Thursday, March 26, 2020

April 2020 - Volume 8 Issue 1


COVID-19: Managing Challenges and Mitigating Risk

Managing risk in construction means managing the three Ms (Manpower, Money, and Material). The current socio-economic situation begs for even tighter management of the 3Ms. The highly fluid and continuously changing conditions due to the COVID-19 have increased the uncertainties of managing projects and companies. As the COVID-19 disease is advancing and spreading across the U.S. at an ever-increasing rate, state-wide lockdowns and quarantines are likely to intensify. Various industries and nearly all aspects of the supply chain will continue to be severely impacted, including the construction industry and its contractors.

 Contractors face challenges on a daily basis and are used to managing unscheduled interruptions on the construction site. MCA’s data and more than 25 years of working experience with contractors across the U.S. indicate that interruptions and delays due to absenteeism, weather, or trade interference are common on today’s job sites. However, the challenges contractors will be facing due to this pandemic are multi-faceted and likely larger in scope. Contractors need to plan and prepare for the following challenges and risks the coronavirus will pose on their businesses from shut down, through revival, and all the way to final recovery:

Supply Shortage and Material Delays:
Interruptions and shutdown of national and international manufacturing facilities around the globe will cause sourcing issues and extended delays in product and material fulfillment due to supply shortage and logistics breakdowns.
Intensified Labor Shortage and Limitation to Perform Work:
Contractors will have to consider employees’ health, which might require difficult decisions regarding revenue or performance. The growing fear, number of infections and quarantines will leave employees unable to work, intensify the labor shortage issues for contractors, and ultimately slow down current projects. The expansion of precautionary measures taken by local agencies may even force contractors to shut down construction sites and entire businesses, effectively prohibiting contractors to perform work.
Project Delays, Delayed Payments, and Financial Risks:
Getting paid in the construction business is already a struggle, even without this current situation. As a result, as every party involved is going through this major disruptive event, payments will be delayed as far as possible, and delays will be passed down to the bottom of the chain of payments, where contractors will be squeezed the hardest, facing major cash and liquidity risk.
Legal Concerns and Disputes:
Both contractors and owners will be reviewing contracts to see what contractual rights and duties exist in light of the conditions caused by the virus' spread. While the coronavirus epidemic was unforeseeable, contractors may still be contractually responsible for delays or cost overruns on current projects.
Economic and Market Challenges:
Despite advantageous financing conditions, there is an increasing risk of higher construction prices, as financing opportunities may dry up, and project owners postpone or cancel projects. The current situation has certainly accelerated the expectations of an economic slowdown, and a serious downturn is more than ever a real threat for contractors. Most contractors might not see the immediate impact of an economic recession. Current backlog, especially in non-residential construction, will help them to bridge about 1 to 1.5 years before experiencing economic difficulties.

Contractors can expect significant project delays, schedule compressions, labor and material shortage, price fluctuations, as well as order and supply chain issues that will ultimately lead to higher project cost and lower profit margins. In a thin margin business like the construction industry, any kind of payment delays and project budget overruns can decide about staying in business and closing up shop. Contractors are urged to take action now and to begin planning and preparing for the challenges and risks in the aftermath of this epidemic. Contractors should evaluate their entire supply chain, identify its strengths as well as weaknesses, and look for alternative supply sources. Furthermore, should review their contractual rights and duties to protect themselves from the increased costs and supply chain delays and interruptions that are threatening the construction industry.

We are about you®, and we care about your business. MCA, Inc. offers a variety of online classes and webinars targeted to support you to mitigate the impact of the COVID-19 pandemic on your business. We will discuss and brainstorm what you should focus on, what you should look for, and which actions you should take now as a business to successfully make it through this tough time. We will prepare you for the entire journey from shut down, through revival, and all the way to final recovery. 

 Visit www.mca-soft.com to learn more about the online classes and webinars to mitigate the impact of COVID-19 on your business.


Effective Labor Management and Profitability with JPAC®

If you ask most project managers how to maximize profits on a construction project, you might receive answers such as reducing overhead or leveraging vendor relationships to drive material costs down, etc.  They aren’t wrong, but why not start with the biggest cost driver: labor cost.  Smart contractors realize this and have started to shift their focus toward effectively managing their skilled labor.  This realization is important not only because of the labor shortage in the construction industry, but because labor still represents the single largest source of profit wasted on a construction site, and therefore represents the quickest source for improvement!
Figure 1: Correlation between Job Profitability and Change 
The fact is that the labor shortage, coupled with increasing competition and other driving factors has driven the need for contractors to not only pay close attention to labor productivity, they also have to manage how efficiently their labor is used as well.   Contractors simply can’t afford to have their highest skilled labor moving material, searching for tools or cleaning up job sites. The most important aspect of the project manager’s responsibility is to manage the job’s labor cost and to provide the right labor force mix for the job to allow for the most efficient labor utilization. In order to stay competitive, contractors must actively manage the overall composite rate and develop a deeper understanding of the effects of prefabrication and the use of lower-skilled labor for unskilled tasks such as material handling and other non-productive tasks.

A recent analysis conducted for a large size electrical contractor highlights the importance and immediate positive financial impact of managing a job’s composite rate on a project’s profitability. An analysis of 53 projects between 2017 and 2019 (see Figure 1) illustrates that reductions in the crew composite rates (relative to the estimated labor rate) immediately translate into higher project profitability. On the other hand, jobs that end up with higher than estimated composite rates are more likely to experience significant losses for the business. The data analysis suggests that, on average, for every $1 a company is able to save on its crew composite rate for a job, it can realize up to 1 percentage point increase in the project’s profit margin. The results demonstrate the large financial impact that effective labor cost management and management of skilled labor can have for contractors on maximizing profits on their construction projects and to mitigate restrictions imposed by the ongoing labor shortage! 


Recuperating Retainage using JPAC® Percent Complete

“Time is Money” and managing cash flow is a well-known struggle for all contractors. It is common in the industry for retainage to not be released on time or, in some cases, not released at all. Subcontractors are particularly prone to significant cash flow challenges and financial pressure because of their adverse position along the chain of payment, which in extreme cases can cause subcontractors to fall significantly behind on their debts. As a subcontractor, you should be thinking about how to have as little cash as possible tied up on a job for as short as possible. 
Figure 2: Retainage Law for Public Projects
(Data as of November 2019) (Click to enlarge)
Federal and state governments started passing laws regulating the maximum percentage of retainage allowed as well as the types of contractual provisions that subcontractors and general contractors can agree to. While most states limit the retainage percentage allowed on public projects to 5% or 10% (see Figure 2), retainage on private construction projects is widely unregulated across the U.S. (see Figure 3). As private projects represent more than 75% of the total annual value of construction put in place in the U.S. (U.S. Census Bureau), it is of utmost importance to pay close attention to the negotiated contractual requirements and rules.

Figure 3: Retainage Law for Private Projects
(Data as of November 2019) (Click to enlarge)
Retainage is typically released upon substantial completion of the work. However, some states like Alabama, Arizona or Georgia, for example, put rules in place that prevent GCs from withholding any additional retainage from future payments after the work is 50% complete. This is why using a proper percent-complete method of job tracking is so vitally important. The earlier you can prove that you are 50% complete on the project, the quicker you can stop having retainage withheld on your project. JPAC® is specifically designed to help you accurately document percent complete through immediate field-based feedback on the actual effort and work performed on the construction site. With the use of JPAC®, you will be able to prove the completion of your project’s percent faster, and start billing for your retainage earlier, thus, reducing the risk exposure of your cash flows and financial pressure for your business.
Visit www.wemsoftware.com to learn more about JPAC® and our services.


Using Labor Codes to Manage Work and Profitability

Figure 4: Industry Common Labor Codes
The terms ‘cost code’ and ‘labor code’ are used interchangeably, and both methods of grouping individual costs based on their nature, function or type of work.

In most accounting software, cost codes define types of costs, such as material, labor, subcontractor, or equipment. In construction, cost codes are broken down into further detail by creating, for example, individual labor codes for the overall labor cost code. An electrical contractor may use labor code “100” to assign and track any time spent and work done related to fixtures on a job. MCA’s research shows that there are between 7 and 15 common labor codes. Figure 4 depicts the frequently used labor codes in the electrical construction industry.
Figure 5: Reasons for using Labor Codes

Contractors use cost codes and labor codes for a number of reasons. A survey conducted by MCA (see Figure 5), asking where company labor codes originated, why they are used, and who in the company uses them revealed that the top reason for labor codes is to “Track hours spent”, followed by “Seeing if the estimate was accurate”, and to “See how much costs go to different tasks”. For more MCA research, click here. 

What many contractors don’t know, however, is that labor codes can be used not only to monitor hours after the fact but to get a real-time view of labor code performance throughout the job, so project managers and business owners can predict profitability more accurately.  JPAC® is the only software that follows the industry standard, ASTM E2691, and can monitor labor codes’ productivity and completion status. Project Managers using JPAC® are able to closely monitor critical individual labor codes and pinpoint issues faster on the job. The traditional method of percent complete relies on cost-to-cost or units of work performed, which might not provide an accurate picture of the progress towards the contract completion. For example, a project manager who sees in the accounting system that 15% of the budgeted hours have been spent, might assume that the project is 15% complete, and therefore bill for 15% of the contract volume, on a cost-to-cost basis. Proper use of JPAC® might uncover instead that the project is actually 30% complete, and the PM should have billed for 30% of the project revenue. Simple math tells us which method would leave us in a more advantageous position!

 If you are interested in more information on JPAC®, click here.


Research Corner

New Research Projects

This past January, MCA had the honor to present two winning research proposals at the ELECTRI International Council Meeting. The research topics funded were:
  1. “Industrialization of Construction: Signal or Noise? Threat or Promise?” (Dr. Heather Moore)
  2. “Estimating with and Pricing of Prefabrication for Electrical Contractors” (Dr. Meik Daneshgari)
To get some impression about the session at the ELECTRI Council Meeting, and to see some of our members in action, please click here for a short recap video. 
  
The winning projects are just the next steps in shaping the industry through and towards the Industrialization of Construction®. In previous years, MCA has published four books for ELECTRI International on the following topics:
For more information on MCA’s research, click here. 
If you are interested in our most recent as well as past publications, please click here. 
Visit also ELECTRI International for additional industry-related research.

U.S. Market Development and Market Studies

The recent update of the U.S. Census Bureau on the U.S. construction market data indicates that the construction market has likely reached its peak. In 2019, the U.S. construction market experienced its first drop after a 9 year-long streak of impressive growth and recovery, surpassing pre-crisis market levels in 2007 and 2008. The value of total construction put in place (CPIP) in 2019 amounted to $1.306 trillion, and 0.1% below the amount spent in construction in 2018. 

The recent slow-down in the construction market is the result of two opposing trends in private and public construction. Lower spending in private residential construction (-4.7%, $514.3 billion) and stagnation of nonresidential private CPIP at $460.5 billion led to a decline in overall private CPIP in 2019.

Figure 6: U.S. Electrical Market Size
In addition to the impacts of the COVID-19 pandemic and the increasing risk of an economic recession, contractors will keep facing the challenges of an ongoing labor shortage, increasing pressure on cost and profitability, and trends toward fixed-bid projects. In 2020, the construction industry will have to focus on mitigating these challenges through improved operations and to identify the individual advantages within specific markets. Identifying and understanding your competitive advantages and disadvantages requires a profound knowledge of the characteristics of your local market. 

MCA has conducted hundreds of unique market studies for Chapters and IBEW locals of different trades over the past 15 years. Most recently, MCA has analyzed local markets for:
  • Electrical Contractors’ Association of City of Chicago (ECA Chicago)
  • Northern New Jersey Chapter NECA
  • Northern California Chapter NECA
  • Western Pennsylvania Chapter NECA


Spring Symposium 2020

Agile Construction® - A Path to Industrialization
A Symposium on Applied Project Management Concepts
May 15th, 2020, Omaha, NE

Mark your calendars! MCA will be in Omaha, Nebraska, May 15th, 2020 for our second part of the Project Management Symposium series as our industry continues its journey toward industrialization. The most competitive companies will be those applying Agile Construction® that support Project Managers through the project life cycle. The upcoming Symposium will offer a live Prefabrication tour. The topics for this session on data-based project planning will focus on:
  • How to set up your jobs for success through successful planning
  • Project planning, including identifying segmented work packages
  • Project Work Breakdown Structure
  • Financial planning and layout for your jobs including cash flow projections
  • Project scheduling, time and resources
  • Project integrated safety plan
  • Increasing profits

 To register for MCA's Spring Symposium, please click here.

 Looking forward:
  • 2020 Fall Symposium “Procurement and Logistics Management” (October 2020)

 Customers On The Move
MCA and Customer involvement. What are they up to, goals and celebrations...Read more, here

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