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Business Continuity Planning for Contractors: Lessons Learned from the Slowdown

Teri M. Samples

August 14, 2020

Most contractors would agree it is important to have an effective disaster recovery and business continuity plan in place to minimize damage from natural disasters or other unexpected business disruptions. Unfortunately, even the best disaster recovery plans were unable to anticipate a completely unprecedented event such as the COVID-19 pandemic and economic slowdown.

Construction executives can leverage best practices from peers to prepare if another wholly unexpected and equally devastating event should occur again. Follow these nine steps to plan and take precaution:

  1. Build a solid relationship with lenders. Access to adequate credit is always important, especially in difficult times. The Paycheck Protection Program (PPP) provided a solid example of this. In many instances it was financial institutions, along with their CPAs that led the way, reaching out to their best clients to help them access PPP funds.
  2. Keep billings and collections current. Keep an especially close watch on underbillings and change orders. Being able to quickly convert potential accounts receivable into actual billings—and then into cash receipts—can be a lifesaver for contractors.
  3. Keep technology up to date. Many companies had to rush to set up systems that enabled administrative and management personnel to work from remote locations efficiently and securely. Any future crises are also likely to require quick action from IT, so keeping hardware and software up to date can help companies adapt more readily.
  4. Implement a strong and effective safety program. If safe operating practices are ingrained as part of the company culture, it will be much easier to adapt those practices to accommodate any new crisis-specific responses that may be needed.
  5. Develop collaborative contractor-subcontractor relationships. Many subcontractors were able to survive the initial COVID-driven shutdowns because their general contractors made an extra effort to keep them working. Conversely, many GCs were able to keep their doors open because their subs were patient and flexible. Everyone benefits when GCs and subs are allies. This is especially true when delays or complications arise due to factors beyond either company’s control.
  6. Maintain accurate, current, and reliable accounting systems. Accurate, up-to-date financial information is essential during a crisis. When financial pressures mount, contractors often must produce current information on short notice.
  7. Reconsider long-term commitments. With many administrative employees still working remotely, some contractors are revisiting their long-term lease contracts for office and warehouse facilities. Because the circumstances of future crises are, by definition, unpredictable, prudent managers should consider whether certain standard, long-term contracts could become burdensome.
  8. Revisit contract terms. Now is the time to review standard contract language and make any appropriate revisions. For example, 10% retainer on a six-month project might be acceptable in normal times, but if project completion is delayed by another six or 12 months, that retainer can be crippling. If necessary, companies can attempt to renegotiate current contract terms, but even if that is not possible, it could be wise to consider rewriting standard language to allow more flexibility in the future.
  9. Consider accounting method changes. You might have contracts that would avail themselves to have a different treatment for tax purposes than for financial statements. It is wise to have an expert review each of your contracts to determine possible changes allowed under tax law. This could create a favorable deduction for tax purposes. In addition, the IRS has acknowledged they would also accept contractor method changes to a Percentage of Completion (POC) tax position, referred to as the “Pay if Paid” method. Under this new method, taxpayers have the ability to adjust the percentage completion method formula under certain circumstances.

We can help. Please contact your Mueller Prost specialist to review your business continuity plan.

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