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Managing Construction Businesses as Activity Grows

 

In the first month of 2016, the value of nonresidential construction spending crossed the $700 million mark for the first time since March 2009. The latest statistics from the Department of Commerce reveal the January value of nonresidential construction jumped 2.5 percent over December 2015 and 12.3 percent year over year. These numbers beat expectations by a hefty amount - some economists predicted as little as a 0.2 percent increase - and bucked the usual trend of a December-to-January decline.

January is just one month, and as Associated Builders and Contractors’ (ABC) Chief Economist Anirban Basu describes it, one whose results are hard to interpret.

February’s results from other industry metrics providers didn’t make January’s peak any easier to understand. According to research firm CMD, the typical seasonal drop appears to have caught up with the industry last month, with CMD’s report showing a 22.2 percent decline in the value of nonresidential starts from January to February. But not all reports agree that there was a February slump. Figures from Dodge Data and Analytics show February’s starts growing 10 percent over January.

Providing commentary on that figure, Dodge Chief Economist Robert Murray notes that, “On balance, the current economic environment is still favorable for the continued expansion of construction activity…” And as Basu said in a statement about the January Department of Commerce findings: “For many months, the average contractor has been reporting decent backlog. Measures of industry confidence have remained stable even in the face of adverse news coming from various parts of the world.”

Like many industry experts, Basu and Murray maintain that the larger economic environment points to expansion for the industry overall and are optimistic about what 2016 will bring despite the somewhat unorthodox start to the year.

Continued economic growth - in construction in particular - is great news for the industry. But growth of available projects can magnify working capital issues, especially if subcontractors take on more work than they can support - as can happen during recovery phases. Taking on more work requires adequate working capital and strong financial management.

In-process projects (and their associated costs), tie-up much of construction subcontractors’ working capital. Managing the cash outlaid on a current project along with the funds needed to begin another, all while payment terms continue to creep upward, is a complex balancing act. Handled wrong, it can lead to financial distress. Complicating this situation, current credit market conditions have made traditional credit lines more difficult to access. Without solid cash reserves or access to affordable capital, subcontractors could be pushed toward expensive short-term funding or, in the worst case for all stakeholders, find themselves stretched too thin and unable to complete their work in progress.

Early payment programs are one way to address construction’s working capital problem and minimize the risk that financial challenges will impact current or future projects. By leveraging the strength of the general contractor’s balance sheet to accelerate payment to subcontractors, a general contractor can help its subcontractors address business challenges. Supply chain finance programs such as the Textura Early Payment Program™ (EPP™) can unlock the cash tied up in construction business operations to improve cash flow and working capital management. The potential outcome of broad adoption of such programs is a stronger construction industry that’s ready and able to take on whatever the future brings.

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