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February/ March 2013
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Construction and Real Estate Industry
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Because Harding, Shymanski & Company, P.S.C. is committed to providing quality service to our construction and real estate clients, we have selected a team of dedicated professionals to serve as your industry's consultants. These individuals understand the language and key issues unique to your industry and possess the drive and determination to help you manage your company on a proactive basis.
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Beware the Recovery: What History Teaches Contractors and Sureties
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Thomas Schleifer has been studying the construction economy during past downturns over a period of 40 years, and he has learned something that is conclusive. The unprecedented length and depth of the recent market slowdown has produced extremely aggressive pricing, changes in owner attitudes, and declining margins. His research also confirms that the failure rate of construction enterprises is three times worse during recovery than during the downturn. In a shrinking market, the ideal would be for each contractor to accept proportionately less work so that the market share of each business is maintained. However, there is a tendency in the industry to resist, often strenuously, any reduction in sales and vigorously fight for the fewer available projects, driving down prices for everyone. To survive the recovery, contractors must avoid losses, keep their capital bases intact and avoid diminishing the equity in their companies. That means they must manage cash flow judiciously during the recovery to remain financially viable and credit-worthy. Contractors must resist the "feeding frenzy" of small-margin, aggressive bidding during the early recovery. Prospering in cyclical markets and surviving both a recession and a recovery in the construction industry starts with recognizing the realities in the marketplace. The results are totally predictable and have occurred without fail in every industry cycle for the past 40 years. Contractors cannot control the market, but they can control their response to it.
For help evaluating your indirect costs and how you can increase margin on projects, contact Paul Esche, CPA, CCIFP, CCA at (800) 880-7800 ext. 1335.
Source: Thomas Schleifer, Engineering News-Record, February 4, 2013.
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Forecasts for Management Decision Making
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Many key metals are going to get pricier over the course of the year.
Steel: Look for hot-rolled steel, used to make cars, trucks and much more, to sell in a range between $650 and $700 per ton, up about $50 from 2012 prices. As the economy continues to improve into 2014, steel costs will increase further.
Aluminum: Expect an average price of about $2,100 per ton, a slight hike from 2012, courtesy of strong auto sales and improving industrial activity.
Nickel: Its per ton price will average $18,000, compared with $17,300 today. Large nickel stocks plus new supplies hitting the market will prevent a steeper rise.
Tin: Though the current price of $25,000 per ton could drift a tad higher in the short term, it probably won't stray too far from that for much of the year.
Copper: Figure on a lot of volatility for the red metal. There's lots of supply, but much of it remains tied up in China as collateral on loans. Copper consumption looks tepid, which should tamp down costs but could also discourage new mines from coming on line. Look for prices to fluctuate between $7,200 and $8,500 per ton."
Source: the Kiplinger Letter, Vol. 90, No. 3, January 18, 2013.
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Recession Shifting Contractor Retirement Plans, Says FMI
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Even as contractors age and seek to transfer firm ownership and management to a younger generation, more are finding that the recession and inadequate transition planning likely will keep them on the job longer. In a new study, industry management consultant FMI says that even though more than half of those construction firms surveyed will change ownership in the next decade, 52% of contractor-owners don't have management in line to replace them and 56% have not developed a formal ownership transition plan. Since FMI's last ownership-transition survey, conducted in 2007, the firm says the proportion of respondents over the age of 60 rose from 20% to 32%. During the same time, more than 33% of respondents saw declines in company return on equity exceeding 20%. The trend is pushing more owners to postpone retirement "to rebuild their business in the wake of the economic decline," says FMI. While transition planning is improving, FMI says there are large disparities across the industry. The survey says 44% of owner respondents personally guarantee bonds for their jobs, but only 40% of those have a plan to exit that obligation. About 36% of respondents don't have a formal plan in place to ensure business continuity, even if the owner dies. If the owner dies, the company "may be forced to liquidate as key managers depart or heirs prefer cash over ownership," says FMI. According to the study, 17% of respondents say they will sell their firms to "third parties," up from 9% in the 2007 survey. But with up-and-down company valuations, owners may not find the buyer with the right price when they're ready to sell, FMI cautions.
For help evaluating your succession planning issues, contact Paul Esche, CPA, CCIFP, CCA at (800) 880-7800 ext. 1335.
Source: Debra K. Rubin, Engineering News-Record, February 6, 2013.
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Disclaimer
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The information contained in this email is for general guidance on matters of interest only. The publication does not, and is not intended to provide legal, tax or accounting advice.
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Harding, Shymanski & Company, P.S.C. provides accounting, tax, and consulting services to our clients from offices in Evansville, Indiana, and Louisville, Kentucky.
Call us today! (800) 880-7800
www.hsccpa.com
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