2023 Construction Perspective: Bracing for uncertainty, Planning for Success

Planning for a Successful 2023

Marty McCarthy, CPA, CCIFP

For organizations that made it through 2022, the shift from surviving to thriving hasn’t been seamless, as many may still find themselves victims of circumstances outside their control. A one size fits all panacea for the construction industry is impossible. Each sector faces unique challenges while balancing compliance and legalities and adapting to new industry trends.

The last two years have been turbulent for the construction sector. But as 2022 comes to a close, experts at Dodge suggest the needle will move, and momentum will pick up for the industry in 2023.

Even in the face of optimism, the fact remains that current market dynamics suggest 2023 will experience variable growth rates across different industry segments as the country, as a whole, teeterson recession. For those industry experts expecting a 2023 recession, there remains to be a determination as to how prolonged or severe the downturn will be. Still, current economic trends and aggressive federal interest.

“Construction is at a pivotal moment surrounded with opportunities to innovate and reimagine its trajectory with new practices that impact the bottom line and contribute to positive societal changes. Despite the clouds on the horizon, the future of construction remains bright.” - Dodge Construction Network Year End Report.

rate hikes suggest the recession won’t be long-lived. In addition, while increased costs and supply chain issues still hinder many businesses, our clients cite the labor shortage as their primary challenge, indicating they have work in the queue but not enough staffing.

With the global economy slowing down and the 2023 projected growth of the US economy lingering beneath 1%, a thorough understanding of the cyclical nature of the construction industry is paramount, as threats to bottom lines range from mild to severe, depending on industry segment, size, and location. In addition, supply chain issues, labor shortages, and increased fuel and material costs continue to impede progress for many organizations.

Construction clients, for example, that deal in commercial construction will have vastly different years depending on what type of facility they are building. In addition, retail office space is moving slowly and has become less attractive after the COVID-19 pandemic, even with signs that many companies will return to their offices.

On the other hand, medical facility construction continues to be profitable and in high demand. This may be fallout from the COVID-19 pandemic, but the long-term future for these types of facilities seems bright.

For companies constructing warehouses, 2023 will likely remain the same as the demand for flexible warehouse space remains strong. If a recession hits, there may be a slight dip in demand, but the impact on this sector shouldn’t be significant.

For residential real estate construction companies, 2023 is going to be a challenge. The increased interest rates have caused a serious lull in the housing market, and if rates continue creeping up, inventory will be harder to move.

While eliminating obstacles in each sector may only be possiblein some cases, there are ways to ease their burden. Although there may not be a one-size-fits-all solution in the construction field, laying the foundation for a successful 2023 starts now by identifying opportunities for efficient tax planning and implementing proactive strategies for the year to come.

Tax Planning

Tax laws are evolving to meet the needs of new trends and business models. Therefore, organizations should consider how to maximize the opportunities or minimize the implicationsof both new and existing policies, such as: • Bonus Depreciation –Section 168(K) • Employee Retention Credit • Research and Development Expenses • Excess Business Loss Limitation • InflationReduction Act • Meal and Entertainment Deductions • Net Operating Losses • Pass-Through Entity Tax Election • Section 163(j) Business Interest Deduction Limit • 179D Deduction • 45L Tax Credit

In addition, the Tax Cuts and Jobs Act of 2017 significantly changed the tax consequences of business structures. Therefore, depending on a business’s financial health, it may be time to consider if a change in structure is warranted.

Careful attention should also be paid to retirement savings plans, which could reduce modified adjusted gross income and help reduce or avoid theNet Investment Income Tax. Finally, exit planningshould be a top priority for those considering retirement. Getting a company ready to sell or conduct a family succession could take years.

A solid tax plan could be a differentiatorbetween success and failure, especially on the heels of the last two years in the construction industry.

Business and Operational Planning Efficiently and effectively monitoring and controlling investments and construction costs helps businesses stay competitive. Taking inventory of current processes and improving internal controls to improve cash flow, increase profitability, and boost financial security should also be part of planning for 2023. For some organizations, digitization through automation, AI, and even robotics will significantly impact safety, design, and efficiency, thus increasing bottom lines over time and presenting opportunities for R&D credits.

For companies looking to grow and for companies struggling to stay afloat, planning for strategic acquisitions and mergers may be a winning solution, especially with interest rates on the rise. A word of caution, however, is that 2023 may not be the time to branch out into a new construction sector. Instead, organizations should focus on procuring profitable projects in their niche and doing what they do best.

This does not mean, however, that construction companies shouldn’t consider ways to embrace new trends. For example, with the cost of building materialssuch as concrete and gypsum rising and increasing demand for green construction, smart buildings, and structure rehabilitation, companies will need to factor in how to reduce building material costs while sourcing sustainable materials. If this isn’t possible, now is the time to consider how to stock store materials in advance. Making this transition takes careful planning and budgeting and should be part of any robust 2023 tax plan.

In addition, it’s an ideal time for teams to perform a thorough internal audit. Organizations should take inventory of their subcontractor prequalification process, job costing processes, internal bookkeeping, employee management systems, cybersecurity, and financial reporting procedures. Where is there room for improvement? Are there metrics in place to capture relevant data? Are KPIs pertinent and useful? An all-encompassing tax plan will shore up weaknesses and provide strategic solutions for future growth.

Final Thoughts It has yet to be determined what will ultimately happen in 2023. But with the current economic indicators pointing towards a recession, it is imperative to be diligent with business plans. These uncertain times call for strategic preparation and planning.

A proactive tax plan is not just about filing taxes, deferring large expenditures, and limiting lines of credit; it's an investment in strategies (including keepinga healthy cash reserve) that can carry an organization through difficult economic times.

It’s important to remember that even with the most efficient technological advances, it is still the workforce that enables the construction industry to thrive. In the face of the current labor shortage, organizations need to accomplish more with fewer employees. Incorporating the costs of training,

apprenticeship, and certification programs into 2023’s tax plan can pay off in the long run by helping reduce turnover and securing more engaged, committed workers.

The Construction Services Team at McCarthy & Company, PC is uniquely positioned to advise clients within the construction industry. Our team of industry-leading advisors helps clients manage their businesses more efficiently, control operating costs, improve cash flow, obtain financing, and meet surety bond requirements. Always in the know, we deliver up-to-date, proactive solutions that will enhance our client’s profitability.

About the Author Marty McCarthy, CPA, CCIFP, is the managing partner of McCarthy & Company. Sureties and bankers respect Marty for his high-quality work and profound understanding of the construction industry. Marty helps clients by giving them the insight needed to grow their businesses. He can be contacted at 610.828.1900 or marty.mccarthy@mccarthy.cpa.