Even though there are signs of optimism that the construction industry is starting to recover, the true turnaround likely will not occur until the fourth quarter of 2012 or early 2013, William Geisen and Susan Argo of Graydon Head said at Barnes Dennig’s most recent contractor’s roundtable.
Due to the slower-than-expected recovery of the construction industry, credit availability is still quite tight. Banks are still taking a beating due to increased government regulations that came along with the Troubled Asset Relief Program (TARP). Due to the struggles of the industry, the construction portion of a bank’s portfolio is always looked at first, which causes additional pressure to the bank on all loans to construction companies. As these pressures mount, there has been a severe tightening by the banks on availability of loans. When loans are made, credit enhancements (i.e. guaranties) are included along with increased fees and interest rates.
Geisen, Argo and Barnes Dennig Director Jim Donnellon shared the following tips for contractors to proactively strengthen their relationship with their bank in this time of credit crunch:
- Share timely and accurate year-end results
- Determine a break-even analysis
- Know the amount of backlog that is bonded vs. unbonded
- Know how fast the backlog is running off
- Use backlog and run-off analysis to project year-end results
It is also important to project where your company is going and what your expectations are. Take the information you have today and proactively translate its impact on current year-end results and long-term plans.
Along with the banking industry, the surety market has undergone a change the last couple of years due to the construction industry performance. There has been a more stringent oversight by sureties to reduce loss ratios. They are increasing reporting requirements for companies while reducing the bonding capacity.
What can owners of construction companies do now to handle the depressed industry? The most important item is to develop a sound business plan by managing overhead, maintaining strong liquidity, minimizing hard debt load and maintain discipline in the market.
The next Barnes Dennig contractor’s roundtable will be on safety. It will be held in October.