COVID-19’s Economic Impact on the Construction Industry

Construction Industry Outlook for the 2nd Half of 2020

As we head into the second half of 2020, many of us are concerned with the industry’s economic outlook in the wake of the COVID-19 pandemic and a possible second wave coming this fall. Based on my anecdotal conversations with many of Keiter’s construction clients, it seems like many firms weathered the storm relatively well in the early part of the pandemic. In many cases, construction was considered an “essential” service, and projects were able to continue on as planned. In addition, many construction firms in the Richmond area obtained loans through the Payroll Protection Program (PPP) that allowed them to continue operating as usual. However, while the local construction industry economy has been relatively unscathed thus far in 2020, there are a number of factors that construction firm decision maker’s should consider as we head into the second half of the year.

Negative Overall Economic Outlook for the Construction Industry

According to a report published by FMI Corp., a leading construction industry consulting and research firm based out of Raleigh, North Carolina, we should expect a decline in 2020 and 2021 across the industry. The report projects a decline in the third quarter of 31 percent compared to the second quarter, which is the largest quarter over quarter decline in the history of FMI’s report. Some of the hardest hit segments in terms of total dollars of new construction put in place include multifamily residential (-17%), single family residential (-10%), religious (-20%), amusement and recreation (-17%), and lodging (-15%). The forecast also projects similar declines in 2021, followed by a relatively stable 2022, and growth beginning in 2023.

While these figures aren’t necessarily specific to the Richmond area, firms should be aware that the overall macro impact on the industry will eventually impact our region, as new construction projects are heavily impacted by the overall economy.

Exhaustion of PPP Funds and Cash Flow

Based on a recent list published by the Small Business Administration, over 2,000 firms in the central Virginia area received some level of funding though a PPP loan. These loans were based on 10 weeks of certain payroll and non-payroll costs. For many companies, these funds were fully utilized during the second quarter. As firms are now forced to sustain operations using normal revenues, some could experience cash flow problems that could ultimately result in delayed payment for certain vendors. While construction firm managers should be concerned with their own cash outflows during this time, they should also be aware that some of their customers may have cash flow problems as a result of a declining economy. This can lead to increasing and aging accounts receivable, and ultimately a cash flow crunch for the construction firm.

What Should Construction Companies Do to Keep Operating at Sustainable Levels?

With a potentially troubling 12-18 months coming up, there are some things that construction firms should consider to keep operating at sustainable levels.

• Delay or minimize expenses – this is fairly obvious, but seek out opportunities to reduce spending in some non-essential areas
• Strong billing practices – now more than ever, it is important to bill as much as possible early in a project in order to maximize cash flows. Also, in the event that a customer is delaying payment to its vendors, it will help to be earlier in line for payment.
• Take advantage of the CARES Act – as part of a recent revision to the CARES Act, firms are able to defer the payment of certain payroll taxes until 2021. Prior to the revision, firms that received PPP loan forgiveness were not eligible for the deferral, but that was changed in June 2020.
• Apply for PPP loan forgiveness – PPP loans are eligible for forgiveness provided the funds are spent on certain qualifying costs. It may be beneficial to work with an advisor during this process, as there are some nuanced rules that can cause confusion.
• Tax planning – work with your CPA firm to adjust estimated tax payments. If your company’s operating projections have changed materially, you may be able to reduce quarterly tax payments to improve cash flow.

We are certainly entering very unique times, and it is important that managers understand the economic environment and challenges ahead. Firms that are proactive in addressing the roadblocks ahead are more likely to make it through this period and end up in a stronger position as certainly some competitors will not. Your team at Keiter is committed to advising you through these times as a strategic partner. Please reach out to me or your Keiter Advisor if you would like to further discuss any of these items.

Additional Resources

Construction Industry Accounting and Tax Articles

Source: FMI Corp.