Dispatch #38 - Should your construction firm give back its PPP loan?

That’s the question the SBA is asking in no uncertain terms by asking businesses to reconsider whether they genuinely need their PPP loan and, if not, return the money by May 14th or face criminal penalties.
 
Hopefully, this is simply a warning intended to scare off companies that would abuse the program’s intent. But just in case government auditors target your firm several years from now, take notice and take action this week.
 
Below are some guidelines to help you do just that. And please forgive in advance the length of this bulletin, but it’s necessary to address an important, urgent and nuanced issue facing contractors this week.
 
Changing program rules
 
Reconsideration hinges primarily on language found in the Department of Treasury’s FAQ #31:

[A]ll borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. 

The quandary for millions of honest small business owners is that (to my knowledge) phrases like “necessary”, “ability to access other sources of liquidity”, and “significantly detrimental” have yet to be defined by the SBA and the Department of Treasury, raising questions such as these:

• “Support...ongoing operations” for how long? Two months or two years? Experts have advised that the pandemic could significantly and negatively impact the economy for several years.

• What if accessing certain sources of liquidity, such as fully drawing on a line of credit, deferring trade payables, and payroll taxes (as allowed by law), causes a contractor to violate its bank and bonding covenants?

• Are shareholders expected to use personal funds or HELOCs to capitalize their business and fund actual or possible losses?

For more information, see also FAQs #37, 39, and 43, as well as a recent Forbes article that presents some of the legal contexts for this predicament. Consult with your attorney as needed, and hope that we receive additional clarification from the SBA this week.
 
The rules of the program are changing and might continue to change as the AICPA and others lobby for common sense clarification.
 
What should a contractor do in the meantime?
 
Generally speaking, you should reconsider your company’s need for a PPP loan, document your conclusions, and file it in your PPP loan audit file.

More specifically:

1. Bear in mind that loan size matters, with loans over $2 million to receive particular scrutiny.

2. Document your decision to take on new debt (the PPP loan) in the corporate records, as you would any significant corporate event.

3. Create and maintain a timeline that narrates your company’s need for and decision to accept a PPP loan.

   1. Monthly financial results and condition before and during the pandemic;

   2. The dates of shelter in place orders (and subsequent extensions, tightening, or loosening of restrictions);

   3. PPP loan program dates (program announced on 3/31, the date your company applied, etc.)

4. In your company’s self-assessment, address the topics recommended by Mario Vicari of Kreischer Miller in a recent CFMA webinar:

   1. Impact analysis of the pandemic on your business

   2. Decision processes that led your firm to apply for and accept funds

   3. Financial analysis and planning—profit, cash and balance sheet forecasts

   4. Use of PPP funds—actual to date or planned if just funded

5. Be specific.

   1. Document project delays, cancellations, and cost increases for each affected project, making notes on each month’s WIP throughout the pandemic;

   2. Declines in service tickets and/or revenue;

   3. Number of people in the field and how many hours they worked;

   4. File meeting notes, financial reports, internal and external email correspondence, RFIs, cost increase change orders (approved or rejected), communications with customers, crew leader daily logs, etc.

6. Include an HR trail. Verbal communications, emails, and formal document exchanges with your employees during the pandemic are likely evidence of your firm’s need for PPP funds. Layoff notices, reductions to hours, converting salary employees to hourly, and paying idle workers demonstrate financial stress. Include copies of letters sent (w/names redacted) in your audit book and evidence of subsequent rehiring and wage restoration.

Do your self-assessment, make a decision, and return the money by May 14th if you’re going to do so. I would add, however, that I’ve yet to speak with a contractor who hasn’t experienced significant losses due to the pandemic or, if they’ve maintained profitability thus far, isn’t facing a higher risk of significant revenue disruption, negative net income, and cash flow stress as the pandemic effects ripple out in the months and years ahead. This risk is on top of historically high volatility in the construction industry, even without a pandemic.
 
So, for contractors who decide to keep their PPP funds, put them to good use, and may they help you successfully guide your firm and its employees along the road to recovery. In my mind, that’s how we can best honor the spirit of the Paycheck Protection Program.

Need help with this or other financial matters faced by construction contractors? Let’s talk!

David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.