Construction After the Shutdown
By: Nathan Croll, Partner, Business Advisory Services; RubinBrown, LLP
Rick Feldt, Partner-in-Charge of Business Advisory Services, RubinBrown LLP
Ken Van Bree, Partner-in-Charge of Construction Services, RubinBrown LLP
We are entering a point where everyone is thinking about getting back to work and leaving our work-from-home experience. That is a good thing to think about! But what is the most efficient and profitable way to do that while keeping your employees, customers and subcontractors safe? Here are a few tips to make that happen.
#1 Priority - Communicate
Many construction companies had crews working at project sites during the work-from-home mandates. However, your customers and suppliers may not have been fully staffed – particularly in the back-office functions. It is extremely important to be in contact with everyone in your supply chain.
- Your financial team should call (or Zoom) the financial staff of each owner or other contractors you have been working with to evaluate their current condition. You should determine if they have been processing pay apps, have they been in touch with the back-office function of the owner, determine their financial state (if possible), etc.The most important determination is whether they are in a position to pay you and in what time frame.
- Your financial team should also be calling your subcontractors and suppliers.It is important for you to know if your subs have been paying their suppliers.Are your subs and suppliers in a financial position to continue doing business through the next 60 days (May and June)?If they are short on materials or supplies, how will that affect your particular jobs? You need to understand the extent of these risks as soon as possible.
- Check in with your surety bond provider. If your surety has any plans for less flexibility with key financial metrics during these challenging times, it's best to get an understanding of those liquidity requirements now so you are not surprised later while bidding a job.
- Stay close to your bank.Many (if not all) of you were working closely with your bank during the PPP loan process.However, that was money guaranteed by the federal government. Loans guaranteed by the bank itself are a different story.It is important to let the bank know what your expected borrowing needs might be over the near term (May, then June, then July).As discussed below, it is important to have a short term outlook during the start-up period.Finally, you might want to consider establishing a secondary banking relationship to ensure access to cash.
- Project timelines could continue to be affected by social distancing guidelines and recommendations (i.e., crew sizes, # of crews allowed to be on site, etc.) for the foreseeable future.This not only adds time but will likely have a dollar impact to each project as well.Communication between the Subcontractors, General Contractor, Construction Manager, and Owner/Owner Rep are as imperative as ever.
- Communication on design changes are also important during this time.A once “open concept” design may no longer be supported going forward which could cause significant re-design and engineering on multiple fronts requiring significant communication and negotiation.
- Contractor and Owner management teams may have also seen changes in their management structure which could cause additional need for more coordination and communication.This may very well be an opportunity to strengthen relationships and develop new methods for collaboration between parties.
Some construction companies have not been able to continue working during the last couple months. It is even more important for these companies to contact each link in their supply chain right now. Don’t wait for the start up to begin!
#2 Priority – Manage Cash Flow
It is important to ensure cash and working capital is sufficient to start and/or continue operations. Some tips to manage your cash include:
- As mentioned above, you should first consider your short term needs when managing cash flow.Once you have assured that you will continue to be liquid over the first 4 weeks of the start-up, you can then look further out.
- Your financial team should be working with project managers to prepare monthly and quarterly cash flow reports by job. Knowing which jobs are generating cash and which jobs are using your cash is critical information needed to manage cash flow for your company.
- Develop a cash flow forecast by week for the next 4 to 12 weeks.This can be done in excel if your accounting software is not capable and it should take in to consideration many of the issues discussed below.Of course, this will still be a forecast.For each assumption that goes into the forecast, you should also develop a degree of probability. For example, projects that are in backlog over the next 2 to 4 weeks could have a probability of 100% - you are certain they will occur.However, the probability that your customer will pay for the work is not 100% even if you have worked with this customer for the last 30 years.Times are different.
The probability estimate applied to each assumption in your cash flow forecast will help you determine what the most likely outcome is for your business over the next 4 to 12 weeks (in this example). It will also help you understand if more actions are needed to realistically remain cash solvent. Additionally, it will show your bank that you understand your business and are realistically assessing the likelihood that future events will occur.
In the end, a cash flow forecast will provide you a road map on what you need to operate your business. It will also provide peace of mind that you know where you are going and you will survive this economic catastrophe.
- Talk to your bank about increasing your line of credit.Once you understand your short term cash needs, let your bank know how much working capital you expect to have over the next few months.You then will be able to discuss with the bank what the appropriate line of credit is to cover the potential pitfalls in your cash forecast.
Similar to the cash flow forecast, a sufficient line of credit based on your best estimate of cash flows will provide peace of mind and allow you to run your business with a clear mind.
- Know your inventory and material requirements inside and out.This is a period of time when you want to make sure you have sufficient materials on hand or access to the materials through your suppliers.Many construction companies will be ordering replacement inventory when the economy bounces back.The supply chain will be stretched thin….think toilet paper!Don’t assume the usual lead times apply.Don’t assume that your suppliers have their normal inventory levels and are paying their own bills (see Priority #1 – Communicate).
- Bill promptly and completely.Bill as much as ethically possible in the front end of jobs.Again, communication with the owner or general contractor is extremely important.
- Do not rely on Insurance policies to cover pandemic costs.In many cases there is specific exclusions for events similar to this.If you think that an insurance claim may be possible, ensure that you are aware of the notice and other key policy requirements.
Really the only priority over the next few months is staying financially strong to ensure your business survives. Communication with your supply chain partners, bank, surety and customers is critical to understand the road ahead. Sound cash flow forecasting and management will be necessary to create your road map and survive the bumps ahead!
Nathan Croll, Partner, Business Advisory Services
Rick Feldt, Partner-in-Charge of Business Advisory Services
Ken Van Bree, Partner-in-Charge of Construction Services
RubinBrown LLP www.rubinbrown.com