Subtrades face delayed cash crunch and insolvencies because of COVID-19 pandemic: NTCCC

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pre and post covid construction activity

Ontario Construction News staff writer

The COVID-19 pandemic is a ticking time bomb for many construction industry trade contractors, with a potential major cash crunch in the fall, says Sandra Skivsky, chair of the National Trade Contractors Council of Canada (NTCCC).

Skivsky says there is normally a significant lag between subtrades’ construction activity and cash flow– even with prompt payment measures introduced through the new Ontario Construction Act. This means that many contractors may have difficulty accessing government assistance programs, and even if they can, the assistance may not be enough to ensure their survival.

Speaking at a webinar last Thursday co-ordinated by McMillan LLP, Skivsky said to her knowledge the looming problem is unprecedented.

She said normally the construction industry operates within an annual cycle, where things slow down in the winter and early spring, as projects wrap up and before new work starts. Traditionally the slowest month for cash flow is in March – with things improving through the spring and summer and peaking in the fall. Contractors budget for this annual cycle.

This year, the indications are that the cash flow will drop significantly much later in the season, reaching a low point in the late spring and early summer, before improving later in the year – but nowhere near normal levels.

She provided some illustrations to demonstrate the problem, noting that “there are many variables that could affect the assumptions. . . and change the timing and magnitude of the impact.”

One assumption, she said, is that owners will actually stick to the 60-day terms. “And I’ve been around a lot of decades to see that, you know, when the economy gets a little iffy, those payment terms get stretched.

“So that solid line moves to the right more and that that cash crunch position becomes even greater. And that is a big threat. It’s permanent.

“So you’re a trade contractor and you get on the site. You’re 60 days out before you can even expect to get any money. In the meantime, you have labor, materials, equipment, operating costs, all of that. So you need money in order to take on new work.”

“You need a healthy cash flow to expand, to take on more work and to hire more people. You need that cash flow to take on apprentices, cover tool and equipment costs as well as paying your suppliers.

“As work picks up, trade contractors will still be experiencing a weak cash flow from March, April and part of May, but their costs will be rapidly increasing as they take on more work. Banks start looking at you a little funny at that point — ‘Well, your revenues don’t quite line up with your expenses and your 90 plus day receivables are increasing’ so instead of extending credit they may cut your credit.

“And all of this triggers a spike in bankruptcies come August and September.

She said recently the Ontario Construction Secretariat surveyed its members. She said of the approximately 200 contractors which participated in the survey, “44 per cent responded that in under these conditions within three to six months, they could face bankruptcy” which would be in August, September, or October timeframe.

“That’s going to be a major issue. I mean, if you are well financed, if you have some reserves, you may be able to ride through that.” Contractors might be able to survive with smaller projects, but the cash flow challenges will be more severe if the work that arises later in the year is only larger scale projects, which may be beyond the capacity of smaller contractors to undertake.

Could government programs, notably the Canada Emergency Wage Subsidy (which can pay a 75 per cent wage subsidy for employees) and the $40,000 Canada Emergency Business Account (CEBA) provide solutions to these cash flow problems?

“The problem with wage subsidies was how eligibility was calculated,” Skivsky said in an email to Ontario Construction News. “As you know if you were to compare March revenues between 2019 and 2020 you may not see a big difference. It’s only in May that you would see the major impact.       “Also speaking of the unionized sector most wages are higher than the maximum for the program so you really are not getting a 75 per cent reduction.

“These programs are not going to make a contractor whole and they may change the timing but I believe we are still going to see the impacts of reduced cash flow on the industry. The CEBA loan/grant is not going to keep a contractor in business,” she wrote. “It would be interesting to determine the actual uptake of these programs and how effective they have been for the construction industry.”

In a follow-up note, Skivsky outlined 10 variables that may affect the industry’s recovery from the COVID-19 pandemic, and thus the actual impact on trade contractors’ business survival.

She said no one crystal ball can foresee the individual and/or combined impacts of variables including:

  1. Government construction stimulus programs/infrastructure spending. Including when programs will be deployed, their value, how long they will be in place and the types of projects and their location;
  2. When is “shovel ready” really “shovel ready”? Clear and realistic timelines from design, to permits, to start-up need to be established. There should be consultation with industry.
  3. Project deferral/cancellations. There have been some major projects that have been set aside and even though a lot of work has been tendered it is not clear what will actually proceed.
  4. Financial capacity of municipalities. Will they be able to participate in jointly funded projects?
  5. Municipal approvals: Are the planning/permitting/inspection functions operating? Will lack of these resources cause delays?
  6. Workforce impacts. The industry was already facing a steep retirement curve and there is a question of whether current conditions will accelerate it?
  7. Payments: The prompt payment regime in Ontario may be tested in the next few months, but in provinces without prompt payment will payment terms become longer?
  8. Private sector: There are many discussion and opinions as to what some sectors will look like post-pandemic. The question is, what types of structures will the private sector be building and when will the confidence come back?
  9. Role of bank and credit facilitators: Will they make things worse?
  10. Existing and future contractual conditions/clauses: How will the owners adjust contract language moving forward?

“There are likely more variables, but looking at the above list it is clear there is a lot of risk to manage,” Skivsky wrote. “And the construction industry has always risen to the occasion required.”            “However at this point no one has the ability to predict the outcome and interaction of all the issues mentioned, but the one very basic thing the industry and owners can do is to communicate, plan in more holistic and sustainable manner and insert some flexibility into the system.”

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