Doug Houser:
From Rea & Associates Studio, this is unsuitable. A management and financial services podcast for entrepreneurs, tenured business leaders, and others who are ready to look beyond the suit and tie culture for meaningful, measurable results. I'm Doug Houser, on this weekly podcast, thought leaders and business professionals break down complicated and mundane topics and give you the tips and insight you actually need to grow as a leader while helping your organization grow and thrive. If you haven't already, hit the subscribe button so you don't miss feature episodes. And if you want access to even more information, show notes, and exclusive content, visit our website at www.reacpa.com/podcast and sign up for updates. Businesses and individuals continue to be greatly affected by the lasting impact of COVID-19. But as we take a look at the industries across the board, construction may be one of the few that has had a positive outcome as a result. Today, David Catanese, Construction Surety Bond Specialist, and Jack Kehl, Surety Bond Manager are visiting us from Overmyer Hall Associates to share what they foresee for the construction industry and the impact of the current economic uncertainty.
Welcome to unsuitable, Dave and Jack.
David Catanese:
Thanks.
Jack Kehl:
Thanks for having us.
Doug:
Yeah, glad that we could put this together. Sorry, we couldn't do it in person, we will try to do that next time it's always certainly more fun that way. But unusual times obviously, that we're in so...
Jack:
Every day is an adventure now.
Doug:
We're doing our best out there, but the three of us being involved in the construction space, and serving construction clients. It's been so different in terms of what we've seen. Jack, what have you seen out there and talking with people about what's going on, what's ahead, and that type of stuff.
Jack:
You know that I have the one word, I think that sums up everything is uncertainty, and we've always operated in this space of somewhat certain results. We know, Hey, we're going to bid so many jobs and we're going to get so many jobs and we know what our margins are. We know what our costs are. And it just was a smooth-running machine until about March, April, the wheels started to come off a little. But the good news in that is the construction industry rose to the occasion. I mean, they figured it out as they always do. And tackle PPE and then remember that just the craziness about three P loans. Trying to figure that out, if they stuck with it, they've figured it out. And so that a spirit that contractors have and bring to the table has been just absolutely astounding.
Doug:
Yeah.
Jack:
It's a good thing.
Doug:
I agree with you wholeheartedly and that's always one of the things I've loved about the construction industry, even though they're their competitors and things like that. They've got to work together on jobs or whatever the case might be. So Dave, with that in mind, what have you seen in terms of activity levels and things like that as we move forward into the remainder of 2020.
David:
The year was off to an absolutely fantastic start. Getting opportunities and backlogs coming into 2020 was at maybe all-time highs that backlog actually helped a lot of contractors through then, that March to July period. Where we did see some big opportunities decrease and they're getting very competitive right now, a lot of bitters on those projects. But for the most part, contractors have really performed quite well here today and I think on the financial side, you're probably seeing a lot of that come through.
Doug:
Yeah, for sure. Now, Jack, obviously it helped that construction was deemed an essential business right out of the gate. So there wasn't the complete stoppage but that said, we've seen certainly efficiency and some timing of projects get delayed. What's the latest that you're seeing on that stuff?
Jack:
It's unfortunate. But there have been a lot of projects that have been suspended. Our projects canceled, particularly in the public sector. So if you would pull up a for example, the OFCC's website with their project listings. For the first time that I remember you'll see cancel, cancel, cancel, and some significant projects. How much of that is just preemptive and those projects will come back online quickly? This is very hard to say, OSU, some of the other universities have had to cancel or suspend work, which is sad and certainly impacts the industry. But by no means, has it been a disaster. And that's because of the momentum that Dave was talking about in the backlog. It carries us along.
Doug:
Yep.
David:
Those projects haven't gone away. There's this idea that there's a pent up demand in the marketplace that will eventually come back. Especially OCC, OSU, there are schools that need to be built. There are buildings at Ohio state that are designed and ready to go. It's just really a matter of time before budgets, I think, correct themselves and get those projects back up and running.
Doug:
I think it's a great point. And in some ways, because the acceleration coming into this was so great. We were seeing obviously a lot of inflation, folks couldn't find adequate workers and employees. It's a little bit of a chance to take a breath and work through some of that backlog. So what are some other things that you're advising folks to do at this point in time? Jack, if you take a look at it, so it's sort of a time to reset, take your breath. What are some good ideas there?
Jack:
Well kind of backtrack just to one step and if we look at work, we talked about public work there and there isn't a certainty in the public sector because of the decline in revenue. But Doug, if I'm a developer and I can get money for next to nothing right now, interest rates are so low. And I can look out into the future and say, this event is going to end and you're sitting on a lot of cash because of the success of the previous 10 years go, baby, go. And we're seeing some of that.
We're seeing some of that, not enough. I think people were always a little timid, but there are opportunities. And I think we're going to see developers take advantage of some of those opportunities and unfortunately, some of that will be in reaction to some fear by contractors and subcontractors who anticipate there will be scarcity. And so when they are a scarcity in the marketplace, what happens? Margins start to go down. We start to think in terms of volume and we bid more. And so I'm starting to see a few signs that I don't like, which are 15 bitters on a job. It's a job you're going like really? That's a marginal job, to begin with. Now you throw 15 players into the mix. The low bid is certainly not, it did not get a price.
What he just did and this is what's the critical thing to understand. What he just did was he took space for good work out of his work program. Those contractors that can figure out the equation that less work, is better than more cheap work and less risk is better than more risk.
Doug:
Absolutely.
Jack:
In that risk is almost inherent in that scarcity mentality, because what do you do? You expand the geography, you expand the scope of work. You get out of the zone that you are really, really good at and really, really comfortable. And the results are so predictable.
Doug:
Oh yeah. We've seen it.
David:
We've been around long enough, we've seen it over and over.
Jack:
I hope that we don't go there. I hope that these things pass, we flip flop very quickly and just blow right through.
Doug:
I don't think we will to me it feels so different than the 08-09 time frame where everything just sank. So rapidly, obviously driven by residential. We're certainly not seeing that this time, but you know, Dave, obviously you went through that time period too. How do you counsel somebody? Clients and that, to really stick with that core strategy as Jack said, what do you talk about?
David:
It's certainly a difficult position that some contractors found themselves in. 08-09 seem to be much slower, so there was a lot of time to react. Similar situation backlogs were still pretty good shape back then. This was just so fast and so wide-reaching that it certainly created some challenges for business owners. But there are still those foundational principles that will always advise our clients to do. And maintain a liquid cash position, monitor overhead work with your professional advisors, like you Doug, to create that cash flow forecast to, to be able to look out in the future and make those sound business decisions backed by information. So right now it really obviously PPP money has helped, but contractors should be watching their cash, watching backlog, and monitoring overhead.
Doug:
Yeah. And Jack as you mentioned as well, there's still work out there. We're seeing demand, obviously residential is still quite strong, but certain types, industrial and warehouse that, that continues to be in strong demand, certainly around central Ohio. So it's that focus on what you do and what you do well, and don't go chasing stuff. Cause when we talk about failures and risk, and you mentioned, you touched on a little bit. It's always one of those three uglies. That you see that get out of control. What have you seen in the past with that?
Jack:
It is always the same thing and it can be summarized with one-word change. It's that machine, the contractor is a machine and they build this machine and they add pieces of parts onto it over time and it gets pretty big. But then somebody decides to turn one of the knobs and maybe it's a certain type of work. So we're a concrete contractor. We're great at parking garages and foundations, we could build wastewater treatment plants. They're just a bunch of concrete. Right? And that's an extreme example, but it's on a smaller scale that will bite you pretty quick. And it's usually an erosion of margin. A lot of times it's erosion and morale of your workforce. You're sending the guy out 60 miles every day. He doesn't like working over in Dayton. He likes working in Columbus. Guess what? Somebody else will hire them to work in Columbus.
And so, it's a summation of a death by a 1000 cuts and before you know it you're bleeding pretty good. But the change in the type of work, the geography of the type of owner working for a developer is different than working for the city of Columbus. It's different than working for the federal government or the Corp of engineers. So all of those factors come into play and there's a time for all of it but a knee jerk or panic reaction is not ever going to produce a positive result.
Doug:
They don't necessarily have all those relationships built either. So I know Dave, from your perspective, you've long been an advocate. It's better when we improve the flow of information amongst ourselves, all of the third-party advisors that a client has. So how do you try to emphasize that with client relationships and all of the information flow?
David:
Maybe more so than any other industry, the Surety industry does not like surprises, whether it's because of increased costs related to COVID or just a bad job, you're selling the company to somebody else. And, here's the resulting balance sheet it's absolutely critical. And really always has been to communicate with a Surety CPA Attorney Banker. Those are all key pieces to that success puzzle. And now more than ever it's a time for business owners to really seek value in those partnerships and to help keep the boat afloat and really just to help those companies stick around so that when the really good times come back they're capable of not only surviving but thriving.
Doug:
And again, I think as you emphasized, don't hold back, be transparent. That's just the worst thing you can do.
Jack:
And Doug, you and I have have seen both modes of operating where the contractor likes to silo these resources and he talks to the banker, then he talks to the CPA and then he talks to the attorney and brings in the bond guy and the insurance guy. But the best has always been when all of us are at the table because the collective knowledge base in that room is off the chart. So if you really want to get creative thought-provoking ideas and a direction in a short period of time, bring all in. Sit them down at the table and give them free rein.
Doug:
Wholeheartedly agree. Because that way you don't lose efficiency in translation either we can all talk and better get in into what each of us needs from each other as well, improve that information flow. So you talked a little bit earlier about credit availability. I know in talking with some bankers, there's still development money out there, real estate deals can still be done. So that's why I take it more positively than the crisis 10, 12 years ago. What about surety credit right now? What do we see in terms of that? Can you guys give us some insight there?
David:
Yes. So far the surety marketplace it's tightened up some, it's just kind of depends on which surety company you're talking about. It certainly hasn't taken a total turn for the worst and it certainly isn't across the board, but there are some companies that have tightened up some of their appetites, but what for good contractors, contractors that have maintained their balance sheet that are aware of their costs have a history of success.
There's really still competitiveness going on in the surety world for that business. There's certainly isn't a pullback of capacity. There's still capacity in the marketplace. It's just maybe a little bit more cautious than it had been in the past. And one of the reasons for the cautiousness is that there are looking out into the future. Their fear is not necessarily today, but what's going to happen in the next six months, maybe 12 months when there's a continued possible, continued decline and work, or continual continuous erosion on that balance sheet.
Doug:
Jack, what about it? Can, can somebody use shirty credit right now to differentiate themselves, or is that not really the case at this point?
Jack:
Well, it depends on the context. I think we're surety credit is undervalued right now would be in the eyes of the owner-developer, right? Because an owner or developer of a project really needs to be able to anticipate what its risks are.
Doug:
Mm-hmm (affirmative)
Jack:
And we are in this period of time where uncertainty is at its zenith in my career. We don't know what six months, 18 months is going to look like. A lot of things can happen. We've got a crazy election going on. We got this crazy COVID thing going on. We've got the impact of those things. If I'm a developer, if I'm an owner, I'm bonding that project. It is the cheapest insurance on the planet for that context. And what that will do is that a weed out some of the weaker or nominal players that may be shiny on the outside, but on the inside, they're starting to rock. So absolutely a great tool for those situations.
David:
I'm thinking in that same vein Jack, that general contractor with their subcontractors is probably never as good with time to bond back those subcontractors than it is now.
Doug:
That's great. Great advice. It's certainly a time to take a step back and really revert all of those relationships that you have and evaluate how people handle the crisis. So any last sage advice? We'll start with you, Dave, as we look forward to 2021. What if you have one takeaway for folks, what would that be?
David:
It would be to maintain cash and maintain liquidity. If you're maintaining liquidity, you're getting the best interest rate with your bank. You're able to weather some of these slowdowns that we're going to have and you're also going to be able to obtain any kind of surety and capacity that you're going to need. With those three feathers in your cap, you shouldn't be able to easily make it through this uncertainty.
Doug:
Good. Jack. How about you? Any, any last thoughts.
Jack:
My simple thought is if you're a management party in a construction company, this is your opportunity to absolutely shine because strategic planning and answering that "What if?" The question in having a plan a, plan B, plan C already mapped out is absolutely going to distinguish you and create success for you and your employees moving into the future. If you don't do that, you will be surprised and it probably won't be a good surprise.
Doug:
Yes. I wholeheartedly agree with you. I'm just a huge, huge advocate for planning. And I think from both of you, that's very sage advice and let's hope we can continue to advocate for transparency in the industry and communication. And we'll all get through this together. Well, thanks for being on both of you, Dave and Jack enjoyed it. As always look forward to having you on again sometime soon.
And if you want more business tips and insight, or to hear previous episodes of unsuitable, visit our podcast page at www.reacpa.com/podcast. And while you're there, sign up for exclusive content and show notes. Thanks for listening to this week show, be sure to subscribe to unsuitable on Apple podcasts, Google podcasts, or wherever you're listening to us right now, including YouTube. I'm Doug Houser, join us next week for another unsuitable interview from an industry professional.
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