March 2021 McCarthy.CPA
MCC Construction Zone
Proactive Advice for Construction and Real Estate Professionals
MCC Construction Zone
Marty McCarthy, CPA, CCIFP
In This Issue It has been nearly a year since the first round of COVID-19 shutdowns. It is not a surprise to anyone that the pandemic has changed a lot of things. People are adjusting and adapting to a new way of doing things and accepting that they must wear a mask and socially distance. While no one likes having to do these things, it is important to everyone’s safety. In this issue of MCC Construction Zone we decided to focus on preparing for the future instead of dwelling on the past. There are things that you can do now to help you to recover, rebuild, and restructure. They include staying up to date on industry trends, looking at alternative ways to generate revenue, planning for a transition, and taking advantage of tax credits that the government is now offering to help you through the pandemic. Many of our clients are benefiting from the Employer Retention Tax Credit. We are going to explain why this tax credit can give you an infusion of cash that you may find helpful. Stay safe!
Marty McCarthy, CPA, CCIFP Managing Partner
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MCC Construction Zone Contents Here We Go Again – The Economic Indicators and Outlook for 2021 Are Improving Slightly ..................... 4 Succession Planning is More Important Today Than Ever ............................................................................ 7 Be Prepared for Change .............................................................................................................................. 10 The Employee Retention Credit (ERTC) ...................................................................................................... 13
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MCC Construction Zone Here We Go Again – The Economic Indicators and Outlook for 2021 Are Improving Slightly By Marty McCarthy, CPA, CCIFP
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t appears that we are still on the economic roller coaster that we have been on due to the COVID-19 pandemic. While many experts predicted a contracting market in 2021, their tone has changed due to encouraging numbers in January. Even so, we have a long way to go to see the market stabilize.
Insight from ABC The Associated Builders and Contractors (ABC) reported on January 9, 2021 that its Construction Backlog Indicator rose to 7.5 per month in January. While the increase was minimal (0.2 months from its December 2020 reading), ABC reported increases in its Construction Backlog Indicators in both the commercial and institutional sectors (7.7 in January compared to 7.3 in December) as well as heavy industrial (6.5 vs. 4 in December). Infrastructure declined -1.9 points from ABC’s December reading (8.9 compared to 7.0 in January).
ABC’s Construction Confidence Index for sales and staffing also increased slightly (58.4 in January compared to 56.6 in December and 58.1 vs. 56.3 respectively). Profit margins dropped slightly (48.6 in December vs. 47.5 in January). McCarthy.CPA
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MCC Construction Zone “Though nonresidential construction spending has continued to recede for the better part of a year, the growing consensus is that the next six months will be a period of improvement,” said ABC Chief Economist Anirban Basu. “While backlog is down substantially from its January 2020 level and profit margins remain under pressure, more than half of contractors expect sales to rise over the next six months and nearly half expect to increase staffing levels. Furthermore, Basu cautioned that a lot depends on what happens with controlling the COVID-19 pandemic and the supply chain considerations.
Insight from Dodge Data & Analytics According to a press release issued on February 5, 2021 by Dodge Data & Analytics, the Dodge Momentum Index increased 3.1% in January to 139.4 (2000=100) from the revised December reading of 135.2. The Momentum Index is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year. The commercial component of the Momentum Index moved 9.9% higher, offsetting an 11.7% decrease in the institutional component. January’s increase marked the highest level in the Momentum Index since the COVID-19 pandemic began. While this is positive news, the Momentum Index is also sending a warning that the construction sector’s recovery may be very uneven in the months ahead. Institutional planning hit its lowest level since the Momentum Index began in 2002 as state and local governments pull back on building plans in the wake of growing budget deficits. Conversely, commercial planning is at its highest level since before the Great Recession, fueled by an increasing number of warehouse projects and to a somewhat lesser degree office projects. On a year-over-year basis the overall Momentum Index is 2.2% below January 2020. The commercial component is up 12.3% year-overyear, while the institutional component is down 27.7%.
Dodge Data & Analytics said that total construction starts for 2020 ended down -8%, but nonresidential building starts finished down -24% and non-building infrastructure starts are down -14%. Residential starts finished the year up +7% from 2019. Most nonresidential building markets and residential new starts are forecast to increase 5% in 2021. Nonbuilding starts will increase 10% in 2021.
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MCC Construction Zone Furthermore, Dodge Data & Analytics anticipates 2021 residential spending will climb about 13%, up $80 billion to $695 billion. Nonresidential buildings spending is forecast to drop -11% to $410 billion, a decline of $50 billion. Non-building spending drops -2% to $343 billion, a decline of $8 billion.
Dodge Data & Analytics expects that the greatest impact of the COVID-19 pandemic on construction is the massive reduction in new nonresidential construction starts in 2020 that will reduce construction spending and jobs for at least the next two years. Although nonresidential buildings spending is down only -2% for 2020, the 15% to 25% drop in 2020 new construction starts will mostly be noticed in lower 2021 spending. Almost every nonresidential construction market, according to Dodge Data & Analytics, has a weaker spending outlook in 2021 than in 2020. Approximately 50% of spending in 2021 is generated from 2020 starts, and 2020 nonresidential starts are down 24%, with several markets down 40%.
Construction has yet to experience the greatest downward pressure from the pandemic. After hitting a post-pandemic spending high in December, spending and jobs losses will not hit bottom until 2022 according to Dodge Data & Analytics. Nonresidential declines will outweigh residential gains.
As you can see the saga continues. We hope to have a clearer picture of what will happen once more people are vaccinated and herd immunity kicks in. For now, we can just keep a close eye on what is going on and plan accordingly.
About the Author Marty McCarthy, CPA, CCIFP, is the managing partner of McCarthy & Marty McCarthy, CPA, CCIFP Company. He is well respected by sureties and bankers for the high quality of his work and profound understanding of the construction industry. Marty helps clients by providing them with the insight needed to grow their business. He can be contacted at 610.828.1900 or Marty.McCarthy@McCarthy.CPA. Disclaimer: This article is for informational purposes only and does not constitute professional advice. We strongly advise you to seek professional assistance with respect to your specific issue(s). Sources: Associated Builders and Contractors, Construction Backlog and Contractor Optimism Rise to Start 2021, According to ABC Member Survey, February 9, 2021. Dodge Data & Analytics. Dodge Momentum Index Increases to Start 2021. February 5, 2021 and Construction Analytics. 2021 Construction Economic Forecast. February 5, 2021.
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MCC Construction Zone Succession Planning is More Important Today Than Ever By Richard P. Higgins, CPA
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he COVID-19 pandemic is an unfortunate reminder that it is necessary to have a contingency plan in place in case something happens to the company’s leadership team. Having one or more senior executive out of the office for weeks or forever because of COVID-19 can be detrimental to a business.
Generally, a succession plan dictates how to transfer ownership or control of the company. Basically, a succession plan provides guidance on how to conduct business and transition the company to someone or a group of people who will take on a leadership role(s). This can be a permanent or short-term situation depending on the circumstances.
Continuity of Operations During a situation like the COVID-19 pandemic, it is possible that all or part of the leadership team could be lost. This would, of course, disrupt the management and daily operations of the business. Contractors should develop a written succession plan that identifies successors and their roles and responsibilities. Interim personnel and their duties should be selected in case the owner(s) and other key individuals become sick or must care for a family member that has COVID-19. A plan must be in place that addresses how the company will continue to operate. Decide who will have financial and contract authorizations, check signing privileges, access to key data, and the contact information for the company’s banker, surety, insurance agent, accountant, lawyer, and other advisors. 7 | Page
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MCC Construction Zone Discuss the plan with successor(s) and key advisors. Make sure they know where to access the plan and understand what needs to be done under different scenarios. It is important that the plan is in writing so no one can question its intention. The succession plan should be reviewed by a lawyer and accountant to ensure it will hold up in court if it is challenged.
Family and Business Relationships A succession plan is important for family-owned businesses. It could save family and business relationships, especially in a situation where the timing of the owner’s departure is unexpected. For example, if the owner dies without a succession plan in place, a spouse could have the right to take on a leadership role in the company. He or she might not be suited for the job and, if there are partner(s), they might not want to work with the spouse. Or it could cause disputes within the family if the spouse, children, siblings, or other relatives work for the company. Any one of them could feel that they have the right to take over the company even though they might not have the ability or skill set to do so.
Avoid choosing a successor just because he or she is a relative. If that person is not qualified, they should not be considered for the job. Do what is best for the company, not the family, because ultimately it is a business decision, not a family decision.
CHOOSING A SUCCESSOR “Avoid choosing a successor just because he or she is a relative. If that person is not qualified, they should not be considered for the job. Do what is best for the company, not the family, because ultimately it is a business decision, not a family decision.”
Rich Higgins, CPA
Available Talent The first step in developing a succession plan is to take a hard look at the talent in-house. If no one can lead the business inside of the company look for another alternative such as hiring someone, merging with another entity, or selling the business. In an ideal situation, a capable person or people will be identified inhouse. This may be a family member or not. When making this decision, it is important to match the temperament and skill set to the job.
Impact of the COVID-19 Pandemic The pandemic has most likely had a financial impact on the business. Many job sites were forced to shut down or slow down during the crisis due government-imposed restrictions and shortages of material and labor. Adhering to restrictions and supplying employees with personal protection equipment has added to job costs. Contracts may have been delayed or canceled, requiring a contractor to lay off or furlough employees. Regardless of the circumstances, realistic expectations need to be set. It could be that the business is no longer attractive to the chosen successor(s). Take a hard look at the financial reports to determine if the overall business is still viable, stable, sustainable, and profitable. Use these same metrics for each job and contract. Then have an honest McCarthy.CPA
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MCC Construction Zone conversion with the designated successor(s) to determine if the plan is still feasible. If not, consider developing an alternative succession plan. About the Author Richard P. Higgins, CPA, is the managing partner – New Jersey office of McCarthy & Company. Contractors trust Rich to assist them with a strategy to achieve their goals by looking at key indicators such as productivity, job costing, profit margins and cash flow. Rich helps contractors establish realistic benchmarks to assess how well they are doing or to alert them to issues that need to be addressed. He can be contacted at 732.341.3893 or Richard.Higgins@McCarthy.CPA.
Disclaimer: This article is for informational purposes only and does not constitute professional advice. We strongly advise you to seek professional assistance with respect to your specific issue(s). This article was originally published in the June 10 issue of Construction Executive.
Rich Higgins, CPA
McCarthy & Company was named a Top 50 Construction Accounting Firm in 2019 and 2020.
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Be Prepared for Change
MCC Construction Zone
By David E. Gibbs, CPA, CCIFP, MBA
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hile most experts are optimistic about the future of the construction industry, the economic data presented many different stories. On one hand, experts are predicting an uptick in the second half of 2021. On the other hand, experts are anticipating a decline in certain sectors.
According to a press release issued by the Associated General Contractors (ABC) on January 28, spending fell on an annualized basis in nine of the 16 nonresidential subcategories. Declining sectors in 2020 were lodging (-24.0%), manufacturing (-17.5%), amusement and recreation (-15.6%), conservation and development (-14.4%), power (-11.1%), health care (-6.2%), office (-3.7%), communication (-2.3%), transportation (-1.2%), and commercial (-1.0%). The three sectors that grew were water supply (5.7%), highway and street (3.6%), and sewage and waste disposal (2.7%).
Contractors in sectors that are showing a significant decline may want to start thinking about a plan to pivot their businesses.
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MCC Construction Zone Managing Uncertainly Even before the pandemic, there was a lot of uncertainty in the construction industry. There are so many people involved in projects who all want to minimize their exposure.
Unexpected costs and delays are typically caused by contractors, scheduling, and the environment. Private contractors who take a systematic approach to assessing risks are more likely to reduce issues before they become problems. Risk management is an important component of conducting due diligence during the preconstruction phase of a job. It involves conducting a risk assessment, identifying potential hazards, and controlling probable threats to completing the job.
While no one could have predicted the COVID-19 pandemic or its impact on construction, the reality is that contractors must understand the uncertainty around everything that is happening. From surges in the number of new cases, to shutdowns and operational restrictions, more federal, state, and local government regulations, requirements to comply with CDC and OSHA guidance on social distancing and personal protective equipment (PPE), disruptions in the supply chain, and increases in material and labor costs, it is difficult to manage the risk of moving forward on jobs. What makes matters even worse is that no one really knows when the pandemic will end so it is hard to plan with any degree of accuracy.
Due diligence should be conducted any time a business is entering a new sector or service offering. This is the only way to know if what is under consideration will work. Here are some recommendations:
Run the numbers. Work on financial projections with an accountant. They are trained to develop forecasts and what-if scenarios. Accountants also know the key performance indicators (KPIs) that are important to analyze against benchmarking data on similar businesses in a geographic area. Analyze the economic data. Associations, companies, and government-related data sources such as the U.S. Census Bureau have a wealth of information on the economic health of industry sectors. Review data from several vetted sources for an accurate assessment. Keep up on news releases issued by the ABC and other organizations to keep updated on new developments. Look at month over month and year over year numbers to determine trends and the long-term viability of the change. Research trade associations and join organizations that will provide information and contacts. Become known by attending networking events, Zoom meetings, and webinars. Read their publications to gather important insights.
Collect market intelligence. Contractors can collect market intelligence by reading books, newspapers, and trade publications, as well as by talking to subject matter experts, people already established in the sector, customers, suppliers, distributors, and other stakeholders. Contractors should also speak to their accountant, lawyer, banker, and surety agent to determine how clients in the same line of business are doing.
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MCC Construction Zone Collect competitive data. Learn who is the market leader and about other major players. Conduct a SWOT analysis to determine your strengths and weaknesses compared to each competitor, as well as the competitor’s weaknesses and how the competitor is a threat.
Analyze the political-legal environment. The political and legal environment consists of laws, government agencies, and pressure groups that influence organizations and individuals. New opportunities can happen because of the political-legal environment, as well as uncertainty and challenges.
Analyze the technological environment. Learn what technology you will need to invest in to operate efficiently. Technology can be used as a differentiator. Measure market demand. Look at the potential market or consumers who have a sufficient level of interest, available market or consumers who have interest, income, and access to a particular offer; target market or the qualified available market that the company decides to pursue, and penetrated market or the set of consumers who a buying the company’s product. Estimate future demand. Prepare a macroeconomic forecast, industry forecast and company sales forecast. The macroeconomic forecast projects inflation, unemployment, interest rates, consumer spending, business investment, government expenditures, net exports, and other variables. The gross domestic product (GDP) and other economic indicators are used to forecast industry sales. The sales forecast is derived from the percentage of market share that the contractor expects to win. Develop an entry to market plan. Include developing internal processes, purchasing materials, supplies and other resources; fitting the business to do the work, and hiring skilled workers. Also include developing promotional pieces, updating the website and social media channels, issuing press releases, etc.
There can be barriers to entering a new market. By analyzing all the above areas, you will be prepared to make better decisions. About the Author David Gibbs, CPA, CCIFP, MBA, is McCarthy & Company’s tax partner. He also manages the day-to-day operations of the firm. David has initiated numerous processes and procedures to ensure that the work produced by McCarthy & Company is consistently of the highest quality. David can be contacted at 610.828.1900 or David.Gibbs@McCarthy.CPA.
David Gibbs, CPA, CCIFP, MBA
Disclaimer: This article is for informational purposes only and does not constitute professional advice. We strongly advise you to seek professional assistance with respect to your specific issue(s). A portion of this article was published in the February 19, 2020 issue of CE This Week or will be published in the March 5, 2021 issue.
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MCC Construction Zone The Employee Retention Tax Credit (ERTC) By Richard Higgins, CPA, McCarthy & Company, PC
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he Employee Retention Credit is a provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This credit provides an incentive for businesses to keep employees on their payroll.
The Employee Retention Credit is a refundable tax credit against certain employment taxes. It is equal to 50 percent of up to $10,000 in wages paid between March 12, 2020, and January 1, 2021. Employers can generally include gross wages and certain health plan costs up to the amount of the credit.
This credit can be taken without penalty and can include any reduction for employment tax deposits in anticipation of the paid sick and family leave credit under the Families First Coronavirus Response Act (FFCRA).
Eligible Employers As explained by the IRS, employers (including tax-exempt organizations) are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either: • The full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or • A significant decline in gross receipts. 13 | Page
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MCC Construction Zone According to the IRS, a significant decline in gross receipts begins on the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The IRS says that a significant decline in gross receipts ends on the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than of 80 percent of its gross receipts for the same calendar quarter in 2019.
Qualified Wages For each employee, wages up to $10,000 can be counted to determine the amount of the 50-percent credit. This credit can apply to wages already paid after March 12, 2020.
The amount of qualified wages depends on the number of employees. For employers with 100 or fewer employees (on average in 2019), the credit is based on wages paid to all employees whether they worked or not. Employers can take the credit for employees who were paid for full-time work.
For employers with more than 100 employees (on average in 2019), the credit is allowed only for wages paid to employees who did not work during the calendar quarter. Only wages up to the amount that the employee would have otherwise been paid during the 30 days prior to the pandemic-related hardship can be included.
ERTC Example:
The employer used the full PPP funds (if received) by the end of the 2nd quarter of 2020. In the 3rd quarter of 2020, the entity’s gross receipts decreased by more than 50 percent compared to the same quarter in 2019. Therefore, the employer qualifies for the credit. In the 3rd quarter of 2020, the employer had 35 employees each of whom earned $20,000 in wages, the credit is capped at $5,000 per employee giving the employer a credit of $175,000 (35*$5,000). This a very simple example of how the credit is calculated. Contact us to see if your company qualifies for the ERTC. Other Considerations As explained by the IRS, an eligible employer’s ability to claim the ERTC is impacted by other credits and relief provisions as follows: • Employers that received a Small Business Interruption Loan under the Paycheck Protection Program (PPP) are eligible for the Employee Retention Credit, but the wages paid with the PPP funds are excluded from the calculation of the ERTC. • Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the FFCRA. • Wages counted for this credit cannot be counted for the credit for paid family and medical leave under section 45S of the Internal Revenue Code. • Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit under Section 51 of the Internal Revenue Code for the employee.
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MCC Construction Zone Claiming the Credit Employers can use this credit by reducing upcoming deposits or requesting an advance credit on Form 7200, Advance of Employer Credits Due to COVID-19. Beginning with the second quarter of 2020, eligible employers can report their qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns (Form 941). The Employee Retention Credit is taken against the employer’s share of social security tax, but the excess is usually refundable. The credit will require you to file an amended 4th quarter 2020 941 (form 941X). The ERTC refund and reduction of the payroll taxes will need to be reflected on your 2020 tax return. FAQs on the Employee Retention Credit are available on the IRS website www.IRS.gov.
About the Author Richard P. Higgins, CPA is the managing partner – New Jersey office of McCarthy & Company. Contractors trust Rich to assist them with a strategy to achieve their goals by looking at key indicators such as productivity, job costing, profit margins and cash flow. Rich helps contractors to establish realistic benchmarks to assess how well they are doing or to alert them to issues that need to be addressed. He can be contacted at 732.341.3893 or Richard.Higgins@McCarthy.CPA.
Disclaimer: This article is for informational purposes only and does not constitute professional advice. We strongly advise you to seek professional assistance with respect to your specific issue(s). This article was originally published in the January/February issue of New Jersey CPA magazine.
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