In this Issue:

• Managing Cash Flow: How the 4Ms are Affecting the Construction Industry
• Construction Related Legislative Review
• Hot Sheet Candidates
• Hard Hat Humor

Managing Cash Flow: How the 4Ms are Affecting the Construction Industry

Managing cash flow has been the main concern of executives across all industries during this great recession. The 4Ms of production (man, machine, material, method) have received more attention than ever as profit margins have shrunk and contractors have been forced to do more with less. In my four years of executive search experience with Kimmel & Associates, I have had the privilege of speaking with thousands of executives covering nearly every facet of the construction industry during these volatile times. As the saying goes, "the only constant is change," and the construction landscape is no exception to the rule.

Man

It's no secret: the unemployment rate is high. The annual unemployment rate for 2010 across all industries was officially 9.6% with 14,850,000 Americans looking for work. Construction unemployment for 2010 was 20.6%, which is up considerably from 10.6% in 2008 and 19.0% in 2009. The unemployment rate only counts those people actively looking for work. Many critics argue the number is in fact much higher when those who have dropped out of the labor market or are underemployed are considered. The "phantom unemployment rate" is often cited at over 15% for all industries, but only estimates are available as it is not tracked by the Bureau of Labor Statistics.

Considering the glut of available talent on the market, how does this affect cash flow? The answer is much more complicated than it was only two years ago. Several costs of employment have changed and/or are unknown, which means employers have to be more cautious than ever in bringing on additional employees with overhead costs. Just a few of the unknowns include the costs associated with health care reform, income tax increases, and social security reform - all of which an employer pays a large percentage on behalf of an employee.

Perhaps the most detrimental costs associated with manpower is a cost that goes almost unnoticed: unemployment insurance premiums. Many companies have had mass-layoff events over the past couple years and may even have layoffs planned in the near future. The unemployment insurance tax is perhaps the most confusing and misunderstood tax there is. When a state pays out a claim to a former employee, that company's unemployment tax rate goes up. In Illinois, the state calculates how many dollars were paid out over the previous three years in unemployment benefits and adds approximately 48% to cover administrative and overhead costs associated with running the program. This means for every $1.00 a former employee collects, the employer ends up paying $1.48. If a former employee in the State of Illinois collects the weekly maximum $531 for the state funded maximum 26 weeks (federal funding pays for week 27 onward), the result is $13,806 in payouts. Multiply by 1.48 to cover administrative costs and the total tax liability increase for a company is in excess of $20,000. A company's unemployment tax rate will go up as a result and over the following 3 years, the state will receive their $20,000, albeit slowly. Multiply this by 10+ employees laid off and it's not hard to see why the stakes are higher than ever to hire the right people for the right position the first time around.

Machine

The Associated General Contractors of America have reported that construction equipment investments are expected to rise in 2011. Surveyed construction firms invested an average of $672,000 in purchasing equipment and another $674,000 renting in 2010. In 2011, purchases and rentals are expected to be $880,000 (+31%) and $719,000 (+7%), respectively. However, 2011 expenditures will be tempered by the implementation of Interim Tier-4 standards for diesel engines.

In 1990, Congress passed the Clean Air Act which implemented increasingly stringent regulations on combustion engines to reduce particulate matter and nitrous oxides over time (Tier Levels). In January 2011, Interim Tier-4 Standards went into effect for 174 horsepower and higher off-highway machinery. In January 2012, Interim Tier-4 Standards will be expanded for machinery in the 75 to 173 horsepower range with Final Tier-4 Standards being implemented in 2013-2014 for both classifications.

What does this mean for cash flow? Major engine manufacturers such as Caterpillar and Cummins have spent billions in research and development, which is an indirect cost paid for by end-users through increased machine prices. The EPA estimated the effects of Tier-4 implementation to result in a 1-2% increase in machine prices. The actual increase is estimated to be between 10-14%. This means a $250,000 Tier-3 piece of machinery will now cost an extra $25,000 or more to comply with government regulations. Older equipment will be grandfathered in with a few exceptions. Since the cost of replacing an old machine with a new machine has increased, the values of used construction equipment should increase. For fleet owners, this means a higher replacement value and increased lines of credit due to asset appreciation.

Furthermore, used equipment values should increase as most manufacturers have cut back production. As production demand for new machines ramps up, it will take several months for parts and material suppliers to increase production to meet demand, resulting limited availability of new equipment and forcing buyers to enter the used equipment market to satisfy their equipment needs.

Material

Overall material prices increased 3.6% in 2010 according to the ENR Materials Index. The United States is a leading manufacturer of construction materials, but no country has made a bigger splash in the construction materials industry more than China. Most Americans have heard of the Chinese drywall controversy by now, but 2010 has been a contentious year for US-China trade on almost every front.

The US Government has adopted a policy of protectionism to prevent cheap Chinese goods from flooding the market and squeezing out US competitors. A 15.72% tariff has been imposed on Chinese steel, but did not keep prices at bay as steel prices increased 5.3% in 2010. In response to increased tariffs on Chinese imports, China has reciprocated with their own tariffs on a variety of related and unrelated goods including a 105.4% on American poultry imports, a $4 billion industry.

In regard to cash flow, materials will always be a prime cost for contractors. Due to the downturn, most material suppliers have experienced a decrease in revenues and an increase in costs-many of which are related to labor costs mentioned earlier. Cash flows have been stressed due to delayed payments from construction clients, resulting in delayed payments to suppliers and other vendors. Considering these delays, the inability to take early payment discounts can make the different between a project being a profit center or a cost center for the company. The aforementioned increase in machinery values may provide cash flow relief through increased credit lines, enabling contractors to take early payment discounts. A contractor with $10 million in material costs capitalizing on a 2% early payment discount can realize $200,000 in reduced outflows just by meeting their financial obligations sooner than later.

Method

Thirty years ago the only computers we had were handheld calculators and adding machines. Fifteen years ago we were asking what this new thing called email was all about. Five years ago BIM was known to us as a typo for IBM. Today, most construction doesn't take place without all of the above.

BIM or Building Information Modeling has taken off over the past five years and doesn't look to be going away any time soon. BIM models projects in five dimensions. We live in a three dimensional world where projects encompass the X, Y, and Z axis. Einstein popularized the fourth dimension of time. The Fifth Dimension is more than just a band from the late sixties, but perhaps the most important dimension in construction: cost.

The driving force behind implementing BIM in projects is to minimize costs. By constructing a project virtually prior to laying the first brick, conflicts can be resolved before the first brick is ever laid. Complex projects such as hospitals often require putting 10 pounds of material into a 5 pound bag. Resolving issues where mechanical systems run into electrical systems in the virtual world versus the real world means less change orders, higher productivity, and most importantly: less variable costs.

An Associated General Contractors survey reports that 46% of construction firms have embraced lean construction methodologies. Embracing lean construction does not only promote sustainability, but also reduces cash flow liabilities as labor and material waste is reduced. Despite the known advantages of embracing lean principals, only 18% of construction firms surveyed who don't currently utilize lean methodologies planned on doing so in 2011.

Construction Related Legislative Review

Contractors who work for the federal government or under programs funded by federal and state dollars should be worried, notes the AGC. There is not a lot of fat in the construction budgets, and federal agencies are keeping score by how many total dollars are cut, not by the results of the investments.

AGC has done an analysis of the cuts in the House Republicans' CR for FY 2011and the President's budget for FY 2012. The House Republicans' CR cut nearly $18 billion in construction spending (about half of the cuts are in BRAC, High Speed Rail and Water Infrastructure), while the President's budget cut non-transportation federal construction by nearly $1 billion. The budget did propose a significant increase in transportation spending. The plan outlines a $50 billion increase for FY 2012 but does not identify revenue sufficient to support such an increase.

Short-hand method for analyzing the impact of nonresidential construction on GDP, earnings and jobs:

• An extra $1 billion in nonresidential construction spending would add about $3.4 billion to GDP, about $1.1 billion to personal earnings and create or sustain 28,500 jobs.
• 9,700 jobs would be direct construction jobs located in the state of investment.
• 4,600 jobs would be indirect jobs from supplying construction materials and services. The majority of these jobs would be located within the state of investment but there would be some out of state jobs supported.
• 14,300 jobs would be induced when workers and owners in construction and supplier businesses spend their incomes locally and nationwide.

Additionally, two pieces of legislation are currently pending in Congress as of the writing of this article. Both pieces involve the repeal of sections of existing legislation: Section 9006 of "The Affordable Care Act of 2010" and Section 511 of the 2006 Tax Increase Prevention Reconciliation Act.

The ubiquitous piece of legislation known as Obamacare involves sweeping changes to the healthcare industry and how employers incorporate healthcare benefits into their employee compensation packages. However, Section 9006 has expanded the use of 1099 forms and claims from individuals to all businesses-small and large-who have made payments to vendors in excess of $600 in the calendar year. This means if a company pays a vendor more than $600 in 2011, it will be required to send the vendor and the IRS a 1099 in the mail at the end of the year. Additionally, the company will receive their own 1099s from client companies who have sent them more than $600 over the past year.

Repeal of the new 1099 rules is underway with bipartisan support and Obama has stated publicly that he is in favor of the repeal. If the repeal does not pass, overhead costs will certainly increase as companies will need to bring on more overhead to pay armies of accountants to tackle the paperwork and reduce available cash flow.

Section 511 of the 2006 Tax Increase Prevention Reconciliation Act is currently under scrutiny with repeal likely. The legislation enacts a 3% government contractor withholding tax which is set to go into affect in 2012. The tax requires federal, state, and local government entities with annual expenditures in excess of $100 million to withhold 3% of all payments to any individual or company providing goods or services to government. The withholdings are sent to the IRS and credited against government contractors' tax liability. The withholdings are essentially an interest free loan for the government and in some cases; the amount will be greater than the contractor's profit margins. The 3% government contractors' tax repeal has bipartisan support and would offset the associated costs by using unobligated stimulus funds.

Hot Sheet Candidates

#147568 - Construction Executive with a broad range of experience including large dam projects, reconstruction of city streets with underground utilities, concrete paving, asphalt paving, and aggregates management. Clients have included DOT and USACE. This individual graduated with a BS in Civil Engineering in 1983 and has worked for only two firms since. Midwest-based and open to relocation.

#404634 - Superintendent who is a quality-driven professional with Industrial, Civil/Site and Power experience. Time in the industry has been split between field supervision as a Superintendent and in-office activities as a Project Controls Specialist. Eighteen years with one General Contractor. Most recent project was performed for the USACE, but has extensive experience with private clientele. Texas-based; mobile and willing to relocate.

#597349 - Renewable Energy Division Manager based in Ontario and leading a Solar/Wind Power Operation with a Global Contractor. Road warrior. Strong wind/solar/etc. project experience from cradle to grave for $500M+ projects. Degreed, PE, highly recommended.

#77441- General Manager British Columbia-based Senior Executive. Has grown heavy civil divisions within highway/bridge/pile driving industries. Stable career history. No continued advancement within current organization - seeking the next challenge. Professional Engineer with BS and MS degrees.

#605635 - Operations / Business Development Leader of a leading Ontario-based Industrial Contractor. This manager is responsible for overseeing all aspects, including business development, construction operations, estimating, and safety. Career focus has consistently been on managing civil and infrastructure projects and programs across the region. Turn around experience - has stopped $5M/year in losses to a now profitable group twice as large as when he joined on. Gold Seal Certified. Open to travel and very strong references.

#558446 - Estimator Miscellaneous & Ornamental Steel. Worked with one of the largest steel fabricators for the past nine years. Located in Baltimore, Maryland area. No relocation. Available immediately.

#622543 - Structural Steel Chief Estimator/Sales Manager in Houston, Texas. Well connected throughout state. Highly motivated, loyal and fast learner. Houston opportunities only.

#558556 - Safety Director with 10 years of experience with steel erection, specialty contractors and general construction. Fall protection specialist. Knows how to create and run a behavior-based safety program. Reduced EMR to .34. Available immediately. Based in Wisconsin; will travel or relocate.

#592636 - Mechanical Senior Project Manager with solid, stable experience in a wide variety of projects up to $22M, including hospital, stadiums, hospitality/hotel, prisons, hi-rise and university/college. Adept in plumbing, mechanical pipe, and sheet metal. Strong references and leadership qualities. Proficient in Microsoft Word, Excel, & PowerPoint, as well as scheduling programs such as Suretrak and Primavera and estimating programs including Quickpen, Timberline, and Cost Net. Prefers California but would consider other West Coast options.

#616368 - Senior Mechanical Estimator with 18 years of both design/build and hard bid experience for projects up to $4M. Project list includes schools, institutional, prisons, courthouses, data centers and hospital/healthcare jobs. This professional can estimate three trades: sheet metal, mechanical pipe, and plumbing. With a ground-up background, able to apply field experience to putting together an accurate bid. Based in Northern California; will consider relocation to another city in that region.

#301487 - Project Manager with LEED AP BD+C. Strong in healthcare and government projects up to $50M. Single employer with Top ENR Firm for 10+ year career. Located in the Mid-Atlantic. Degreed.

#110441 - Project Manager/HVAC - Mechanical who has held three positions in 14 years. Over 22 years of HVAC Industry experience. Specializes in Mechanical/Electrical Contracting and has managed projects from $40K to $4.5M. Projects include public works, testing research labs, high rise condominiums, hospitals, education facilities, office and high end commercial and residential projects. Lives in Massachusetts and will travel in and around the Boston area. Holds AS degree in Electro/Mechanical Engineering, OSHA - 10 & 30 hour course, Master Electrician's License and Trane Equipment Courses. $115K base.

#333379 - Operations Manager - Concrete who has a solid track record of success and has repeatedly demonstrated leadership skills and ability to generate results with diverse product mixes in challenging markets. Candidate has MBA and is a graduate of military college. Has held positions as General Manager, Sales Manager and Vice President for Aggregate, Cement, Concrete and Block Manufacturers. Compensation: $120K's; Southern California.

#321623 - President / General Manager - Construction Materials President of up to $200M portfolio of manufacturing and service companies in telecommunications, infrastructure, building materials and environmental. Exceeded budgeted profit goals six years running, during this downturn. Average ROI over the six years was 34.6%. Generated $62M in new revenue growth by developing customer and market presence, repositioning existing product lines, and introducing new products and services. Led three different company turnarounds with total profit improvement of $12.2M on combined sales of $38M. Initiated and led start-up company growing it to 13 locations, 550 employees and $24M in annual revenues. Established M&A experience with 20 acquisitions exceeding $300M in value with the lead role in eight. Compensation: $110K; located in Arizona.

#604623 - Plant Engineer- Steel Manufacturing who has had a steady progression of responsibility during nine years in steel production, holding positions as Foreman and Supervisor in processing and maintenance at major Cold Mill facility. Career progression at current employer and has held positions as Project Engineer, Melt Shop Maintenance Technician and Plant Engineer. Possesses excellent people skills and has a BS Mechanical Engineering. Compensation $78K; located in Southeast Tennessee.

#609166 - General Manager - Steel Roll Shop who has 21 years of experience in Steel Manufacturing with a degree in Manufacturing. Has been the General Manager and Production Manager for Spiral Pipe/Tube Producer and Major Steel Manufacturers in Hot/Cold Rolling, Caster, Maintenance, Quality and Sales. Highly recommended by previous managers. Compensation open; will relocate in Midwest or Southeast.

#248025 - Operations Manager/Business Developer who has proven success in locating and securing the profitable projects. Strong, long-term owner, developer and architect relationships. This energetic "seller-doer" not only has the ability to bring work to the table but also to successfully manage and develop the profit center. Experience includes higher education, K-12, commercial, retail and correctional projects. Currently located in Florida but open to relocation.

#336132 - Vice President - Concrete Structures has held Senior Management positions with companies from $55M to $700M during career with some amazing results. An innovative business leader with over 30 years of experience in Global markets at a Fortune 500 Company. Has a record of success building sales and marketing teams, improving manufacturing effectiveness, leading turn-around, and gaining competitive advantages from logistics, finance, and information technology while meeting company sales and profit goals. Interested in Midwest or Southeast location.

#353996 - Fabrication Chief Estimator with an exceptional pedigree and tenures for nationally renowned fabricators. Comfortable leading a team, training staff and meeting with Clients and General Contractors. Expert analysis on historical data against current project performance. Assist management to determine most profitable work. Comfortable with large complex projects and managing staff to hit bid deadlines. Will relocate to Mid-Atlantic or Southeast. Compensation: $100K.

CARTOON

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