There is no playbook for how to manage a business in this COVID-19 environment. While construction activity is still happening to varying degrees across the country, state and owner restrictions, job quarantines, employee safety, payment delays, supply chain delays, and other concerns present unique challenges for the construction industry.
Below are four critical areas that construction contractors should consider as they continue to navigate the COVID-19 crisis.
- Owner and Customer Concerns. Some owners have requested that all work on their projects be put on hold, and a number of states have required all non-essential construction activity to stop. It is likely that some customers will invoke a “termination for convenience” clause if it has been included in the contract.
A stoppage to a project will put it behind schedule and increase estimated costs because of the inefficiencies of stopping and restarting a project. For jobs that are able to continue, additional resources and safety measures need to be put into place in order to keep the job safe.
Steps to consider:
- Review all contracts to determine the rights you and your customer have, such as force majeure, termination for convenience, delay damages, etc.
- Track costs for any additional resources needed for jobs, either because of changing how the work is being completed (e.g., social distancing) or because of a shutdown and restart of the project. These could include increased material costs, increased equipment, overtime, personal protection equipment, etc. Costs should be segregated when incurred because it is often difficult to do so after fact. This will provide you with the support you need for possible change orders or for evaluating profitability on jobs, if job modifications do not occur.
- Have open discussions with your customers and try to work together to come up with a mutually agreeable solution.
- For new contracts that are in the process of being signed, re-evaluate and modify terms if necessary.
- Subcontractors and Suppliers. Your subcontractors and suppliers are likely going through a lot of the same issues that you are. In addition, there are likely to be supply chain issues the longer this current environment lasts.
Steps to consider:
- Review your contract terms, similar to the owners and customers above.
- Have open discussions with your subcontractors and suppliers to understand any issues they are having and communicate what you are seeing.
- Evaluate the financial capacity of your subcontractors and suppliers to weather delays.
- Identify potential alternative subcontractor and supplier resources.
- Consider ordering materials in advance for projects you expect to continue. This could cause cash flow issues, so communicate with customers and to try to get them to approve payment prior to ordering materials.
- Workforce. In the current environment, some employees are afraid to come to work for fear of virus exposure. You may also have office personnel who assist with project administration and who are now working from home.
Steps to consider:
- Re-evaluate your infectious disease control plan’s policies and employee safety training.
- Educate your employees on the proper procedures and supply them with equipment to limit their exposure on job sites and the risk of spreading the virus at home. Examples include social distancing on the job, disinfecting equipment, and changing outfits when arriving and leaving the job site.
- Track employee movements so that if there is potential exposure on a job site, you can determine who may have been exposed.
- Optimize remote access for employees working off-site.
- Reinforce cybersecurity controls and policies with remote workers.
- Operational Liquidity and Cash Flow. The current environment has created a great deal of financial uncertainty for many contractors.
Steps to consider:
- Create a cash flow projection (13 weeks or longer) based on expected outcomes to understand how this downturn will impact your company. Continuously update this projection and incorporate changes you are seeing in your assumptions.
- Regularly communicate with your employees to keep them informed and reduce the chance that they are caught off guard by any future decisions if operations continue at reduced levels.
- Communicate with your bankers and bonding relationships to avoid surprises. Also, evaluate whether current facilities are sufficient to support your business or if they can be expanded.
- Evaluate new legislative programs that can provide additional cash flow to your business, such as the Payroll Protection Program (PPP), Economic Injury Disaster Relief (EIDL), employee retention tax credits, deferral of employer payroll taxes, and other recent improvements to tax regulations. Contact your advisors (bankers, attorneys, and accountants) for assistance in understanding the various programs and benefits available to you.
- Make sure bills are getting out timely and follow up on collections for items past due.
- Consider delaying payments to those vendors that are not considered critical.
While the information above is not all encompassing, it provides some critical items for contractors to consider as they continue to weather the COVID-19 storm. Also, we are here to help. If we can be of assistance in any way, please do not hesitate to contact us. And for additional resources, please visit our COVID-19 Resource Center, which we continue to update regularly.
Mark A. Guillaume, Director, Audit & Accounting and Construction Industry Group Co-Leader
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.