Pendulum Swinging Back Towards General Contractors

The COVID Crisis will likely swing the pendulum back to General Contractors having the power for a while in contractor relationships.

  • Specialty Contractors (e.g., plumbing and heating professional, electrical professionals) can expect Margin Compression due to facing multiple bidders for jobs
  • Many more sub-contractors will be willing to lower their margins (sometimes below cost) to keep their crews busy

 

Develop an Emergency Brake

 Develop a proactive four tier cost cutting plan and implement it immediately when the pre-established triggers are met.  We call this the Emergency Brake and our best thoughts on how to implement one are in our book, Rock the Recession.  Hope is not a strategy!

 

Do Your Paperwork

  • Notify all vendors and customers with whom you have contracts (owners, generals, or subs, depending on what time of contractor you are) that you have been impacted by COVID19 to set the stage for schedule extensions and change orders to existing contracts.
  • CREATE cost codes to capture all costs and productivity impacts related to COVID19 in the field and the office. These costs may, in the future, be covered under your business interruption policies. It’s very possible Congress could legislate that COVID19 is an insurable matter. Better to document and track costs now.

 

Prepare to Pounce!

  • If you have a strong balance sheet, prepare to POUNCE!  Look to buy talent, cheap acquisitions, etc.  Use this time to INNOVATE – develop new products and solutions.  Also, use this time to digitize and streamline your work processes and train your people.  Develop capabilities for pre-fabrication!
  • Replace C-Players with A-Players leveraging your culture.
    • Make a target list of who you want to hire when the world returns to normal.  There should be at least 10-20 names on your list.
    • Use this time to deal with problem people you have put off dealing with because times were good.
  • Look out for Acquisitions (maybe give-aways) as the ill-prepared go under or Baby Boomer owners decide they don’t want to invest the effort to get their companies back to normal.

 

Ving

  • In 6-12 months, we are fully expecting ambulance chasers to put up billboards to advertise helping people who got COVID19 sue their companies.
    • We want you to develop a communication plan detailing what you have done to protect your people in the field and in the office and have them acknowledge that they read it, got it and document their acknowledgement of same.
  • Make sure your people are hearing and seeing you and your message – Ving is great for this (VingApp.com)
    • Double Down on Safety & Compliance, Ving has already created all the material that contractors need and it is specific to our industry!
  • Full Disclosure, Paul and I are both investors in VingApp.com because it is so good!

 

Refocus on Culture

  • Make sure to stay close to your A-Players and up & comers

 

Be Prepared.  Slow Economic Activity could last longer than you think!

  • Talk to architects to see what activity they have on their books and what they are hearing.
    • Remember there is a lag in the construction industry.  You may be good now with backlog, but not so good nine months from now.
    • The Architectural Billings Index has fallen sharply.  Architects aren’t billing anywhere near as much in March as in prior months, which means less projects to build for contractors coming down the pipeline!
  • Continue to hoard cash
  • Develop your tax strategy with your CPA firm
  • Evaluate A/R collectability

 

Trace Route and Evaluate Your Backlog & Pipeline

    • It’s time to start doing some Root Cause Analysis to figure out the impacts of COVID-19 to your end customer and their customers
      • Talk to your customer – find out what they are seeing
        • An example for contractors:  if you have a ground-up, distribution center in your Backlog for a manufacturer of theater seats and you believe nobody is going to movie theaters anytime soon – that portion of your Backlog is at risk of cancellation or collection risk.  Think through each customer in your Backlog and Pipeline to understand how strong your position really is.

 

Document Your Need for a PPP Loan

  • We’ve heard from several clients who are worried they shouldn’t spend their PPP funds because the government is going to make them give the money back.  The concern is that the government will audit everyone that got a PPP loan and if you didn’t “really” need the money, you’ll have to pay it back.  In order to get ahead of this fear, Paul and I recommend you conduct a meeting of your shareholders (if you’re the only shareholder of your business, it should be a brief meeting) and write a memo to document your need for the PPP.
    • This memo should outline what your mental state was when you applied for the PPP.
    • You should then send this memo to your board (if you have one), or if not, you can email it to your accountant, attorney and/or banker to create a written record of your thoughts.
  • Later, if you are audited, you’ll be able to produce this document (created long before and thusly much more convincing) about what you were thinking when you applied for the PPP.
  • If you’ve received PPP funds, and you want to keep it and have it forgiven, Paul and I recommend that you invest in having your accountant and lawyer help you create your strategy.  We can also be on the team, but legal and accounting professionals understand the nuance of the program and its evolving nature.  Think of it like making your insurance premium payments.  You pay your insurance each month in case something bad happens in the future.  Pay the money to have your advisors help you come up with a strategy so you can sleep easier at night.  Hopefully, you’ll never be audited, and you’ll never need it.  But, like insurance, if you don’t pay the premium and you need it, you’ll be a lot more upset than what you might invest now to prevent disaster.

 

Provide Psychological Safety to Your Employees

  • The US is opening back up now on a state-by-state basis.  As we call workers back to our companies, how are we going to make them feel safe at work?  There are some measures we are taking (e.g., social distancing and mandatory mask wearing) that we know slow the spread of the virus.
  • There are other measures you might consider implementing (e.g., touchless door openers, touchless faucets, temperature taking) that might not be directly linked to coronavirus, but make people feel better about coming to work.  Which of these solutions can you implement at your office and on your jobsites?
  • And, what about parents who are currently home schooling their kids?  What accommodations can you make to help them get back to work?  What if camp is cancelled this summer?  What if there is a double dip and the Coronavirus resurges in the Fall and kids can’t go back to school?

 

Seek Expert Tax Advice

  • How are we going to pay for the $2.3T Cares Act and the subsequent expenses of COVID-19?
  • The tax rate was increased to 63% during the Great Depression and grew to 94% in 1944 (on income over $200,000 or about $3M in 2018 dollars)…
  • If taxes go up to help pay for the debt we have incurred and will incur as a nation, what is your strategy to mitigate this expense?
  • Start thinking about how you will hedge your tax liability with your accountant now so you can start getting ahead of this issue.
  • Taxes are a huge expense for most of us…  Invest now to mitigate future liabilities.

Leave a Reply