Construction Industry Budgeting and Cash Flow Management is More Important Than Ever

The construction industry is no stranger to budgeting and cash flow management. With most construction projects in New York now open, these budgeting skills will continue to be critical as we navigate through the COVID-19 pandemic.

Update Project Budgets

Many of your construction projects have budgets that were developed when you completed your estimating and bid process under different cost structures and circumstances. Ask yourself, ”Is this budget still realistic and attainable?” If you are experiencing certain inefficiencies, roadblocks, or even cost savings (it’s not all bad!) as a result of the pandemic, be sure that your project budgets have been updated accordingly. Some items to consider when evaluating these budgets include:

• Labor costs – Have you had to reassign employees? Have the scheduled shifts changed: night work to daytime work, road closures, delayed or accelerated schedules, etc.? Have you modified employee wages during the pandemic? Have the social distancing requirements changed your permitted job site headcount and project timeline?
• Equipment costs – If your project timeline has changed, have you updated the anticipated equipment burden relating to these changes? Will dropping fuel prices have an impact on your equipment costs?
• Materials – Are your suppliers operating and able to provide the required quantities at the quoted price? Will a change in a project timeline impact your supplier's ability to provide the required materials?
• Change orders – Not all cost increases have to fall on your shoulders. Discuss these modifications with management and project owners. What can you address through a change order in order to receive fair and reasonable compensation?
• Collections – When will the invoices or AIA requisitions from the job be paid by the project owner? Will there be additional delays in payments for any projects?

Modify Company Budgets

Most contractors do a great job with completing project budgets, but now is the time to consider creating or modifying your overall Company budget. Overhead costs may be different than your budgeted amounts due to project shutdowns, delays, social distancing requirements, and travel restrictions. Some items to consider when evaluating enterprise expense budgets and overhead costs include:

• Labor costs – Do you have more people working in administrative roles as a result of project shutdowns? Have you modified employee wages during the pandemic? Are you getting the same efficiency from employees? Have you furloughed employees?
• Insurance costs – Have you considered rate modifications for employees who are being paid in an administrative role rather than a field role? The New York Compensation Insurance Ratings Board recently released a new classification code for employees who have experienced a temporary change in duties that mirrors the rate for clerical office employees. If your sales volume is going to be impacted, can you anticipate a related change in liability insurance costs?
• Office expenses – Have you incurred additional costs in order to appropriately sanitize your job sites and office space and have cleaning and personal protective supplies available to your employees? Have you provided telecommuting and technology resources to your employees in order to facilitate working from home?
• Travel and entertainment – This is an area that could be a budget reduction for businesses. Have conferences, seminars, trainings, trade-shows, etc. been canceled or changed to a virtual/remote setting? Are there upcoming events that may be canceled or modified?
• Prioritize your spending – Do you have a plan for which expenses get paid first and which expenses can be delayed or paid at a later date? Will additional furloughs be needed prior to the end of the year?

Managing overall cash flow is the most important piece of the budgeting puzzle. During and after the pandemic cash inflows may be reduced or delayed. Construction companies with a good budgeting process and plan to address any potential cash flow shortages will be better prepared to adjust their spending as needed.

Consider Cash Flow Strategies

Cash flow should not only be managed on each individual construction project but also in aggregate to get a picture for the entire business. As project owners are likely facing the same budgeting and cash flow strains that you may encounter, they may have to make tough decisions about continuing a project and determining which invoices are a priority for payment. Cash flow management and alternative sources of funding are imperative as collections on receivables may slow. Some resources available that you should consider are as follows:

• Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) – Have you received an SBA loan to assist with payroll and other operational costs? If the funds are spent appropriately, a PPP loan can be forgiven in full resulting in a large cash influx to the business. If you do not plan on requesting forgiveness or do not anticipate that your entire loan will be forgiven, have you factored the repayment into your cash flow projections?
• Payroll tax deferral and credits – The Coronavirus Aid, Relief and Economic Security (CARES) Act includes provisions that allow for businesses and self-employed individuals to defer payment of the employer portion of the OASDI payroll tax (6.2%) for up to a year. Payroll tax credits are also eligible for employers for retaining employees during the pandemic. It is important to note, the provisions for each of these benefits can be impacted if your business receives a PPP Loan. Payroll tax credits are also available to employers who pay qualifying sick or child care leave to employees under the Families First Coronavirus Response Act.
• Interest rates – Interest rates are currently very low; is your business carrying loans at high-interest rates that you could refinance at a lower rate?
• Available lines-of-credit – Does your business have borrowing capacity with your lending institution? Is this something you should draw on now? Are you able to increase your credit limit before it is necessary?
• Deferral of debt service costs – Many lending institutions are offering payment deferrals as a result of the pandemic; should you take advantage of this resource?

Your Bonadio Team is Here to Help.

If navigating this pandemic feels like a moving target, you are not alone. Conditions, regulations, and resources change daily. Being able to adapt and modify your plans in order to remain viable is essential to your success. We look forward to continuing to help our clients and communities through this unprecedented time.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.