10,000;
  • 6 percent for underpayments; and
  • 8 percent for large corporate underpayments.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis.  For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates are computed from the federal short-term rate determined during October 2018 to take effect Nov. 1, 2018, based on daily compounding. Revenue Ruling 2018-32, announcing the rates of interest will appear in Internal Revenue Bulletin 2018-51, dated Dec. 17, 2018.

 

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2019—The Year of Talent: A Reflection on the Major Trends Affecting the Construction Industry for 2019 and Beyond

December 2018

 

by Gregg Schoppman, FMI

With a certain level of redundancy, the industry is still pondering the labor issues that continually wreak havoc on construction projects across the nation. In the face of amazing opportunity, the universal “governor’s switch” for the growth engine remains the war for talent. Talent at all levels seems to be the common denominator. The words “We can’t seem to find good people” remain an ever-present lamentation. However, this phrase is not new and continues to rear its ugly head, dating back to the 1980s. Yes, the 1980s. Scroll through various news releases and thought leadership over the last 40 years and the commonality of construction labor shortages seem to dominate the headlines. So, is it time to cut the charade and realize that this is an inevitable aspect of a challenging industry or proactively manage component of the business?

The “Year of Talent” appears to be an appropriate rallying cry for the New Year. In addition to its impact on a firm’s long-term ability to execute work, no one is getting any younger. Businesses are continually wrestling with succession depth for owners and simply business leaders in all facets of the organization. Best-of-class firms have managed to use this industry challenge as a opportunity to develop a strong, competitive yet collaborative, culture that accomplishes many things—soft/hard skill enhancement, business management education, improved communications (internal and external), morale improvement and ultimately leadership growth.

Talent is but one trend that is on the horizon for the New Year. While there is always a pall of a potential economic slowdown or market correction, businesses remain focused on developing a fact-based strategy to drive success. The key theme is not simply riding the wave of the market highs but in fact driving the wave and being in control of any uncertainly the market will bring.

The Year of Talent

This is not simply about training and education but a full, comprehensive program that examines the full complement of “people-focused” strategies. These include:

  • The Brand—What does an employee-driven market think about your firm? Why would they choose you in a sea of great organizations?
  • Recruiting—Where are you “fishing?” There is no “secret location” but how and where firms fish for talent has to be deliberate, consistent and disciplined.
  • Hiring—How many levels does you hiring process have? How do you evaluate a candidate? What screening tools are available for ALL positions within your firm?
  • On-Boarding—What does the first day, week, month, year look like? Is there structure and discipline to how new associates are brought on board?
  • Training and Education—How are new associates trained? What about mid- and senior-leaders—is their training and education stunted?
  • Performance Compensation—How do you reward star talent? How do you retain star talent long-term?

The knee-jerk reaction for many is that these elements are not easy nor are they done on nights and weekends. More firms are evolving to a leadership position that is dedicated to full-time talent growth and development. While there is a cost impact, the cost of doing nothing in the New Year to cultivate and grow associates may be far greater.

Innovation

It seems silly to mention the role of technology as being a critical trend. Every year, technological improvements move at an exponential rate in terms of innovation and growth. The best question to ponder is how your firm is keeping in lockstep with these changes. There is a fine line between fascination with technology (the bright shiny object) and true innovation (leveraging technology to enhance all aspects of performance). Whether it be the continued push toward prefabrication and modularization, enhancements in autonomous vehicles and equipment, utilization of Lean/agile/six sigma principles and systems or simply using the storehouse of data firms sit on to proactively drive business decisions, technology needs to become an action point within every firm’s business plan.

Risk Management

As projects get larger or more complicated or timeline compressed or some combination of all of these, there needs to be a refocused commitment to firmwide risk management. With the rise of tools that serve as “profit centers for risk,” such as captive insurance programs and trade partner default vehicles, contractors will be required to comprehensively think of risk. Coupled with increased life safety requirements from customers and agencies and the ever-increasing cost of healthcare costs, risk management requires a trained professional to integrate all of these elements across business units and projects. It is not simply enough to view this as an “annual renewal” process. Rather, it will require integration into areas such as:

  • Go/No Go Project Selectivity—True risk registers for project or client targeting.
  • Preconstruction Risk Planning—Balanced life safety and productivity planning.
  • Post Construction Reviews—Incorporation of best practices and lessons learned.
  • Quality Assurance and Quality Control—Limiting long-term potential sources of liability.
  • Employee Health and Wellness—Healthy employees correlate to lower health costs.

Risk is an aspect of construction that must be measured, but it is not enough to compartmentalize this within the office of the CFO or Controller. Risk management in the future requires careful, proactive installation in all corners of the firm.

Acute Infrastructure Needs

Channeling Dean Vernon Wermor from the 1978 comedy Animal House, “0.0.” Well, it isn’t quite that bad but according to the American Society of Civil Engineers, the infrastructure within the United States received a grade of D+. Anchored by D scores in the aviation, energy, schools and transit categories, the nation is grossly negligent across all the areas that serve as the backbone. While there are many questions as to the federal, state and local responses to these needs from a budgetary perspective, it is apparent that something must be done. Consider the simple fact that Americans spend an average of 43 hours in traffic annually—what a way to spend a week vacation! What is the impact to logistical needs within the firm and employee health before you even consider the impact to the marketplace should the $4 trillion in spending be funded? The opportunity is vast even if only a fraction of that funding comes to pass but more importantly, there remains opportunity for ancillary businesses. For instance, even if a contractor does not build in the water, wastewater, transportation, aviation, etc., sectors, it is important to consider the industries that complement them or simply the growth that will positively impact a geography.

Ramifications

There is no shortage of scenarios that may positively or negatively impact the construction industry. When leaders apply optics to these trends, they can easily provide roadblocks to growth or engines fueling opportunities. Whether the economy wanes or continues to thrive, the critical questions to ask are:

  • If our best customer went away, what would our business do?
  • If our niche or sector(s) went away, what would our business do?
  • If our best people left the organization, what would our business do?
  • What aspects of the organization not only require the most continuous improvement but also what impact would that have on our long-term health?
  • What should the leadership team in our organization do now to develop both craftspeople and management to run the business in the future?
  • If we mined the data our organization has, what would it yield about the firm’s current performance?
  • What data should the organization use to make future business decisions?

Best-of-class performance should not be left to luck. The rising tide that raises ships is wonderful when times are good, but the high performer today may not be the same firms of tomorrow. Winning strategies and tactics require discipline, dedication and ultimately talent to make the next year just the beginning of a dynasty.

As a principal with FMI, Tampa, Fla., Gregg Schoppman specializes in the areas of productivity and project management. He also leads FMI’s project management consulting practice. Prior to joining FMI, Schoppman served as a senior project manager for a general contracting firm in central Florida. He has completed complex and sophisticated construction projects in the medical, pharmaceutical, office, heavy civil, industrial, manufacturing, and multi-family markets. He has also worked as a construction manager and managed direct labor. Furthermore, Schoppman has expertise in numerous contract delivery methods as well as knowledge of many geographical markets. He can be reached at (813) 636-1259 or gschoppman@fminet.com.

 

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What Version Are You Using? A Reflection on the Need to Audit and Update the Firm’s Standard Operating Procedures

December 2018

 

by Gregg Schoppman, FMI

It seems like just yesterday when we were last asked to update the applications on our smart phones. The reason it feels too recent is because it was just yesterday. Whether it is to mitigate the risk of security breaches or simply provide new enjoyment on Candy Crush, the ubiquity of updates/upgrades has become so ingrained in how society uses everything from smartphones to tablets to video game consoles. However, one document rarely sees the prevalence of such spring cleaning. Standard operating procedures can often be aged in much the same way dinosaur bones are carbon dated. In fact, similar dating can be assigned to the coating of dust that covers the antiquated three-ring binder that sits atop the shelves of managers and superintendents throughout the world. Ironically, it is the same ambivalence toward monitoring the firm’s “procedures” that has led to an ever-increasing lack of consistency in the way that manager and superintendents govern and more importantly proactively lead their projects. Put another way, firms wrestle with maintaining standards of management thus creating “Bob’s Way” and “Mary’s Way” rather than the “Brand X Way” of operating. In the end, the version is largely dependent on the individual rather than a set of best practices that are tested, vetted and the best application of the management team.

Relevance

How did it get this far? The first question that every firm should ask relates to how loosely held management procedures are driven in the firm. For instance, is the operations manual a suggestion or a standard? One reason that leads to management apathy of process and tools is the lack of relevance to the current paradigm. For instance, if the tool and process is not germane to the current business model, it will quickly be scrapped. Are the processes geared toward a “hard bid environment” but the firm is now doing design-build? Are the tools not integrated into the current technology platform? It is easy to see why a superintendent or manager will develop their own work-around when the firm is deeply grounded in an antiquated system.

This is not to say that the original versions are abandoned to obsolescence. Better yet, this is an example of integrating version 2.0 into the daily routine. It is imperative for every firm to embrace a culture of continuous improvement to capitalize on these upgrades. Strict adherence to the status quo is increasingly dangerous in this quickly evolving marketplace. Even if the enhancement is as simple as revising a preconstruction planning agenda or creating a new version of the last planner tool (i.e. two-week look-ahead), nothing should be relegated to the status of sacred cow territory. In fact, small revisions (think version 1.0001) might get the engine of innovation started and lead to greater incremental progress.

Visualization

There is something surreal about using prose to describe something multi-dimensional. Consider an engineer that used a written narrative to illustrate a complex system like a water treatment plant. Rather than drawings, the engineer describes everything in words. Complicated? Why take the same approach to internal processes? Consider the following comparison:

Preconstruction Process 1.0 vs. Preconstruction Process 2.0

Preconstruction Process Version 1.0

When a project starts, the first thing that a project manager should do is assign a project number. To do this see the controller and they will get you the latest number in the sequence. Next , you should coordinate with the estimator on a day to conduct the hand-off meeting. Once the meeting is set, you should begin the meeting with a discussion on the drawings. The second item should be around safety. During the safety discussion you might want to call the Safety Director. Some of the items around safety should include, fall protection, competent person, etc. etc. etc. etc. etc.

Preconstruction Process Version 2.0

Preconstruction Process 2.0

This commentary is less about whether the steps listed are the correct ones for the process. Rather, it is about creating a linear or simply a logical road map for individuals to process and follow. This is even more important in an industry that relies so heavily on visual models and depictions to provide direction. Lastly, steps in the process can now be assigned ownership to drive the most important element of version control—accountability.

Accountability

Pop quiz—are the procedures in the firm a suggestion or is it dogma? Most leaders would say that there is an expectation that procedures are strictly followed otherwise why would they exist. However, if they are to be followed, how does the management team know if the process is followed? For many firms, the only indication is if a project makes money or loses money at the end of a project. This is the equivalent of gauging the success of a diet simply by stepping on a scale but failing to measure food intake or exercise. For a firm to effectively manage the efficacy of its processes, it must measure them. Examples of “upstream” behavioral metrics to consider include:

  • Preconstruction planning.
  • Look-ahead planning (Last Planner for the Lean firms).
  • Close-out meeting.
  • Post project reviews.
  • Trade contractor coordination.

For instance, if a firm begins 10 projects in a month, there should be evidence of 10 preconstruction planning meetings. While it sounds puerile to measure processes such as these, it probably has a more demonstrative impact on the bottom line. Metrics can also tell a great deal the aforementioned categories. Weak adoption of processes may indicate deeper issues such as lack of relevance or germaneness. Without this information, firms develop blind spots that mask the real problems in their operations. Measuring monthly costs is important but simply using these metrics to manage a business is like driving a car with the rearview mirror.

Most operating manuals are 80 percent to 90 percent “there.” Preconstruction planning doesn’t change that dramatically to necessitate wholesale overhauls. However, it is imperative that business knock the rust off and look up under the hood to ensure these guidelines are in fact driving the businesses.

As a principal with FMI, Tampa, Fla., Gregg Schoppman specializes in the areas of productivity and project management. He also leads FMI’s project management consulting practice. Prior to joining FMI, Schoppman served as a senior project manager for a general contracting firm in central Florida. He has completed complex and sophisticated construction projects in the medical, pharmaceutical, office, heavy civil, industrial, manufacturing, and multi-family markets. He has also worked as a construction manager and managed direct labor. Furthermore, Schoppman has expertise in numerous contract delivery methods as well as knowledge of many geographical markets. He can be reached at (813) 636-1259 or gschoppman@fminet.com.

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The Construction Industry: Looking Ahead at 2019

December 2018

 

by Todd A. Feuerman, CPA, CCA, MBA, Ellin & Tucker

“Slow and steady wins the race” would be a fitting mantra for the construction industry moving into 2019. While the uptick of the economy and projected growth in construction contract revenues is promising, business owners and executive teams still face a number of challenges, like tight labor markets, concerned financial lending market and political climate changes, which may impact material pricing on job sites for items imported for construction.

The 30,000-Foot View

The momentum is in the numbers: according to a recent survey completed by Engineering News-Record’s Top 400 Contractors, the Top 400 contractors, as a group, generated $375 billion in contract revenue in 2017 vs. $366 billion in contract revenue in 2016. This is a calculated increase of 2.1 percent year to year. Recent reports issued by Dodge Data & Analytics also suggest that U.S. construction starts will increase by 3 percent with additional room for expansion.

There is, however, still a lot to be said for the state of construction backlogs. Though recent trends have indicated that the timing of work released into production per se is somewhat unpredictable and subject to delayed starts, the logs themselves are generally quite substantial in size and scope. For instance, the Hudson Yards project in New York City, which is slated to be the largest construction project area in U.S. history, is often delayed by regulatory agencies releasing work and funding needs.

The construction market has benefited in certain geographical regions during 2017 and 2018 from very large construction projects. The completed projects include new campus facilities for high-tech giants such as Google and Apple, as well as continued warehousing and distribution centers for Amazon, which recently selected both New York and Northern Virginia as the company’s two new Mid-Atlantic headquarters. As more of the giants continue to grow and expand in the market, the need for mega construction projects and related infrastructure projects should follow. Another key element that has provided a boom to the construction industry relates to hurricane rebuilding in the southeastern region of the United States, as well as other natural disaster rebuilding from the wild fires in the western region of the United States.

Additionally, certain sectors of the construction and development arena have been and will continue to be impacted going into 2019 more favorably than others. For example, solar and power construction should continue to improve and provide steady growth. While amusement and recreation construction spending have proven to be very “lumpy” and unpredictable. State highway funding may see some improvement even with uncertainty regarding federal funding for large projects. Airports and train infrastructure continues to show signs of significant improvement. Each of these sectors have been impacted by project funding and political scrutiny applied to the larger projects; however, once jobs are released there is generally a significant windfall of work that enters the market place.

Let us take a closer look at some the key areas the construction industry should pay close attention to in 2019:

Construction Concerns and Renewed Strategy

While there are very favorable signs of continued growth in the construction industry, there are still fears in the marketplace that have caused some to proceed with caution warnings. Risk factors that have caused some level of trepidation in the construction market include the following items:

  • Political and regulatory uncertainty.
  • National economic uncertainty.
  • Local and regional area economic uncertainty.
  • Rising material costs.
  • Rising interest rates.
  • Immigration employment protocol.
  • Overall shortage of construction workers.

As the construction industry has improved over the past several years, construction firms have been able to re-think their approach to the market and re-focus resources to projects that will provide an acceptable financial return with a more controllable risk. As the quantity of opportunities continues to increase, so will the overall quality of projects available for bidding. Many construction firms have been able to favorably use the overall improved trends in the construction industry as a means to focus on what they do best as opposed to simply accept any project that comes along, regardless of the job’s ultimate strategic and financial risks.

Labor Shortage

One of the single biggest issues that the construction industry continues to face is the extremely tight supply of skilled workers and the perceived negative notion that younger workforce entrants face when entering the construction workforce. With the baby boomer generation set to retire within the next five to 10 years and with the intense federal pressure to limit and reduce the immigrant labor force for Mexico and Central America, the construction industry is faced with a monumental task of finding workers.

Industry lobbying groups and special interest groups continue to address these issues at the state and federal level in an effort to develop funding for trade education programs, apprenticeship programs and ways to create a softening approach to immigration protocol, which should all help to some extent. However, time is not a friend and training is critical to develop a workforce needed to complete construction backlog now and in the future.

Material Pricing Pressures

Building material costs, like all other sectors of the economy, have also continued to increase for many reasons, including but not limited to high demand from the general increase in the construction industry to specific trade products such as steel which continue to rise. Steel costs have become particularly problematic due to the political pressures levied on the tariff costs that will come into play with trading partners of the United States. In addition to steel prices, the varying fluctuation in the oil industry has continued to impact almost every component used in the construction industry. Based on the commodity nature of oil, this is likely to continue into 2019.

Technology Trends

Technology continues to become the norm in the construction industry. An industry that was once perceived as archaic is now looked upon as cutting edge. The use of BIM collaboration, cloud computing and mobile data has and will continue to be a major asset for construction companies to properly manage operations. In addition to office-related technology, construction firms have been effectively implanting technology in the field as it relates to personnel, equipment and job site viewing.

While GPS technology continues to be used in construction, visual job inspections and oversight has been impacted by the use of drones. Drones have become more prevalent in conducting site surveys, site inspections and general site management. Drones have proven to be invaluable in the key area of producing quicker and more accurate land surveys, while reducing the costs associated with inside and outside labor costs. Contractors have been able to more effectively manage multiple jobs and more complex and dangerous job sites through the use of drones.

The Bottom Line

The 2018 U.S. construction market continues to experience solid results and is expected to continue this trend into 2019. This progress can only be sustained by a stable economy, improved international relationships, political policy clarification and most importantly, finding the workers to complete the projects. An economy is only as good as the men and women that participate in its success, and the construction industry will be judged by this same thought.

Todd A. Feuerman, CPA, MBA, CCA, is a director in the Audit, Accounting and Consulting Department of Ellin & Tucker in Baltimore, Md., where he oversees audit, accounting, consulting and tax services for general contractors, specialty subcontracting and government contracting firms. Feuerman also serves as chairman of the firm’s construction services group. He earned his bachelor’s degree in accounting from Towson University and MBA in finance from University of Baltimore’s Merrick School of Business. Feuerman can be reached at (410) 727-5735, Ext. 3066, or tfeuerman@ellinandtucker.com.

 

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New Construction Starts in 2019 to Hold Steady, Dodge Data & Analytics Predicts

December 2018

 

by American Subcontractors Association

Dodge Data & Analytics on Oct. 25 released its 2019 Dodge Construction Outlook, a mainstay in construction industry forecasting and business planning. The report predicts that total U.S. construction starts for 2019 will be $808 billion, staying essentially even with the $807 billion estimated for 2018.

“Over the past three years, the expansion for the U.S. construction industry has shown deceleration in its rate of growth, a pattern that typically takes place as an expansion matures,” said Robert A. Murray, chief economist for Dodge Data & Analytics. “After advancing 11 percent to 14 percent each year from 2012 through 2015, total construction starts climbed 7 percent in both 2016 and 2017, and a 3 percent increase is estimated for 2018. There are, of course, mounting headwinds affecting construction, namely rising interest rates and higher material costs, but for now these have been balanced by the stronger growth for the U.S. economy, some easing of bank lending standards, still healthy market fundamentals for commercial real estate, and greater state financing for school construction and enhanced federal funding for public works.”

“An important question going into 2019 is whether deceleration is followed by a period of high level stability or a period of decline,” Murray continued. “For 2019, it’s expected that growth for the U.S. economy won’t be quite as strong as what’s taking place in 2018, as the benefits of tax cuts begin to wane. Short-term interest rates will rise, as the Federal Reserve continues to move monetary policy towards a more neutral stance. Long-term interest rates will also rise, reflecting higher inflationary expectations by the financial markets. At the same time, any erosion in market fundamentals for commercial real estate will stay modest. In addition, the greater funding from state and local bond measures passed in recent years will still be present, and it’s likely that federal spending for construction programs will increase once all the federal appropriations bills for fiscal 2019 are finalized. In this environment, it’s forecast that growth for construction starts will decelerate further, but not yet make the transition to the point where the overall volume of activity declines. For 2019, total construction starts are forecast to hold basically steady at $808 billion. By major sector in dollar terms, residential building will be down 2 percent, nonresidential building will match its 2018 amount, and nonbuilding construction will increase 3 percent.”

The pattern of construction starts by more specific segments is:

  • Single family housing will be unchanged in dollar terms, alongside a modest 3 percent drop in housing starts to 815,000 (Dodge basis). There will be a slight decline in homebuyer demand as the result of higher mortgage rates, diminished affordability, and reduced tax advantages for home ownership as the result of tax reform.
  • Multifamily housing will slide 6 percent in dollars and 8 percent in units to 465,000 (Dodge basis). Market fundamentals such as occupancies and rent growth had shown modest erosion prior to 2018, which then paused this year due to the stronger U.S. economy. However, that erosion in market fundamentals is expected to resume in 2019.
  • Commercial building will retreat 3 percent, following 2 percent gains in 2017 and 2018, as well as the substantial percentage increases that took place earlier. While 2018 market fundamentals for offices and warehouses are healthy, next year vacancy rates are expected to rise as the economy slows, slightly dampening construction. Hotel construction will ease back from recent strength, and store construction will experience further weakness.
  • Institutional building will advance 3 percent, picking up the pace slightly from its 1 percent gain in 2018 which itself followed an 18 percent hike in 2017.
  • Educational facilities should see continued growth in 2019, supported by funding coming from numerous school construction bond measures. Healthcare projects will make a partial rebound after pulling back in 2018. Airport terminal and amusement-related projects are expected to stay close to the elevated levels of construction starts reported in 2017 and 2018.
  • Manufacturing plant construction will rise 2 percent following the 18 percent jump that’s estimated for 2018. The recent pickup in petrochemical plant projects should continue, and cuts in the corporate tax rate from tax reform should encourage firms to invest more in new plant capacity.
  • Public works construction will increase 4 percent, reflecting growth by most of the project types. The omnibus federal appropriations bill passed in March provided greater funding for transportation projects that will carry over into 2019, and environmental-related projects are getting a lift from recently passed legislation.
  • Electric utilities/gas plants will drop 3 percent, continuing to retreat after the exceptional amount reported back in New generating capacity continues to come on line, dampening capacity utilization rates for power generation.

The 2019 Dodge Construction Outlook was presented at the 80th annual Outlook Executive Conference held by Dodge Data & Analytics at the Gaylord National Resort and Convention Center in National Harbor, Md. The 2019 Dodge Construction Outlook can be ordered via the Dodge Data & Analytics store.

 

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Growing Pains and Three Steps to Relieve the Pain

December 2018

 

by Larry Silver, Contractor Marketing Inc.

Every business has its start and begins to grow. Each organization like a fingerprint is unique and has a different history. If the company reaches the five-year mark (80 percent don’t) and actually begins to thrive, growing pains will emerge to challenge, frustrate, and hinder the firm from its full potential.

At the birth of any business, there are just a handful of people who do everything. They wear many hats and both secure and execute the work at hand. But, as the organization grows, the various functions get delegated to specific people who do their level best to keep that function operating well.

However, as each department grows and adds people and complexity to the mix, it becomes challenging to communicate well and to stay informed of the day-to-day challenges that bombard the business.

The construction industry is notorious for producing strong entrepreneurs who take on gargantuan risks for razor-thin margins. I commend every one of you in that situation for your courage and skill.

Another trait that contractors are known for is flying-by-the-seat-of-their-pants. They wing-it every day to get as much done as is humanly possible in the hours given. But as the business grows, this informal approach lacks the professionalism and organization needed to succeed in a larger way, the way most contractors dream about succeeding.

Therefore, I want to set forth a three-step solution to this dilemma that most every contractor faces sooner or later as their firm grows.

Step #1: Have a Clear and Written Vision

It’s not enough for the president and a few key leaders to know what the vision is. You have to document it, create a visual representation of it, and communicate it frequently throughout the organization. Why? So this is not just one person’s vision, but everyone can take ownership and watch it form over time. This promotes enthusiasm, loyalty, retention, and the intangible benefits that employees desire.

A vision is where you see your firm in the long run, the distant future—20, 30, and even 40-plus years out. It acts like the North Star giving guidance to your strategic decisions, not only at the annual planning time, but throughout the daily grind.

It’s the vision that drives the business, shaping it to be what you visualize over time. The mission describes “how” you will go about accomplishing your vision. It explains the particulars—who to market to, the type of hires you need, the service offering that you focus your energy on.

Step #2: Create a Culture Where the Right People Are in the Right Positions

To expand and grow various aspects of the business, you will need a diversity of talent and experience. This is the main theme of the bestselling book “Good to Great” and makes all the sense in the world. There are many tasks and needs in business that no one person can fulfill.

I enjoy hearing the personal stories and testimonials from great business people and their accomplishments. In Dayton, we have Clayton Mathile, the former owner of Iams Pet Foods who sold to P&G in September 1999 for $2.3 billion.

His big focus in business was to properly manage and control growth. At one point, he realized that he did not have the experience to take the firm to the next level, so he hired a president who could. This takes great humility and understanding.

Clayton built his empire one competent manager at a time. It doesn’t really matter whether your product is dog food or construction services, the main unchanging growth principle is hiring and maintaining a competent workforce.

Step 3: Align Your Firm and All Its Resources Daily

What is the one thing that each employee, each manager, each principal of your company can perform each day to head in the strategic direction to accomplish the vision? What does this look like? It looks like an organization that functions like a “Team” (Together Everyone Achieves More), doing what is important and a high priority for that day.

The firm’s leadership must be sensitive to this need to have synergy among its members. Synergy is when the sum of the parts is greater than the sum of the whole. I encourage leaders to allow employees to have access to the total resources of the firm (individuals, departments, financial info, leaders, clients, vendors, etc.) for the benefit of the whole group.

When an organization has access to itself and its resources, there will be active listening and a clear action that results. This will leverage the growth potential in quiet and consistent fashion, like the business has not experienced before.

Work on the Business

The leaders must learn to work “On the Business” and not just in the business. So many fires occur that need to be put out. This creates what is commonly called “Tyranny of the Urgent” in our industry. Many think if they are busy putting out these fires, they are doing their absolute best to serve the business.

I say these fires are a distraction to what the business really needs to grow. Focus on executing what is important every day for your business (The Three Steps mentioned) and teach your staff to do the same. Watch what happens. Your business will be on a fast-track toward your desired future vision.

Larry Silver is president of Contractor Marketing Inc., a national consulting/recruiting firm specializing in the AEC industry. Silver can be reached at (937) 776-7170 or larry@contractormarketing.com.

 

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