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Will your construction business survive the Coronavirus pandemic?
Covid-19, the disease caused by the novel coronavirus, is without a doubt here to stay. And even with lockdown lifts in most parts of the world, the numbers keep soaring, with other parts of the world, for example, Melbourne putting into place second lockdown measures as the number of new cases and deaths soar.
For businesses throughout the world, Coronas has been the real kicker, and it no longer comes as a surprise to see businesses close down, as the businesses with an online presence working hard to leverage the power of internet/ digital marketing. Over and above, no industry is safe, and if you are in the construction business, you might want to take time to read this article. The uncertainly around us is almost paralyzing, which means that having some concrete facts about the world pandemic and how it’s influenced your industry could be exactly what you need.
But even as we delve deeper into the effects of the Coronavirus pandemic on construction businesses and what you can do to survive, we need to face the fact that Coronavirus is here to say. And as mentioned by the WHO director in a recent press release, there is no way that we are ever going back to the old normal. What this means is that the human race is now, more than ever, needed to evolve, to come up with new ways of survival (living), as we work on ways of making our businesses profitable.
Besides the WHO’s call for the world’s preparedness for a new kind of normal, industry leaders (specifically leaders in the construction industry in the UK) have acknowledged the critical level of contribution to the economy that the construction industry is making. This contribution comes in as a result of the government’s move to keep construction businesses and sites open amid the pandemic, all in a bid to encourage support and resilience of the entire UK economy.
In a letter to the industry, the construction industry business secretary acknowledged the role of the industry, and the move to keep the industry operational is a welcome move. However, it’s not an easy process – as said, things aren’t getting back to normal, and even as the construction businesses get to breathe a sigh of relief over these directions, the biggest task at hand is for you to identify ways of protecting your workforce, as you work on mitigating strategies to delay project progress.
Why Will Coronavirus Impact Your Construction Business
In as much as construction businesses remain open during these unprecedented times, your construction business can only remain operational if you do the following:
First, you need to put in place measures to protect your workforce. Obviously, this is not something that will just happen overnight, and the progress of your projects will stall. You have to revise your timelines, but importantly, dedicate funds for the training, protection, and management of the workforce. Quarantine and self-isolation are affecting the ability of most contractors to work. The industry is forced to grapple with matters like:
- Workers being unable to work because they’ve fallen ill
- Other workers are fearing for their lives, even if healthy because of the expected convergence of large numbers of people at worksites and buses/ trains.
- Quarantine is also affecting sureties, lenders, developers, and governments.
Secondly, you have to deal with project and supply chain delays involving jobs and materials. You get to stay in business, but you won’t pick off where you left. For example, your workforce must reduce because of social distancing, and the fact that you might not be able to operate at full capacity given the losses suffered when operations were suspended throughout the country. Then you have to factor in the time and resources you will need to review the current construction contract terms, issuing of notifications, record keeping, as well as the placement of all relevant measures to keep sites and workforce safe. Then unavoidable negative effect from coronavirus disruptions, job, and material delays is the increase in the cost of construction materials, even as job completion times drop.
Thirdly, it’s time to look for short-term solutions that would help in safeguarding project viability, as well as necessary strategies for resource retention, retention of general capabilities, and materials during (and potentially after the end of this pandemic period).
While doing all these and keeping all matters compliance and contractual specifics in line with standards for health and safety, your business also needs to work around relationships plus reputational issues to prevent compromised contractual positions.
The fourth thing is delays. Bear in mind that your construction business will be affected by the fact that some construction works cannot continue at the moment. Procurement streams and some collaborative projects might have to be halted. And to be honest, it’s time we came to terms with the fact that some of the construction projects that haven’t been canceled yet might be canceled very soon.
Next, your construction business will face legal disputes and protections, which will not only slow down payment speeds, adding on to the pressure of economic uncertainty. As you already know, dealing with construction payment is already this big thing that we have to grapple with. Adding legal issues to the equation will only worsen things – think supply chain disruptions, signs of recession, payment and job delays, legal disputes, and other expensive disruptions.
Then we have to address the fact that coronavirus has brought with it wide market and economic challenges affecting the industry directly. The risk of recession over the next 3-6 months is expected to be worse than the 2007 recession, and a global economic slowdown is now a real threat we all have to deal with. The most pessimistic scenarios anticipate a massive global recession, along with the reduction of GDP beyond the 1% mark.
Finally, the global impact of coronavirus on the engineering and construction industry is expected to affect a significant number of large scale projects because of the plummeting oil prices, as one of the compounded effects of the global pandemic. E&C companies serving the energy and chemical markets are recording short-term revenue reduction, even with the long-term effects expected to be dire.
How Can Contractors Survive From Coronavirus Impact?
Unfortunately, the future of the construction industry remains bleak. But as a contractor, one of the smartest moves you could make is to find smart ways to manage. Here are some of the things you could do to protect your business from coronavirus impact.
Boost your cash cushion
Now is the time to look for ways of raising cash, whether it means determining the size of your lines of credit or staying on your bankers’/ insurers’ good side. It helps if you use staffing models. Remember that cash is king, and you need to manage your cash well.
Some of the ways you could increase your cash cushions include:
- Applying for a working capital loan(s)
- Keep an eye out for any SBA loans.
- Buying materials that come with longer terms
- Obtain cash from your slow-paying accounts
Address and take inventory of all immediate legal issues you are facing or might face in the coming days. Since you have live construction jobs and live construction contract obligations, you need to work on ways of protecting your interests.
- We are talking about providing notices in case of expected delays and change orders.
- If you can void your contracts, do that now
- Come up with new agreements (that’s what Zoom meetings are for).
- But before you take any of these actions, consult your construction attorney.
Set stricter measures on the protection of lien rights.
Remember that whether you get paid or not will depend on so many things that are currently out of your control, which is why you need to protect your lien rights so that you don’t get caught up by stray bullets. To do this, you must send preliminary notices on all your jobs. With other contractors under significant cash stress and others filing for bankruptcy, and all the payment and job delays coming your way, these notices will protect you. Send those notices to avoid being stiff.
And for all jobs whose payments are pinched, it’s time to pull that trigger. Escalate matters for the protection of your rights – send intent to lien notices and/ or file for the mechanic’s lien.
Keep an eye out for payment behaviors and changes from the general contractors.
Take notice of things like an increase in payment problems, changes in retainage practices, and if the contractors are starting to pay other contractors slowly. You might clash with the general contractors, but you have a business to protect.
Advice for Construction Businesses
Any positive changes in the engineering and construction industry (E&C) in and out of the US largely depends on the length and the severity of the global crisis. There are a lot of unknowns for everyone to deal with, but that doesn’t mean that you are 100% paralyzed.
For the survival of your construction business, you need to carefully calculate steps to protect your business interest. Some of the things you need to consider doing include:
- Take advantage of government stimulus action, if there are any available. Look for direct cash disbursals, packages for tax benefits, etc. Such government action could help cushion you from an upward ripple effect.
- Consider refinancing your debt – while access to capital is currently constrained; this is a path worth exploring.
- Work with subcontractors and governments closely. This is the most important step for you to take if you are going to protect your business. With an increase in the number of construction sites being shut down, one of the most emergent measures for you to take is to engage and work with all your project subcontractors.
- Assess your business’ loans, profitability, cash flow reserves, and revolving credit to find ways of supporting your ongoing operations in this low-revenue business environment. Keep in mind your current and forecasted cash expenses, taxes, and all other cash operating business.
- Review your corporate and capital cost budgets for the identification of your marginal investments, as well as any discretionary items that you can cut out.
- Divest in underperforming and non-core assets, assess M&A/ Mergers and acquisitions, and their potential for cash.
- Work with state, municipal, and federal governments to coordinate plans around consumer and workforce safety, even as keep all your mission-critical projects running.
- Assess your labor costs and consider contingency workforce planning scenarios around periods of diminished activity and demand.
- Confirm the safety of your employees and look for ways of protecting them. For example, initialize strict sanitation rules, and put in place measures for remote working
- Think of ‘forward-paying your subcontractors if their sites have been shut down
- Run educational campaigns for employees who have to work on-site, and consider all possible workforce scenarios that would help reduce labor costs.
- Track employee movements
- Consider operations and functions that could be outsourced in a bid to trim your operational costs.
Supply Chain and Operations
- Work with local, federal, and state governments for timely insights on construction projects that could be shut down for early preparation
- Update leading supply chain knowledge and practices to increase operational implementation. Maintain 100% transparency
- Maintain situational awareness and identify all potential weaknesses in your supply chain, for example, locations affected by COVID.
- Identify alternative suppliers
- Work on tightening your cybersecurity plus overall system resiliency for safe remote working environments
- Consider the use of industry automation solutions to keep the number of workers on-site low.
Financial Reporting and Tax Matters
- Broaden all financial disclosures beyond the standard details needed in financial statements
- Be ready to disclosure and impairment considerations for 2020 (if the fiscal year ends in Jan 2020).
- Make disclosures on risk
- Communicate to your lenders
- Prepare and assess tax-changes put in place by the government
- Consider restructuring supply chains if your business handles tax plus transfer-pricing elements
- Consider customs and trade impacts on foreign subsidiaries
- Look for M&A opportunities if you have a strong balance sheet
- Look out for all prospective tax benefits
- Make strategic plans regarding operational costs in one jurisdiction versus the other.
Covid-19 has hit hard and all industries, particularly, the construction business is forced to take a hard look at the current state of affairs, evaluate best-case scenarios, and make any changes needed to cushion and protect the business. The recommendations above should help you make smarter, more informed business decisions.