There is a collective understanding that the novel coronavirus, COVID-19, has had a devastating impact on the US economy. While nearly all industries have felt the effects of the global health crisis, each sector faces unique challenges to overcome.
While construction continues in many areas of the country, the fallout may lay in the future as other industries pull back on expansion or supplies and equipment become more difficult to acquire due to heavily disrupted global supply chains.
Squar Milner works diligently with our construction & engineering clients to understand the challenges specific to the industry. Through careful evaluation of the ongoing international situation, our industry leaders have predicted some of the challenges confronting construction & engineering companies and offered advice on how to manage them.
What’s in this article?
- The challenges facing the industry
- Make health and wellbeing a top priority
- Assess your cash position
- Perform scenario planning
- Utilize business interruption insurance
- Stop all internal special projects
- Review your back log and plan accordingly
- Communicate regularly with your subs and vendors
- Squar Milner is here to help
The challenges facing the industry
The situation leaves many questions and uncertainty for those in the construction & engineering sector. Some of the emerging obstacles we have seen include:
- Companies spending less in capital investments – As the coronavirus ravages the US economy, companies will likely pull back on expansion, leaving a huge gap in the construction industry. Two large airlines, Delta and United, announced plans to reduce capital investment by $2 billion each as a result of the pandemic’s economic impact. Companies in many other sectors will most likely follow suit.
- Disruption in China – For smaller construction companies, a major source of concern is the disruption of global supply chains. Obtaining necessary equipment and parts may prove especially difficult due to the severe impact of the coronavirus on manufacturing in China.
- Government mandates – Governors and mayors across the country have been shutting down their respective jurisdictions, creating possible effects on the construction industry. Just last week, Boston became the first US city to shut down construction entirely. While construction continues for now in most places, companies across the country fear their cities will face the same fate.
Steps to overcome the financial effects of COVID-19
Our Construction & Engineering leaders at Squar Milner have been diligently assessing the ongoing situation. As construction & engineering companies confront these difficult economic times, our industry team recommends the following:
1. Make health and wellbeing a top priority
At the end of the day, we are in the middle of a global health crisis. The health and safety of your employees should be top priority. Please follow the guidance of the CDC as well as state and authorities to implement best health practices.
2. Assess your cash position
We highly recommend you quickly assess your cash position. You should consider your lines of credit and if you have access to any additional credit.
A number of banks have outwardly committed to working with clients to help them through the coronavirus pandemic; however, the extent of that help is yet to be seen. As such, we strongly encourage you to evaluate your cash position as we enter into a time of economic uncertainty.
3. Perform scenario planning
While the situation rapidly changes, we encourage you to prepare as best as you can. This means performing scenario planning. By making educated assumptions on what the future may hold and how your business environment may be impacted, you can develop dynamic strategies. For the given situation, we suggest you:
1. Consider current operations given the work you have on hand now. To do this, do the following:
- Review outstanding accounts receivable. How can you accelerate collections? Project collections for at least the next three months.
- Review outstanding accounts payable. Determine when payments need to be made. Project payments for the same period.
- Project employee costs for the same period.
- Project the cash flow for each current project – money in and money out.
- Project overhead for the same period.
- Put it all together.
- What does it look like? If you can anticipate it, you can make changes. Are you in good shape? What big challenges lie ahead?
2. Prepare at least 2 or 3 scenarios based on a sharp drop off in work. For instance, consider a 25%, 50% and 75% drop in work.
3. Ask even more questions. For instance, when does it make sense to begin laying off employees? You do not want to fall into some of the same troubles many companies experienced during the 2007-08 recession. At that time, too many businesses waited too long to reduce staff levels. Remember, you can always rehire as the situation evolves. Should it come to the point at which you are considering staff reductions, be sure to consult with your labor attorney to ensure you are handling the layoffs correctly.
4. It is also important to keep valuable Project Managers and Supervisors on your team. However, if you go out of business, they will find work elsewhere.
4. Utilize business interruption insurance, as necessary
As we better understand the impact of COVID-19 on business operations, it is important to keep in mind some considerations related to certain insurance coverage and policy implications. One significant insurance aspect to evaluate is business interruption insurance.
As Jim Untiedt, President of PentaRisk Insurance Services, LLC, advises, most claims are likely tied to income losses from indirect exposures, such as supply chain or civil authority related impacts. In the event of a claim, as with any other, it will be evaluated on its own merits and adjusted based on the applicable policy wording and specific details driving each loss.
Furthermore, there may be some coverage under an environmental policy for viruses particularly for disinfection, but each policy is unique. Some policies to examine may include contractor’s pollution liability, professional pollution and other forms focused on industry verticals such as healthcare.
5. Stop all internal special projects
At a time like this, resources and cash are extremely valuable. For the time being, cease internal special projects like office remodels, consulting projects, retreats, etc. You can always restart these endeavors as you gain a better understanding about your business situation.
6. Review your back log and plan accordingly
Now is the time to carefully review your back log schedule and determine what jobs may fall out or get postponed. This is where scenario planning, as mentioned above, becomes essential. Contact each of your future projects to assess where they stand on starting/stopping any of the jobs that you have scheduled.
7. Communicate regularly with your subs and vendors
Like you, your subcontractors and vendors are assessing their financial situation and business plans for the immediate future. It is important to communicate with them regarding your plans and to understand where they stand on projects. This will help each party better assess what they should be doing for the time being.
Squar Milner is here to help
With changing tax deadlines, stimulus packages, government assistance, and more occurring on a near-daily basis, you need a partner by your side who can help you make the most optimal business decisions.
Our Construction & Engineering industry leaders have extensive experience working with clients in the sector, and understand the complex challenges specific to your industry. We are here to help you as you plan, strategize, and find ways to overcome the mounting challenges stemming from our global crisis.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.