By Katie Evans and Alex Petrone
Deemed an “essential service” during the Covid-19 pandemic, the construction industry continued unabated through the historic economic shutdown that closed most other businesses. Residential construction was considered essential in Florida due to a nation-wide housing shortage; commercial construction received the coveted essential status as other essential businesses, such as healthcare and food delivery, rely on the construction industry to build facilities and supply materials used to deliver life supporting services.
Construction executives who benefited from being open for business, however, cannot be complacent when considering and planning for next steps. At Daszkal Bolton, we are advising our construction clients through the crisis with business strategies and forecasting models that 1) anticipate labor and materials shortages; 2) evaluate cash flow controls based on current conditions and; 3) mitigate health and economic risks. These discussions also include tax impacts for individuals, the business and various loan programs.
Existing construction projects and those in the pipeline have delayed the economic impact felt by the industry. Already, there is evidence of lower demand in both commercial and residential projects as a result of hesitation in the U.S. economy from banks, real estate developers, and investors. While work continues, there is a noticeable decline in new project starts.
According to a survey by the Associated General Contractors of America, there is a “deteriorating demand” for construction as construction employment declined by 975,000 jobs in the April 2020 jobs report. Astute business owners are starting to plan their course of action as financing becomes scarcer and customers signal reductions to control expenses. The shortage of construction labor becomes even more acute as the industry feels the impact from the Coronavirus with safe distancing rules that may limit productivity.
Such uncertainty can either stymie business leaders or motivate them to protect their business, their suppliers, customers, and employees. How? A laser focus on the following priorities can minimize loss and improve opportunities:
- Health and safety precautions
- Contract Management
- Cash flow needs
- Securing SBA and government funded loans
Heightened attention on contract management is crucial during these times. Customers are attempting to renegotiate contracts to allow construction to continue, just at a lower price point. Construction leaders should also focus on budgeting and liquidity. We are recommending clients review their internal budgets. Through cash flow modeling, they can plan for the best and worst case scenarios. Companies that have high levels of debt and low cash reserves may face a liquidity crisis, so it is important to review cash flow requirements and plan ahead for potential needs.
Even with the decline of project starts, some builders are hopeful and expecting a surge in demand for new projects when the economy officially rebounds. This demand for supply and inventory will exacerbate the labor shortage that the industry was experiencing prior to the Covid-19 outbreak so careful planning is required from construction companies.
Now is the time to evaluate business processes and look for opportunities to streamline and reconfigure processes by reducing or removing inefficiencies. Developing improved internal controls will help businesses better understand their strengths and weaknesses and become stronger, leaner, and better prepared for the new normal and an uncertain future.
Katie Evans is a supervisor in our Tax Department with over a decade of experience in the construction industry.
Alex Petrone has more than twenty years of experience working with closely held private businesses and their owners to provide comprehensive business and tax planning as well as succession and estate planning.