Due to the current economic environment, contractors may be unsure about the financial position of their companies. The Construction Financial Management Association, or CFMA, has recently published its 2001 financial survey results. This survey provides construction companies with financial information whereby they may compare themselves to other construction companies. These companies may be general contractors or subcontractors, and they consist of heavy and highway contractors, industrial and nonresidential contractors and specialty trade contractors. The 2001 survey was comprised of 729 participating companies from different regions within the United States.

Companies surveyed:

The survey demonstrated the changes many companies are making towards a more tax favorable structure as 54% of the companies were structured as privately held S-Corporations as compared to 39% in 1997. In addition, 28% of the companies had transitioned ownership to family members over the past five years while 22% changed ownership through sales to employees. 59% of the construction companies reported doing business as general contractors and 35% as subcontractors. Further, 87% of the specialty trade contractors performed projects as subcontractors. 89% of the companies recognized revenue on the percentage-of-completion method of accounting. The majority of contracts performed were fixed-price contracts.

Financial results:

The sluggish economy was most evident in the decrease in profitability of the companies. Specifically, on average, the surveyed companies experienced a small decline from gross margins of 8.8% in 2000 to 8.3% in 2001. Both of these gross margin percentages were down from a high of 11.5% in 1997. Gross margin percentages for heavy and highway contractors decreased from 12.4% in 2000 to 10.6% in 2001 while specialty trade contractors averaged a drop from 17.9% in 2000 to 15.6% in 2001. In contrast, industrial and nonresidential contractors experienced relatively consistent gross margin percentages in 2000 and 2001 of 5.2% and 5.1%.

Similarly, net income as a percentage of revenue for all companies decreased slightly from 2.0% in 2000 to 1.8% in 2001. Specifically, heavy and highway contractors lost .4% percent in their bottom line from 3.1% in 2000 to 2.7% in 2001. Net income percentage for industrial and nonresidential contractors remained at 1.2% for both years while specialty trade contractors enjoyed an increase from 3.4% to 3.8% in 2000 and 2001.

Insurance and bonding:

An interesting aspect of the 2001 financial survey pertains to average insurance costs for contractors. Insurance premiums have become more costly for businesses, especially those relating to employees. As a percentage of payroll, 8% was paid for workers’ compensation coverage, 10% for healthcare insurance and 7% for general liability insurance. Also, 58% of contractors reported carrying professional liability insurance.

The average contractor in the survey bonded approximately 41% of their total revenue in 2001. Further, 68% of the companies reported that they bonded less than 20% of their total subcontractor dollars. This represented a substantial decrease from 77% of their total subcontractor dollars in 2000, illustrating the tightening of the bonding market.

Challenges:

The survey found that the majority of participating companies faced similar challenges over the next five years. 43% of the companies cited shortage of trained field help as their top challenge while 19% believed sources of future work would provide difficulties for them in the future. Other potential problems noted were the shortage of trained project managers, rising healthcare insurance costs and workers’ compensation insurance costs.

Economic outlook:

Despite these future challenges, many contractors are looking toward increased profitability and more opportunities for projects. For example, 51% of the companies predicted that contract volume over the next year would increase by an average of 21%. Furthermore, 47% of respondents reported an increase in backlog from the prior year. These companies reported an average of 8.1 months of work in their backlogs. In addition, companies are planning to expand their businesses as 24% surveyed were preparing to move into new geographic regions.

The CFMA Financial Survey can provide a construction company with a powerful tool to compare themselves to others within the industry. Berntson Porter & Company can assist companies in obtaining and analyzing CFMA’s 2001 Financial Survey.

Michael Schmidt, CPA