Letter to the construction industry: 8 observations on change, and a parting reflection

Jack Callahan, recently retired CohnReznick Construction leader, discusses the changes he’s observed over his 40-plus years in the industry.

    two construction workers standing and discussing accounting
    Excerpted from an article that will appear in the February edition of Utility & Transportation Contractor

    What makes the construction industry so special is its sense of lineage. Its foundation in “building” both literally and figuratively. Building structures. Building relationships. Building a future for families and for communities. From a business perspective, my construction lineage began 44 years ago at Price Waterhouse. It was 1984 when I joined Tony Pascale in his startup consulting firm managing surety claims administration. Along with Michael Lipari, Amy Benbrook, and Tony Pascale, we built up a boutique construction accounting firm that, in 2005, we combined practices with CohnReznick. I retired on Jan. 31, but am leaving you all in good hands with Mike and Amy and their teams, who will provide continuity with our clients, and Scott Damiecki, who will be the new national construction lead at CohnReznick. 

    Firsthand observations based on 40+ years in the industry

    The construction industry has gone through a tremendous amount of maturation and change in the years that I have been involved. Below are some of my observations. 

    1. Government funding has increased, and we continue to see volatile peaks and valleys on the stream of work. I like to say we have seen a “politicalization” of construction. We have long seen the movement of work around the state based on political results, but we now have the federal government becoming the funding source for a large number of projects that, historically, would not have been thought of as government contracts. While this federal funding looks like it will bring a great deal of additional work, it has been slow rolling out. This federal work will also come with a great deal of contract compliance challenges that must be understood and monitored. 
    2. Shifts in labor force age demographics. The statistics on the percentage of union workforce that will reach retirement age in the next seven years is staggering. I saw a recent report that 41% of today’s construction workforce will reach retirement age by 2031. Furthermore, the new, young talent has been difficult to attract and retain. Many of our clients’ labor force is made up of workers marking 20 to 40 years of service. Current trends don’t indicate that will be the case with the new workforce. Contractors must exercise best efforts to be viewed as an employer of choice, and they must also be viewed by subcontractors as a prime contractor of choice.
    3. Technology has and will continue to have a material impact. Much of the technology advances have been positive. However, they come with new challenges, such as cybersecurity. It’s important to note that certain federal contracts will have cybersecurity requirements built in. Technology also presents the need to upskill the current hard-hat-wearing construction workforce. Working with our hands is going to look a lot different in the years to come.
    4. Supply chain will be more critical than ever. Buy America/Buy American Act provisions combined with increased volume of work has put tremendous challenges on the supply chain. Pricing volatility and availability of material can really have a negative impact on a contract. Now may not be the time to always search for the lowest price. Find a fair price supplier, pay them on time, and develop a relationship of trust. It will pay more dividends than a lower price over time.
    5. Banking and financing for the construction industry has long been a volatile topic. Banks and financing institutions go through cycles, and it seems every so often construction becomes a blacklined industry group. We have established ourselves with the banking community as a firm that is consistent and reliable. As such, we have strong connections to those banks and, more importantly, those bankers who understand construction. The last few years saw low interest rates and easier credit availability. I hope you took advantage and are aligned with a solid bank in what clearly is now an uncertain banking market.
    6. Surety and insurance continue to be a lifeline for most contractors. Most of the public work projects require surety bonds, and the cost of insurance is a significantly higher percentage of costs than they were in the past. As with banking, you need a solid relationship and an environment of trust with your bonding and insurance agents and companies. That trust is a two-way street. Be honest and forthright, commit to getting your financial statements out on time. If you have a challenging job or need to take distributions, make sure everyone is aware before they see it in the financials. Dealing with your surety is one instance where it is much better to ask for permission than beg for forgiveness. 
    7. Legal representation is more critical than ever for the contractor. Contract terms and subcontract agreements are increasingly complex. Compliance provisions expand all the time, and as cost of money and uncertain real estate market challenges persist, we will see more claims and thus more litigation. Your attorney must be someone who will provide guidance and direction up front and then be a pit bull when the going gets tough. They also need to have not only the expertise but the support resources to stay on top of all the required notice provisions and compliance challenges. 
    8. The need for a construction specialist to provide your financial, assurance, and tax needs has never been more critical. Your accountant has to be on top of the accounting and tax standards but also keenly aware of the impact on the users of your financial statements, the surety, bank public agencies, and others. The last few years on the assurance side, we faced the impact of both lease accounting and revenue recognition. We at CohnReznick went to great lengths to educate not only our clients but also the banks and bonding companies. Through that preparation and education, we had no surprises when those changes were implemented. The Paycheck Protection Program loans and Employee Retention Credits also brought, and continue to evidence, great uncertainty. Through our efforts to educate our clients, we were able to provide timely guidance to help ensure they were able to secure funding that they were appropriately entitled to. Remember that both of those plans have long audit timelines, and in this year of an election we will hear more about actual and purported fraud with these programs. 

    A final word

    I often say that the success of a contractor depends on their family – brothers, sisters, wives, husbands, and children – all pulling together to support the family business, each in their own unique way. It is equally as critical that contractors surround themselves with a core team of trusted advisors that know and are committed to their specific business and the industry. In my opinion that team needs to include the accountant along with attorney, banker, insurance, and bond agent all willing to work collectively to bring their unique perspectives and insights into the short- and long-term decisions that continually face the contractor. You don’t need a group that will endorse all ideas and initiatives unchallenged. You need a group that can pick apart ideas, bring you their concerns and opportunities through their own lens, have open debate, then all get behind the collective decision ownership has made. You need a family – both genetic and chosen. I thank you all for being a part of my chosen family. 

    It has been a great run for me. I have enjoyed the people in this industry, and it has kept me involved and active. Through all your efforts, as an accountant, I can say I built the infrastructure of New Jersey. 

    I heard a great quote I want to leave you with:

    “Often when you think you are at the end of something, you’re at the beginning of something else.” – Fred Rogers

    With retirement and the transition of appointing new leaders, it is vital we remember to embrace the movement of life and always look toward the opportunities that lie ahead. 

    All the best,

    Jack Callahan

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