No Guesses – No Surprises, Number Two
Dr Thomas C Schleifer
Last week we looked at how a construction CFO crafts a cash flow plan, project by project. A cash flow plan is also an essential part of a construction company’s mid-term (six months to a year) plan. However, to effectively plan cash flow into the future beyond the current project, proactive CFOs should always factor in the market volatility that impacts costs and revenues. It is, of course, almost impossible to predict what will that planners can use to estimate the degree to which construction markets might expand or contract influencing both revenue and costs.
Construction Industry Confidence Index
Engineering News Record conducts a Construction Industry Confidence survey that measures executive sentiment about where the construction market will be in the next three, six, twelve, and eighteen months. CFOs often use the consensus expressed in the survey to adjust their individual company business plans quarterly. The measure is based on responses by U.S. executives at leading general contractors, subcontractors, and design firms on ENR’s top lists. Sentiment is rated on a 0-100 scale. A rating above 50 shows a growing market; below 50 a shrinking market.
Construction Professional’s Consensus
Executives surveyed after the first quarter of 2022, for example, are mildly pessimistic about the economy. However, the sentiment ratings for separate business segments vary depending on how contractors view their particular segment:
- Overall Economic Confidence – down four points to a rating of 46. The index has dropped 34.3% since Q2 in 2021.
- Distribution/warehouses – Down 2 points
- Higher Education – Down 1 point
- Transportation – Up 14 points to a 70 rating.
- Hotels/hospitality – Up 13 points to 57 rating.
- Retail – Up 10 points to 42 rating (highest since Q3 of 2018).
In other words, although the overall economic outlook is questionable, some construction executives are optimistic about their business segments in the mid-term. Hands-on CFOs use these surveys to help plan the year’s cash flow projections.
Construction Financial Management Association
The CFMA also polls CFOs from general and civil contractors and subcontractors about markets and business conditions. The Confindex is based on various financial and market components, each rated on a scale of 1 to 200. A rating of 100 indicates a stable market; higher ratings indicate market growth. Let’s look at the CFOs’ recent sentiments about the future:
- Overall Rating – 116 (Indicates mild optimism about growth opportunities).
- Current Confidence – 116 (up 1) (Current conditions are stable).
- Year Ahead – 115 (down 1) (CFOs think stability will prevail for the entire year).
- Business Conditions – 131 (up 8 points) (This is an indication of how strong current demand is for construction services probably due to regional mega projects, such as Intel’s recently announced $20 billion semiconductor plant in Columbus, Ohio).
- Financial Conditions – (which measures present and future credit), down 5 points to a rating of 105. (CFOs are concerned that the Federal Reserve is going to start tightening monetary policy which in turn will make financing projects and construction loans more expensive, even as more infrastructure dollars start to hit the economy).
- Labor Shortages – 74% of respondents to CFMA’s Confindex survey are highly concerned over labor shortages. (They characterize it more as a skills shortage than a worker shortage. The fastest growing occupational category within construction is unskilled labor. Skilled worker shortages have been driven by retirements, but also by changes in immigrant worker availability. Slowing immigration and more aggressive enforcement of existing laws related to undocumented workers have drained an already shallow labor pool.)
These sentiment surveys are a statistical representation of the consensus of informed construction professionals looking at construction markets in the near future. They enable CFOs to construct an informed mid-term cash flow plan.
No guesses – No Surprises!
Find additional information on topics discussed here in the book The Secretes To Construction Business Success, published by Routledge https://bit.ly/3G9ornf.
For a deeper look into the role of CFOs, read more here: CHIEF FINANCIAL OFFICER
For a broader view into financial management, read more here: FINANCIAL MANAGEMENT
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