Construction companies love their accountants — and well they should, given the help they need on a range of compliance issues. Kit Dickinson of ADP shares the latest issues in the construction industry, and what they need from their CPAs.
Transcription:
Dan Hood (00:03):
Welcome to OnAir with Accounting Today, I'm editor-in-chief Dan Hood. Construction is a key client industry for accountants. Something like two thirds of the Top 100 firms regularly report that it's an area of growth, and they did so in 2022, but it's also an area where a lot is happening. A lot is changing and going on here to talk about what's going on in construction and why construction companies love their accountants. And what those accountants should maybe be doing for them is Kit Dickinson. He's industry executive at payroll and HR services provider ADP. Kit, hanks for joining us.
Kit Dickinson (00:29):
Thank you for having me.
Dan Hood (00:31):
I want to jump in. One of the reasons we're talking about this is because ADP recently put out a report on what's going on in construction and sort of like I said, things that are changing, the things that are new developments, new trends. What are some of the big challenges you see companies in the construction industry facing?
Kit Dickinson (00:46):
Yeah, that's a great question. A lot of the organizations that I've had an opportunity to speak with, either at conferences, panel discussions, there's generally three themes that consistently come up as challenges facing these construction companies. First is the labor shortage. You had mentioned at the top that there are unprecedented opportunities, projects, demand that is leading to a labor shortage, attracting and retaining the different workers needed to staff the demand for their different projects. The second would be the increasing and unpredictable costs of material. So with inflation, with high interest rates, with supply chain issues that persist, the cost and the timing to get material to the job site is more than ever before. And a third one that we run across regularly is really having systems and partners to help keep compliant not only from a wage and hour and pay perspective, but also data security of their operations. You've got projects being run at different locations funded by different sources. It's made compliance a heavier burden. You've also got ransomware and other issues like that that we're seeing come up and data breaches that create that ongoing risk for businesses if they don't have the right systems and partners in place.
Dan Hood (01:56):
Gotcha. Now, it's interesting as I'm listening to you describe those challenges. Some of those sound like they're recent or let's put it maybe cyclical is another way to put it, right? You've got changes in supply chain, supply chains, they're always starting moving up and down, that sort of thing. They're exacerbated during covid and so on and so forth. But some of those sound like they're perennial problems. Maybe we could talk about that. When you look at those challenges, how do you sort them in terms of new challenges or recurring challenges that have popped up again and that sort of thing? Because that'll sort of determine to a degree how they respond to it or whether they know how to respond to it.
Kit Dickinson (02:28):
Definitely. Yeah. So these challenges really have been part of the industry for some time, but they've all been magnified coming out of the pandemic. So labor shortage is an example. It's really been impacted in a couple different ways with workers transitioning out of the workforce. The average aging construction is around 42 years old, and then you couple that with an increase in projects that are funded by the Infrastructure Act or other federally funded projects needing over 500,000 new workers. So that's really stressing the stressing the labor market and exacerbating the shortages that are out there on the increased material costs, again, with high inflation that resulted post pandemic higher interest rates to help curb that inflation. Now you've got supply chain issues that were starting to get better. Then you've got wars going on, global conditions that are really continuing to impact the unpredictability of different costs of running a project.
(03:26)
So you've got your challenges that have really been amplified there. And then around compliance and data security, the infrastructure act that I mentioned earlier provides great opportunity to win new business, generate new revenue, but that opportunity comes at a cost. That cost is compliance, both in terms of pay and reporting expectations. So those combined with system concerns, I think there's estimated 50 to 60,000 construction companies still running legacy ERP systems on premises introducing nature. I'm not surprised by that. It's crazy. And it's unfortunate because it's introducing significant risk for a cyber attack versus a proven cloud-based offering. I was actually at a conference recently and an organization shared their story of having a ransomware attack and how they were dark for two weeks, figuring out how to pay their employees, figuring out how to run their business. So it's real, and it's one of those that no one thinks is going to happen to them until it does.
Dan Hood (04:25):
Right now you mentioned I could make a terrible prejudicial guess. When you say, I think you said 60,000 firms that are still construction firms that are still working on legacy systems, I could make a wildly uninformed guess about the number of those that are smaller versus larger firms and that sort of thing. But I don't want to be mean to smaller or larger, so construction firms. So I'm not going to say that, but I'm going to ask, is there significant difference between sizes of construction firms, like the issues they're paying attention to? Do these issues affect different size construction companies in different ways? Or is there even that wide range of sizes of construction companies for them to worry about?
Kit Dickinson (05:01):
Yeah, so generally, to your point, the smaller organization is more aptt to run things in a more often manual method because they can, it's not as impactful, and therefore the benefit risk equation is different for 'em. As you go up the continuum to enterprise level clients, which obviously have hundreds of millions or billions with bees in their revenue, they have more at risk and therefore they need to scale their business to support, whether it's through different systems or other departments and mechanisms to ensure that their people and their data are safe. Right.
Dan Hood (05:40):
Well, let's talk about that kind of thing by keeping the data safe, but also all dealing with some of the other issues you mentioned, the supply chain issues, the people issues or the people shortages that they're facing. What should they be doing to handle these or how can they start to handle these and maybe get ahead of them for the future?
Kit Dickinson (05:57):
Yeah. When you're dealing with this type of uncertainty, unpredictability, unprecedented nature really in construction, companies really focus on controlling the controllables. And so some of the actions that I've seen organizations invest in are related to the labor shortage. Make sure that you're viewed as an employer of choice to help attract and retain the right workers for your project. So that means using compensation benchmarking to understand not only what should I be paying these individuals, these workers from a wage perspective, but also benefits are becoming equally more and as if not more important to align with the different demographics that are out there. For example, you've got your Gen Z workers that are looking to impact the world. So ideas around paid days of service along with flexibility and schedules and PTO or maybe a different set of workers might be focused on professional development, leadership training.
(06:50)
So really understanding where these workers are at and what's the most important to them. Another thing, as I mentioned earlier, with needing upwards of 500,000 net new workers for this infrastructure act, you really need to expand your efforts to recruit younger workers, really starting almost in high school to educate the benefits of a career in the trades. I was speaking with one organization down in Florida that they actually, after they have their high school interns, they have a banquet and they put on a nice dinner and they invite the parents. And by having the parents there, the parents they find are often the biggest detractors because parents often think you must go to college and follow that path. But after learning about the wages that can be made, the professional development, maybe even owning your own business at one time, these parents come away bigger advocates for construction than the kids themselves.
(07:41)
And then you also have to focus on expanding your de and i efforts and attracting women into the industry, making accommodations for childcare and other things, nursing stations for new mothers. All those things can really help with that labor shortage. When you look at the unpredictable costs, we find companies are doing more forecasting, especially for their equipment, beyond one year, knowing that it could take more than a year to obtain a piece of equipment that you know is going to be needed for a project site. Others are doing prepaid fuel so that they can lock in and control what they're ultimately going to be paying. And then on the compliance, it really comes down to, we talked about it earlier, moving away from those on-premise solutions to more secure cloud-based applications delivered by proven vendors. So ADP obviously has great respect and security compliance in the industry to help pay one in five Americans. You really have to be thinking, do I have the right systems in place and vendors in place to help me, not only today, but as I grow into the future?
Dan Hood (08:44):
Right. Excellent. Alright, well this is a fantastic picture of what the construction industry is going through, what it's facing now and what it needs to be doing going forward. I think it's been clear as you're go through a lot of areas where I think our audience of accountants is going, Ooh, I can work with that. I can help with that. I can do help with that. And you've hinted at some of the issues, the areas where they're going to need help in terms of compliance and that sort of stuff. So I want to dive more deeply into that, but we're going to take a quick break first.
(09:12)
Alright. And we're back with Kit Dickinson of ADP talking about the construction industry and the issues that it's facing and where it's heading. We're going to turn now to talk about one of the great partners of the construction industry, which is their accountants. That's true in most industries, that their accountants are the most trusted advisor of their clients. There are reasons for which it's particular closeness between the construction industry and construction clients and the accountants. We're going to dive a little bit into that. And first I want to sort of take a slightly different approach to it is you had talked a little bit about the compliance burden that construction companies face, and it seems in some ways that it's a little bit larger than normal than for the average business. Obviously, if you look at healthcare is probably the most complex compliance burden or nonprofits, but construction has, I think a lot more than people might expect. What's driving that burden?
Kit Dickinson (10:00):
Yeah, it really stems from the fact that the construction industry is really unique in the nature of the business that's performed. It's at job sites that could be in different cities, different states. You could have funding from government, you could be required to employ union members. You have to supply specific reporting that's unique to construction, to the government on your projects. And really that helps increase the complexity and really reinforces the need to partner with a proven CPA as your trusted advisor as well as the necessary HCM and other vendors to support your complexity at scale. And so where these concerns complexity really comes into play is that, for instance, the infrastructure act that we've talked about a few times now, all of those dollars require paying what are called the prevailing wages and for submitting certified payroll reports. So you have specific wages that's based on the location and the role of the job.
(10:58)
So let's say I'm an asphalt paver, I might get a one rate in Albany, New York, but that same asphalt paver gets a different rate in Manhattan or New York City. And so then after you complete the process, the payroll process to really demonstrate compliance with these contracts, that company then has to submit what are called certified payroll reports. So really as the name implies, that it helps certify that the payroll is accurate, correct. And signed by a company officer. So you've got that dimension when you're working on government funded projects. Also in the Infrastructure Act, president Biden called out very clearly and directly that the administration wants union workers working on American projects. So now you've got a construction company that has to see, okay, this person is an asphalt paver. What would they make according to the government contract? But then they're also part of a union, so what does the union contract say to make sure that I'm compliance with both contracts? So you've got that and then layer in the complexity of job sites, different cities, different states, and introducing tax considerations that have to be in compliance. So really what it all speaks to is making sure you have systems and partners that you can trust to provide the right level of advisement and have the capabilities within the system to handle these complexities so that as they win new projects in different areas are staffed with different types of employees that they feel they're ready and prepared to be successful.
Dan Hood (12:21):
Right. Well, yeah, and it's a fantastic set of examples, but also you talked earlier about the buying a piece of equipment that you're going to know you're going to need in a year because the project isn't year, but you need it because of the problems with the supply chains. And then you think about how do you handle that in terms of amortization and depreciation and all kinds of stuff like that. I mean, I'm sure there's accountants all, as I said, listening to us going, oh yes, lemme tell you about this aspect. And it's things that there's still reason a person running a construction company would've any idea of those things. So they turned to their accountant for that. Maybe let's talk about that. What are construction businesses looking for from their accountants?
Kit Dickinson (12:59):
Yeah, so as you mentioned, they are probably the most trusted advisor for running their business and making sure everything is kept in compliance as mentioned earlier. So they're really looking for guidance on do I have the right costing structure? So I have true visibility into my jobs from a profitability perspective, I'm looking for best practices on the financials, whether it's managing expenses, equipment, depreciation, as you referenced. I want to make sure that my company financials are not only review, but attested by my CPA that they're in accordance with gap and are accurate or provide reasoning as to why I might deviate it from gap. And then the other thing is more and more we're seeing is they're looking to this trusted advice of their CPA on helping with vendor selection to make sure that I'm on those right technologies, keep me secure, keep me compliant. So as I grow and my business changes, we see this on a regular basis that companies are on a certain set of systems when they were a $10 million company, that was sufficient, but they're not a robust now that I'm a hundred million company. So those are the types of things that they're going to look for from their CPAs as they go through the process with them.
Dan Hood (14:13):
Gotcha. And all things that Right. Those, a lot of those are squarely in the CPAs wheelhouse, squarely in the accountants wheelhouse. They should be able to help from all them. Are there areas where you think, yeah, there's more that accountants could be doing for their clients? I mean, obviously if clients aren't asking for all those previous services or if the CPA isn't providing them, those are things they should be doing, but we would expect them to be doing that, right. Are there areas where you look at, you go, wow, accountants could be doing this, but they're not. Or areas where they could be helping going forward that firms need help with, but that maybe they're not necessarily getting it?
Kit Dickinson (14:42):
Yeah, so you touched on it. So all those things mentioned of what the client's looking for, the more proactive the CPA can be, the better the relationship's going to be, and that expert expertise to the clearing. Another area that we've seen come up is helping with different bonding or finance options and recommendations. So going back to that equipment forecasting and purchasing and maybe fuel costs, prepaid fuel costs, those are the types of things that having ACPA come to their client with those recommendations, knowing that they're facing these construction companies is often a huge benefit to these organizations that can use that type of help.
Dan Hood (15:22):
Right. Excellent. And that's the kind of thing that accountants, particularly if you're working with more than one construction client, even if you don't come up with it yourself, you've got a particularly smart savvy client pick that idea up from them and spread it out around the rest of the industry. Certainly ideas like that, prepaying for fuel and something like that are, as you say, great things for an accountant to bring to a client to submit that relationship. This is all fascinating stuff and we could talk a lot more about it, but we're running up against time. Any final thoughts on either the relationship between accountants and construction businesses or other challenges you see them facing? Other opportunities you see for the industry ahead?
Kit Dickinson (16:00):
We covered a lot of ground, and I think really as we look to calendar year 2024, what I'm seeing and hearing is a lot of these challenges are going to continue to persist. So going back to controlling the controllables, to getting the right workers, being that employer of choice, taking advantage of different analytics that vendors provide to make sure you're competitive, getting the people in, but also having different initiatives to retain the workers. That's another thing that I'm hearing quite a bit is it's great to bring them in, but if they're going to leave for $2 an hour more, it's going to be a problem. And so efforts to retain workers is something that should be equally important. So again, partnering with the right vendors and CPA firms can help get those best practices to be successful as we get into the new year. And we'll see what that brings.
Dan Hood (16:50):
Excellent. Alright, well, great advice and a lot of fascinating things to think about. Kit Dickinson of ADP, thank you so much for joining us.
Kit Dickinson (16:57):
Thank you.
Dan Hood (16:58):
And thank you all for listening. This episode of On the Air was produced by Accounting Today with audio production by Kevin Parise. Rate or review us on your favorite podcast platform and see the rest of our content on accountingtoday.com. Thanks again to our guest and thank you for listening.