By Yann Reichelt, Business Assurance & Advisory Services Manager | Real Estate & Construction Industry Team
What engineering and construction leaders need to know for the last quarter of 2019
As we enter the 4th quarter of 2019, it’s a good time to reflect on where the industry stands and ensure company leaders are considering best practices to employ in the future.
State of the Engineering and Construction Industry
According to FMI’s Q3 2019 Engineering and Construction Outlook report, total engineering and construction spending for the U.S. is forecasted to grow less than 1 percent for the year, compared to 3 percent growth in 2018. Industry sectors such as lodging, public safety, manufacturing, and health care generated growth rates between 5-10 percent, while sectors focused on single-family, multi-family or commercial residential construction decreased 2-5 percent during 2019.
Engineering and Construction Industry Mergers and Acquisitions
M&A activity in engineering and construction remains strong in 2019, however, is beginning to show signs of slower growth. This is, in part, because 2018 was a record year for M&A activity with 534 transactions announced and a 26.5 percent increase compared to 2017*. The increase in 2018 was largely driven by demographic factors urging retiring baby boomers to look towards succession planning as well as private equity activity employing a “buy-and-build” strategy. Due to the volume of activity in 2018, a slowdown in M&A activity during 2019 was expected as companies are either more selective due to the current economic cycle we are in or are in the process of integrating recent acquisitions.
Uncertain Economic Climate
The economic climate entering the fourth quarter as a whole presents uncertainty due to trade disputes, softening global economy, upcoming elections, and inverse yield curves. Despite these factors, the Construction Financial Management Association’s September 2019 Confindex report remains positive for the short-term. The Confindex reported, “During the third quarter of 2019, the Overall Confindex reading rose 3.6 percent on a quarterly basis”. The report points to easy access to capital and a strong backlog as drivers for short-term confidence. Long-term confidence, however, is less optimistic citing concerns over constrained labor supply, material increases, compressed project schedules, and margin compression.
Accounting Best Practices for Engineering and Construction Businesses
With the engineering and construction industry being particularly impacted during recession periods, company leaders should develop and communicate best practices throughout the company:
Timely and accurate internal financial reporting
- Close monthly internal reporting within 15 days of month-end and coordinate internal reporting with a construction-focused CPA so year-end attest results coincide with monthly reporting through the year
- Prevents misguided expectations developed by banks and sureties when significant year-end adjustments are proposed
- Share accurate financial information with the operations department to ensure new jobs or change orders are being appropriately bid and priced
Flexible balance sheet
- Weigh the costs and benefits of owning equipment versus renting equipment. Although renting equipment may come with higher pricing over the long-term, it provides liquidity in the short-term.
- Consider maintaining an active line of credit with a bank
- Promote aggressive cash collection efforts by utilizing project managers to assist in the cash collections through communications with GCs, subcontractors and owners.
- This has the added benefit of controlling cash flow and maintaining relationships with vendors and suppliers to negotiate payment terms and discounts, when possible
Accountability for Project Managers
- Hold regular face-to-face Work in Progress (WIP) meetings with project managers to ensure contract prices, estimates, and costs are accurate
Proactively assessing the impact of newly adopted or upcoming accounting pronouncements
- Revenue Recognition (ASC 606): changes in economic conditions may impact not only the estimates of overall contract costs but also the impact of variables consideration clauses in contracts. For example, estimated likelihood of performance bonuses or penalties may need to be recalibrated on an ongoing basis as ASC 606 requires variable consideration to be assessed and allocated to the transaction price at the beginning of the contract.
- Leases (ASC 842): another factor to consider when making the decision to rent versus buy is how the lease standard will affect the company’s balance sheet. Under ASC 842, operating leases that meet certain criteria will be required to be recorded as a right of use asset and liability, which may impact debt covenants or other ratios important to the company. For more information on ASC 842.
*Source: FMI 2019 M&A Trends for Engineering and Construction
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.