By Jack A. Callahan, CPA, is a partner with CohnReznick
When I set out to write this, all was well with the economy and New Jersey utility contracting. For those of you who have heard me talk about strong backlogs and great stimulus at recent events, I did hedge about the potential for a black swan.
Sadly, that swan has taken the form of COVID-19. The effects of this are certainly undetermined now, but it already is disrupting some construction sites with shutdowns, and other states are either enacting or considering issuing other stoppages for large-scale sites. We all hope that the downturn is temporary and that the events of early March will help to advance a federal infrastructure bill.
Once COVID-19 became a business disruption reality, we mobilized as a construction practice and generated ideas and initial thoughts on what contractors need to be thinking about. We also have pushed out numerous communications about the latest from the government as well as developed resources to help you strategize through the COVID-19 emergency. That is all found on our firm’s resource center.
It will also be critical to monitor relief bills and tax updates from the government. In recent days, the Small Business Administration committed to issuing (www.sba.gov/disaster) Economic Injury Disaster Loans for up to $2 million in assistance. We all are hearing of other governmental assistance programs.
Before this all began, I was going to write that I am certain that in my 40 years in this industry, I have not seen an expansion that hasn’t contracted within 10 years. Well, we went 11 years with growth, and now can honestly say I have never seen anything like what COVID-19 is impacting. This is uncharted ground for all of us. Is this a several-week or few-month pause in work? Will it spark a new burst of positive trendlines? Or will it cause issues and slowdowns?
For our construction contractor clients, we want to provide the following thoughts and potential action items as immediate considerations due to the crisis:
- Cash is and always will be king. You will need to assess your current cash position, and keep a very close eye on accounts receivable collections, timing of accounts payable payments, and effective utilization of your line of credit. You need to model out your cash flows weekly, monthly, and quarterly to identify and understand your liquidity situation. There will be opportunities here if you effectively manage your cash.
- You will need to develop and/or review your wind-down strategy to determine how quickly you can cut overhead and in what areas in the event of work stoppages. Labor shortages have been a critical concern in this strong economy. You need to assess how best to reduce overhead and communicate these reductions in such a way that you won’t lose your key players who will be needed upon resumption of full operations. What other obligations can be extended or adjusted?
- Labor management will be critical. You need to know from your labor counsel how to manage furloughs effectively. A recently passed coronavirus relief act includes paid sick leave and family leave that could substantially impact all of you. See attached AGC discussion. While everyone is feeling the pain and understands the hardships to be asked, effective, timely, and honest communication will be critical to minimize the impact.
- Review critical external commitments. Talk to your banker, talk to your surety agent, talk with your insurance agent, and talk with your legal representation. Nearly every state, New Jersey included, has pending legislation that would force business interruption insurance to cover COVID disruption. Know all your requirements and deadlines and be sure no commitments are missed without effective communication.
- Site security. The City of Boston recently shut down construction sites. When they did this, they gave contractors limited notice. You need to have contingencies in place to quickly and effectively shut down a construction site. Securing equipment, safely storing cranes and heavy equipment, making certain materials and small tools are secured. Government shutdowns will not stop the criminal element from targeting your unmanned sites.
- Refamiliarize yourself with your contract clauses – specifically those with owners, subcontractors, and suppliers. Understand required notices that must be given and procedures that must be followed to best protect your company’s position in the event of a claim.
While there is so much more to consider and actions to be taken, we hope that this short list will get the conversations going among your internal team and your trusted advisors.
Register for the upcoming NASBP Virtual Seminar presented by Jack Callahan on this topic on April 7, 2020 at 2 p.m. Eastern time. Registration is $89 for members and $179 for non-members or you can get the NASBP 2020 Virtual Seminar Annual Subscription, and see every Virtual Seminar this year.
Jack A. Callahan, CPA, is a partner with CohnReznick and serves as the firm’s Construction Industry Leader. In this role Callahan is responsible for developing a team of accounting, tax, and consulting professionals dedicated to, and experienced in, servicing contractors. He serves on the NASBP CPA Advisory Council. He can be reached at email@example.com or 732.380.8685.