Author: Bryan Abee, Audit Principal
The construction industry relies on physical human interaction more so than many other industries, and is therefore presented with unprecedented challenges in responding to the COVID-19 crisis. At the forefront of every construction company should be the health and well-being of its employees and addressing delays on projects. As talks of a recession are all but certain, it’s important for construction companies to respond quickly and effectively to the increasingly dynamic economic crisis.
What Happens Next?
The assumption that receivables are as good as cash in a good economy does not hold true in a bad economy. Many companies will attempt to mitigate the impact of COVID-19 by managing claims in a way that benefits their own financial interests. Expect companies to withhold payment for damages (e.g. delay damages or penalties) or to slow pay subsequent pay applications during this period of increased uncertainty. It is inevitable that some projects will fail and be taken over by a lender, which could lead to general contract and subcontractor disputes over claims to compensation. It will be common place for multiple claims to limited sums of money.
How to Respond?
Company’s should be looking at their receivables on a weekly basis, with the focus being on amounts owed on specific projects, amounts left to be earned on specific projects as more work is performed, and the aging of outstanding receivables. Companies should not delay in taking action to collect on large or delinquent receivables. Lien and bond claims are subject to deadlines that, if missed, could nullify certain rights or defenses.
Companies are well advised to review both new and existing contracts to ensure they are in compliance with all contractual requirements, particularly those involving delay provisions or penalties, and to ensure notice provisions are strictly followed.
Always recognize, cash is king. It’s not glamourous or exciting, and might not win you any awards or accolades. However, cash gives companies the flexibility to weather the storm, the ability to avoid yielding to gain a quick payment, and the ability to take advantage of opportunities that might present themselves.
Fortunately, there are many government programs to assist financially. The Small Business Administration (SBA) has an emergency loan funding mechanism that was in place prior to the COVID-19 pandemic. There are also proposals for payroll tax relief and enhanced emergency loans through the SBA, and numerous bills in various stages of approval in congress.
As with any crises, there will be opportunities that arise. Don’t miss those opportunities. With nearly everyone working from home, there are many buildings with deferred maintenance or upfit needs that are no longer filled with people whose presence would normally preclude heavy construction activities. Creative industry players will be able to come up with far more examples of potential opportunities.
Once the health issues and project delay issues are addressed, the financial impacts of COVID-19 will become vital. Getting ahead of the curve will be critical to protect the financial integrity of construction owners, lenders, contractors, subcontractors, and suppliers. By following or adhering to lessons learned during the 2008 financial crisis, companies in the construction sector should be able to, once again, survive to fight another day.
How does Briggs & Veselka help Construction, Contractors & Construction-Related Service Companies?
Briggs & Veselka has extensive experience with commercial, residential and real estate tax and accounting issues. Our clients include some of the largest and most successful construction and related companies in South Texas, and our construction group practice leader is considered a thought leader in construction accounting, with active membership and involvement in a number of local industry-specific professional organizations.