Monday, March 17, 2008

The Evolving World of Construction Accounting:John Corcoran, CICPAC Executive Director, shares his views with Foundation Software's CEO, Fred Ode

At the December, 2007 AICPA Conference in Las Vegas, Nevada, Fred Ode sat down with John Corcoran, CPA for some personal observations on the construction industry, past, present and future. Their talk lends some insight into how construction accounting CPAs and technology vendors can better serve the needs of contractors who face uncertain economic and market conditions.

Spotlight on The Authors:

John Corcoran: With more than 40 years of experience in both public and private practice, John Corcoran is a nationally-recognized consultant within the construction industry. As Executive Director of CICPAC (the Construction Industry CPA/Consultants Association) since 1994, he has helped to promote and advance this specialized area of accounting. CICPAC is a nationwide network of CPA firms specifically selected for their experience in and commitment to serving the construction industry.

John began his career as a public accountant after graduating from Loyola University with a Bachelor’s Degree in Business Administration and a major in accounting. In 1984, he was appointed CFO for a Phoenix-based contracting company, and he has been devoted to the construction industry ever since. A member of CFMA, he has also served on the steering committee for AICPA and the AGC/CFMA annual conference. Currently, he is involved with AGC, ABC and NASBP and is on the Advisory Board for Construction Accounting & Taxation.

Fred Ode: As the founder of Foundation Software Inc. in 1985, Fred Ode has spent 23 years developing job cost accounting systems for construction. He has managed the growth and development of the company and was integral in the design of the Foundation’s flagship product: FOUNDATION for Windows, which is today used by more than 2000 labor and equipment-intensive contractors throughout the U.S.

Fred graduated Cum Laude from Ohio University with a Bachelor's of Science Degree in Business Administration and minors in both Economics and Mathematics. Having developed college-level construction management curriculum, Fred serves on the CEM Advisory Board for Ohio University and has been a guest lecturer at both Ohio University and The University of North Florida. His association memberships include the Associated Builders and Contractors (ABC) and Construction Financial Management Association (CFMA) where he served on the National Strategic Planning Committee, and the Northeast Ohio Committee Chair for Chapter Development. In addition, Fred is a frequent speaker at industry tradeshows, association conferences and seminars.

FRED: We've both been in the construction industry for well over 20 years. From a historical perspective, how has the industry changed, in your experience?

I think the biggest change from when I started on industry side in 1984 to today is technology. Quite honestly, the reason I was hired for my CFO job in Phoenix was that they had a controller who had been there forever, since probably 1947. Every entry was in a hand-posted ledger, in the same handwriting. It scared the owner of company, and through a CPA firm that he had engaged in, I was brought in to bring them up to speed with technology. I was very proud of myself. I selected a couple of IBM XTs, the hardware of the time, and I found a software program, But I had no idea how to run it.

FRED: What software package was it?

Control Data, CDCI, out of Atlanta, Georgia. I told the young lady who demonstrated it that I would buy the package if she would come to work for me as the assistant controller. At first she said no, but about a week later she called to say she would come to work for me. So I bought the software, and she ran it.

FRED: I remember that system. Do you think that was a critical move to get her to come work for you?

Back then it was very critical. We had nobody in the company who had any idea how to automate the company, and I had no technical background. We couldn’t go out and find someone to run on day-to-day basis. It turned out to be a very successful conversion. After two months, we gave up the hand posts. It was actually a very simple system; the only thing automated was payroll, job costing and general ledger. At the same time we had a wholly-owned subsidiary and we decided to install them on the same product. This may sound unbelievable, but I hired the second girl that did the demo. She became the controller of the subsidiary. So I had the two people who came from the software company working for me.

FRED: What's interesting is, back then, people who had working knowledge of computers or software were very rare. Which made them so valuable.

Yes, it was a big step for this company. Now, the biggest change I'm seeing in the industry is caused by government regulations, whether its FASB or IRS. It's making it more and more difficult for contractors to comply with different rules and regulations that are coming out. And of course, the other major thing right now is the shortage of help. Labor, not only in the construction industry but also at the CPA firms. It's very difficult to find good people.

Another big change in the industry is the amount of women that work in construction now. Years ago, when I started, you would never find a female estimator or a female project manager or a female electrician. But they are out there now. CFOs were male dominant and now most of them are female. I am a member of CFMA, and our chapter in Arizona most of our officers, who are CFOs and controllers in the industry, have been women.

FRED: And that's a good thing, correct?

I think it's good; it's brought diversity to the workplace. It's given women an opportunity especially in construction industry and in accounting profession to be on equal level with men as far as salary goes.

FRED: In Dunn & Bradstreet, the list of U.S. contractors is somewhere around one million. In your opinion, what distinguishes the companies that are going to be successful and survive from those that probably won't be around in a few years?

I think a major factor is succession planning. To plan for the future. The construction industry is a very parochial business. Generally they are closely held and family owned. In fact, they put their family name on the door. They lean toward their children to succeed them. And you have to make sure that you have capable children to carry forward the business. Otherwise, you need to make the decision to hire outside the family.

Fred: You seem to be implying that most contractors have a certain level of success. And the major problems that you see when companies fail start with the 2nd generation or when original founders leave.

Well, we'll leave out turns in economy, or the firms that are undercapitalized.

FRED: Yes, but the best companies can get through the downturns. I know what you are saying. It takes leadership. But what distinguishes those companies that can survive the downturn and show a little bit of profit from those where downturn will kill them?

I think it has to do with corporate culture. Successful companies have a history of success. They know how to be successful and have put away something for the proverbial rainy day. And they have established credit lines with banks and surety companies, which allows them to survive in down times.

FRED: Whether you want to look at it as consistently showing more profit than other companies, or doing better in downturns in economy, they are able to adapt. Successful contractors can shift gears if something changes.

Yes, they are innovative. And they accept change. I would bet that there are still companies out there that are doing their estimating and their bids on paper. They are not even using Excel, which is little better because you don’t have to use calculator. Unfortunately, if you read the CFMA technology survey, the most popular estimating software is Excel.

FRED: Yes, we run across many people who want to know if our product will interface with Excel. And of course, we say, " Yes, Excel interfaces with us and we interface with Excel." But you mentioned two words that I would like to discuss further. One was change and the other was innovation. Can you elaborate?

Sure. Profitable contractors, by and large, are not afraid of technology. And they understand that technology can enhance their operation. Whether it be from estimating or job cost to equipment out in the field. The use of PDAs now by superintendents and project managers, the ability to have a camera built in to PDA to take picture of something that goes on at a job site. Documentation and the web so you don't miss change orders. Preparing yourself for litigation even though it may never come by documenting everything. The smart companies, the ones that will survive, are using the technologies and innovation at all levels of their business.

FRED: I don't think anyone can argue with that concept. Now let's say we are talking about that contractor doing his bids on paper. How does that contractor begin the process? How do they go about it? That seems to be the biggest challenge.

Initially, I think they rely on their outside consultants. It's probably their CPA who will first point out their deficiencies -- especially as it relates to what they are using for general ledger and job costing -- and help them find a better and more efficient way to do it.

FRED: Okay, that's the technology advice coming from the CPA. But there is document management, transmittals, submittals, document imaging, and so on.

I think the CPA gets involved in all that to some extent, but an awful lot of that comes from the IT consultants and others that are out there. That's sales. It's being at exhibits like this where contractor walks through and sees the document imaging, construction payment management programs. They see the software. And they question how new technology might work for them. The good stay the best in their industry by going and getting continuing education.

FRED: Here's a question from the contractor’s perspective: How do you know you’re going to get a good CPA for your company?

The first thing you want to do is make sure your CPA or consultant understand the industry, is active in the industry and has multiple clients within the industry. I think you want to make sure that the CPA and any consultant is active in various trade associations, such as CFMA, AGC, ABC, or CICPAC… I am biased there. Most contractors want to have the best of everything. They want to have the best car, the best tractor, the best home. Why shouldn't they have the best CPA or consultant?

FRED: What percent of contractors have the foresight to hire a construction-strong consultant?

I can't give you any real numbers, Fred. But I think it's becoming more prevalent. I think a lot of it is dictated by the growth of the companies. As they grow, they have bonding requirements, they have credit requirements, so at some point it becomes clear that the contractor needs to upgrade particular systems, whether it be estimating, or accounting. Surety firms, especially, like to see financial statements in a certain form; the contractor must follow regulations. And if the Surety firm gets one form that's a little bit fuzzy, they are not going to have good comfortable feeling and it's going to be difficult to get bonding through.

FRED: Many construction owners jump off their backhoe, start their company and don't realize they even have a business. Do you think contractors reach a certain size and suddenly they must change?

I think the real awakening comes when things get a little tight and all of the sudden they don't have that next job. And the cash flow that was there, maybe job A is being fed by job B and Job C is feeding Job B and all of the sudden there is no job D and they come to this awakening: "Woops, we are running out of cash flow." I think that’s when they start looking to outside consultants. They may go to their banker first; they might not even be big enough to go to sureties.

FRED: This one author who wrote a series of business books says, basically, it's a crisis that forces your hand. It either makes you or breaks you.

You asked me earlier what I would do in perfect world. I would make sure that I had the best project managers, the best estimators that I could get. I would also have the best consultants, whether it be the CPA, the lawyer, the IT person. I would have a well-recognized software to run on my programs and hire good quality people and pay them more than the next guy's paying them so I can keep those people.

FRED: I like to say: people first, technology and processes second.


FRED: What would you say was a turning point in your career?

The company that I was working with in Arizona said I was spending too much time with CFMA activities. I was a national officer then. Basically, I chose to find another job in the industry where I could continue my CFMA activities. The association was very important to me and I thought it was very short-cited on part of the company. As it turned out, the Arizona market was down at that time; this was during the savings and loan scandal. It took me a good four or five months to find employment and it was out of state. I had to relocated and commute to California, leaving my family in Arizona.

FRED: And why did you see this as an important thing to do?

Well, my involvement in CFMA was very important to me, and my career path. If I was going to be able to advance in the construction industry, an industry that I actually fell in love with, I felt it was important to me to continue on that career path. CFMA would have played a very big role in it. If I hadn’t been able to be active, I don’t think I ever would have achieved what I have today.

FRED: That says a lot about your character. The way I look at this, you made a sacrifice. You took a short term career risk for a long-term benefit.

You said it better than I could.

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