It’s hard to believe that we are more than half-way through 2018. Summer projects are in full-swing and most contractors are entering the busiest time period of the year. Thanks for taking a few minutes to join us for YHB’s second quarter construction industry update.
In this edition, we’ll take a quick look at construction industry employment statistics through the first half of the year, and also review some financial accounting standard changes on the horizon.
Construction Industry Employment Statistics
We often get asked by our clients and friends of the firm to give our opinion on the economic outlook of the industry and the overall “vibe”, whether it is positive or negative, in terms of what we are seeing out in the market. A good indicator to gauge the level of optimism and get a feel for what is coming down the pipeline is to take a look at the monthly construction employment information published by the Bureau of Labor Statistics.
According to the Bureau’s June 2018 statistics, the construction industry has added roughly 282,000 jobs over the last 12 months, which represents a 4.1% increase over the prior year. Nonresidential specialty trade contractors are leading the way, accounting for just over 106,000 of the overall change.
On a monthly basis, the industry has added about 13,000 jobs, which is a slow-down from the 29,000 new jobs which were added during May. Of the jobs added in June, almost half are attributable directly to the heavy and civil engineering section, which is a positive sign, and may indicate a trickle-down effect from the anticipated increase in government infrastructure spending.
Overall, the construction industry unemployment rate in June sits at 4.7%, which is slightly above the national average of 4%.
In our opinion, most contractors appear to have adequate backlog, with the ability to be more selective on the types of projects they undertake. Optimism for the time being remains strong.
Accounting Standards Update
Accounting standard changes are the last thing any business owner, CFO, or controller want to address. Handling the day-to-day operational issues are enough to occupy all of your time as it is. Nevertheless, with bonding capacity, debt compliance, and financial performance at stake, these issues are still worth keeping top-of-mind in the near future.
The Financial Accounting Standards Board’s revenue recognition standard is set to go into effect January 1, 2019 for calendar-year non-public companies. While contractors will not see a significant change in how they recognize revenue on most contracts, there will be the need to carefully examine situations where multiple performance obligations exist or if contracts contain variable consideration provisions. For example, the construction of a single building would likely represent a single performance obligation, while the construction of a building and detached parking garage might represent two performance obligations, even if combined into a single contract. Variable consideration would consist of items such as performance bonuses, liquidated damages, or unapproved or unpriced change orders. Going forward, it will be prudent to review all contracts on the front-end where these characteristics could potentially exist.
The new lease accounting standard, while not effective until January 1, 2020 for non-public companies, has the potential to be more disruptive to the contractor’s balance sheet. In a nutshell, all leases over 12 months will require the recording of a right of use asset and lease liability on the balance sheet. This includes operating leases that would have normally escaped this treatment under the old accounting rules. Working capital and debt-to-equity ratios could be impacted significantly. It will be important to review debt covenants currently in place and proactively modify them to conform to the new accounting rules to ensure that the Organization remains in compliance.
If this sounds scary, we agree. Your team of trusted advisors at YHB is here to help guide you through these changes as they occur. Let’s be proactive and start the conversation sooner rather than later.
We hope you’ve enjoyed this edition of YHB’s construction industry quarterly update. We look forward to speaking with you soon.