Top 5 Impacts for Construction Company Leadership | SVA

One unique aspect about the construction industry is that economic upturns and downturns are not always immediately realized. Because construction projects have longer timeframes, the impact of changes in the overall economy take more time to be recognized than in other industries.

This poses a challenge for both short- and long-term planning, which can be a daunting task.

What the Construction Industry Should Expect After COVID-19

The impact of the pandemic seems to be somewhat delayed for the construction industry, so owners need to be prepared for a possible lull in work as the pandemic effect catches up to the industry.

State funding could be impacted in the future, depending on how state budgets rebound from revenue losses in 2020.

The bigger impact on construction projects could be related to the ramification of the increasing trend in virtual shopping and working in the retail and office space sectors.

What Should You Be Focused On?

Our experts agree there are five areas you should focus on as we move out of the pandemic and look ahead to 2021 and beyond. These are:

1. Construction Risk Management
2. Key Metrics to Measure
3. Looking for Ways to Grow Your Company
4. Working Capital Management
5. Tax Strategies

Let's start by discussing Construction Risk Management.

Managing risk is one of the top responsibilities of a construction company CFO. There are three risk areas you should focus on:

Financial Risk

• Managing your financial risk entails understanding the impact of price increases on supplies and labor so you can accurately forecast profit margins for each project.
• You will need a plan to control growth so that operational aspects of the business are ready to support that growth.
• A good understanding of your line of credit and lending capabilities will allow you to plan more proactively.

Contract Risk

• Understanding contract penalties and performance obligations will help you manage your unexpected costs and challenges.
• Utilize an expert in Construction Compliance Analysis to review non-compliance issues during the planning, construction, post-construction, and completion phases of each project.

Project Risk

• Creating consistent project management processes will help keep your projects running smoothly and efficiently.
• Some of the project risk factors include inconsistent revenue streams, inability to obtain bonding, potential of large capital expenditures, and compliance with building code safety requirements.

Number two of the top five focuses on Key Metrics to Measure.

Business owners need to answer the simple question:

“What are the 5 key metrics you expect to measure your business against in 2021”?

The metrics could be different for every company. These should be determined at the beginning of the year by your leadership team and measured monthly, quarterly, and at year-end. These are your performance indicators that measure the health of your business and they can be compared to your peers. Here are a few you can choose from:

• Gross Profit Margin should be calculated for each project as well as used to determine your company’s overall health.
• Net Profit Margin should also be calculated for each project.
• Current Ratio measures your assets against your liabilities to indicate your ability to pay short-term debt.
• Working Capital Turnover Ratio assesses sales against working capital and shows how much company value you have available.
• Fluctuating supply lead times will affect project timelines and eventually profits. Analyze lead times as a benchmark for future order planning.

Work with your CPA to determine the metrics you want to measure and be consistent throughout the year by evaluating and modifying operations to improve those benchmarks.

Ready to learn more about the other 3 strategies? Download our eGuide (click the image below):