Construction Firms:  How You Can Protect Cash Flow During This Disruption

Social distancing requirements, stay-at-home orders and owner delays are just a few ways that the COVID-19 pandemic has led to reduced construction work. And many industry watchers are convinced that construction firms have not yet fully experienced the effects of the pandemic’s disruptions. While client delays, labor shortages and supply chain disruptions may largely be out of your control, you can take actions to give your firm the best chance of surviving – and even remaining financially healthy – during this time.

In the coming months, the industry is likely to see more delayed or cancelled projects, as well as delayed payments to contractors related to clients’ cash flow issues. In fact, analysts predict U.S. commercial and institutional construction spending will decline by 11% during 2020. Even once the U.S. lifts pandemic-related restrictions and the economy begins to recover, it may be quite a while before companies are able to pay for or take on major construction.

Consider the following steps to track and manage cash flow for your construction firm.

1. Make sure you have the right tools to measure and project cash flow.

Construction firms need to track and project cash flow on a weekly, monthly and quarterly basis – for both the company overall and for each project. Knowing when to make changes could mean the difference between business crisis and business continuity.

Your quarterly tool should be a 13-week cash flow model, which uses the past performance (as well as project plans and other predictions) to forecast future cash flow and flag potential issues. Given the current uncertainties, include at least medium-case and worst-case scenarios in that model. It’s also best practice to update your 13-week cash flow model weekly, and right now, you may want to update it daily. Your regular updates may include revised estimated costs and payment schedules based on possible labor shortages, supply chain and material availability issues, payment delays or other work delays.

This model can help you to better understand when to stock up on materials that can experience supply chain disruptions, as well as when to purchase only what’s needed. It can also help you to make personnel decisions, decide when to step up collection efforts, and know when to consider additional financing.

If you apply for a line of credit, a bridge loan, an SBA loan, the federal Paycheck Protection Program (PPP), an Economic Injury Disaster Loan (EIDL) Emergency Advance or another type of financing, your lender will want to see your cash flow projections.

2. Talk to your lenders.

If you have financing of any type, communicate with your lender regularly during this time, even if you don’t think you’ll need assistance. A strong working relationship is generally helpful if you decide to ask for an interest holiday, loan forbearance or restructuring.

3. Evaluate how you might access working capital, including from non-traditional sources.

Prepare for a worst-case cash flow scenario by researching available working capital sources. If you haven’t already, consider applying for one or more of the loan programs mentioned above. If you have already received a PPP loan, reach out to your accountant for assistance with calculating loan forgiveness; it can be quite complex. Keep in mind that the accounting for related expenditures should be segregated and not comingled.

You may also want to consider applying for a line of credit – even if you don’t currently need it. And if you have an unused line of credit, try to keep it active so your lender won’t close it.

Finally, consider non-traditional lending sources, such as family offices and private lenders.

4. Be extra careful about timely billing and collections.

Based on the current level of economic uncertainty and disruption, consider treating every customer and every job as a payment risk. That means timely billing is more important than ever, because your clients could go out of business or experience their own cash flow issues.

Talk with your staff members about the increased importance of quickly completing documentation and invoice authorization, and emphasize staying on top of all billing-related work. Be proactive and fast about notifying customers of delinquent amounts. If you don’t already have someone dedicated to this task, consider designating one staff member to oversee all invoicing, billing and collections-related work. Also consider assigning a staff member to identify and follow up on receivables that need attention. These business process improvements will also serve your company well in the long-term.

5. Consult your attorney regarding policies on invoice reminders, preliminary notices, notices of intent to lien and lien filings.

If your client goes bankrupt, you may not be able to fall back on breach of contract to get paid for labor or materials. This means it’s critical stay on top of required legal reminders or notices related to filing a lien. Speak with your attorney for advice in this area.

For example, you may want to ask your team to pay close attention to lien and notice deadlines in each state where you have projects, and consider sending reminders or notices (known in Florida as a “notice to owner” or NTO, and in some states as a “preliminary notice”) earlier in the project cycle. Doing so may allow you to invoice – and receive payment – earlier in the cycle, and it will help with filing a lien if you need to.Also stay on top of deadlines for filing a notice of intent to lien (required in some states but recommended in all).

In addition to the various notices required by each state’s laws related to construction projects, individual contracts may have their own notice requirements. Have your team stay on top of these as well, and consult your legal counsel about any questions.

6. Evaluate contracts and leases.

This is a good time to get in touch with equipment lessors, office landlords and others with whom you have contractual agreements to discuss looser terms, discounts or turning in idle equipment. Use the 13-week cash flow model to evaluate which contracts could have the greatest impact on cash flow, which payments are coming due soon and which equipment you might not need.

7. Take stock of expenses that could be cut or postponed.

Consider waiting on incurring some expenses. Also, talk with vendors about changing payment terms or obtaining extensions. Explore sourcing changes or reorganization initiatives that might save money. And debate whether deferring or reducing owner compensation or distributions makes sense to save cash.

8. Evaluate your supply chain.

You may want to explore materials suppliers that are less expensive, offer better terms or have greater availability. When considering cash flow, generally speaking, you may also want to avoid buying excess supplies. However, current and possible future supply chain disruptions may mean that “just in time” purchases don’t make sense for your business right now.

In addition, consider whether key suppliers are in danger of bankruptcy, ceasing operations or significant disruptions that could in turn impact your business. You should have a contingency plan that includes multiple back-up vendors to mitigate risk. As much as you can, protect your supply chain from disruption.

9. Support your employees.

Whether they are on a job site, in the office, working from home or furloughed, clearly show your employees that they are cared about and supported. Ways to do this include regular communications, help identifying assistance programs or filing for unemployment (if they’re furloughed), and a flexible policy on working from home for back-office employees. Good employees are one of a company’s most valuable assets, and in recent years, the construction labor market has been quite tight. If you can hold onto your employees through this crisis, you may have an advantage.

The COVID-19 pandemic presents a number of challenges for the construction sector, and it may require unusual measures to keep your business healthy. Contact me or another member of our real estate and construction industry team to learn more about how Kaufman Rossin can help you evaluate and optimize cash flow during these uncertain times.