Core Values

In my last post I want to talk about how important it is for a company to have a defined set of core values. To do this successfully management must implement the correct “Tone at the Top”. Tone at the top is the aura of the company that is created by the company’s top leaders. This tone will flow down to all employees and the company because they are paying close attention to the behavior of company leadership.

Below are just some of the steps to create a list of core values.

  • Determine what makes your company unique
  • Be passionate
  • Create a team
  • Brainstorm
  • Analyze feedback from employees

These are just a few of the steps companies can use to create core values. If you’re a successful company with great employees without a defined list of core values. Don’t worry, you probably already have them and just haven’t defined them.

Relating to my goal of “Bridging the Gap” in the construction industry below are a few of the core values that are mandatory in my opinion.

  • Excellence
  • Determination
  • Integrity
  • Inclusion

Granite Construction (my employer) does a truly fantastic job of stressing the importance of Core Values.

Our leadership team is constantly reaching out and connecting with employees to share why the company believes these core values are so important. Not just with emails. But with videos, online and in person Q&A’s, and courses to promote our core values.

If you and your company wants to “Bridge the Gap” between your operational and financial department it will take a total team effort. Top leadership will need to set the example of how successful teams work together. Don’t forget to listen to your employees. Without them, bridging the gap isn’t possible.

Construction Planning and Scheduling

As accountants, it is critical for us to have a basic understanding of how construction planning and scheduling works. The key is to understanding “planning” is to think about “what” is going to be done, “where”, and by “who”. It is a timetable of activities that is crucial when estimating and building a project. Many activities in a project are linear. You cannot start the next activity until the preceding activity is completed.

There are many types of software that can be used to assist in creating a schedule. Bar charts and precedence diagrams are the primary types of schedules that are used in the construction industry.

Below are the steps neccessary to build a schedule.

  • Define activities
  • Order activities
  • Establish activity relationships and draw a network diagram
  • Determine quantities and assign durations to activities
  • Assign resources and cost
  • Calculate early and late start/finish times
  • Compute float values and identify the critical path
  • Schedule activity start/finish times

A particular important aspect of scheduling is to understand is the critical path. The Critical Path Method is the sequence of scheduled activities that determines the duration of the project. Meaning, if any of the activities on the critical path are delayed, the entire project is delayed.

Once the schedule is established and production begins on a project. An accountant and project manager should work together to gauge how the work is actually progressing and compare it against the original schedule. It is common for work to start off slowly and get behind. If the work is new, there can be a learning curve. As production continues it is very common to see efficiency increase and the work be completed on time.

In most cases, a project has a date of final completion in the contract. If the project is not finished by that date, a contractor could be liable for liquidated damages. When estimating the project, it is important that the estimator leave enough time or “float” to account for possible delays. Weather, materials, production. It is not wise to think that everything will go perfect on a project.

It is not expected that an accountant be responsible for the schedule. But you must understand it and know when action must be taken from a financial perspective to account for any changes to the schedule.

Estimating continued…

Once a contractor has determined they meet certain upfront requirements to bid the job estimators will begin to study the drawing and specifications.

Estimators must put a plan together for the bid. How much time to they have? Is it enough? It is important to visit the potential construction site and attend any pre-bid meetings with the client. Divide the bid into work packages. A work package is a specific portion of the project’s scope of work that will be assigned to a particular group.

The next step is the quantity takeoff. This means calculating how much material will be needed in each work package to complete the job. It is important to include a waste factor into the calculation. The contractor then request vendor price quotes for the material and inputs into the bid. (Be careful to include sales & use tax if not already on the quote from vendor)

Next, the cost of labor must be calculated. The first step in this process is to determine the crew mix to be used to install the material. Then, determine the production rate for the crew. Using historical rates is the best practice for coming up with the production rates. Inputting unrealistic rates will hurt your profit when performing the job. Take into consideration any unique job conditions that could affect the production rates. Last, the wage rates for each work classification in the crew mix are determined. If using union labor it is important to ensure that you are using the correct rates by verifying with any union agreements. After adding in the burden to the wage rates you will have the total rate per hour for each class of worker.

The estimator must then determine the required equipment for the job. Does the contractor already own the equipment or will it need to lease, buy, or rent. As with labor a production rate and cost rate must be determined for each piece of equipment.

In most cases, a contractor will “sub” out a portion of the work. A subcontractor is a separate contractor hired by the general contract to perform certain portions of the work. Trades such as plumbing, electrical, and HVAC are typically subbed out to specialty contractors. Each sub will give a quote to the contractor and it will be inputted into the bid.

The last steps of preparing the bid are taking into consideration overhead, contingencies, and profit. Every contractor has certain cost that cannot be directly traced to each individual job. These cost are typically referred to as overhead or indirect. Administrative staff at home office, office rent, depreciation, etc. Next, contingencies should be considered. Potential for bad weather delays, strikes of union, disagreements with client. It might be neccessary to add money into your bid Now for the most fun part. How much profit do you want to earn on the work? It is important to consider your competition and how badly you need the work before deciding on your final profit number.

All of the above information is entered into a sheet that summarizes the cost in the bid. After final reviews you are ready to turn it in.

Estimating….

Now it is time for the accountants to learn. We can’t just expect operational folks to help bridge the gap. We’re going to have to roll up our sleeves and get to work.

It is important to learn how a job was estimated. If you expect to forecast a job successfully so that it is recognized in the financial statements correctly, you’ve got to have an understanding of estimating. I’m not going to go into details of the estimating process. I’m taking a high level approach to how a job is estimated.

First, a client (often referred to as a owner) realizes they need a construction contractor to build something in a certain place. That something can be a building, bridge, tunnel, etc. It doesn’t really matter what they need as the process is similar. Most of the time the client will reach out to a designer or architect to get preliminary drawings. They give the designers the outline of what they need and where it has to be built. This is done to help the clients get a feel for how big the project is going to be and if it is even feasible.

If the client decides to move forward with the plan a project manual is created. A project manual (often referred to as specifications) is a document that accompanies the drawings and includes information on how to bid the project, the contractual obligations of the successful contractor, and the specifications for the materials used in construction.

This is where the estimating comes in. A contractor submits a bid or proposal based on the drawings and project manual. The estimator must examine these documents very, very closely. Missing an important item can be the difference between making a profit or loss.

These are some of the major items that must be looked at before the estimator can decide to move forward.

  • Bonding (Does the company have the bonding capacity to bid on the project)
  • Insurance (Does the company have the insurance to satisfy the requirement of the contract)
  • Equipment (Does the company already own the neccessary equipment to build the job)
  • Schedule (Is the company capable of meeting deadlines set out in the contract)
  • Personnel (Does the company have the personnel available)
  • Qualification (It is getting more common for Clients to require contractor’s to meet certain qualifications in order to bid on a project)

In my next post I’ll talk about the next steps the estimators must take.

Analyzing the Cash Flow Statement

I believe the statement of cash flows is the most difficult financial statement to understand. The goal of the statement is to inform users of the cash entering and leaving the company. It is important to remember that the cash flow statement is not used to project how much cash a company will have in 6 months or a year. It tells you how the company managed its cash in the current year.

The structure of the statement is broken down into three parts.

Cash flows from Operating Activities including any cash used in the normal course of business. This includes receipts of cash from sales or services or cashed used to pay suppliers, employees, interest on loans, etc. It is important to remember that this section covers the cash in/outs to keep the business up and running.

The next section is cash from Investing Activities. This includes purchase or sale of assets, securities and stocks, loans to vendors or from customers, etc. This section is meant to show how much a company is investing to produce a profit in the future. As the saying goes, “It takes money to make money”. In order for a company to grow it must put money back in the company. Purchasing additional equipment, properties, etc. shows potential investors that a company is trying to grow.

The final section is cash from Finance Activities. This includes cash from loans from banks (principal amount only, interest payments are covered in operating section), payment of dividends, cash used to repurchase shares, etc. This shows how a company is financing its business. Did it sell additional stock during the year to raise capital? Or did it purchase bonds?

This wraps up the statement of cash flows.

I do want to add the importance of what I call an informal cash flow. This is the projection of cash for set amount of time. This is very important part of managing a joint venture project in the construction industry. Partners will contribute cash at the beginning of the job. The accountants with the help of operations must continually evaluate the progress of the job and communicate to partners if cash is too low and an additional contribution is needed. It is important to let the partners know ahead of time so they are able to make the neccessary arrangements.

Breaking down the Income Statement

Next I’m going to give a brief breakdown of reading an income statement. (Also called the profit and loss statement or P&L) Having the tools to analyze the income statement is a mandatory skill if you are in charge of running a construction project. This is the financial statement that tells you how money you have made or loss in the current year.

The top section of the income statement contains the revenue items. These can be sales of products, performance of services, or many other types of revenue producing activities. The next section is your cost of goods sold. These are the expenses incurred to create your products or services. Raw materials, salaries, etc.

The above formulas give you the Gross Profit and Gross Profit Margin. These are essential in understanding if you are making money from your core business. It is important to analyze the changes in Gross Profit year over year to see what’s changed. Has our cost gone up? Why? Do we have more sales? Can we maintain production to meet those sales? All of this questions must be answered so you are able to create a long term strategy.

The next section is General or Operating Expenses. These are the expenses not directly related to creating your product or service. Advertising, marketing, office rent, etc. Many times these are referred to as indirect or overhead expenses. Subtracting these expenses from Gross Profit gives you Operating Income.

The final section includes your income and expenses relating to income taxes, interest from loans, etc. Subtracting or adding these amounts to your Operating Income gives you Net Income. (The bottom line)

There are different ratios you can use to help analyze your income statement. Gross Profit Margin, Operating Margin, Times Interest Earned, Price-Earnings Ratio, Earnings Per Share, etc.

In the next post we’ll talk about the cash flow statement.

Understanding the Balance Sheet

I want to give a brief breakdown of how to read a balance sheet. It isn’t neccessary for operational personnel to become experts in how to read the balance sheet. They don’t need to memorize the different ratios. But they need to be able to interpret it enough to use it as a tool.

The first thing to learn about the balance sheet is the equation in which it is based on. Assets = Liabilities + Equity

The first section on the balance sheet is Assets. These are usually divided into Current and Non-Current Assets.

Current Assets

  • Cash on Hand
  • Inventory
  • Short Term Loans
  • Accounts Receivable

These are usually items that can be quickly converted into cash in a short amount of time.

Non-Current Assets

  • Property, Plant, Equipment
  • Long Term Investments
  • Long Term Loans
  • Intangible Assets

These items cannot be quickly converted into cash.

Combining Current and Non-Current Assets will give you Total Assets.

The next section of the balance sheet is liabilities. Like Assets, it is broken down into current and non-current.

Current Liabilities

  • Accounts Payable
  • Short Term Debt
  • Accrued Expenses
  • Dividends Payable

Like current assets, these can be expected to turn into a cash outlay within a year.

Non-Current Liabilities

  • Long Term Loans
  • Bonds Payable
  • Deferred Revenue

These types of liabilities are not expected to become current in the next year.

The final section is Stockholder’s Equity. Stockholder’s Equity is the remaining amount of assets available to shareholders after all liabilities have been paid. There is no current vs. non-current break out.

  • Common Stock
  • Paid in Capital
  • Retained Earnings

Learning the layout of the balance sheet is a must for every person who expects to have an understand of the financial statement process.

In my next post we’ll take a look at the Income Statement.

Diversity in the workplace

One of my favorite things about working in the heavy civil tunnel construction is the diversity of the people. My first job was for an Italian company and the project was located in Las Vegas, NV. I worked with men and women from Italy, Mexico, Japan, Spain, Switzerland, Columbia, and the US to name a few.

The complexity and difficulty of tunnel work is endless. Each job is unique and brings a new set of challenges. It takes a team full of people with an abundance of experience to work through the problems that will inevitably come up.

Below are just a few of the benefits of diversity.

The industry of tunnel work is amazing. Because of the intricacy of the work it attracts and requires the most talented employees. The pride of the workers is evident in the stories they tell. Every jobsite is full of worker’s testimonials about prior projects. You can hear the satisfaction in their voice. For a company to be successful it must be diverse.

It is the responsibility of management to learn how to best deal with a diverse workplace. They should utilize Hofstede’s Cultural Dimensions. In order to best manage a group of different individuals you must study to understand how they are different.

Bridging the Gap

I feel a heightened sense of responsibility working for a public company. I have the obligation to all stakeholders (stockholders, investors, creditors, customers, employees, etc.) to ensure that the projects that under my watch produce reliable financial statements that are free from material misstatements. Working for a private company is different. It is not that put forth less of an effort or take my job less seriously. But you are responsible to the owners of that company. The repercussions of mistakes or errors typically do not involved public authorities.

The challenge is that consistently providing accurate information is a total team effort. You cannot do it alone. It is imperative that you make a meaningful connection with your team members. Don’t always email questions. Pick up the phone. Call them. Ask them how they’re doing? How’s their family? What are their goals? What are their weaknesses? What are their strengths? I believe in having personal, professional relationships. Treat your team as you would your own family.

I have found in my experience that the Project Manager (usually my main point of contact on a jobsite) can have very different strengths from job to job. One project manager could be very proficient in running operations, but lacking in financial acumen. The next could be financially savvy but still gaining experience in maintaining efficient operations. You need a well balanced team. The PM lacking operation experience needs a strong superintendent. The PM missing financial knowledge will benefit from an experienced controller. The team needs each member to step up in different ways. The group must feel comfortable enough to ask for help. This can be very difficult for proud people. But I view saying “I don’t know” as a sign of leader. Pretending that you know everything and not involving your team will end up hurting the project in the end.

In my next post I’ll talk about the diversity of people I have experienced in my career. One of the things I love most about my job and working in large, heavy civil projects is how many different types of people I have encountered.

Let’s work together.

There is much debate about whether SOX controls bring any value or prevent material misstatements. There are people on both sides who have great points regarding the pros and cons. The reality is, SOX controls are not going away. If anything, there will be additional scrutiny and controls placed on public companies. I find debating there worth a waste of time and energy. The key is to shape the controls your company has implemented to give you the best value possible. This is where working together across departments is key.

Now since I work in the construction industry that’s where my blog will focus. In my previous post I talked about how important the forecast is to the financials. The issue at most (not all) construction companies is the divide between finance and operations. Finance people worry about the income statements and balance sheets. Operation folks worry about building work. But the truth is you must understand both. Finance people should strive to understand the work. Learn how to interpret a schedule. Visit job sites and see first hand the progress on the job. Get some boots on and get dirty. I can’t tell you how many times in my career I’ve talked to an accountant that has never left the office. Never met the project managers in person.

Operation people need to have a level of understanding of the financials. How do changes in the forecast flow into the financials. Why are we over or under billed. Why accruals matter and how missing one affects the books. Project managers tend to solely focus on production. I don’t disagree that production should be their main focus, but they must make time for the accounting side.

I believe every company needs to have a person responsible for being the bridge between the two departments. That is what I’m currently trying to do. I have a ton of experience on the accounting side. 13 years on the job. Accounting degree. MBA (almost). CPA. I’ve got that down.

But the last few years I’ve made new efforts on the operational side. I’m working on getting a construction management degree. I’ve involved myself in operational meetings. Sat and listened whenever I can.

In my next post I’ll continue to build on why I think it is so important to meet in the middle.