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Access the 2020 Top 50 Construction Accounting Firms™ ranking  Download PDF or  View Online

 

As the nation grapples with the ongoing COVID-19 crisis, construction CPAs have been tirelessly advising clients to keep their businesses healthy and viable even as they face unprecedented new challenges on multiple fronts. Jobsites are reopening with new health and safety precautions in place, and contractors are assessing backlog schedules and rehiring workers that were furloughed or laid off when the industry had shed more than a million jobs at the end of April. 

In May and June, however, industry employment rebounded, adding 591,000 jobs and recovering an estimated 56% of jobs lost since the start of the pandemic, according to an Associated Builders and Contractors’ analysis of recent data from the U.S. Bureau of Labor Statistics. While this number is stunning—and an indication that economists clearly missed the mark in their original predictions on COVID-19’s market impact—times remain tense as the country experiences a resurgence of new infections in its most densely populated states. For this 2020 ranking of The Top 50 Construction Accounting Firms, Construction Executive reached out to hundreds of U.S. accounting firms with a dedicated construction practice to learn how they were guiding their clients in the midst of ongoing economic uncertainty. Among their top concerns were the shortage of skilled workers, increasing construction costs, reducing risk and managing cash flow.

Workforce Concerns

“The pandemic has affected construction clients very differently based on both the states and regions in which they primarily operate, as well as the industry sectors that they serve,” says Jon Zeiler, managing partner of Crowe’s construction and real estate practice. “Areas where construction was deemed not essential were hit the hardest with a large number of jobs delayed for two or more months and many having to furlough employees during this time.”

“Acquiring and retaining qualified labor is an entrenched issue for contractors, exacerbated by the coronavirus,” says Joseph Natarelli, leader of Marcum’s national construction practice. “The question now becomes: will qualified skilled laborers return when the country re-opens? Or will they use this as an opportunity to find employment elsewhere?”

“Luckily, contractors were able to maintain more workers than they otherwise would have because of the PPP loans. Had that not happened, the result could have been devastating not just to them, but to the industry as a whole,” Zeiler says. 

According to the U.S. Small Business Administration’s most recent report on the Paycheck Protection Program, the construction industry has received 12.38% of loans, ranking it third in approvals through June 30, and ensuring the survival of many businesses.

“Many of the loans will only be partially forgiven, but the good news is that the remaining portion retains a low interest rate and may be payable over two years,” adds Brian Bohman, partner at Wipfli.

Workers that are receiving unemployment checks must weigh the decision whether to return. “Additional unemployment benefits available from congressional action may make it harder to rehire workers since they may benefit more from unemployment than from their normal paycheck,” notes Larry May, partner at Carr, Riggs & Ingram.

“Between health concerns and supersized unemployment benefits, which will end, there is an immediate struggle to staff projects,” says Carl Oliveri, construction practice leader at Grassi. “People will come back eventually, but the first and largest step is for the construction contractor to invest in and roll out protocols to ease concerns.”

Michael Ceschini, managing partner for Ceschini CPAs, agrees. “Since working from home isn’t an option for laborers, contractors must reiterate the importance of practicing health consciousness to their employees—taking the day off if they are feeling sick, adhering to social distancing guidelines and washing hands as often as possible. These practices also put pressure on construction company owners to ensure that these protocols are adhered to, not just for health reasons, but to avoid unwanted fines,” Ceschini says.

For all of these reasons and more, contractors face increased competition for skilled workers willing to return. “Construction firms are ultra-competitive and looking to provide the best culture to attract employees from other companies,” says Martin McCarthy, managing partner at McCarthy & Co. “Employees have leverage, and the best companies acknowledge this.”

Bohman agrees. “Although money may be the ticket into the ballgame of work, it’s culture and engagement that wins it. Fostering a great reputation matters—a lot. Turnover is expensive in many ways. Successful construction companies devote resources to having an HR manager and a recruiter who can engage with employees, high schools, trade/technical colleges and universities,” he says.

Rising Costs

Construction costs were expected to rise incrementally in 2020, but the pandemic changed that outlook immediately. With additional money being spent on PPE for workers and the reality that the industry is China-dependent, construction firms are reassessing their contingency plans. Delays and increased material costs prompted renewed interest in seeing manufacturing return to the United States While this may seem like an ideal solution to both employment and supply issues, it’s an undertaking easier said than done. When the United States exported manufacturing overseas, it also exported risk and pollution, something the nation may be unwilling to take back. For now, at least, increased pricing is here to stay.

“Alternative sources for building materials in Europe and South America also suffered in Q2 as lockdowns spread throughout the world. With these delays, material price increases are expected to continue for the near future,” Natarelli says.

Rising costs are not just restricted to materials and labor. As Ceschini points out: “The greatest concern I repeatedly hear is the rising cost of insurance. As security requirements expand amidst the virus outbreak, contractors will see an ever-increasing need for insurance to properly protect themselves.” 

Increased training expenses are another unforeseen consequence of the virus. “Small to large contractors are incurring unforeseen costs to provide COVID-19-related training to their labor forces, including information on how to interact with others using social distancing to stay safe on the jobsite,” says Mike Karlins, partner at Calvetti Ferguson.  

“The current pandemic is certainly causing additional unforeseen costs and delays—costs that could not have been predicted as recently as a few months ago, let alone at the time of the original contract. In order to provide change order documentation to general contractors or owners, unforeseen costs and schedule impacts must be both identified and quantified,” Bohman advises. “Track and log any unique costs and schedule impacts that are associated with COVID-19 expenses. Have a contingency plan for anything vital. If you have a key material, explore multiple sources. Different locations are experiencing different restrictions; don’t assume that any supplier will be exempt from disruption. Contractors need to look at adding new contract clauses to allow for material cost changes and must be diligent with locking in material pricing, tracking changes and producing documentation.”

“Contractors have developed new operating protocols to incorporate additional hand-washing stations, required mask usage and social distancing on jobsites. In some cases, this has resulted in additional shifts with fewer workers per shift,” Zeiler notes. “Some project sites have staggered employee start times to avoid long lines for daily temperature checks and hoists. Contractors are attempting to capture the productivity impact of these measures and seek reimbursement for the unplanned additional costs under force majeure clauses in contracts.”

Other unforeseen expenses can include increased “costs to mobilize and demobilize, direct costs incurred and indirect costs by analyzing efficiency rates before COVID-19 and after,” says Elain Ervin, partner and leader of Moss Adams’ construction practice. “Be diligent regarding cash flow, forecasting, management and maintaining a strong corporate treasury.”

In short, additional costs due to the pandemic should be carefully itemized and contractors should not be wary of passing those costs along to clients.

The Backlog Effect

“At the start of the year, many of our clients were expecting an increased backlog compared to last year. That has changed over the past couple months as the percentage of clients expecting an augmented backlog has decreased,” Natarelli says. “However, as states reopen, they should be able to resume the work that has been on hold and rehire lost labor. By year-end, backlog may not be as originally expected, but it should be at a healthy level as long as new restrictions are not imposed in the fall.”

“Contractors are concerned about what business activity they can project for the next 18 to 24 months as they work off their backlog,” says Ron Lenz, partner at Katz, Sapper & Miller. Lenz notes that new bidding opportunities at the federal, state and local level have drastically slowed as the double whammy of declining tax revenues and increasing unemployment claims have combined to cripple budgets for government-funded construction projects.

“Projects that were going to bid in the third and fourth quarters of this year have been delayed until early 2021. The hope is that the projects will still go to bid and not be canceled,” Karlins observes. “As we did during the financial crisis a decade ago, we’ve told many contractors to quickly reduce overhead as backlogs contract. Don’t wait too long to lay off employees if necessary. If they wait too long, the company’s equity may substantially decrease resulting in an inability to get future work bonded.”

With many large corporations getting used to and seeing the benefits of remote work, there is also a growing concern that new corporate building projects may slow down. On the flip side, companies and municipal buildings that opt to stay “in-office” will be looking toward designs that incorporate private and health-conscious spaces which could result in new opportunities for contractors. In the interim, shorter backlogs remain a concern.

Tough Decisions

Contractors are tough by definition. It takes resilience to stand firm in the mercurial nature of the industry when so much inherently depends on weather, regulations and the economic forces of global markets, capital, labor, supply and demand. Times of economic crisis are an opportunity to assess business practices and the tougher questions about a struggling construction firm’s long-term viability. 

“Business owners have a tendency to skip the strategic plan, running by gut and emotion instead,” Bohman notes. “But emotions run high in uncertain times. One of your most important roles as a leader right now is to establish a sense of calm. That starts with guarding against your own emotional reactions. Contractors cannot be ad hoc in their thinking right now. This is the time to analyze and plan, even though those plans need to be agile, changing as circumstances dictate. Surround yourself with people you trust, be transparent with them about what’s really happening in your business, and ask for options so you can make the best decision in the situation at hand.”

Communication is paramount for those facing uncertainty. Dealing with uncomfortable situations should be attacked head on. “If a construction business is fighting for survival, we recommend evaluating your options and developing a plan before the company is too far gone,” says Tracy Tufts, director at LaPorte CPAs. “Options to consider include whether to sell your business, merge, liquidate or suspend operations for the duration.”

“Unfortunately the reality is some businesses will not make it,” McCarthy says. “Those that have working capital will find that the reason we counsel them to retain working capital is the reason they survive. Businesses may have to liquidate equipment, reduce their scope of services, have meaningful discussions with creditors and make very hard decisions.”

Combining operations is an option for some companies that wish to remain viable. Merging operations can reduce costs such as office overhead, staff and equipment. If this isn’t an option, getting in touch with your legal advisor, your accountant and then your bankers is paramount when formulating a successful exit plan. “Exiting a construction business, other than declaring bankruptcy, is a challenge,” Lenz says. “If someone intends to close, they should work off their backlog and not bid new projects.”

“The number one reason why contractors fail is cash flow related,” Oliveri says. “During the shutdown, I saw open requisitions being funded. As there was little to no work being put in place, the outflow was minimal. Coupled with the PPP loan, there will be instances where contractors are liquid as the industry reopens. However, that cash will fly out the door without proper planning. Pay cycles will be extended, labor and material costs will rise, not to mention the investments in PPE. If a construction company isn’t expecting to survive this, they should start to plan for a shutdown, consulting with their advisors to ensure the collateral damage is controlled and all obligations are negotiated.”

The Getting Paid Paradox

For an industry that pumps billions of dollars into the economy, it is a hard truth that getting paid remains one of the most difficult issues for general contractors which in turn delays payments to subcontractors and vendors. The stress of “hurry up and wait” to get paid often necessitates short-term loans to pay employees while passing up opportunities to bid new jobs. The art of prompt payment relies on many factors, but key among them are an airtight contract, impeccable documentation and enforceable liens.

“Many firms are now doing a much better job of documenting support for monthly requisitions,” McCarthy says. “The more data provided to support an invoice to a general contractor or sub, the better the chance to have it processed. Always make sure the payment request mirrors the contract provisions. Lastly, be on top of all ticket work and convert them to change orders promptly,” he advises.

Negotiating your contract thoroughly and adding interest penalties can help with getting paid as well. “From a general contractor’s perspective, we have seen companies negotiate hard on payment terms at the onset of the contract, either reducing the days until payment or building in an interest component into their bids for those projects with extended payment terms, which we have seen range from 90 to 360 days,” Zeiler says. “In limited cases, owners are offering earlier payment if the general contractor is willing to take a discount; however, these terms are typically not palatable given where most general contractor margins currently are. From a subcontractor’s perspective, the pay-when-paid clauses of most general contractors’ standard contracts have caused their accounts receivable days outstanding to increase significantly in recent years.

“Communication is key,” says Salvatore Leone, co-leader of Citrin Cooperman’s construction practice. “No one likes an unexpected bill. Successful collections happen for contractors that are in regular contact with customers, that discuss any potential change orders as soon as possible and that give ample reasoning for the extra charges. Successful firms build relationships with their customers. Showing the value that their firms provide not only expedites collection efforts but also creates future project opportunities.”

Bohman agrees. “When a new contract is obtained, best practice is to review it for the required format, timing and supporting documentation for billing and essentially perform a dry run with the owner or general contractor to confirm your understanding of the requirements,” he says. “This will assure prompt processing and payment, avoiding the ‘you forgot to submit this for payment’ excuse. When the first actual billing is submitted, call or email to confirm that it was received, everything is in order and the exact date payment will be received to avoid the ‘we never received your billing’ or ‘it was received late’ excuses. Continue the same process with future billings until everything is running smoothly and you are confident that you will receive prompt payments.”

Knowing the laws of the state you are doing business in helps accelerate prompt payment as well. “In the current environment, filing and maintaining construction lien rights will become even more important,” says Tim Pass, principal of Smith Schafer & Associates.

Retirement Plans: To Cut or Not to Cut?

If one thing is certain, it’s that the COVID-19 crisis forced many issues out into the light that employers were neglecting. As the stock market took some serious hits in the early stages of the pandemic and then slowly recovered, employers looked at what they were contributing to their employee’s retirement packages, and if they were still worth anything.

“As in many other industries, construction business retirement plans will feel the impact of COVID-19,” Tufts notes. “Due to the economic slowdown, both discretionary matching and employee contributions may decrease for many. Firms facing substantial layoffs may encounter partial plan termination considerations. Laying off more than 20% of plan participants can result in vesting all participants at 100%.”

“I believe it would be reasonable to see a reduction, if not an elimination, of company contributions to retirement plans for 2020 in anticipation of reduced cash flow caused by the shutdown,” Ceschini adds.

While some companies may opt to cut or defund their retirement plans completely, others are seeing what resources are available to keep retirement plans in place. “After several years of improving funding statuses of defined benefit plans (pensions), we may see a steep decrease in value and possibly result in financial improvement plans and surcharges that will cost participating employers more in the future,” Pass says.

Cybersecurity Training: Do it Again, and Again

Cybercriminals never miss an opportunity to come up with a new way to take advantage of current events, and COVID-19 is proving to be a lucrative one. Scammers have perfected ways to make an email look like a Center for Disease Control alert, complete with phony links to cases in your area, or offer up links to health expert advice—all uniquely formulated to download malware on your devices. With more office staff working remotely, companies need to keep their employees apprised and their devices protected from these malicious scams.

“The surge in teleworking, including VPN and remote access, only increases the risk to organizations,” Leone says. “There are malicious cyber-related scams including, but not limited to, phishing, data breaches, malware distribution, cyber intrusions and attempts to exploit teleworking. Cybercriminals are constantly adjusting their tactics and attempting to take advantage. Businesses need to be cognizant of this and maintain appropriate IT controls in order to mitigate external attacks. Organizations also need to educate their employees to limit the vulnerability of the business for a potential data breach. The appropriate security measures need to be taken to ensure external cyber risk is minimized. Companies should consider use of an ‘IT stress test’ to determine potential areas of exposure to these cyber attempts, and in turn, act to correct controls related to any identified areas of weakness.”

John Jamison, technology risk services partner at Calvetti Ferguson, has much to say about the positive impact of ongoing, consistent training and check-ins. “First, ensure that security is part of the culture and DNA of your organization and that your end users receive frequent training and reminders on how to apply scrutiny and due care in their daily computing habits. An annual security training program is not sufficient to keep these items fresh in the minds of your employees, instead, you may consider providing end-user training more frequently throughout the year in short, digestible formats. Implementing periodic testing of your ‘human layer’ is critical to ensure that the security training you are providing is getting through and being put into practice in your employees’ daily lives.

“Periodic phishing simulations or other social engineering examinations are a few methods that you can use to determine whether your end users are properly applying the lessons they have learned. Finally, if upper management does not take security seriously, neither will the employees. Company leadership must embrace security initiatives and model appropriate behaviors for the team,” he advises.

Lenz adds: “As many tasks are now handled in a remote fashion, aside from having active IT controls that address both new and ongoing cybersecurity threats, we strongly encourage continued education of their staff. It is important for all company employees to be able to identify the various methods of cyber attack and remain steadfast in handling them properly. Even one successful phishing attempt can be detrimental to a company’s business and financials.”

An Uncertain Future

“The pandemic has created a lot of fire drills,” Bohman says. “At this point, the fires have been controlled so that contractors can start to look forward at least slightly. Questions are no longer about today and this week, but instead, what will things look like in six months to a year?”

Without a crystal ball, there’s no way to estimate the long term impact, but as Leone notes, “By following the lessons learned during the 2008 financial crisis, parties in the construction process should be able to survive to fight another day. Getting ahead of the curve to manage, preserve and defend against claims will be vital to protect the financial integrity of construction owners, lenders, contractors, subcontractors and suppliers.”

As Muhammad Ali once said: “It isn’t the mountains ahead to climb that wear you out; it’s the pebble in your shoe.” Having an accounting firm on your team that is well-versed in the complicated machinations of construction accounting allows you to concentrate on the mountains during challenging times.

Access the 2020 Top 50 Construction Accounting Firms™ ranking Download PDF or View Online

 

The Top 50 Construction Accounting Firms™ logo may not be used in any form whatsoever without the express written permission of Construction Executive. For more information, contact [email protected]
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