Season 2
Season 2
S2:E14 - Contractors, Don't Let Fear Drive Your Business Decisions!
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Calculating risk and making sound business decisions during times of economic distress can feel like staring at a mirage in the middle of the desert. In this episode, CRI Partners Larry May, Bobbi Hayes, and Robert Coker discuss the dangers of allowing economic fear to drive a contractor’s decision-making process. From liquidating investment accounts for fear of market declines to spending money simply to get a tax deduction, don’t head towards the mirage.


Intro:

From Carr, Riggs & Ingram, this is It Figures: The CRI Podcast, an accounting advisory and industry focused podcast for business and organization leaders, entrepreneurs, and anyone who is looking to go beyond the status quo.

Larry May:

Hey, welcome to another episode of It Figures: The CRI Podcast. Today, we’re here to talk about making sound economic decisions for construction contractors. And we’re going to start by introducing ourselves. I’m Larry May I’m with the Jackson office of CRI and I am the sub-line leader for the construction practice. I’ve been working in construction for about 25 years now. And a lot of the things we’ll be talking about today are things that I’ve witnessed. Next we’ll go to Bobbi Hayes who’s with us also.

Bobbi Hayes:

Hi, I’m Bobbi. I am from the Albuquerque office of CRI and I have been working with contractors for about 40 years. So I think I’m senior to everybody on this podcast.

Robert Coker:

I am Robert Coker in the Birmingham office. I sort of lead the charge in this office in terms of contractors. What makes me a subject matter expert, I guess, would be I’m a good listener.

Larry May:

Well, y’all are both great at a lot of things, and we all worked together closely. With the economic slow down and the recovery from COVID-19 and other things today, we wanted to talk about a few things that we’ve witnessed that contractors seem to do that are probably not the wisest choices.

So the first thing we’re going to throw out there is one thing that often happens is contractors start buying work because they worry about cash flow and keeping their workforce in place. And so first to you Bobbi, what are the dangers you’ve seen from doing this?

Bobbi Hayes:

Well, buying contracts to just make some cashflow come in. That’s just a downward spiral, because it’s going to make cashflow problems worse in the long run. And we can understand workforce retention because all contractors are struggling with finding enough skilled labor in this market, but it isn’t good to have a short-term solution to a long-term problem.

Robert Coker:

I guess I’ll add to that. You know, this is, it draws a lot of parallel to back in 2008 when we saw everything come to a screeching halt. Where I saw contractors actually taking on contractors, where they had a built in loss, and there is so much risk in what contractors are willing to take on. They might think they’re saving cash on the front end or having cashflow is important, but when you think of the downside risks that they have, it’s just tremendous. I mean, they have such great exposure already, even in a good market, you can lose money. In this market where there is that shortfall of labor and skilled labor, there’s even more risk that is exacerbated by the fact that they don’t have the skills necessary to perform at the levels that they have historically. And it’s true across all industries and especially contractors.

Larry May:

I agree with both of you. And what we’ve often seen is if you bid a job with zero gross profit built in something always goes wrong. There’s always something accounted for and particularly in times of stress where you may have a subcontractor that goes under and you’ve got to get someone else to perform the work. We’ve got material and supply shortages right now we’ve got delays. So I think in this particular time, it’s even a worse idea to do this then… well, it’s a bad idea anytime, but right now I think it’s even a worse time to try to do that.

Robert Coker:

And you know, I think one of the things that these contractors have in the back of their minds as they often do in good times is they go in and say, “oh yeah, I’m going to make this margin on the front end.” You know, especially if it’s a fixed price contract, okay. I’m not going to have much margin on the front end, but their hope is as they go and get some change orders in that scope of work, when we all know that those are usually pretty fat in terms of margins. I think that is a real danger because if those don’t occur, they don’t have that scope change and those change orders related to it. They can find themselves under water pretty quickly.

Bobbi Hayes:

Well, I’ve had contractors tell me recently that they were ordering materials for a job in mid-July, that they expected to get delivered in early August, which was about their normal timeframe, found out they’re not going to get it till close to the end of September, early October. So even wishing and hoping for change orders, the ability to execute those timely and get those margins that you might hope for on a change order, may not materialize.

Robert Coker:

Worse yet, you know, liquidating damages because they can’t perform the things that are beyond their control. And that’s a real risk in some contracting.

Larry May:

Absolutely. I think all of those are good points, but one thing that I think that bears mentioning is one good thing about when you face times like this, is taking the opportunity to retool your business so that you can be profitable with less volume by reducing your overhead and your indirect cost. What, what have y’all seen with that? First to you Bobbi.

Bobbi Hayes:

Well, back to the 2008, 2009 comparison, contractors did not aggressively look to their overhead to reduce it. They viewed the circumstances as temporary, they lasted much longer than any of them anticipated. And those that were not willing to make the cuts that were necessary to, to get through a down period or were overleveraged and did not have enough cash on hand, they didn’t survive. So contractors have to take a hard look at what is in their overhead and what is in their indirect costs and have a good budget and control over those areas.

Robert Coker:

You know, one of the things that I think sometimes is underutilized, and this isn’t necessarily a plug for us. It’s just a factor, you know, we are often the creature of last resort. They call us in when it’s time to be the fixer, but having us come in on the front end and help with that analysis, I think is invaluable. I mean, you might spend a few dollars on our fees, but what we can help you save by doing a thorough analysis of that process and maybe helping you evaluate the numbers. I think we’re really good at developing strategy, as well as evaluating processes to help streamline the business and help you evaluate costs that we see as fact. And everybody’s interested in, you know, making the most out of the dollar these days, especially in these uncertain times.

Bobbi Hayes:

I agree with that, Robert, I think that it’s very hard to do analysis on your own company because you’re in the middle of the picture. Someone standing to the side, that’s objective can look at those numbers and put suggestions on the table that you might not see for your own company.

Robert Coker:

Or better yet even having an objective view, because I understand, this is their baby and you don’t want to call their baby ugly. So it’s a real tough process to evaluate at times and see it objective… I guess, comes to mind, the old phrase, they can’t see the forest for the tree.

Larry May:

Right. I think one thing that I see too, that you have to be very careful of is we see a lot of peer groups. I know we work with a lot of different contractors and a lot of times ones in the same field. So not only do we have the objective view of looking a company, but we also have seen other companies that may have done some things that would be helpful. The one thing that I’ll often see that I strongly discourage is when contractors view their accounting department as a overhead, when they really are a vital part of the business to give you the feedback and the reports and the report cards on how you’re doing on your bidding versus performance.

So that’s one thing I think that’s a cautionary tale of, yes, you need to be aggressive in reducing overhead and indirect cost, but that doesn’t necessarily mean unless your accounting staff is very overstaffed, that that would be a department that you would want to make significant changes to necessarily.

One thing I would like to bring up is right now, I know we are seeing a lot of delays with materials shipments, materials shortages, due to the pandemic. How are y’all’s contractors dealing with that Bobbi and Robert? Because that can have a serious effect on your profitability of the company. And, you know, some of the things I’ve seen are people because of fear or maybe ordering too many supplies on the front end that they may end up getting stuck with. So are y’all seeing that same thing? First to you Bobbi…

Bobbi Hayes:

Well, I’m seeing more contractors trying to stick to a just-in-time model that they were used to, that they are really being hit with the reality that the just in time model is currently broken and they, I see them still struggling to adapt to the right balance.

Robert Coker:

You know, I think the more and more of mine. They do have a very cautious attitude about the promised delivery dates. And so often, these vendors, it’s out of their control and I’ve seen it across all lines of business manufacturing, as well as construction. And so, you know, you’ve also got to consider this, we’re in a period of tremendous heightened inflationary costs, as far as that goes, the materials prices are out the roof. So while you might think it’s a great idea to order early, you might be cutting off your nose to spite your face because you may be paying, a third more now by buying up in quantity. And all you do is lock in future losses cause you way overspent in terms of your material cost.

Larry May:

Absolutely. That’s definitely a lot of what we’re seeing right now in this very unusual time we’re living through-

Robert Coker:

You know it’s crazy, OSB that used to be about 12 bucks a sheet, now it’s about 48 to 50 dollars a sheet. That’s absurd.

Larry May:

Right.

Robert Coker:

They can’t operate like that very long, and if they don’t have the right provisions within their contract, that allows them to at least some have so equity or negotiation power to re-evaluate contract pricing due to huge increases in material prices. They’re out of luck.

Larry May:

That’s exactly right. But one thing that, another thing that I see that is people trying to anticipate the market If they have investments in wealth personally, and in their businesses and, for fears clients that last year when the COVID started and the market was crashing cashed out and had huge losses where, you know, we know in hindsight, which is always 20:20, but the market bounced back better than ever by year end. So, one thing that I see a lot and wanted to know y’all’s thoughts on, or I do, y’all have a lot of… I strongly recommend that clients not try to anticipate the stock market.

Bobbi Hayes:

Oh, I totally agree with you, Larry. That’s not what contractors do for a living. I think business people who are good at what they do often think they’re good at everything, and that’s not necessarily the case. So I think getting sound financial advice, a good financial advisor to help guide them helps keep from panicking and also from trying to buy back in at the wrong time. So I think it’s important to get good quality financial advice for those that are holding investments.

Robert Coker:

You know, it goes like this, right? You’ve never lost a penny until you sell it. So you’ve locked in that loss, right? Or by the same token. Yes. I totally agree with someone taking some money off the table that they’ve just had tremendous gains, to preserve some of that cash, right? In other words, to have some liquidity and not be forced to sell in a down market because my God, it’s a roller coaster.

I mean, who knows what this whole turmoil in the middle east with Afghanistan is going to mean? I mean, it’s just so many variables that we don’t have any control of. You know, COVID with this Delta variant, who knows what we’re going to have happen? So it is invaluable that you seek good, sound, financial advice. And we work so closely with brokers and others, and we can be a part of that sounding board, if you will, as far as helping you make good sound business decisions, such as investments, not that we’re specialists in that, but we see it every day.

That is our business. You know, the funny part of that is I see these, it’s this great plumbing supply place or this plumbing repair. We fix what your husband tried to, right? We’re not all created equal. I know better than to rewire my house in hopes of saving a dollar and then burning it down.

Larry May:

Yeah. I think anytime you’re letting fear drive your market, your investment decisions, you’re going to end up losing. The same way as being overly, too big of a risk taker, if you get into too risky of stuff to try to make money. That seems unfair. I know in Mississippi, we’ve had a huge Ponzi scheme going on because it looked too good to be true, and it was. So, you know, but with, with fear, I’ve seen way too often through too many cycles, short-term downturns make people afraid and they end up with foolish decisions and have those real lives losses that would have bounced back had they just left them where they were-

Robert Coker:

A long time ago in a galaxy far, far away, when I was there, Tuscaloosa was actually doing an internship there at Merrill Lynch in ’87. And I watched it happen up close and personal. And that was my real first exposure in that world of finance where I saw people just hit the panic button. But again, locking in losses, there’s no recovery from that, it’s gone. Just sitting tight and just stomaching it. And I know that’s hard for people to do because they’re fearful. So I know it’s not an easy decision, but I highly recommend that you don’t make rash decisions because everything has a cycle. It’s like a sine wave. You might be in the trough one minute and be at the peak on the next-

Bobbi Hayes:

And beware the lure of cryptocurrency. It’s a very, very volatile market and fortunes have been made and lost in days. And-

Robert Coker:

Is that Tales of the Crypt?

Bobbi Hayes:

Yes. Ha ha!

Larry May:

Well, the other thing that I wanted to talk about that I think that I see happen too often in fear-based decisions deal with taxes. You know, no contractor likes to pay taxes and probably no one likes to pay taxes, but where they’re fearful of a large tax burden. So they end up spending a dollar to save 30 cents. Whether it be on vehicles that aren’t needed, or equipment that’s not needed, or non-essential bonuses, travel, various things. And I know we all see it. And I try to always say, “remember this, you’re spending a dollar to save 30 cents, and if you want to flip that around is you could take 70 cents home by just keeping the dollar and paying the 30 cents tax on it.” I was wondering what y’all’s thoughts were and how often you were seeing these type things.

Bobbi Hayes:

I see it all the time with contractors. I’ve always taught, make the economic decision first, not the tax decision and for acquisition of vehicles and equipment. It’s important to do a capital budget and make sure that your needs and your wants are different. Needing something because you’ve rented a piece of equipment for 14 months and will have continued use of it and deciding to buy it is a need in a capital budget. Wanting something is not necessarily the same thing.

So I think careful capital budgeting is very important, but I do. We see contractors making large purchases in the month before their year-end, which has adverse impacts on their financial statements for bonding. Just to try to save what they perceive is going to be a tax dollar without really recognizing what that additional equipment is going to bring in revenue, because equipment needs to work to make money for a contractor.

Robert Coker:

You know, even better yet. Bobbi, I think one of the things that’s crucially important is to do sort of a study of how your equipment is being utilized. And if you are going to do some kind of purchase, that makes sense, maybe you sell off some of the unused equipment or the heavily unutilized equipments if you’re going to do this to fund those purchases. It might even drive a loss in that process where you’re saying, okay, well, I’ve got a tax loss that I can take here, which is often not the case because of bonus and other accelerated methods of depreciation. However, that doesn’t mean that’s not true, but, but looking carefully at your fleet of vehicles or your equipment and realizing, okay, I’m paying a lot of money on that to service that debt every month, is by the same token, something they should evaluate.

Yes, they’re getting a deduction for interest, but that doesn’t mean we want the interest deduction. Again, what Larry is saying here, if I’m spending a dollar on interest, all I’m getting back is 30 cents, but that 70 cents is sort of like Cheech and Chong, it’s Up in Smoke. It’s gone.

Bobbi Hayes:

Okay. I agree with you, Robert. I think the key is if you see the equipment and it’s just sitting in your yard and it’s not going anywhere, you got to take a hard look at maybe it’s time for that piece to go.

Larry May:

And that’s one thing I often see is people think if it’s paid for, it’s not costing you anything, but it is. Idle equipment cost to you in insurance and taxes, whatever you want to say. And by being idle, it’s not doing you any good.

Regarding new purchases, I generally try to encourage contractors particularly at year end when we’re doing tax planning to, if it’s something you’re going to buy within the next three months and you’ve got a ghastly tax burden, but it’s something you’re going to buy. It’s not a matter of if it’s just a matter of do I do it today, tomorrow, February, March. But if you’re going to do it within 60 or 90 days of year end, well go ahead and do it. And let’s get the tax advantage.

But if you’re sitting on the fence, or if it’s unneeded and you’re just upgrading something that when you have something perfectly good to do the job, keep your money. Pay your taxes and keep your 70 cents.

Robert Coker:

You know, something that dovetails perfectly with all of this, right? You know, it matters in the way in which you buy that equipment. Whether it be with cash, with bank debt, or going out and leasing it. But again, as we well know, the freight train that’s coming down the tracks is the new leasing standard, right? Which has no impact for tax, but it does have an effect in terms of how it affects your working capital. So that’s coming up here shortly as well.

So we’ve got… There’s lots of variables to consider in all of this. So, and buying toys just for the sake of the tax deduction, I’ve seen it a million times in my 31 years of doing this and I love toys myself. But sometimes, as we said earlier, that’s just not a sound business-

Bobbi Hayes:

Yeah, I’m seeing a number of contractors working really hard to justify how an RV is a corporate asset.

Larry May:

I see RVs, boats, and various things, all of which the Bonding company does not care for. And although not related to a directly related to our topic of fear purchases, but you know, the investments in land, a lot of my contractors love land. Then the problem with that is in a downturn that’s very hard to liquidate. You are not necessarily going to get your top dollar on a quick basis. And that’s another thing though, that’s often one of those is really, if it’s hunting land or whatever, it’s really a toy and not a necessity for that business, and doesn’t it need to be bought in the business for sure.

Bobbi Hayes:

I agree with you there Larry, plus holding land and holding real estate in general, inside a company that’s taxed as a corporation, whether a C Corp or an S corporation has never followed sound tax advice to do that. Unless it’s specifically land that is being developed into lots and you’re in that business. Otherwise, land, real estate doesn’t belong on the balance sheet of a contractor, in my opinion.

Robert Coker:

Whether you’re getting a long-term asset, and you’re also getting a piece of that is going to be a short term liability. So you got also weigh at all in with, what does that mean in terms of your working capital and how that impacts your contractor’s license and bonding ability?

Larry May:

Absolutely. The one other thing I wanted to cover that people often are not taking on that’s fearful is embracing technology. They, they delay that because people, technology is often a challenge for me, and a lot of the older people, but that is something that should never be put off. I mean, I think even in down times. A lot of times, if it’s a slow period for you, it’s a good time to embrace technology because you have time to learn how to properly use it before you’re swamped with work again.

And so, in my opinion, I think it’s a good time for people to look at the available technologies. This is also something that helps you with your overhead, often will help you be more profitable, even with less volume. So I think it’s a good time for, all contractors to look at the available technologies and invest where necessary. Are y’all seeing any of that, or would you agree with that? Bobbi and Robert?

Bobbi Hayes:

I do agree with embracing technology. That’s the field of technology in construction is one I followed for a long time. Technology can help with accuracy in a lot of areas. For example, BIM, building information modeling, or, you know, use of drones has been the most early adoptions of technologies for constructors. The market is changing though. There’s going to be further and further advances in the quality of mechanical adaptions, robotics, et cetera. Artificial Intelligence will drive the accuracy of how the physical models in robotics can be used. And over time it is really going to help the construction industry with filling in the challenges with the lack of skilled labor.

I think Japan leads in this area because the projected decrease in their available construction workforce was so extreme that they’ve made a big push into investing in technology in the U.S., we see job site robots now that can come out of Boston Scientific and some of the other really great videos, you might be able to catch on YouTube about their robot dog and what can happen with it.

It’s going to be one of those situations. You have to continue to continually evaluate because it’s going to make a difference in how you compete. I had a group of highway contractors that I work with that went to one of the association conventions about a year or two ago. And they went out to a job site and they witnessed a row of dozers all working the field, and they were all controlled by one person in a trailer. These are the types of things that exist now, and there’s more to come.

Robert Coker:

You know, just want everybody to understand that embracing technology is not your teenage son spending every waking moment texting someone. But those handheld devices, those phones have enable so many to actually capture real time data. You know, technology also dovetails into software and getting real time information, as well as eliminating the paper, if you will, and the process to allow that to be imported into their software. I think it’s really important these days for companies to evaluate how well their software is capturing job cost data and helping them manage their businesses.

We find these days that data is power. You know, you hear it talked about all the time about information and using that information and sifting it and sorting it to tell the story. But having it real time, I think has made a real difference for a lot of contractors because they know immediately whether or not they’re making money on this job or where the status of it is instead of waiting a month to see the data. If you’re utilizing technology that utilizes a paperless process, I think it can be invaluable to turn that into a better management tool, in allowing you to preempt some of the losses that may be occurring in the field.

It is a connector in every way. And, you know, I think COVID has brought about one beautiful thing in the sense that it’s forced us to have better technology. To be able to work remotely and get data and connect people and understand how we can have meetings via zoom with, whether it be our customer, or vendor, or our project manager, or field persons. They can have communication constantly that way. Even though I’m sick to death of zoom calls, it is still a tremendously utilized process, and it can save a lot of money. If you’re not spending the gas, the time, the effort, and the money to go to another location, it’s dollars in the bank.

Larry May:

Absolutely. I think one thing that I hope fear is driving people to do is to look at their cyber security, because I know during the last eight-months I’ve had multiple clients hit with cyberattacks. Not in well and actually over the last five years. So I do hope that the fear after the pipeline was shut down and other CNA, the largest cybersecurity carrier getting shut down for two weeks, I do hope that there is a fear of that in the marketplace where people are taking a look at that. I know we’re near the end of our time. So I guess I’ll just ask Bobbi and Robert for any final comments y’all wanted to make before we have to end.

Bobbi Hayes:

Well, while it’s still available, companies need to take a hard look at the retention credit. A lot of them are still overlooking that and that they may have possible exposure to being able to claim it. And that’s a credit that’s available on… a totally refundable credit that’s available as a percent of wages and it’s obtained through the filing of the quarterly 941’s. We are still seeing companies that are not looking at that, and very often when they do, they are finding that there is cashflow for them available there.

The new infrastructure bill that was passed in the Senate does cut the retention credit off at September 30. So we do expect that this quarter that we’re in will be the last quarter that it will be available. Of course, a company can go back and amend returns, but processing amended returns, we were trying to clarify with clients, the IRS is running six to 12 months on anything amended that is filed in paper. So that’s something to take into consideration. It will help cashflow if it’s amended, but it will take a while for that cashflow to come in.

Robert Coker:

You know, I don’t know if anything about this is economic, I’ve always been a music fan and here’s some good advice. You don’t pull on Superman’s cape, you don’t spit into the wind, and you don’t pull the mask off the old lone ranger, and you don’t mess around with Jim. So I’ll end it with that.

Larry May:

Well, yeah, I would appreciate your comments and your help. And I agree on the employee retention credit. You definitely need to look into that. I’ve been amazed at the dollars that our clients have been eligible for as have they. I’d like to thank you all for joining us. If you need any follow-up, please go to our website at cricpa.com.

We try to keep resources there. Current articles, videos that you can watch for covering various subjects articles, and a lot of other resources. And if you need help, call any one of us. Robert, Bobbi, and I worked closely together as a team for our construction practice, as long as many others in many other offices. And we can direct you to someone who can help you. So I just appreciate you all joining us today.

Robert Coker:

Thanks so much Larry. And Bobbi.

Outro:

If you want more CRI insights or are interested in learning about our firm, please visit our website at cricpa.com. Thanks for listening to this episode of It figures: The CRI Podcast. You can subscribe to It Figures on iTunes, Spotify, or wherever you prefer to listen to your podcasts. If you liked what you heard today, please leave us a review.