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CLA has surveyed 159 specialty trade contractors throughout the United States to help you understand how your organization’s performance compares to the competition.

Industry trends

2018 Specialty Contractors Benchmark Report: Construction Industry Insights

  • Jon Weston
  • 11/7/2018

Every day, owners of privately held specialty construction companies and their management teams address challenges in operations, contract negotiations, and unexpected urgent situations. The current market condition tests contractors with a demanding volume of projects, which make it almost impossible to have an objective look at their financial performance.

CLA construction professionals have compiled financial data for the past three years from privately held businesses across the United States to create an annual benchmark report. This report provides recent trends, meaningful and relevant financial performance comparison to their peers, and offers insight that can help contractors uncover their challenges and opportunities for continuous performance improvement.

The 2018 Specialty Contractor Benchmark Report summarizes data from 159 contractors. Contractors included in the survey are largely labor-intensive and privately held companies engaged in work related to concrete, steel fabrication, roofing, painting, landscaping, and other specialty trade contractors.

Specialty Contractors’ To-Do List

  1. Stay on top of your cash flow management. Project cash inflows and outflows of a potential project that will have an impact on your overall operations, and closely review terms and conditions of any new project prior to your bid submission so that your organization is prepared for unexpected delays.
  2. Review the available technology to determine what can help minimize the void between qualified workers and timing of jobs.
  3. Get your employees involved with industry associations, and use their education and training programs to improve their knowledge.
  4. Become the employer of choice in the competitive labor market, and develop strategies to open the pipeline of future laborers to your company.
  5. Review the Tax Cuts and Jobs Act and consult with your tax advisor to see how the new laws will impact your company. Consider changes needed to your entity structure to maximize tax rate savings and capitalize on new incentives.
  6. Review the cash collection cycle and determine if interest and finance charges should be allocated to jobs for the lag between paying employees and vendors and receipt of receivables from customers.

Overview and Executive Summary

Industry challenges and opportunities
Across the specialty construction industry, gross margins were fairly consistent in 2017 compared to 2016, but overall profitability increased by almost 0.9 percent to 7.9 percent of revenue. Further, overall months in backlog increased to 4.5 months from 3.6 months in 2016.

This trend is a direct result of market conditions in which specialty contractors can selectively work on projects with a higher gross profit margin. Even with the positive outlook throughout 2017 and in 2018, specialty contractors face several challenges.

  1. Specialty contractors are being asked to meet requirements imposed by larger prime contractors such as time constraints, payment terms, and contract provisions that may be unfavorable.
  2. The skilled labor pool is aging. Contractors have difficulty hiring sufficient numbers of skilled replacements to meet demand. The same issue is true for management, as leaders near retirement age without the next generation prepared to take their place.
  3. Contractors are looking for better quality of life for themselves and their labor resources, so they are focusing on projects close to where employees live in order to minimize commuting time to the job site.
  4. The significant volume increases in 2017 are expected to grow and will put additional pressure on timely billing, collection, and financial reporting to maintain healthy financial position and satisfy the expectation of financial institutions and sureties.
  5. Cybercriminals persist in targeting small and medium-size businesses through ransomware and online banking attacks.
  6. Recent national and worldwide natural disasters will further impact the construction labor market and put upward pressures on material prices.

Key ratios and trends

Months in backlog ― The current market conditions offer specialty contractors continuous work flows and opportunities to obtain additional projects. Contractors are becoming selective in bidding process to maximize profitability in the strengthening market. Months in backlog increased from 3.6 months in 2016 to 4.5 months in 2017. In conjunction with the skilled labor shortage in the market, this trend may put additional pressure for specialty contractors to incur higher labor costs through overtime or weekend labor hours to meet completion timelines.

Debt-to-equity ― Overall, the debt-to-equity ratio has improved from the past two years to 0.9, which is supported by the working capital upward trend. It appears that specialty contractors are managing cash flows well without over-stretching their ability to fund operations. Contractors should plan in advance for replacing aging equipment as well as new lease accounting implementation while managing their debt-to-equity ratio.

Efficiency ― Specialty contractors convert accounts receivables to cash in approximately 60 days, whereas they pay accounts payables to suppliers or subcontractors in approximately 20 days. Based on the benchmarking survey calculations, contractors financed their projects for 40 days during 2017. It is unlikely that specialty contractors can extend their payment terms with their suppliers to 60 days, but they may consider the implied financing cost for gross profit margin calculations.

Report methodology

Financial ratios and key performance indicators have been computed using information obtained primarily from audited and reviewed financial statements of our construction contractor clients. Participation in the study is voluntary, and data gathered have been analyzed by representatives from our construction industry practice. This report summarizes data from 159 specialty construction companies with operations conducted throughout the United States.

Financial ratios and key performance indicators

Analysis of financial ratios and key performance indicators can help assess a contractor’s financial health, operating efficiency, and profitability. Understanding how your company’s performance compares to similar organizations can prompt you to investigate the variances, which will uncover underlying causes, and make operational changes to both improve profitability and efficiency.

Consistently monitoring key financial and operational indicators can help improve profitability, manage operations, and provide key information for developing competitive bids and maintaining healthy financial statements for bonding. Some of the advantages and limitations of using comparative indicators are outlined below.

Advantages

  • Benchmarks provide comparisons to contractors with similar operations.
  • The data help identify unusual operating results and trends.
  • Performance indicators highlight areas of strength and areas for potential improvement.

Limitations

  • Variances from benchmarks alone do not necessarily reflect an opportunity or a challenge.
  • Potential for inconsistency in data collection can reduce the usefulness of comparisons.
  • Benchmarks should be used in conjunction with other analyses of a contractor’s operations.

Ultimately, no single ratio or financial analysis should be evaluated on its own to assess a contractor’s financial condition. Variances from benchmarks should be investigated and considered in the context of the company’s specific operating structure, sub-industry, and the region in which it operates. In many cases, the most useful information is a combination of benchmarking data as well as the company’s own historical financial results.

Ratio analysis and key performance indicators

The following graphs present median data for years 2015 through 2017 for the specialty contractor industry.

Margin on self-performed revenue

Margin Self Preformed Revenue Formula

The ratio represents the percentage of self-performed contract revenue the company retains after incurring direct costs associated with completing the contract.

Subcontractor expenses for specialty contractors may not be a significant portion of the overall cost associated with a project. Often subcontracted work yields little or no profit margin to the prime contractor and can result in total gross profit percentages becoming skewed based on the amount of work a particular company subcontracts to others. Analyzing a company’s margin on self-performed revenue often provides a better indication of the company’s ability to generate profit on the work it performs.

In 2017 and 2016, specialty contractors across the segment maintained consistent margins on self-performed revenue approximating 23.5 – 24.0 percent. 

Specialty Contractor  Margin on Self-Performed Revenue

Margin and Self Performed Revenue

 

Pre-tax income as a percentage of revenue

 

Pre Tax Income Formula

This is the ratio of earnings before income tax as percentage of total construction revenue.

The higher the percentage, the more potential return can be provided to owners or re-invested into the business. Pre-tax income as a percentage of revenue increased in all segments, with the exception of union contractors and contractors with revenue between $15 – 50 million. Union contractors face a wide spread labor shortage, and this trend may be the result of several factors, such as paying overtime to meet project deadlines or rising union labor costs.

Specialty Contractor – Pre-Tax Income as a Percentage of Revenue

Pretax Income

 

Working capital turnover

 

Working Capital Formula 

Working capital turnover indicates the amount of construction revenue generated by each dollar of working capital. The higher the ratio, the more efficient a company is in using working capital to generate revenue. However, a very high working capital turnover can indicate that a business does not have enough capital to support its revenue goals. Sureties and lending institutions often look at working capital as an important metric in their credit-granting decisions.

Working capital turnover varied throughout the specialty contractor segments. Specialty contractors self-perform substantial portions of their work and pay out labor costs weekly. Similar to pre-tax income, the working capital of larger, more established contractors, produced greater levels of revenue in 2017 than they had in 2016. Non-union companies appear to have been selective about putting their working capital to use in their projects and produced higher pre-tax income in 2017.

Specialty Contractors – Working Capital Turnover

Working Capital Turnover

 

Days in accounts receivable

 

accounts receivable Formula 

Days in accounts receivable (AR) calculates the average number of days that receivables are outstanding or how quickly a contractor converts its receivables to cash. Fewer days in accounts receivable are desirable, as this suggests a company takes less time to covert its receivables to cash.

Overall, it took specialty contractors longer to collect their receivables than other contractors in 2016. This was mainly caused by a higher volume of work in 2017 and the longer timeframe for collection. The trends indicates that collecting receivables currently requires two months from the time invoices are submitted. This stretches the cash position of specialty contractors.

Specialty Contractor – Days in AR (Excluding Retainage)

Days in AR

 

Days in accounts payable

 

accounts payable formula 

Days in accounts payable (AP) calculates the average number of days it takes a company to pay its outstanding payables to trade creditors, such as subcontractors and suppliers. More days in accounts payable suggest a company is stretching out its payments to improve cash flow. Care needs to be taken to maintain compliance with applicable prompt payment requirements and to avoid damaging relationships with subcontractors and suppliers when delaying payment.

Results varied by industry segment in their payables cycles. Larger union companies were able to improve this ratio to combat the increased aging of receivables. Non-union shops paid their payables faster in 2017 than they did in 2016, but caused strain on their cash flow. In all industry segments, specialty contractors are paying their payables faster than they are being paid by their customers, which means they may require short-term financing during the peak construction season.

Specialty Contractor – Days in AP (Excluding Retainage)

Days in AP

 

General and administrative (G and A) expense as a percentage of revenue

 

G and A Formula

G and A expense includes costs associated with the day-to-day operations of the business and often include management and office salaries, rent, utilities, and insurance costs. Since G and A costs are independent of costs associated with construction contract activity, they are viewed as fixed. From a competitive standpoint, reducing G and A expenses as a percentage of revenue can offer a company a competitive advantage over its peers. This is achieved by maintaining efficiency in G and A spending relative to a company’s revenue growth.

Certain expenditures are subject to discretion by management, including executive compensation, bonuses, benefit plan contributions, and charitable donations. In the rising construction market, an increase in certain types of G and A expenses is common because these costs are variable. They are often the distinguishing factor in G and A expense percentage differences among organizations.

Specialty Contractor – G and A Expense as a Percentage of Revenue

G and A Expense Revenue

 

Balance sheet compositions

Below is the weighted average composition of the balance sheets and income statements of all the survey participants. Contractors can use this information to assess their overall financial position and compare their results to those of their peers.

Specialty Contractor Benchmark – Asset Composition

Asset Composition

The asset composition of specialty contractors consists primarily of contract receivables, cash, and underbillings. Generally speaking, specialty contractors do not carry a significant amount of equipment and other assets compared to heavy civil engineering contractors. Specialty contractors’ financial positions significantly depend on collectability of receivables and how soon these amounts can be turned into cash. Aged receivable balances generally are discounted in bonding capacity calculations by sureties.

Also note, a company’s asset composition may be different than noted above due to its location and length of its construction season. Typically, seasonal contractors in the northern part of the United States would see a higher percentage of cash and lower percentage of receivables due to a few months with minimal billings.

Specialty Contractor Benchmark – Liability and Equity Composition

Liability and Equity 2018

Similar to asset composition, a contractor’s location and seasonality would have an effect on its liability and equity composition. Seasonal contractors typically have lower accounts payable balances, whereas contractors operating 12 months of the year may have higher amounts of payables. As specialty contractors do not require significant capital expenditures on an annual basis, the liability and equity composition above indicates that specialty contractors are managing their financial leverage in the current favorable market.

Income statement compositions

These charts show the weighted average composition of direct contract costs compared to total revenue for all contractors and specialty contractors surveyed in 2017. The comparisons vary depending on whether contractors self-perform or sub-contract most of their work. They are also affected by seasonality, location differences, and the company’s overall business strategy. Therefore, the composition for a particular contractor will depend on operating capabilities, strategies, and the nature of the projects under contract over the reporting period.

All Contractor Benchmark – Cost of Revenue Composition 2017

Cost of Revenue ALL

Specialty Contractor Benchmark – Cost of Revenue Composition 2017

Cost of Revenue

These charts show the weighted average composition of general and administrative expenses compared to total revenue for all contractors and specialty contractors surveyed in 2017. These comparisons may be different for a company depending upon a variety of factors, including its size, complexity, corporate structure, and culture. A related performance indicator is a company’s G and A expenses as a percentage of its revenues. This provides a gauge of overall overhead expenses relative to how well those costs are generating revenues. This can offer insight into a company’s cost structure compared to its peers.

All Contractor Benchmark – G and A Expense Composition 2017

GA Expense Composition

Specialty Contractor Benchmark – G and A Expense Composition 2017

GA Expense Composition SPECIALTY 

Additional key performance indicators (median)

Below are additional key performance indicators that may be helpful in assessing a company’s overall financial health and performance. 

  Year All specialty Union contractors Non-union contractors Contractors $0-15M Contractors $15-50M Contractors $50+M
Gross profit percentage 2017 21.9% 19.9% 24.3% 24.4% 18.8% 20.0%
2016 22.1% 21.6% 22.4% 24.0% 22.1% 19.8%
2015 25.1% 21.0% 29.0% 28.0% 22.6% 19.3%
General and administrative expense as a percentage of revenue 2017 14.0% 12.6% 16.8% 16.8% 11.8% 11.7%
2016 15.1% 13.8% 15.8% 16.5% 12.9% 12.4%
2015 19.1% 14.7% 23.3% 22.3% 16.2% 12.9%
Earnings before interest and taxes as a percentage of revenue 2017 5.7% 6.3% 5.5% 6.0% 5.7% 6.1%
2016 6.7% 6.4% 7.5% 7.7% 6.7% 6.7%
2015 5.8% 5.8% 6.2% 5.4% 5.8% 5.7%
Working capital as a percentage of revenue 2017 13.5% 13.2% 14.1% 17.4% 11.8% 11.7%
2016 12.8% 13.8% 11.5% 15.4% 9.6% 11.5%
2015 16.3% 18.4% 14.3% 20.1% 10.8% 13.2%
Days in cash 2017 16.1% 13.8% 18.7% 20.6% 8.1% 3.9%
2016 12.9% 12.8% 14.5% 13.5% 15.5% 7.2%
2015 27.9% 24.9% 30.8% 36.9% 20.0% 10.5%
Current ratio 2017 1.8% 1.7% 2.1% 2.1% 1.6% 1.4%
2016 1.9% 1.9% 1.7% 2.3% 1.6% 1.8%
2015 3.2% 3.6% 2.9% 4.1%

2.2%

2.0%
Debt to equity 2017 0.9% 0.9% 0.7% 0.6% 1.6% 1.7%
2016 1.0% 0.8% 1.2% 0.8% 1.4% 1.2%
2015 3.2% 0.6% 4.0% 5.4% -0.6% 2.5%
Months in backlog 2017 4.5% 5.2% 2.6% 3.1% 4.8% 5.4%
2016 3.6% 3.9% 2.7% 2.7% 4.3% 4.8%
2015 3.8% 4.4% 3.2% 4.1% 3.5% 3.2%

How we can help

CLA offers this publication as a resource for professionals in the construction industry. It is intended to assist management by providing comparable data, industry trends, and other information to help them make strong financial decisions.

A more detailed comparison of your financial results is available through the CLA Benchmark Analysis. This analysis provides a comprehensive comparison of your financial results to a defined group of similar contractors that are selected using a number of factors, including geographic operating region, company size, union or non-union labor force, public or private work focus, and many other considerations. The analysis provides for easy comparison between different sized companies and combines balance sheet and income statement analysis along with a graphical comparison of approximately 40 key performance indicators.

The information presented in a benchmark analysis has assisted many construction companies in identifying areas for improvement and highlighting aspects of their business that need further attention. A company’s decisions-makers can use the analysis on an ongoing basis for strategic planning, risk mitigation, internal budgeting, and to help define and track financial and operating goals.