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Wednesday, March 25, 2020

How Construction Companies Can Manage the Business Disruption of COVID-19


Due to the coronavirus (COVID-19) pandemic, construction companies face unprecedented and completely unpredictable operating challenges. Social distancing measures, government-ordered business closures, and evolving federal and state relief programs create a maze of decisions for management teams to navigate daily.

Making these decisions requires in-depth financial analysis. The following are key considerations for construction company management teams to keep in mind as they work to limit the impact of COVID-19 on their business by protecting the balance sheet, reducing operating costs, managing banking relationships, and maintaining effective financial reporting.


Protecting the Balance Sheet

Challenging economic conditions demand a focus on your balance sheet. Consider these measures.

  • Intensify the focus on cash flows. It has never been more important to monitor your outstanding accounts receivable on a daily basis and ramp up collection efforts. If necessary, consider offering incentives to your customers for timely payment, such as discounted accounts receivable terms, waiving credit card processing fees, or offering contract discounts in exchange for early mobilization deposits.
    Also consider being more aggressive in exercising your available lien rights. You probably have customers who are always slow to pay your invoices, and for one reason or another, you do not lien their projects. The fact pattern that made that the right business decision previously may produce a different answer in today’s COVID-19 world.
  • If you are a sub-contractor and find your company in a “paid when paid” contract position with a customer, proactively approach them about how you can assist in getting their pay applications to their customer timely.
    Additionally, be responsive to your punch list items on the job. Client acceptance of work is commonly the cash flow trigger to your customer and company. Times like these demand being a responsible partner to all the contractors involved on your job sites. You are all in this together.
  • Manage your accounts payable. Prioritize your vendor payments and delay payments where it can be done without impairing your operations in the short term. Be opportunistic; it is very likely that your key material suppliers and other vendors are also exploring ways to get creative to keep cash coming in the door. If you do not see your key vendors extending pricing and payment term incentives, proactively engage them in conversations about such opportunities.

Managing Operating Costs

While no one wanted to face today’s COVID-19 challenges, such times do create the opportunity to focus on the fundamentals of your business. No management team ever intends for excess to creep into operating expenses, but the daily time demands of managing the business often result in excess expenses going unnoticed. Now is the time to refocus on cost cutting.

  • Dive into your largest expense categories, such as payroll and insurance, as well as discretionary spend areas such as marketing. Having the data that you need to make the best cost reduction decisions requires in-depth analysis, as well as the experience to properly interpret that data.
  • Cutting payroll costs can be one of the most difficult areas to make the right decisions for your company. There are a variety of methods to consider. Should you cut headcount, and if so, where should those cuts come from?
    If your business model focuses on the use of in-house field labor, project closures or delays may make it clear that field personnel reductions are needed. Consider your poor performers first; anyone that is a candidate for transition from the company regardless of COVID-19 would certainly be a possibility. Next, focus on areas where you have duplicative or excess resources.
    Are there areas of your business that are being impacted more quickly than others? For example, are your new construction activities slowing down but your maintenance operations are holding steady? If so, examine your new construction trade labor for duplication or excess before looking at your maintenance technician positions.
  • Workforce reductions are not the only method for reducing payroll. Also consider temporary wage reductions. If you can reasonably draw down wage levels to match anticipated cash flows, this would allow you to retain valued trade talent, demonstrate your commitment to your team, and bring wages back to normal levels as the cash flows of the company allow. Additionally, furloughs may offer an effective alternative to employee layoffs.
  • Evaluate your current insurance deductibles and coverages and see whether there is an opportunity to reduce premiums while maintaining adequate coverage. This should include all major policy types, such as workers compensation, general liability, and project bonds.
    Now may be a great time to take your insurance needs back to market and explore whether you are with the best provider or surety option for your company. Alternatively, this could also be an opportune time to approach your current providers about demonstrating their commitment to serving as your valued business partner and asking them to find ways to reduce your existing policy premiums.
  • Areas of discretionary spending should be evaluated closely for cost saving measures. Expenses related to marketing efforts, investments in technology upgrades, or internal research and development programs could all be candidates for reduced spending without producing short-term negative impacts to operating results. Reductions in discretionary spending could also create opportunities for further payroll cost savings as positions heavily involved in areas experiencing investment reductions may have limited responsibilities remaining.

Managing Bank Relationships

Maintaining a strong and collaborative relationship with your bank and lenders through COVID-19 challenges is critical. As a management team, demonstrate to your bank that you are proactive in dealing with these difficult operating conditions.

  • Update your cash flow projections, consider upcoming debt service requirements and evaluate your ability to stay current on these obligations. Inform your bank timely if there are anticipated shortfalls and engage with them to find solutions through this period of hopefully temporary debt service challenges.
  • Recent interest rate cuts could provide a great opportunity to refinance existing debt structures and improve your cost of capital. If possible, work with your lender to take advantage of this.
  • If your debt facilities are subject to borrowing base calculations, now may be the time to approach your bank about amending those calculation methodologies. Explore whether the percentages applied to your accounts receivable in your borrowing base calculations can be increased. Also explore whether there is an opportunity to include presently excluded accounts or retainage receivables from these calculations.
  • Utilizing updated operating result projections, reforecast your restrictive financial covenant compliance reporting and assess the probability of a covenant violation. Approach your bank with anticipated violations and discuss potential compliance waiver options in advance.
  • If the changes to your operating environment create concerns about the reasonableness of current restrictive financial covenant terms, bring those concerns to your lender and explore appropriate revisions to problematic terms.
  • Consider available borrowing capacity under your current debt facilities and whether taking advances on these facilities now, in anticipation of decreases in operating cash flows, is an appropriate step.

Managing Financial Reporting

In order to be well informed through these critical decision-making processes, its vitally important to have timely and accurate financial reporting data from your finance team. Here are some key elements to consider.

  • While it is always important to focus on project status and maintaining accurate estimated costs to complete projections, times like these heighten the importance of this area of financial reporting. Take time to evaluate the current effectiveness of your job cost projection process. Ask yourself, how frequently does your company experience job margin fade in the latter stages of project completion? If the answer is too frequently, then you have a great opportunity to focus on your existing processes and implement best practices.
    If you have not done so previously, establish regular meetings of your project management, operations management, financial management, and executive management teams to review job status. Use these meetings as an opportunity to closely review the details of ongoing jobs and update your job cost projections. These meetings can also provide the opportunity to identify actions that can reduce job cost overruns, such as ensuring the timely return of rented equipment when it is no longer needed on the job site.
    Also use these meetings to discuss any cost overruns being incurred and evaluate the underlying root causes of these overruns. While errors in the initial job estimate may be to blame, such overruns represent change order opportunities. Today’s operating conditions make effective change order identification and execution more critical than ever.
  • Evaluate your financial statement close process and the impact that social distancing measures, such as remote work arrangements, may have on established procedures. Revise your processes as needed to ensure the timely completion of your financial close. If you anticipate delays in completing any required annual financial statement reporting to your bank, reach out and inform them of this possibility and explore deadline extensions.
  • You may need to revise your existing account valuation reserve methodologies to incorporate the impact of changes to your current operating environment, such as the appropriateness of your allowance for doubtful accounts or inventory valuation reserves.
  • Carefully consider your liability and expense account accruals and whether additional COVID-19 related accruals or adjustments are needed.
  • Audit firms are also implementing social distancing measures that may necessitate alternative methods of providing audit evidence to them and completing the fieldwork phase of the audit. Collaborate with your auditor to develop any audit approach and communication plans that may be required due to these changes to your current-year audit environment.
  • Changes or additions to your financial statement footnotes may be warranted, such as your subsequent event disclosures. These disclosures should be evaluated through your independent audit firm’s report date and include such events as cancellations of significant projects, modifications to existing debt agreements, and business operation closures.

These steps will help you limit the impact of COVID-19 on your business.

Need help? Contact our construction experts, who stand ready to assist you through these key considerations and more. And visit our COVID-19 Resource Center to stay current on the various pandemic-related governmental assistance programs, as well as other information.

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