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Financial Management of Asphalt Paving Contracting Business

I may soon be getting involved in an M&A consulting project related to the acquisition of a mid-sized (~200 employees) asphalt paving contracting business that is fully bonded.  Revenue mix is approximately 50% public sector, i.e., state/municipal and 50% private/commercial sector.  I would like some guidance from fellow Proformative members who have either worked in or provided services to this industry.

1.  What are the top 3 areas to focus on during due diligence for such businesses?
2.  What are the top 1-2 construction industry software packages used by this industry?  I would think that the best of breed offer a tight integration of the bidding/cost estimating process into the generation of a formal written proposal and then tight job cost accounting/reporting by job.
3. Since I imagine there are typically not any CPAs/MBA employed in the accounting departments of such businesses, financial systems need to be user friendly with really good help desk support.  Also, most policies/procedures are not formalized in writing and most of the trade secrets of successful companies in this space are in the head of the owner/entrepreneur.

Thanks for any insight you can share.


Michael B. Hutchison
Title: Chief Financial Officer
Company: Pine Island Chemicals
(Chief Financial Officer, Pine Island Chemicals) |

Jerry, I can comment on #2 and 3 of your questions.

Timberline is one of the most popular programs. Viewpoint is also very popular. CFMA publishes, or used to publish an annual acccounting software listing for contractors that might be helpful for you.

The likelihood of a CPA being involved in the internal accoutning is directly proportional to the size of the business. My company is $250 Million and we have 2 CPAs in the top accounting positions. HOwever, most construction companies will try to get by with a competent bookkeeping staff until forced to upgrade to CPA/MBA type personnel.


Rajeev Seshadri
Title: CFO
(CFO, ) |

Jerry, It depends on the size of the contractor. I've seen Quickbooks/Peachtree used by a lot of the smaller contractors, as well as American Contractor.

With respect to due-diligence,2 starting points could be (a) Insurance/surety bonding history and details; and (b) job costing info. A third area is the historic cost structure. It tends to be very predictable, and variations from an industry average are probably points to explore.

Jerry Sweas
Title: President
(President, ) |

Rajeev, thanks for your thoughts. Can you clarify a few things?
1. Is American Contractor a supplement to say Peachtree? Is there some integration of the two, e.g., same shared customer/vendor data base, etc.?
2. I am somewhat confused by your comment about the cost structure tending to be very predictable. This business is located in a cold weather state so it is a very seasonal business with little work for 4-5 months except for emergency pathching projects. Then the recession forced management to lay off 40% of workforce Please clarify.

Rajeev Seshadri
Title: CFO
(CFO, ) |

Jerry, American Contractor is an accounting package, much like Timberline, only less expensive and used by smaller contractors - its from Maxwell Systems in the san Francisco Bay Area. Nothing to do with Peachtree - I guess I wasn't very clear there. Quickbooks or Peachtree are the entry level accounting software packages and are surprisingly common even at some large-sized contractors. Many have never upgraded, using Excel liberally to augment these packages. Each of the packages are stand-alone, i.e. you upgrade from one to the other, so there is data import (a one-time effort), but not integration.

Regards your second question - all the outdoor contractors are seasonal, dependent on the weather. One contractor I worked with in the MidWest, switched Weatherbug on his computer first thing at 5 AM, before dispatching crews to worksites! The seasons come around each year, so year to year comparisons of like period should show similar period results. Also, for each job/project, the percentages of labor, materials, equipment rentals/cost, other variable job costs, selling expenses, shop labor (mixing) etc. are all like to remain relatively constant for similar types of jobs. Variances from a standard cost should be explored...the operational inefficiencies, competitive position, etc. all tend to be highlighted then.
Trust this helps.
PS - Considering the layoff, it is likely that management kept additional labor as long as they could in the face of declining revenues, i.e. fewer jobs. Thus, the labor costs associated with jobs prior to the layoff would likely be unusually high. Of course that depends on how they account for labor costs on jobs. If unionized, you may want to look at the union reports, and prevailing wage reports submitted to those types of jobs where union labor is required.

Donald Bowman
Title: Part-time CFO
Company: Pretium Bay Consulting
(Part-time CFO, Pretium Bay Consulting ) |

Some due diligence items to consider. Take a look at the ashpalt oil supply contracts - looking for any take or pay clauses, time frame, cost increase clauses- that sort of thing. More globally the industry structure is important- are there any aggregate companies also in the paving business? The financial condition of the state's highway funds is also critical. Several years ago there was a significant downturn in highway funding in Maryland. The number of paving companies did not decline but pricing certainly did. Obviously the condition of the equipment is important. Make sure you have an old salt that understands the business and can evaluate the condition of the equipment. The field operating people are key to performance- particularly the field superintendents. These are the guys that can really effectively deploy and manage the paving crews. Labor can be tough to control.
Hope that is of some small help.


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