Construction Industry COVID-19:
Financial & Processes Preparedness
By: Drew Addison, Vice President of Surety
There was quite a bit of discussion around the development of a recession due to the effects of governmental policy to combat the virus, as well as comparing the current performance of the market against 2008-2010 recession data.
As we learned in 2008-2010, it is better to be proactive than reactive, especially with the bright red flags that are visible. Reflection on recent economic recessions is a good place to start. You should ask yourself:
- What have I learned from past experience? (Tech Bubble 2000, Great Recession 2008-2010)
- What am I learning from this current experience? (Similarities/Differences)
- What steps can be taken now to prepare?
- Where do I want to go from here?
- What do I want to be on the other side?
Once you get your head and plans on the other side of fear, THEN navigating the fear becomes easy and disciplined.
Align your Financial Support Team – The Time is NOW for Conversations with:
- Your Bank
- Your Surety and Insurance Agents
- Your CPA
- Your Vendors
- Your GC’s and/or Project Owners (Public and Private)
- Your Business Partner(s)
- Your Employees
Your Bank – What to Ask…
Begin the conversations now with your banker regarding Line of Credit terms and limits. A full underwriting on your accounts by your bank will be necessary, experience and capitalization will dictate what you qualify for.
A detailed review of options for your Line of Credit terms is critical for every business owner, regardless of economic performance. Ideally, you will want to explore the options of extending the terms to reflect Long Term Debt when you borrow against it. You will also want to discuss your interest rates, and planning to improve them.
- Extending Terms (example: 12 months to 24 months) will keep the balance from reporting on your short-term liabilities, thus having a direct impact on your Working Capital.
- Attain a thorough understanding of your current interest rates and what you can do to lower them. You must be proactive in working with your bank to improve your accounts.
- Is there an option to increase your line of credit? If not, what should you be monitoring, financially, to increase your limit?
- What would a loan forbearance look like (if needed in the future)?
- Have a clear understanding of what that process is like
- What does it mean for your account if you need to utilize it?
- Forbearance should ONLY be utilized as an emergency measure
Are there Alternative Lending options available?
- Example of Alternative Lending is Purchase Order Lending:
- Not a common lending practice (especially for early contractor/banker relationships)
- Option to provide capital to fund a large individual project in order to hold liquidity in the company
- Underwriting of this kind of financing is largely held on the financial strength and experience of the project owner
- This is NOT factoring (factoring is underwritten using AR’s, last thing you want to do right now) – PO financing is usually cheaper than Factoring
State Lending Opportunities – SBA Support
These are loans and they will need to be repaid. All loans over $25K require collateral, and longer term loans require real estate as collateral. They are low interest (3.75%) and can have longer repayment terms depending on the collateral and need. They can be used for most purposes, except refinancing other term loans.
If you are projecting financial hardship, this might be a plan to consider. If you have a good relationship with your bank, I urge you to visit with your bank first. In many cases, the banks are preparing payment deferral plans or interest-only plans, to climb out of the hole. That initial conversation may help avoid taking on more debt.
- Eligibility is key, but apply NOW
- If awarded, set aside for emergency
- Don’t use to avoid hard decisions
The SBA Disaster Relief Program will be administered directly through the SBA via the following website: https://disasterloan.sba.gov/ela/Declarations/Index
Your Financial Support Team (Banker, Surety, & CPA) – Open Lines of Communication
“To effectively communicate, we must realize that we are all different in the way we perceive the world and use this understanding as a guide to our communication with others.” – Anthony Robbins
Your CPA, Banker, and Surety Agent are key business partners that you have available, and you can benefit greatly by opening direct communication between yourself and your chosen team.
- Does your CPA and Banker perform and understand construction accounting and cash flow (are they a Construction CPA and Construction Oriented Banker)?
- Arrange strategic financial planning meetings with all parties together
- Work to build a strategy to help build your financial profile
- Develop timelines and forecasting goals to get you through a tough economic time
- Utilize this team for guidance, especially when faced with difficult decisions
Your Revenue and Profit Centers – Vendors and GC’s/Project Owners
Just as your CPA, Banker, and Surety Agent are your Financial Support Team, your Vendors and GC’s/Project Owners are your Revenue and Profit Team. Again, Communication is KEY in these relationships (E-mail correspondence alone is not enough)
- Building Strong Vendor Relationships
- The first step to nurturing an effective business relationship is by establishing and maintaining a connection
- Pay promptly
- Provide lead time
- Refer your vendor to colleagues
- Always under promise and over deliver
- Understand the power of no
- Ask for referrals
- Building Strong GC/Project Owner Relationships
- Make the shortlist through financial stability
- Itemize scope and quickly present varying price scenarios
- Advertise similar projects completed with scope, schedule, budget, man-hours worked, and any special considerations that were part of the project
- Prepare references you know will be willing to speak in-depth about your performance
- Go above and beyond the bare minimum required once you win a project
- Once you win the bid, contractors who know they are auditioning for their next job with the GC/Owner, will likely find continued success in the future
Your Company & YOURSELF – Key Considerations for Internal Processes Management
Tough decisions may need to be made in the very near future. Now is the time to identify areas of consideration so those can be informed and calculated decisions.
- Dust off your Business Plan – Review your plan, and update! Annual business plan updates are one of the most underutilized tools that provide the most leverage in tight underwriting cases.
- Key Employees – Identify those that are pertinent in keeping your business moving
- Curtail Hours – Change to hourly contractors for non-essential employees
- Postpone Raises & Bonuses – Revert to retained earnings
- Executive Pay Cuts – Revert high executive pay back into retained earnings (investing back into your company for liquidity, and survival through the tough times)
- Cancel any Capital Improvement Projects, equipment purchases, or moves
- Insurance Coverages – make sure all premium payments are for essential coverages to continue work (no more, no less)
- Accounts Payable – negotiate terms and/or discounts NOW
Your Company & YOURSELF – Key Considerations for Internal Financial Management
Utilize tools available to manage your company’s financials from a “30,000 foot” level, rather from the “jobsite” level. Analyze and monitor your financial annual trends and performance to identify what works:
- Increased financials for mobilization – negotiate more favorable funding of contract starts
- 1st draw Contract Negotiation for material or postpone any project that drives revenue within 30 days – Fully understand how and WHEN initial payments will be conducted. That is YOUR liquidity and working capital at stake!
- Negotiate Retention reductions upon substantial completion
- Hedge material prices wherever favorable terms exist (also in fuel and transport cost)
- DOCUMENT, DOCUMENT, DOCUMENT – No changes to any project without proper documentation!!! Even if it’s a little change, or seems insignificant, you must build a case before one exists
- Focal point on liquidity and asset performance ratios
- Understand current equity position, and what you can do to improve it
- Operating Liquidity – Working Capital available currently, and for how long excluding LOC and inventory (do not base it on anything that may not be able to immediately turn into cash)
- Work on Hand – move your schedule to a “Percentage of Completion” basis. This will allow you to view and manage your over/under billings, and identify potential profit loss and job borrow situations which lead to contractors going out of business
- Trend analysis over multiple years – identify the most successful financial year, and dig into what operations, labor, and processes were in place that resulted in that success
- Benchmark your KPI’s against industry data so you can see your trend results against industry
To assure greater accuracy when implementing financial analysis tools and this information, it is important to examine the trend over time (minimum of three years). Keep in mind that no technique is perfect. All analyses are reliant on the quality of the underlying financial statement data. The preference of all sureties is that their contractors obtain CPA prepared statements annually. While a CPA prepared Consolidation will suffice at the start of the program, it is imperative that it be upgraded to a CPA Year End Review at the very least. The quality of the statement is always considered in negotiations to grow your program (i.e. capacity growth, dividend availability, indemnity, etc.). This whitepaper, and our analyses are not prepared by a registered CPA, broker, analyst, investment advisor or financial expert. Everything provided is purely for guidance and informational purposes. All Information contained herein should be independently verified and confirmed. We do not accept any liability for any loss or damage whatsoever caused in reliance upon such information or services.
Drew Addison Vice President of Surety
10101 Reunion Place, Suite 100 – San Antonio, Texas 78216
(210) 697.2226 direct • (361) 254.0896 mobile
Posted by Nicole Lozano in Blog, Surety
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