When we look back at 2020, we will all have our own descriptions of the type of year it was. Words like challenging, uncertain, re-invention, THE election have been tossed around, but perhaps the catchall description is unprecedented. It is not very often that we experience something that has never been seen before, and that is exactly what the COVID-19 pandemic has been. It is unlike any other crisis in that it has affected every business, no matter the size, in every industry around the world by forcing business owners to re-think how they deliver their goods and services. Innovations, technology adoptions and increased remote work environments, which may have been 3-5 years away for most business, were implemented (in most cases) overnight.
All of this, the very definition of unprecedented.
And as 2020 draws to a close, construction contractors should re-focus their vision towards the future with an emphasis on these 10 items that will help them survive the economic uncertainty 2021 is expected to bring, while positioning them to explode once the signs of rebounding start to emerge.
1. Make sure you have a fluid, cash flow model and operating budget covering the next 18 to 24 months. Contractors fail in good times due to cash flow constraints, let alone in times of financial and health crisis. By utilizing tried and true financial management planning tools, such as project-centric cash flows and budgets, you will be able to identify where projects will experience cash surpluses/deficits and understand how this will impact the entire company. The power of this strategy is, when a constrained period is identified, management will be able to take the necessary steps to identify other sources of cash flow that will carry operations.
2. Don’t take work to keep the field busy. As backlog is burning off at a rapid pace, the replacement work is not as readily available as it was a year ago. While there are needs for new projects to mobilize across all sectors of the economy, the uncertainty caused by the COIVD-19 pandemic has put a freeze on funding. However, work is still coming out and there are more bidders in those pools who are pricing aggressively, at slim to no margins, to win work. This is sure to have a negative impact as it is unsustainable and will lead to cash flow issues for those contractors and ultimately a failure, which could have a waterfall impact. To the extent the savvy construction company can, bid work to make money, even if at a lower profit, stay within your expertise and look to see where overhead can be reduced and corporate capital conserved. Do not be a factor in the dangerous formula of Less Work + More Bidders = Aggressive Pricing.
3. Evaluate your income tax options and develop your strategy. While not immediate, there is an expectation that President-elect Biden will look to reform the United States’ tax structure. This does throw a twist into income tax planning, as a proactive income tax deferral plan is an effective way for a construction company to finance itself. The deferral enables you to conserve capital that can be deployed into projects while requisitions are being funded, to avoid a lengthy dip into any credit facilities or looking to ownership to infuse additional liquidity. While we are in a wait-and-see position, in terms of where President-elect Biden will take income taxes in future years, we know what the income tax rates are for 2020. And if, after consulting with your tax advisor, you believe rates are going to increase for 2021, the notion of accelerating income becomes a viable tax planning strategy that could save future cash flows.
4. Treat your Paycheck Protection Program loan as a “wild card.” The intent, evolution and taxability of the PPP loans has been a well-publicized odyssey. At the program’s onset, the construction contractor was able to acquire a federal loan that could be converted into a tax-free grant if used on qualified payroll and related expenses. The IRS clarified some of the program’s rules by informing borrowers that the funded expenses would be nondeductible and must be disallowed on their 2020 income tax returns, regardless of when a company applied for forgiveness. All of this is contrary to the program’s intent. Factor in the SBA’s scrutiny as to whether or not a company truly needed the funds, and the once touted “main street”employee-paycheck-saving program has become one of the most polarized pieces of legislation in recent years. For the construction contractor who used these funds on payroll, the questions become: was it truly necessary or should it be repaid;, if forgiveness is sought, when does the loan drop to income for financial reporting purposes; and how will the contractor’s bank and/or surety treat this?
5. There will not be a better time to start your estate planning. Estate planning is an important initiative for all contractors, but it is not a demanding one. In other words, where is the contractor going to spend her/his day: in their professionals’ offices signing documents or on the job site making sure everything is being built to spec? As a result of the COVID-19 pandemic, the construction company, sometimes the most valuable asset in the contractor’s estate, could be valued at an all-time low. Coupled with the current high lifetime gift tax exemption ($11.58 million for 2020 or $23.16 million if married), you can move ownership of the construction company, real estate and other assets out of your estate while saving on gift tax. But be careful if you have an outstanding PPP loan. IRS Notice 5000-20057 imposes transfer restrictions if the transfer involves more than 50% of the ownership interests or assets, which may include SBA approval, an escrow account and additional documentation until the loan has been forgiven or repaid.
6. Draft and scenario train your COVID-19 plan. As we enter 2021, ideally with an end to the pandemic in sight, contractors should still look to develop, implement and refine their COVID-19 response plans. The plan should focus on proper hygiene training; what to do if there are positive cases in the office or on a job site; measures to understand what the owner’s and other contractors’ protocols are while on the job site; and contact tracing. However, as with any other plan, the contractor’s COVID-19 response plan is only as good as execution. Start with a staff training and awareness campaign to let the office and job site employees know their health is important and being considered. From there, engage in scenario training, ensuring people understand their functions and what protocols they are responsible for if an outbreak occurs. And communicate the plan within and outside the company to all interested parties.
7. Cybercrime is the industry that never sleeps. Hackers love the construction industry as they perceive it to be one with a high proliferation of companies within the middle market that are either unsophisticated when it comes to investments in technology or view these types of investments as having little to no return. Mix in times of financial and general uncertainty, and cybercriminals have the perfect setup to prey on already vulnerable and fearful companies by offering everything from “free” job site COVID-19 tests to financial grants in exchange for employees’ personal information. While the construction industry may be a late adopter of cyber and information security protocols, it is never too late to promote awareness throughout the organization and foster an environment where it is ok to be skeptical of an email, a request from a new face on the construction site, or a new vendor payment process.
8. While we are on the topic of technology… Most construction companies had to put their technologies to test rather quickly during the initial shutdown. Employees had to “lean into the curve” and learn how to work remotely, IT teams were stretched as they made sure VPNs had bandwidth to accommodate multiple users at once, and mobile meeting platforms such as Zoom, Google Meet and Microsoft Teams became the norm not only for internal meetings but also project kickoff meetings and even walkthroughs. While a number of the initial issues caused by shifting to a virtual work environment have resolved themselves, contractors continue to have opportunities to evaluate their remote workplace strategies, assess if technologies are meeting their needs and continue to explore new ways to build. While certain aspects of construction can never be virtual (a laborer cannot swing a hammer remotely, after all), the opportunity and need to adopt job site health and safety technologies have never been greater.
9. Huddle up with your professionals and advisors. The construction contractor should be engaged in a continuous dialogue with their professionals to understand what they are seeing across the industry as well. For example, a conversation with your bonding agent could reveal issues other contractors are experiencing, which could be on your horizon and mitigated through proper planning. Furthermore, construction contractors should discuss with their accountants the expected financial impact of the pandemic, i.e. financial reporting and income tax implications. This conversation should extend to the bank and surety, making sure they are on board in case there are upcoming requests that will require your credit providers’ backing. In other words, leave no room for surprises.
10. Keep your eyes open for opportunities. Every market condition presents opportunities, and this is no different. So keep your eyes open. These may come in the form of labor or other talent, new customers as you step up and fill a market void, or accelerated investments in technology – whatever it is, be open to it.
While not an all-inclusive list, these items are certain to continue to impact the construction contractor in the office and on the job site. Success for the upcoming year can be achieved through continued dialogue with your people and professionals as the operating landscape continues to evolve; better access to real-time project data (financial and non-financial) that will enable you to make critical job decisions in the moment; and an emphasis on conserving corporate capital while being open to new opportunities and the right type of growth. As we close the books on 2020, a year which saw some reactive decisions, the construction industry has the opportunity to proactively script and plan 2021.