Join John Bibeau, Partner, and Patrick Conwell, Director, for an in-depth interview on accounting in the construction industry in today’s COVID environment. In this episode, they provide insights on the Employee Retention Credit related to the construction industry and the impact of COVID on leases, supply chain, accounts receivables, contract clauses, and WIP schedules.
[00:00:00] Ashley: Hi, I’m Ashley and you’re listening to the “Business Owner’s Guide Podcast: Tips, Talks, and Trends from a CPA.” Today we welcome John Bibeau and Patrick Conwell from our Construction Niche for discussion on the construction industry and the role of accountancy in today’s COVID environment. But before we begin, let’s find out more about our guests.
[00:00:26] Ashley: John is a Partner and has over 25 years of experience in public accounting, specializing in audit and accounting engagements for middle-market firms. He also has expertise in tax planning and consulting services to closely held businesses and their owners.
[00:00:40] Ashley: Patrick is a Director and has over 20 years in public accounting, providing professional auditing experience, including reviewing and supervising audits and other consulting services.
[00:00:49] Ashley: Thank you, John and Patrick for being here today, I appreciate you taking the time to join us on this podcast. And with that, let’s go ahead and get started.
[00:00:56] Ashley: We all know the employee retention credit was offered by the U.S. Government to encourage businesses to keep employees on their payroll during the pandemic. John, can you start off by telling us how the employee retention credit does in fact relate to the construction industry?
[00:01:09] John: Thanks Ashley. We are noticing a lot of construction companies are qualifying for the credit. Even when at first glance it would appear that they would not. This is mostly due to the contractor thinking they don’t qualify because they may have had a good year profit wise or overall revenues for 2020 or 2021 are up. However, due to the cyclical nature of contract revenue, the contractor may have had lower than anticipated revenue in quarters throughout the qualifying periods in 2020 and 2021, which could make them eligible for one or more quarters of the credit.
[00:01:42] John: You really need to look at revenues for 20 and 2021 compared to the same quarters in 2019. For 2020, if you experience a drop of 50% or more in revenue per quarter, compared to the same quarter in 2019, you qualify. For 2021 it’s even easier to qualify. If you experienced a drop in revenue of 20% or more in any quarter compared to 2019, you would qualify.
[00:02:09] John: Even if you do not meet these benchmarks, you may qualify. If you had a work stoppage due to a government mandated shutdown. This is typically not the case with many contractors due to most of them being considered essential during the course of the pandemic.
[00:02:22] John: These credits can be quite large, though, up to 5,000 per qualified employee head count for 2020. And then for 2021, it goes up to 21,000 per qualified employees headcount. We are seeing companies that are qualifying for hundreds of thousands of dollars of credits, even a few in the million dollar range. The takeaway here is you need to have the calculations of your revenue run by quarter to see if you qualify. Then you can analyze your quarterly payroll to estimate the potential credit. We have a team professionals here at our firm that are assisting with these calculations.
[00:02:54] Ashley: Patrick, can you provide insights on how accounting for leases under accounting standards, codification ASC 842 will impact the construction industry.
[00:03:03] Patrick: Sure, the lease standard that will need to be incorporated in your upcoming financial statements has been a long time coming.
[00:03:08] Patrick: There’ve been many delays for various reasons, including COVID. Construction companies have leases for offices, warehouses, construction equipment, vehicles, typically a fleet of vehicles of vans or trucks, and job site offices, such as trailers. Currently you’ll have some leases that qualify for capital lease treatment.
[00:03:26] Patrick: However, at the majority of equipment leases and fleet vehicles have been classified as operating leases for which you only record the expenses paid . One thing to consider building leases, including related party leases, all need to be accounted for under the standard. Companies will need to implement the new standards for a year starting after December 15th, 2021. One caveat though for calendar ending December, 2022 companies will need to calculate the amounts as of January 1st, 2022, in order to be compliant for the entire calendar year 2022.
[00:03:54] Patrick: Companies need to calculate and record the right of use asset and lease liability along with the corresponding amortization. These amounts will be reflected on the balance sheet and income statement. Either Excel or specialized softwares can be used to calculate right of use assets, at least liabilities. You can find examples of Excel worksheets online, or various specialized software can be used.
[00:04:12] Patrick: PKF Mueller, we’ll be using lease crunch to assist in these calculations. You need to be aware of the various impacts on the financial statements, including various required footnote disclosures. Also, you need to consider whether the lease standard will cause any issues. When complying with your debt covenance, you should contact your bankers every bank has different definitions of what is required to be included in the calculation.
[00:04:31] Ashley: As we all know, supply chains were affected by the pandemic as well. How has this impacted the construction industry?
[00:04:38] John: Yes Ashley, supply chains have been severely impacted by the pandemic among other things. This has made communication with vendors, particularly important. The relationship you have with your vendors can help reduce the risk of losing supply of goods and services altogether or help avoid costly delays. A good relationship with vendors has always been important, but now it is more important than ever.
[00:05:00] John: Suppliers have the upper hand for the first time in a long time in this economy. Focusing on price may not be as important as it used to be. Can your vendor deliver as promised may be more important than ever. Does the relationship you have with your vendor, encourage them to see you as a true business partner, rather than just another customer.
[00:05:17] John: Consider building relationships with face-to-face meetings when possible. Focus on building a relationship that fosters regular, honest communication, and I can’t stress enough. The communication should be regular. Transparency is also an important tool. Sharing realistic budgeted needs and timeframes can help build trust in the relationship and every good relationship there is mutual trust between parties.
[00:05:40] John: Remember all good relationships have give and take. Communicate only real deadlines and do not push every deadline the same. For example, if a deadline has shifted or isn’t as important as originally communicated, keep your vendor in the loop. This will help build trust within the relationship.
[00:05:56] Ashley: As accounts receivable, collections have slowed or come to a halt due to the pandemic. How can contractors, subcontractors and suppliers be more vigilant to protect their ability to receive payment on projects where cashflow might become problematic.
[00:06:09] Patrick: COVID is just another variable amongst the challenges of receiving payments for services within the construction industry. Different parts of the construction cycle will have variance in payment structure amongst companies. For example, a company’s performing excavation and painting, should each have different expectations for receiving full payment? Companies are paid according to contracts, usually pay when paid. However potential delays such as COVID causing job sites to shut down, are just one of the many possible reasons for these delays.
[00:06:37] Patrick: Before consideration of payments, companies need to consider the timing of billings. You need to really understand your contract. Does it allow for billing upfront? You should really bill whenever possible. You may be over billed. The contractors may not have to pay depending on the terms. However, if you don’t try to bill, the customer will never pay. Companies need to know what the required payment terms as there’ll be different, depending on the customer or general contractor.
[00:06:58] Patrick: If contract terms require payment, you need to know all your remedy for receiving payment. If not receiving the required payments, timely. Liens may be required if not receiving timely payments. None of this will matter. If companies are not timely monitoring outstanding accounts receivable. You should notice if there are any changes in payment patterns, companies need to monitor if a are suitable over 60, 90, or 120 days are trending upwards.
[00:07:19] Patrick: You need to know if there are any overall challenges and delays on the job that might be causing the project to be over budget that can cause issues with the owner. Communication between the accounting staff and project managers, critical to identify these issues. You also need to identify the issues timely in order to file a lien. Usually you have 90 days from the completion of work but should check your local statutes, ensure timely filing.
[00:07:41] Patrick: Just to reemphasize, you need to know your customers and constantly monitor your outstanding accounts receivable to ensure collections with the uncertainty in the industry, especially with the added unknown variables caused by COVID.
[00:07:51] Ashley: As almost every construction contract has a time is of the essence provision and a completion deadline. Can you describe how COVID-19 has impacted contract clauses?
[00:08:00] John: For sure. On time without delay may have been your company model. I’ve heard many contractors proudly boast about their perfect on-time record. The fact that a handshake is good enough for a lot of the particulars may be the case until us accountants and lawyers get involved.
[00:08:16] John: Well, the world has changed forever. COVID has severely impacted the ability to deliver the job on time and on budget, mainly due to COVID related work stoppages or delays. Ever increasing laws and regulations regarding work and working conditions. Also, as we discussed earlier, COVID related supply issues are impacting everyone involved in the project.
[00:08:38] John: All these factors have made timely completion, more difficult than ever. So what can you do about it? Review your current contract language with your attorney, become familiar with what happens if there is a delay, ask your attorney, what is your recourse if there is a costly delay? When can you rightfully get an increase in the contract price? When will you be responsible for the costs of delay on your customer or general contractor? When will you need to file a claim? What will be needed to document your damages? Work with your accountant, to create a system, to help you capture those damages. Make sure that you have a complete understanding of when your contract allows for you to pass along material price increases. Communicate with your customer or general contractor upfront so you have a clear understanding of this. This will help in the event, you need to pass these increases along to your customer under the terms of the contract. This is even more likely than ever due to the increased elements of inflation in the economy in the last six months to a year.
[00:09:33] Ashley: My final question for you relates to work in progress reports. What are some of the challenges that you have encountered when reviewing or auditing WIP schedules?
[00:09:40] Patrick: There will always to be some challenges to reading and interpreting WIP schedules as there are many different formats. Bankers and binding agents are increasingly scrutinizing WIP schedules and the current economic and COVID environment.
[00:09:50] Patrick: While most schedules will eventually get you to the proper contract asset and liability, the path taken may differ. The first issue we see as auditors, it’s not accruing losses. Accounting rules dictate that you need to record the entire loss on a job when known, not just the portion of the loss as calculated under the cost of cost input method.
[00:10:06] Patrick: Also for completed jobs, some clients will not reclassify underbilled jobs as unbilled receivables. This can cause your statements to be misleading. Third issue involves accounting personnel not receiving up-to-date information regarding costs of complete from the project manager. These can include change orders not recorded, estimated costs to complete that don’t reflect the current state of the job. This can cause the WIP schedule to be misleading. Also the last issue would be leaving the completed jobs on the WIP schedule. This can overstate your footnote disclosure for accounts receivable and work in progress.
[00:10:36] Ashley: Well, I think that was a really great overview. And thank you for your time today to explain six ways COVID-19 has affected the construction industry and the role of accountancy. If any of our listeners have any questions or would like to learn more, would you please share how they might be able to reach you?
[00:10:49] John: Sure you can reach me at firstname.lastname@example.org that’s email@example.com or you can give me a call at (708) 428-5308. Thank you.
[00:11:10] Patrick: You can reach me at firstname.lastname@example.org that’s pconwell or give me a call at (708) 745-3522. Thank you.
[00:11:22] Ashley: And thank you to our listeners. Don’t forget to visit us at pkfmueller.com to learn more about our firm’s services. You can also follow us on social media, from our updates, insights, and upcoming events.