As bond producers and their contractor clients consider how contractors will use federally subsidized loans disbursed by the government in response to the COVID-19 pandemic, Martin C. McCarthy suggests that bond producers share this message with their contractors: “Make sure you have a plan.” McCarthy, Managing Partner of McCarthy & Company, PC, in Lafayette Hill, PA, wants producers and their contractor clients to think carefully about how the contractor will use funds obtained through the U.S. Small Business Administration Paycheck Protection Program (PPP).
The PPP money was meant to provide liquidity for businesses to stay afloat during the economic downturn caused by the pandemic. One of the features of these loans is that they will be forgiven by the government if businesses hire back laid off employees and if the money is spent on qualified expenses. This is a strong incentive to hire everyone back in order to offload the loans and to spend the funds per the program guidelines.
But McCarthy notes that conditions in the construction industry could get worse before they get better. He cites banking industry statistics showing that banks are starting to limit construction loans. He warned that construction activity could constrict rapidly if banks begin calling their loans, forcing a halt to construction projects across the country. In addition, McCarthy added, many contractors are already receiving notices of cancellation of projects that were previously awarded. Statistics indicate a downturn in construction is coming.
McCarthy suggests a producer and his or her contractor client consider all of the contractor’s options. He notes that circumstances have changed since the PPP loans were first issued in the spring.
“The business decision was to provide a resource as things were tightening,” McCarthy said. If the contractor finds that business prospects are not turning around, then the best business decision may be to hold onto the money and convert it to a loan rather than resuming employee salaries. McCarthy notes that, even as loans, the PPP money represents low-cost capital.
“Where else can I get a loan at 5 years at 1% without a personal guarantee or collateral?” McCarthy said. “You’re going to make more than the 1% it is going to cost you, typically. If you’re going to spend money for the sake of spending money, that’s silly. If it is a true business need, then spend it.”
McCarthy said that NASBP bond producers should pose these questions to their contractor clients:
- What are your bidding prospects moving forward? If projects won’t support the number of pre-pandemic employees, then proceed accordingly.
- Will you take on more expenses because of the pandemic, such as cleaning supplies, personal protective equipment, or reorganization of the office, to accommodate social distancing or remote employment? PPP loans could cover these added costs.
- Will productivity on current jobs decline because of new workplace rules? The PPP loans could provide liquidity to overcome a cash crunch caused by spending more to complete projects than expected when they were bid.
McCarthy said educational and governmental construction could see major slow-downs because governments have been hit hard by lower tax revenues. Also, restaurants are in trouble; and malls and retail, which were teetering before the pandemic, could be especially hard hit. Sectors such as multi-family construction, on the other hand, could hold up better.
McCarthy said producers should recommend their contractor clients remain flexible to cope with the new environment. For example, contractors shouldn’t expect that new construction at the local university will come through in the next quarter, he said. Contractors should be on the lookout for jobs in unfamiliar areas.
On the upside, McCarthy stated that cities could choose to loosen zoning restrictions to encourage businesses to take the place of ones that have been lost, opening the way for new construction.
The short- and medium-term is uncertain, but McCarthy has confidence in the industry’s long-term profitability. “Infrastructure as a whole doesn’t get any younger. Construction will continue to grow; it will continue to thrive. Roads continue to break, bridges need repair, and buildings get old,” he said. “Look at changes in demographics–that’s going to mean different construction needs in different areas.”
· Webinar, “PPP Loan Forgiveness and Operating Post COVID-19” - McCarthy presented jointly with Jason Copley in the Construction Group of the law firm of Cohen Seglias and its handout
Martin C. McCarthy, CPA, CCIFP, is the managing partner of McCarthy & Company, PC a leader in construction accounting. Construction Executive included McCarthy & Co. in its list of Top 50 Construction Accounting Firms. McCarthy also serves on the NASBP CPA Advisory Council. He can be reached at Marty.McCarthy@MCC-CPAs.com or 610.828.1900.