N EWS FI NANCE S
Cash pinch
BY SAM BARNES
Uncertain project economics can put a contractor’s profitability at risk. Here’s how some are navigating it. during contract negotiations, says Jay Montalbano, managing partner of accounting and consulting firm Hannis T. Bourgeois in Baton Rouge. One thing is for certain: Given the wildly fluctuating material prices of the last couple of years, contractors should ensure that their contracts don’t lock in prices for more than 90 days. “In markets where Fortunately, “contractors we’re growing our have a bit of an edge right now,” Montalbano says, operation, we’re because of the current consuming more construction boom and cash and therefore ongoing labor shortages. cash flow becomes “They’re in a better posimore important.” tion to negotiate. In one instance, a plant owner DANE BAILEY, CFO, went to the contractor and Performance Contractors asked what it would take to keep their people on site. They’re recognizing that they need to pay more.” Owners are also negotiating over increased benefits, such as insurance and time off, particularly with those “nested” industrial contractors who have had a presence in the plant for years. INTEREST RATES AND CASH FLOW Managing cash flow is another critical piece of the profitability puzzle, but it can be a tricky proposition in today’s high interest rate environment. That’s because many
SEVEN ways to make your projects more profitable 1. Negotiate favorable contract terms that don’t lock in material prices for more than 90 days. 2. Work on improving cash flow. 3. Effectively manage change orders in the field. 4. Bill promptly. 5. Efficiently manage collections and make it a regular part of site discussions. 6. Look for and suggest value engineered cost savings to the owner. 7. Eliminate organizational silos to improve information sharing.
DON KADAIR
AN INDUSTRIAL contractor’s ability to maintain a healthy profit margin can be tenuous, at best, in an age of fluctuating material prices, rising wages and escalating interest rates. Material prices continued to rise in the latest monthly data available at press time, increasing by 1.5% in August, according to the Bureau of Labor Statistics’ Producer Price Index. That continues a trend that shows no sign of stopping. “Anyone who thought that excess inflation would simply go away later this year has been rudely awakened,” ABC chief economist Anirban Basu noted in a press release. “Price growth continues to be problematic. While energy prices will grab headlines, items like concrete and switchgear have also exhibited inflationary tendencies.” Escalating interest rates are bringing their own challenges, particularly for contractors that depend heavily on loans to fund their projects. For many, the Federal Reserve’s aggressive rate hikes have led to organizational changes and an increased focus on cash management. The rising interest rates pose a specific threat to a contractor’s profitability, since their performance is profoundly affected by the management of cash flow. No matter the business environment, though, laying the groundwork for a profitable project begins
contractors need credit to finance working capital. It was a different scenario just two years ago. “You almost didn’t need cash flow management
because interest rates were so low,” Montalbano says. “Now, rates are creeping up and cash flow management is huge because that interest expense will kill you.” That, in turn, can negatively impact a contractor’s ability to price projects competitively. The situation is prompting many contractors to reexamine their contracts. “Those contractors that are heavy into ‘cost-plus’ contracts [whereby they are reimbursed for expenses plus a pre-determined profit], experience more of a cash flow drain,” he adds. “They are billing the customer monthly and the plant might pay 60 days later, so they’re floating two to three months’ worth of payroll at any given time. That’s difficult from a cash flow perspective.” On the other hand, contractors
Daily-Report.com | BUSINESS REPORT, November 2023
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