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What is the importance of establishing and using cost codes in accounting software?

Bill Gustaw 
Team Leader, Solutions Group
CMiC


The Importance of Applying Generally Accepted Accounting Principles, Demonstrating Auditability and Incorporating Security Measures in the Current Construction Landscape

Despite common misconception, independent contractors can’t simply bypass key accounting practices due to the size of their organization alone. In fact, I recommend that they apply the same accounting practices and best practices that larger organizations do:

  1. To apply generally accepted accounting principles (including the appropriate division of duties).
  2. To ensure that all regulatory requirements are met.
  3. To demonstrate auditability.
  4. To ensure that their data and systems are secure.

While the scale and complexity of each organization may vary, the basic principles in running them should remain the same.

The Applicability of Standardization and the Benefits of Implementing a Construction-Focused Software Solution

I also recommend that independent contractors establish cost codes, regardless of the scale of their operations. In doing so, it will promote standardization in costs and enable them to report against the same scope of work—both horizontally, as well as vertically. To that end, they will be able to identify areas where they are making money and put their focus toward the areas where they are not.

This is where implementing a construction-focused software solution comes in. While it manages their financial transactions and helps them demonstrate compliance, it will give them the bandwidth to focus on strategic and operational activities to help them move their businesses forward.

Larry May 
Partner
Carr, Riggs & Ingram CPAs and Advisors


Although sometimes underestimated, few things are more important to a construction contractor than maintaining accurate, timely financial statements and job cost reports. Without establishing and using cost codes supported by construction accounting software, this is almost impossible. In addition, the cost codes should mirror those used by the contractor in their estimating to ensure that accurate progress reports can be obtained as close to real time as possible.

Tracking job costs accurately using cost codes allows the contractor to know whether their job will make the planned profit and alerts the contractor when to intervene if a project has a problem. As proven by this past year, organizations never know what will affect contracts.

Pandemics are rare, but weather delays, materials shortages, poor work by a subcontractor or a bad initial estimate are all too common. The earlier these can be detected, the more likely that additional resources can be deployed to ensure that the job is completed with minimal damage to the business.

Finally, management needs accurate job costing to calculate over/under billings to properly track not only the profitability of an individual job but the business as a whole. Construction contractors must have adequate discounted working capital to maintain their surety programs. If businesses aren’t maintaining an accurate job cost system using cost codes in the accounting software, management may be trying to run a business with little foresight and run the risk of not maximizing profits.

Scott Stafford, CPA 
Partner, Audit
Armanino LLP


It is often said that it is not what you know that gets you into trouble, it is what you do not know. That is certainly true when it comes to financial management of a construction project. You know your crew is on-site, you know you purchased the materials per your estimate and you know you have rented the equipment required. So why do the job costs start overrunning the original estimate halfway through the project? At this point, everyone starts scrambling for information. Senior management reaches out to project managers, project managers reach out to crew managers and everyone turns to the finance team for answers. The “what you do not know” is impacting job profitability, team morale and the company culture.

So, how do you turn this around? The answer lies in your accounting system and specifically how you structure the chart of accounts. When you prepared the job estimate, you budgeted all components of the work that would be required. Ideally, you want to align your accounting system with those components so that you can track the actual costs for each of these components. 

The chart of accounts needs to be able to accommodate not only project coding but specific cost category coding as well. Such a structure allows you to understand where a job’s specific cost category overruns the budget, and it also enables timely monitoring of job costs so you can predict where costs are running hot and address root causes before they impact profitability.

Mike Ode 
CEO
Foundation Software


Accounting software can help make your processes more efficient and give you reliable, accurate data, but at the end of the day, what you’re getting out of the system is only as good as what you’re putting in. Having a cost code structure in place and using it consistently across teams are essential for getting useful data from your software.

Cost codes can help you quickly see how much you’re spending on each part of a job. In the short-term, this allows you to do things like catch overruns or see where you might be running into budget issues. In the long-term, knowing your cost patterns can help with future projections. Once you determine exactly where money is being spent on each job, you can start to create better, more accurate estimates—and you’ll be able to see which projects end up being your most profitable so you’ll know which ones you should be bidding on in the first place.

Simply having cost codes is only half of the solution, though—the structure needs to be followed. All employees entering costs or invoices into your accounting software need to be aware of how those costs should be assigned. If costs are attributed to “catch-all” codes or multiple codes are being used for the exact same type of cost, your data suffers as a result. By having a cost structure in place—and adhering to it—you can start to get more meaningful data.

Alex McBride, PE
Senior Manager
Wipfli


Cost codes are your most important tool to track where and how project costs are being incurred. Unfortunately, the data is only as valuable as it is accurate. It behooves your organization to take the time to create and review cost codes that allow for granularity, but don’t overwhelm employees with their quantity. A thoughtful approach that reduces administrative burden increases your chances of employee buy-in—a key necessity.

With accurate cost code data, a company can utilize available technology platforms for real-time monitoring. This bird’s eye view allows you to identify and address cost overruns in specific portions of a project as early as possible. Project leaders know that the earlier an issue is identified, the more control you have over its outcome. Fortunately, a robust cost code system provides the insights to make business decisions proactively instead of reactively.

In the event of scope changes, specific cost codes can be created to capture discrete or short-term issues. These “buckets” of actual costs are one of the most effective tools for pricing scope changes, claims or disputes, especially if the project has a history of tracking its costs accurately. Approaching unique cost codes thoughtfully and communicating their use to the entire project team helps you establish the evidentiary record to support any future negotiations and claims.

Thinking beyond projects that are underway, accurately tracking project costs gives you and your estimating team a continuous feedback loop to estimate future projects more successfully.

Joel Hoffman
Senior Manager Product Management - Construction
Acumatica


Cost codes provide the ability to create a project hierarchy such as phases, activities and work breakdown. When creating cost codes, you enhance the readability of projects, providing organized visibility into costs, including cost types, estimated and actual quantities, cost budgets, commitments and revenue.

By creating a standard cost code list, and similar structure across the organization, you can analyze information for all projects in a consistent manner. This provides for project progress reporting, notifications when certain criteria or thresholds are met and helps mitigate risk on your projects.

Adding cost types to the cost code allows companies to extract specific values related to the usual labor, material, equipment and administrative costs but, in the current economic environment, cost types also provide the ability to track PPE related costs, home IT costs and other areas that can be used to create effective budgets moving forward. For those companies that received pandemic-related benefits, the documentation of costs will be critical.

When your accounting software provides the ability to associate transactions to the cost code (e.g., accounts payable bills, purchase orders, receivable invoices, expenses, timecards), you can analyze the budgeted versus actual costs and revenue values. This information keeps projects on time, on budget and enables businesses to eliminate profit fade.

How should a construction firm approach building and protecting its creditworthiness?

Tim Cummins
Lead Partner, Construction and Real Estate
Aronson LLC


Building and continually enhancing your creditworthiness is a daily and monthly process. Construction executives must manage profit, grow equity and develop cash reserves to support the business as it grows. These activities are essential to obtain and maintain credit.

Build and protect your creditworthiness through regular, regimented actions, including the following:

  • Preserve profit and build equity and reserves each year for reinvestment into the business. Set a monthly and annual target.
  • Monitor return on equity to ensure effective use of credit and better-than-the-market return.
  • Manage risks and costs associated with project overruns, delays and late completion.
  • Monitor material management in the field. Anticipate supply chain risk. Consider the risks and benefits associated with the advance purchase of materials.
  • Evaluate repetitive and near-repetitive construction processes to identify and aggressively act on labor productivity gains and costs savings.
  • Embrace technology to improve efficiency and productivity and related monitoring and reporting. Do not become complacent with your current technology.
  • Evaluate fluctuations in inflation rates and interest rates to manage estimates and bids, as well as the impact on profits during the construction process.
  • Continual risk management—identify and scenario plan, including the impact on your credit against the risks noted above.
  • Most importantly, communicate transparently with your bankers and sureties on a monthly or quarterly basis, without delay. When you need them, any additional underwriting can be smooth, quick and will provide for another opportunity to build your balance sheet, as well as enhance your creditworthiness as you grow.


Michael B. Ceschini 
Managing Member
Ceschini PLLC


A construction firm’s ability to build and protect its creditworthiness is paramount and, perhaps, more important in construction than in any other industry due to the scrutiny by third party vendors including sureties, banks, subcontractors and owner prequalifications.

These important steps should be taken by contractors to help build and protect the company’s creditworthiness:

  • Establish and maintain lines of credit with industry-relevant vendors or suppliers. The better your relationship, the better the likelihood of avoiding upfront payments of items or services. A company can establish a positive business credit history by securing a line of credit or payment terms such as net-60 or net-90 with vendors or suppliers that report those payments to business credit reporting agencies.
  • Pay on time all the time! This is the number-one rule in any credit situation. Paying your bills on time shows that you are reliable and can effectively manage (and pay off) your debt. A late payment history, especially severely delinquent payments, will bring down your business credit rating and negatively impact your business credit profile.
  • Diligently monitor your business credit history. This can help you spot any issues or blemishes that aren’t accurate. If you do find an error, be sure to file a dispute with the reporting agency.
  • Maintain accurate information and records. Doing so can help you avoid various instances of fraud. In addition, accurate information facilitates communication between a credit firm and a company regarding potential fraudulent activity.

Building and maintaining creditworthiness should be a part of every construction firm’s long game. Consistency and accuracy are key factors in ensuring your reputation as a financially sound, reliable and trustworthy firm.

How should construction firms prepare for a potential audit of Payroll Protection Program loans?

Todd A. Feuerman, CPA, CCA, MBA 
Director
Ellin & Tucker


The Paycheck Protection Program has been instrumental in keeping companies afloat by providing financial security for business owners and job security for employees. Now, the question many business owners have is whether the Small Business Administration will actually forgive the loans. Those receiving less than $2 million enjoyed relatively quick notice of forgiveness by the SBA while those who received over $2 million have been at an uneasy standstill. Banks have finally begun to receive monies from the SBA, signaling that the wait for forgiveness of those larger loans is coming to an end. However, this does not mean business owners are free from potential audits.

The SBA’s payoff to the lender and corresponding forgiveness letter are not protected from a potential audit. The SBA still has the right to audit and potentially reverse the decision to forgive for up to six years from the date of loan forgiveness, regardless of how much PPP money the business received. As a result, every business owner must be prepared for the possibility of an audit. While little is known about this audit process, it is certain that applicants will be required to provide all documentation surrounding the loan including strategic plans, financial records and other statements.

Business owners should be asking themselves the following questions: Did I conform to the requirements to be eligible for PPP loans? Can I support my reasons for needing the loan? Did I comply with how I was supposed to spend the money?

John Gallo 
Principal
UHY LLP


We advised our clients, when they were pulling together their information for the Payroll Protection Program, to do so as if they were subject to an audit. This ensures that the amounts are accurate and provides an easy audit trail in the future, if needed. We recommend that clients put a narrative together in order to be able to easily refresh their minds regarding the thought process when they applied for the PPP loan; the narrative should always be from the mindset of when the company applied for the loan. It should include how they determined loan eligibility and should not be a post-loan perspective. It is also important to keep all this data safe and secure, should it be needed in the future.

Joseph Natarelli 
National Construction Services Leader
Marcum LLP


Companies with Paycheck Protection Program  loans will, in many cases, be requested (required above $2M) to complete the PPP Loan Necessity Questionnaire as part of the forgiveness application; the questionnaire may be used by the SBA in reviewing the good-faith certification that a company makes on the PPP borrower application and as a roadmap in the SBA’s audit of the loan. The questionnaire requests certain financial measurements to determine the need for the loan. 

When completing the form, contractors should attach a supplemental narrative discussing all of the ways the pandemic impacted the company; examples include delays in the collection of receivables, delays or shutdowns of projects with scheduled timeframes and related costs, delays or cancellations of any projects out to bid, additional costs (e.g., PPE or other) incurred due to the pandemic, government shutdowns and other COVID-19-specific impacts to the company in its daily business operations. Also include letters from third party service providers (e.g., bonding companies and banks) as to the need to maintain certain financial metrics required for bonding programs, not only support the existing work but to be able to continue to bid on new work. Additionally, the company should maintain documentation of all amounts spent on eligible payroll and non-payroll costs, including payroll tax filings, payroll registers, bank statements, invoices, copies of canceled checks, etc., most of which is provided to the bank in connection with the submission of the forgiveness application.

In your experience, what are the biggest mistakes that construction firms make when facing a crisis like the pandemic?

Jon Zeiler 
Managing Partner of Real Estate & Construction
Crowe LLP


When I reflect on mistakes contractors make when facing a crisis, I think about the recession of 2008 and the pandemic in 2020. Many of my clients learned valuable lessons from missteps and actions that were taken or not taken in 2008. In turn, I saw contractors implement a more aggressive plan last year in preparation for the potential slowdown with both short-term and longer-term plans to react accordingly. 

These plans included actions that could be implemented if necessary to reduce additional costs, including deeper cuts, as well as even more aggressive plans for larger cost-reduction measures such as shedding entire markets, geographies and departments. The plans also included levers that could be pulled for additional cash savings as their performance and the market demanded. 

Many firms made much deeper cuts immediately during the pandemic as opposed to waiting until it was too late to do so. These cuts included practice development costs, travel, external training, underperforming personnel and floundering profit centers. Firms also knew not to count 100% on their backlog as these projects could be delayed and even canceled, so they considered some sort of discounting on their known backlog, expected win rate and amount of available work to bid. Additionally, successful firms took actions focused on conserving and accumulating cash reserves and gaining access to liquidity.

Keely Wuertz
SaaS Executive Consultant
National Payment Corporation (NatPay)


Being prepared during any crisis such as the recent pandemic can stall or delay routine events such as providing HR services and payroll for your employees. The pandemic also caused some challenges with HR and payroll departments working remotely.

The technology to enable secure electronic document delivery is available today on a “Software as a Service” (SaaS) basis utilizing a pay for performance business model. This means that the ability to deliver documents electronically to your employees can be achieved rapidly with minimal internal IT commitments and in a budget-neutral manner. Consider the wasted time and money spent in manually processing HR benefits and payroll-related transactions. According to a Cedar Group study, implementation of employee self-service reduces costs by $9.00 per employee per month (PEPM) by eliminating manual, paper-intensive tasks.

Adam Tillman 
Shareholder and Market Leader
BerganKDV


The biggest mistake we see construction firms make when facing issues like the pandemic is not remaining controlled in their decision-making. We see some that make knee-jerk reactions and overreact to a situation, as well as some that take the approach that everything will be okay and are not prepared as a result. 

We tell our clients continuously to remain disciplined in their practices, watch cash flow carefully, communicate with their people and stay informed on what is going on in the industry, the general economy and their primary market(s). Work with your leadership team and advisors to develop action plans based on different potential scenarios that allow you to act quickly as facts and realities come to light. 

The goal is to be prepared and make smart decisions and, in doing so, manage tough times, remaining nimble and being poised to take advantage of future opportunities. This sounds simple, but it requires discipline.

Carl Oliveri 
Partner, Construction Practice Leader
Grassi Advisors & Accountants


In my opinion, a big mistake was not forecasting cash flow changes. We have financial tools that can pinpoint when cash challenges will arise so contractors can prepare for them. As construction companies are burning off backlogs, and replacement work is not as readily available, cash flow issues will multiply. Going into the pandemic, many contractors carried heavy cash balances. As projects were shuttered and prior requisitions were funded, they maintained a good cash position because there was no immediate outlay for project costs and many received Payment Protection Program loans. Now, with projects ending, slow replacement work, and the PPP shutdown, a cash pinch is emerging.

This is compounded by rising materials costs, which impact every contractor. The first impact was on work already won before COVID-19, since jobs were bid and awarded with an estimated materials cost. If a project was shut down or hadn’t started and material costs increased, the contractor absorbed those costs. For new projects, every contractor is dealing with the increased costs in their bidding. The difference is, who is willing to give up a point or two of overhead and profit, even in instances where installation of materials is self-performed?

Despite the dire need to find replacement work, another big mistake is to take work for the sake of getting a win and keeping your people busy. If it’s not profitable or your team is not qualified to perform the work, the ultimate costs of that maneuver could lead you down the road to failure.

Shane Brown 
Partner, Construction and real estate industry group leader
Plante Moran


One of the biggest mistakes firms can make is not taking advantage of the opportunity that a crisis provides. It’s a good time to step back and see which practices, processes and plans are working and which ones aren’t. A crisis can illustrate how ready your leadership team is for the next step—whether it’s growth, a leadership change or an ownership change. Are they ready to take over? For many leaders, the recent pandemic has crystallized their future plans—some are expanding their businesses, and some are ready to move on. However, it’s hard to move on those big plans when there isn’t a solid succession plan in place. The pandemic has shown the value of succession and strategic plans.

It’s also an opportunity to invest in your business. Many firms used the pandemic as a chance to make investments in technology and analytics to give them better insights and increase productivity. Executives were able to step back during shutdowns, look at their strategic plan and accelerate technology adoption during a slower time. They’re seeing the rewards from that investment now as they’re able to take on more projects and have a real-time view of their sales, production, equipment use, etc.

Elaine Ervin 
Partner, Construction National Practice Leader
Moss Adams


One of the top mistakes construction firms make is not having a sound business strategy. To stay competitive during disruptive times, your firm needs to have business fundamentals that are in shape and working well. But many companies don’t develop these safeguards, despite knowing a downturn will likely bring future challenges.

At the beginning of the COVID-19 pandemic, there were many unknowns for businesses. Jobsites were shut down, supply chains were disrupted and many firms couldn’t plan ahead.

The companies that were able to stop, analyze the situation, determine headcount and establish how to move forward were the most successful. They approached the situation strategically rather than reactively. Having an overall business plan allowed them to proactively address challenges and stay in business.

Effective fundamentals account for not only processes and strategies, but also cash flow, key performance indicators , contract language, pricing volatility and talent shortages. Your business should establish safeguards around each of these areas. For example, providing strong company culture, compensation and benefits packages can attract and retain your best employees during disruptive times.

Establishing your business strategy and regularly monitoring each of these aspects can help your firm stay competitive despite external factors. If a crisis hits, your firm can then easily fall back on its pre-established business fundamentals.

What are your recommended best practices for managing prompt payment?

Ken Hedlund
Principal
Somerset CPAs and Advisors


Contractors should have consistent and disciplined processes and procedures for project bids, estimates, change orders to maximize profitability and cash flow. Key considerations include proper checks and balances, tiered levels of authority, review and approvals every step of the way to avoid the potential for unintended errors. 

Many successful contractors utilize the concept of a “project office.” A project office includes a solid link between project managers and finance and accounting. Project assistants are assigned to project managers to provide regular, consistent, independent, objective and collaborative review and support. This allows for segregation of duties and controls; it also requires teamwork and regular communication. The project manager can then spend more energy on the non-administrative side of the project, which is what they love to do. 

A project office, if properly designed, detects cost overruns, out-of-scope identification for timely change order documentation, along with accurate and timely billings. Generally, every project assistant and their project manager should bill every project monthly.  

Projects should not be underbilled. Underbillings should be considered an exception with a requirement for an explanation if or when it occurs. Once billed and outstanding for 45 to 60 days, the project assistant and or project manager should personally be required to follow up with the client. Discipline and accountability with this structure will maximize profit and cash flow. Underbilling is an asset with no hope of collections, accounts receivable is an asset which will typically be paid in 45 to 60 days and cash is a productive earning asset resulting in interest income or reduces interest expense on the operating line of credit.

Rick Janes
Senior Director, EVPay
EleVia Software


Today, having visibility into your organization’s cash flow is essential for understanding health and performance. When helping architectural and engineering firms, we like to have discussions focusing on whether they are taking advantage of technology to drive improved cash flow by increasing prompt payments. 

Why? A critical component of your businesses cash flow is having systems and processes that allow for timely payments. And while we are finding that more firms are turning toward ACH payments in favor of paper checks, this seemingly “automated” payment process requires an exhausting, laborious effort from finance teams. Leveraging ACH payments can be positive from a cash flow standpoint, but it’s tremendously time consuming to reconcile payments to invoices. For this unique problem, payment receipt integration is key; it accelerates cash flow and cash flow visibility, speeds payments, automates manual coding and reduces manual steps. 

With integrated, automated solutions, customers  find the turnaround on payments faster; they also find it beneficial that their clients have a portal to pay older or skipped invoices. In having a prompt payment process, you can greatly improve cash flow, improving overall business performance.

Bassem Hamdy 
CEO/Co-Founder
Briq


The importance of prompt payment in the construction lifecycle can't be overstated. Now, more than ever, is the time for contractors to be sure that they have best practices in place to manage the payment process efficiently and accurately. During the pandemic, the need for standardized processes and automation of payments was critical, as companies adjusted to a remote work environment. 

Adopting an automated workflow allows contractors to maximize best practices by:

  • Increasing accuracy and significant time savings
  • Enabling management of payments from multiple locations
  • Providing a timely and accurate audit trail
  • Improving relationships with subcontractors and suppliers

Managing the money workflow in construction is a critical component in maintaining profitability in a historically low margin business. Best practices for prompt payments that include process automation have significant financial and operational benefits. Automation also enables the finance department to become knowledge workers, rather than data entry workers. Historically, contractors have been reluctant to adopt technology solutions. But during the past 18 months, the construction industry has done an amazing job of embracing technology as a solution to many of the challenges presented by COVID-19. Moving forward, we expect that contractors will continue to invest in process automation as a critical component of their best practices.

Linda L. Roberts 
Principal
BerryDunn


Prompt payment laws establish acceptable time parameters for contract and materials invoice review and payment on federal, public and private projects as defined in each state’s statutes. Interest and penalties can apply if deadlines are missed.

The first hurdle to getting paid in a timely fashion is gaining swift approval of invoices or requisitions. General contractors and subcontractors can improve odds of invoice or requisition acceptance by carefully reviewing submissions to ensure they adhere to the owner prescribed form or format and contain complete and accurate information. Cash flows are negatively impacted if invoices are rejected and payment receipt is delayed. Further, general contractors risk having to pay subcontractors and suppliers prior to payment receipt if invoice approval is not timely.

General contractors employing construction industry ERPs can leverage automation by linking subcontractor invoices to owner requisitions and establish payment dates for approved invoices based on owner payment receipt date or in accordance with contract or prompt payment terms. Invoicing and payment terms should be entered at the time jobs are set up in the system—whether as prescribed in the contract under pay-when-paid terms, prompt payment regulations or statutes, or in other special arrangements.

If system-based payment automation is not possible, policies and procedures should be established that require the finance team to check for subcontractor or vendor amounts associated with each contract when payments are received, check with project managers to identify existence of any work issues imposing payment holds, establish and monitor due dates, and make timely payments.

Mike Milligan
Head of Global Marketing and Strategic Partnerships
Zuuse

We've all heard the old adage, time is money. Nowadays this may be more true than ever. Many of us are working remotely, and staying productive through a global pandemic requires us to rely more and more on our cell phones, home WiFi systems and technology in general. Yet, in this challenging construction market, cash flow is absolutely critical. Especially for small businesses. This is not new news. But whether you're a controller, project accountant, AP manager or jobsite project manager, chances are you're still spending an inordinate amount of time relying on inefficient, manual processes that are nearly impossible to automate, don't integrate with your ERP system and are anything but simple. 

For example, last year, we at GCPay spoke with many customers to see how much time they spent processing payment applications with their subcontractors before adopting our payment automation platform. Would you believe that on average, we heard that it's often upwards of an hour? Whether it was chasing inaccurate lien waivers, error-prone spreadsheets or incorrect invoices from their subcontractors, the result was delays in payment applications from subcontractors, which in turn affected their own ability to be efficient. Technology doesn't have to be an expensive investment, nor does it have to be an intimidating proposition in terms of learning a new software application. It actually can be pretty straightforward with the right support from a provider. By integrating with a company's existing ERP system, it eliminates those paper-based workflows, manual processes and double-entry accounting practices, saving time and money.

Do you have any advice for construction firms to mitigate the ongoing impact of the pandemic?

Julian Xavier 
Managing Principal of Construction
CLA


Due to the essential nature of its work, the construction trade overall was able to continue operating during the pandemic—which was great news for our industry. However, there were some obvious negative impacts, and the best-in-class contractors reacted quickly to increase their ability to continue operating successfully. To mitigate ongoing effects of the pandemic, there are several key areas contractors should assess.

Financial results and cash flow projections should be prepared and updated on a timely basis to understand what your short-term costs and backlog revenue look like. Cash flow projections are also critical for assessing liquidity needs—and whether your existing line of credit or other financing means are adequate to support ongoing operations. You may need to make some hard decisions on expenses to ensure your company remains viable.

Revisit bidding and pricing practices on new work to make sure that pricing for materials, labor, productivity, etc. are aligned with current market conditions. Using the same productivity and pricing information from prior history could lead to significant problems.

Examine and place heightened awareness around billing and collection practices to keep cash coming in the door. This could include a daily or weekly review of aging reports and more frequent contact with slower-paying customers.

Lastly, focus on accurate and timely financial reporting, and meet with project teams to identify any issues or delays. Make sure these are quantified and captured as potential contract changes that are converted to change orders.

What are the biggest lessons for construction firms from the Payroll Protection Program?

Kevin L. Branner, CPA
Principal
YHB | CPAs & Consultants


For most contractors, work continued and remained profitable during the pandemic. However, many construction companies started dealing with a market of declining backlogs and postponed or canceled projects. The pandemic forced all contractors to take on additional costs to protect employees and make jobsites safer. Given the uncertainty in the construction environment at the time COVID-19 hit, the provisions of the Paycheck Protection Program only created further doubt and skepticism for a construction firm’s ability to meet the criteria of needing the funds to continue to operate and employ workers.

The main issue for most of our clients was how frustrating the process has been. The difficulty for both contractors and their advisors is in translating the ongoing changes and updates from the time the program was rolled out, lack of timely guidance by the Treasury Department and U.S. Small Business Administration, back and forth requirements on eligibility and other ambiguities in areas of the loan application and forgiveness application.

For others, we realized strengthening record-keeping policies and procedures had to become a priority. The importance of documenting how the construction firm was eligible for the PPP loan, as well as maintaining and tracking how the funds were used for payroll and other, non-payroll eligible costs, were top concerns.

Ultimately, the hope is that what was learned during the exhaustion and strain created by the first round of PPP loans will make things somewhat smoother for contractors who met the eligibility requirements for “PPP 2.0” forgiveness.

Why should construction businesses instantaneously transform field operations data into accounting data?

Neil Ashizawa 
Chief Product Officer
Jonas Construction Software


Immediately transforming field operations data into payroll and accounting data enables businesses to generate cost and financial reports at the exact moment they require them in order to make timely business decisions. 

Executives and owners should not have to wait on the following process to make timely business decisions that maximize profits and equity:

  1. Use materials, equipment, subcontractor and labor costs to fulfill projects or services
  2. Convert costs to accounts receivable, accounts payable and payroll
  3. Input AR/AP/payroll to accounting software
  4. Generate cost and financial reports

This process simply takes too much time to make timely, critical business decisions.

Construction businesses require specialized software to produce cost and financial reporting the moment they are required to maximize profits and equity. 

This specialized software must:

  1. Help field personnel to efficiently fulfill work requirements on job projects or field services.
  2. Enable the input of “Cost Type” data that gets immediately calculated into AR, AP and payroll data.
  3. Enable AR, AP and payroll data to be immediately reflected in cost and financial reporting.

How are you helping contractors to navigate the Employee Retention Credit if they received a Payroll Protection Program loan?

Phillip Ross 
Partner
Anchin


Most of the focus on government relief has focused on PPP loans, which have been hugely impactful. As a result of PPP's popularity though, ERC is less understood, but ERC is already having and is going to have a major impact on the industry this year and we’re proactively advising clients on how to navigate the complex process, as well as maximize the benefits and improve cash flow to be ready for the market’s upswing.

Originally, companies that took a PPP loan couldn’t file for ERC, so PPP loans seemed the natural choice. This legislation changed towards the end of 2020, and you can now apply for benefits for both programs as long as you’re not utilizing the same wages for each one. In order to qualify for the benefits in 2021, a company must have at least a 20% decrease in their tax gross receipts for a quarter as compared to the same quarter in 2019. Another change for 2021 is enabling larger companies to benefit from ERC as, now, employers with fewer than 500 employees during 2019 can claim this refundable tax credit. 

The amount of the credit was also increased to up to 70% of the first $10,000 of qualified wages to each employee ($7,000 credit) for each quarter. Any wages for an employee that are in excess of the PPP wage limit can be used for ERC purposes. There is an interplay between the two programs in order to achieve the greatest combined benefit. Additionally, once a company qualifies for the credit for a quarter, they automatically qualify for that next quarter as well so there is an opportunity for planning. Companies can greatly improve cash flow by reducing their payroll tax deposits once they know they qualify for the quarter instead of waiting to receive the credit back as a refund.

ERC is taxable though and the credit is a reduction of payroll expense, so this could result in a slightly reduced Research & Development credit for a company. The ERC benefit far outweighs the reduced R&D credit and will be a huge boon for the industry in 2021.

What trends have you seen in contractors’ abilities to obtain insurance and surety bonding?

Marshall Shepherd 
Partner
Melton & Melton, LLP


The ability of contractors to secure insurance and surety bonding is key to either inhibiting or obtaining envisioned growth. Financial uncertainty and other business challenges arising from the COVID-19 pandemic have made obtaining insurance and surety bonding more challenging, especially for startups and contractors with little history.

As with most other business processes, having a strong set of financials makes the process of obtaining bonding much smoother for contractors. Bonding agents are looking to make sure that the contractor is profitable, as well as that the financial statements and key estimates are reliable. Bonding agents are particularly focusing on estimates pertinent to the jobs completed during the year, in addition to those in progress at year end. Contractors must be able to report this information on a consistently accurate basis in order to provide assurance as to the past, present and future financial health of the company.

The volatility created by COVID-19 has increased the number of requests for semi-annual and annual reviewed financial statements. In order for contractors to demonstrate strong financial standing, they need the right personnel in place to keep both the financials and the business in order. Bonding agents need to see that there is both consistent positive cash flow and reliable estimates. Large adjustments to the financials create red flags that should be avoided.

Consistency is key; the ability to demonstrate creditability, profitability and a strong financial history are needed more than ever in today’s post-COVID-19 business environment.

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