2022 CFMA Annual Conference Recap: What We Learned

For the first time in two years, the Construction Financial Management Association (CFMA) Annual Conference and Exhibition was held in person. Taking place last month in Atlanta, GA, the theme was appropriately titled, Coming Together. The event provided a fantastic opportunity to once again network with construction financial professionals all across the United States and discuss current developments and best practices to take home in the new environment that the industry is facing.

Topics that were addressed throughout the conference focused on current economic developments and inflation, remote work, and potential implications of impending regulatory changes including infrastructure developments and possible tax law changes related to the Build Back Better Act. Below are a few key takeaways that we believe are most relevant to our clients in the construction industry.

Managing Cash Flow

This session focused on best practices for determining a cash flow issue, and how to improve overall cash flow in your business.

Key takeaways:

• Project managers are crucial to the cash flow cycle. They need to have financial acumen to understand cash flow and how it affects their projects. They should take responsibility for collections, understanding that cash flow cannot solely be the responsibility of the accounting team.
• Make sure your company is using a Schedule of Values and completing it as thoroughly as possible including breaking out materials separately.
• Implement a minimum acceptable billing amount (i.e., Earned Revenue plus 20% of costs to date).
• Try to load as much as possible in the final scheduled progress billing. Leave the actual final billing as small as possible as that can be a difficult billing to collect upon.
• Implementation of an exit strategy is key once a job is nearly 80% complete. Inefficiency closing out jobs often leads to profit fade late in the project.

Subcontractor Prequalification

This session focused on steps to implement a subcontractor prequalification process as a general contractor, types of information requested, and best practices. These practices can be useful to a subcontractor as well.

Key takeaways:

• Build a database of dependable trade partners. This exercise is also seen as a good business practice to owners and sureties.
• Establish a maximum contract amount you are comfortable entering into with a subcontractor. This could be calculated as a percentage of total revenue, a working capital multiple, equity multiple, or some other metric calculated by the company. Make this maximum amount available to bidding/preconstruction teams so they know before they solicit bids.
• Try to update information collected on a partner at least annually to ensure that prequalification is still accurate and valid.

Tax Update

This session included a panel discussion that focused on developments in state and local tax, transactions and tax policy, and a follow-up session largely focused on potential changes related to the potential Build Back Better legislation.

Key takeaways:

• There has been an uptick in states performing unclaimed property audits, some going back as far as 10 years.
• In the M&A market, many transactions currently are being done by strategic third-party buyers or private equity groups. This generally results in the maximum value going to sellers but could have perceived downsides to the current owner including requiring rollover equity (where the owner is required to remain involved in the business for a period of time).
• For the Build Back Better Act to have any chance of becoming a law, it will need to pass Congress this year, most likely by the end of September due to the Congressional schedule. The speaker of this session estimated a 30% chance of it passing at all.
• There is a significant focus on cryptocurrency from the IRS and an expectation of increased scrutiny and audit activity in the upcoming years.
• There were reminders of expiring tax provisions from the Tax Cuts and Jobs Act of 2017 including a step-down in 100% bonus depreciation over the next few years (80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026).
• Remember to review your estate plan, as the lifetime exemption for gifting will revert in 2026 to approximately $6 million per person. The current 2022 exemption is approximately $12 million per person.
• File electronically with the IRS whenever possible given the agency’s current backlog of unprocessed paper tax returns. Dissatisfaction with the IRS related to untimely response was mentioned by many CPAs. The IRS budget for 2022 did receive a 6% increase in funding that mostly will be used to improve taxpayer service.
• Regularly review your tax planning strategies with your tax advisor. There are many different tax accounting methods available to contractors, many of which are dependent on the nature of the underlying contract. Over time as the type of work and structure of your contracts change, revisiting your tax accounting methods can be a great strategy on saving tax dollars.

Economic Update

This engaging presentation was led by a crowd favorite in the industry, Dr. Anirban Basu, and focused on the current economic disruptions all businesses are facing: inflation, supply chain issues, and a potential recession.

Key takeaways:

• Inflation is currently 8.3% based on the last 12 months (as of April 2022). Inflation should continue throughout 2022, and Dr. Basu predicted a recession will occur in 2023.
• There are 11.5 million job openings as of March 2022. From 2015 to March 2020 (pre-pandemic), this number hovered between five and seven million.
• The area of greatest concern from the most recent CFMA CONFINDEX (Confidence Index) Survey in Q1 2022 is skill shortages with 74% of respondents noting a concern in this area.

Accuracy and Transparency of WIP Schedules

This session focused on ways for construction financial managers (CFMs) to understand the factors that contribute to having an accurate WIP schedule and the ability to identify red flag jobs early on.

Key takeaways:

• CFMs should foster a culture of sharing, not hiding. If project managers become afraid, they are more likely to bury things that later rise to the surface causing issues that could have been corrected earlier in the job.
• Project managers should have accurate and up-to-date visibility of the profitability and cash flow of their jobs. Additionally, production dashboards give project managers an easy reference to show cost codes that are ahead or behind as well as labor usages versus budget.
• Having a process in place to track change orders can be crucial in identifying troubled projects. One general guideline is that if more than 5% of the contract revenue is contained in unapproved change orders, then executive action must occur.
• Implementation of a monthly project review process helps keep the line of communication open between the project team and the CFM. Having a standardized listing of topics to be covered in each meeting can help avoid missing a discussion of a crucial piece of the project. Such items for discussion should include:
  • Preconstruction planning
  • Labor productivity
  • Project management module (change orders, RFIs, submittals, etc.)
  • Job status report (financial, cash position, metrics, remaining costs, etc.)

Other Key Takeaways for Contractors

• Environmental, Social, and Governance (ESG) is an up-and-coming topic that all contractors should learn about. Expect to see owners, general contractors, and other parties ask about ESG activities your company practices. You may already be doing many of these activities, and awareness is the first step in communicating how your company is helping.
• Construction finance professionals should work with their IT teams to make sure a thorough cybersecurity response plan is in place at your company. Items to consider include patching, anti-virus protection, passwords and encryption, data backup, vendor risk, and cyber insurance.

Overall, the conference provided a much-needed forum to bring construction professionals together after a two-year hiatus. For more information on any of the above topics and takeaways or if you have questions about another area of your business, please contact a member of KSM’s Construction Services Group or complete this form.