The past several years have been marked by unprecedented growth for construction contractors, but also by unprecedented and ongoing challenges. How will your construction company face those challenges and still prosper?

Labor shortages, lack of a skilled workforce
Many industries have faced labor shortages, but it has been more challenging for the construction industry. Many workers retired due to the COVID-19 pandemic, and others found less strenuous employment. Those workers are not coming back to the construction industry even though there is more work now than ever before. As well, the construction industry is not attracting talented individuals to meet current demand, and workers are aging or retiring faster than younger people are coming into the industry.

Some things to consider in dealing with the shortages:

• Partner with nearby educational facilities: This option has been mostly overlooked, but offering apprenticeships or internships could help cultivate a next generation of workers. Partnering could be a win-win: a student graduating has a job and you have an opportunity to evaluate the skill of the student.
• Temporary labor: It might not be ideal for many contractors due to the complexities of the contractor’s business, but temporary workers could help fill a gap while you pursue more qualified labor.

Recession
When it comes to the dreaded “r” word, construction is unique. Due to existing contracts and other building that needs to be done no matter the circumstances, many contractors have at least a year’s work before what they see as a potential recession and the related slow down in new contracts. Whether a recession is coming is debatable—some think we are already in one—but no matter the circumstance, there are a few things that contractors should not do before a potential recession:

• Take on more debt: Taking on debt could require using working capital to pay down the newly acquired debt. That working capital will be needed in other areas of the business, such as marketing and payroll, that are necessary to generate leads and retain employees to complete current or new jobs.
• Cut marketing: Closing down or cutting back marketing efforts that bring in new business just because of their cost is not advisable. If your marketing has been successful in bringing in jobs, don’t stop it. Instead, review your marketing to determine which efforts are productive and which are not and could be changed or cut.
• Retain break-even or worse profit centers: If the profit center isn’t making money, or is just breaking even or close, it must go. Even if the economy turns around, you’ll need a compelling reason to add back that profit center when your efforts could be directed at increasing profitable work.

Supply chain issues
You don’t have to be a contractor to be aware of the impact of today’s supply chain interruptions. Your lead times for completing work can extend well beyond what they have been in the past when you can’t get your hands on the resources you need. Price volatility has added to this problem causing some construction contractors to try to stockpile certain resources, which could lead to other problems. A substantially increased inventory might not be covered by the builder’s risk policy if not locked up in a certain way, and could require additional insurance and the related cost. Excessive inventories also can tie up cash you need for other activities and operations. There is hope that supply chain issues will lessen in the later part of 2022, but 2023 could still be a bumpy start when it comes to resources.

Options for dealing with supply chain issues include:

• Talk with your network and share data: Communication is key for businesses internally but also externally. Partnering with your suppliers and sharing relevant data could help everyone in the chain.
• Increase inventory minimums: As mentioned, adding inventory can cause cash flow or insurance problems. But using just-in-time methodology can leave you sitting idly waiting for supplies to complete a job. Analyze your data and make determinations as to what levels of increased purchases might not cause cash flow issues. Advance planning could keep you from having to use funds from one job to pay for another, which as contractors know, usually results in the demise of the business.

Contractors need to take a hard look at their businesses and make some determinations on the labor they have and will need moving forward, how to ensure they can stay afloat if a recession occurs, and how to keep jobs moving and stay profitable when their supply of materials could be limited. Construction currently is going strong in many parts of the country, but with all the issues contractors face now and could face moving forward, they must be careful not to overpromise and under-deliver. Harming your reputation could be more damaging than all three of the challenges we have discussed.

Consulting a trusted financial advisor can help you make good financial decisions and work to ensure you are here for many years to come. The construction industry experts at HBK Construction Solutions can help. You can contact me with your question or concerns at 772-287-4880, or by email at rmishock@hbkcpa.com.

While the COVID-19 pandemic caused many struggles for businesses across the globe, many manufacturers continue to face significant supply chain disruptions. A combination of skyrocketing costs, truck driver shortages, lack of goods available, and delays at ports have wreaked havoc for many manufacturers, no matter the location, size, or nature of their business.

With many predicting that such disruptions could continue throughout or even beyond 2022, the Biden Administration is continuing its efforts to strengthen the country’s supply chain. Last February, the Administration released the Executive Order on America’s Supply Chains to begin addressing some of these struggles. One year later, on February 24, 2022, they released the Biden-Harris Plan to Revitalize American Manufacturing and Secure Critical Supply Chains in 2022.

Order Overview

The 2021 Executive Order called for research, discussion, and planning to identify and mitigate risks in key areas of the supply chain, such as semiconductors, advanced packaging, high-capacity batteries (including for electric vehicles), critical minerals, and pharmaceuticals. Further, the Order set forth a plan to review the supply chains related to the defense industrial base (including goods for which the US is dependent upon other nations), public health and biological preparedness, information and communications technology, emergency sector, transportation, and agricultural commodities and food products.

Through this research, the Order hoped to identify risks including capacities, geographic locations, supply concentration, climate change impact, and others that could impact the resiliency of the American supply chain. Further, needs related to the workforce’s skills, research and development, and transportation were to be identified.

Biden-Harris Plan

As initial research called for in the Executive Order has now been completed, the Administration has detailed actions it has begun taking, including increasing support to solve current challenges, investing in the supply chain, and institutionalizing resilience through the improvement of collaboration between federal agencies. Further, the Administration recognized that additional actions are necessary, including:

• Proposing that the Export-Import Bank (EXIM) provide financing to certain manufacturers, an initiative to be voted on in Spring 2022 by the EXIM Board.
• Unlocking funds through the Small Business Administration (SBA) and Department of Treasury to provide access to capital for certain manufacturers.
• Working to scale innovative technologies, promote workforce initiatives, and taking other actions to help Manufacturing USA Institutes strengthen supply chains.
• Using the Bipartisan Infrastructure Law to update infrastructure that can be used to transport goods more expediently.
• Reducing foreign dependence on certain critical minerals.
• Using measures granted under the Bipartisan Infrastructure Law, American Rescue Plan Act, and Buy American Act to support the improvement of supply chain resiliency.
• Working with trading partners to build supply chain resilience, prepare for future crises, and mitigate future disruptions.

Manufacturers currently facing supply chain disruptions are looking for quick answers. However, it is unlikely that these companies will see immediate relief due to the Administration’s plan. Instead, manufacturers should view this Plan as a long-term strategy that may help resolve long term issues or prevent their recurrence.

As a result, manufacturers should consider taking actions to strengthen their own individual supply chains. These actions may include:

• Maintain communication with suppliers. Communicate your needs and request updates regarding open orders or market information.
• Where possible, consider engaging multiple suppliers for critical goods. Work actively to ensure that those suppliers are not sourcing from the same supplier; having a single source anywhere in your supply chain may reduce the effectiveness of your efforts to dual-source.
• Revisit your purchase orders. While just-in-time inventory is a strategy used by manufacturers, potential disruptions in the supply chain can cause the need for higher inventory quantities.
• Prepare for cost increases. With inflation continuing to rise, manufacturers should expect costs of goods to increase. Be prepared to pass those increases to customers as appropriate.
• Keep a close watch on your cash. With increasing costs and the potential need for higher inventory levels, the potential for cash flow issues rises. Create a cash forecast to help you manage it.
• Set expectations with your customers. Keep them abreast of anticipated cost changes as well as goods’ availability. While it will not increase the resiliency of your supply chain, it will help you maintain a higher level of customer satisfaction.

To discuss options to manage your supply chain, please contact a member of HBK Manufacturing Solutions at 330-758-8613 or manufacturing@hbkcpa.com.

Many manufacturing companies, and other businesses, have long accounted for their inventory on the last-in-first-out (LIFO) basis. LIFO assumes that inventory acquired most recently is sold first, usually resulting in matching higher-cost inventory with current sales. A company with LIFO inventory that experiences a decrease in their inventory levels may often recognize additional taxable income as a result of the LIFO decrement. A LIFO decrement is the excess of the prior period ending inventory minus the current period ending inventory. Decrements result in a reduction of LIFO layers created in earlier years, thereby creating taxable income. In other words, the capitalized lower-cost products are not being deducted in the cost of goods sold, resulting in higher taxable margins.

Many conditions related to the COVID-19 pandemic severely limited manufacturing capacity and caused major interruptions in the global supply chain. In addition, some businesses exhausted current inventory to assist relief efforts during the early stages of the pandemic. These events made it extremely difficult for U.S. companies to maintain their inventory levels in 2020, often resulting in a substantial reduction in inventory levels. These difficulties have continued into 2021 and, in many instances, have intensified. While the overall economy has rebounded strongly since last year, the spread of the Delta variant has added a great deal of uncertainty to many businesses that may have liquidated their inventory in the past eighteen months.

As a result of these circumstances, many companies are likely to see a decrement in their LIFO inventories and will realize additional taxable income and the associated tax liabilities. This will further exacerbate the recovery efforts of these companies, as the additional cash outlay may prove to be an undesirable drain on their finances.

Sec. 473 of the Internal Revenue Code provides relief for eligible taxpayers that experience liquidations of LIFO inventories as a result of a “qualified inventory interruption.” Sec. 473 can be applicable if a business has had an interruption in the ability to obtain replacement inventory due to a trade embargo or other international event. Under Sec. 473, the company would have three additional years to replenish the liquidated inventory. A “qualified inventory interruption” occurs under Sec. 473(c)(2) when the Treasury Secretary, “after consultation with the appropriate Federal officers, determines that…any embargo, international boycott, or other major foreign trade interruption has made it difficult or impossible to replace any class of goods for any class of taxpayers during the liquidation year, and the application of Sec. 473 to that class of goods and taxpayers is necessary to carry out the purpose of Sec. 473, he shall publish a notice of such determinations in the Federal Register, together with the period to be affected by such notice.”

The AICPA has written two letters, in April and August 2021, including detailed examples, requesting that the Department of the Treasury and the Internal Revenue Service apply the relief measures afforded in Sec. 473 for businesses that were unable to maintain their prior inventory levels due to the effects of COVID-19 on the global supply chain. Specifically, the letters requested a safe-harbor method and expedited relief in this scenario. In particular, the AICPA recommended that the safe harbor provide that the taxpayer would disregard the liquidation for this year and would retain the LIFO layers related to the opening inventory. This would alleviate the burden of paying additional taxes on the related income.

As of this date, there has not been a response from the Department of Treasury or Internal Revenue Service. However, taxpayers should be aware of these potential consequences due to the disruption of the global supply chain and reduced inventory levels.

Please contact HBK Manufacturing Solutions if you would like to discuss the possible effects of a LIFO inventory reduction and any potential relief.

Severe weather can affect all areas of the country. Tornadoes, snowstorms, wind, thunderstorms, and hurricanes affect us all and can have a major impact on our businesses.

For instance, the 2021 hurricane season has already begun with five active storms, including Hurricane Elsa, which made landfall in the United States earlier this month. The National Oceanic and Atmospheric Administration (NOAA) expects between 13 and 20 named storms this year, with about 6 to 10 of those storms anticipated to become hurricanes.

The effects of these storms on manufacturers can be wide-reaching, regardless of where a manufacturer is located. If a manufacturer’s supplier is located in an area affected by a storm, the manufacturer may face supply chain disruptions, extended lead times, force majeure declarations, and increased costs. For instance, when Hurricane Harvey landed in southern Texas and the Gulf Coast in 2017, it caused severe disruption to many chemical and plastic factories located in that area. Manufacturers were unable to obtain goods from these companies, and many factories made force majeure declarations because of their limited abilities to produce. Later that year, Hurricane Irma struck southern Florida. The impact of the two storms led costs of raw materials including lumber, steel, and plastics to increase by double-digit percentages.

In addition, oil and gas costs often rise after a hurricane. Hurricane Katrina, a category 5 hurricane that hit the Gulf Coast in 2005, severely hurt refinery and production capacity in the United States. According to the U.S. Senate’s Joint Economic Committee Report on the impact of Hurricanes Katrina and Rita on oil prices and the economy, capacity concerns caused the federal government and some European countries to release oil from their emergency stockpiles. Despite these actions, the average weekly gas price increased 41.6% compared to the same period the previous year. As a result, manufacturers using material derived from oil experienced significant cost increases because of these storms. Further, freight costs increased substantially, impacting many manufacturers and businesses across the nation.

Because hurricanes and other major weather events are inevitable, manufacturers who may be impacted by severe weather should take time to consider their vulnerabilities. Manufacturers may take the following actions to help mitigate the effects of hurricanes and other severe storms:

1. Create a disaster recovery plan.

   A disaster recovery plan is a written document that includes actions to take in the case of a disaster, including a severe weather event. Typical plans may include reviews of resources, budgets, data, suppliers, and compliance requirements that may be impaired as the result of a disaster. Businesses without a plan should consider the risks and impacts of a disaster, and the steps to follow in the case a disaster occurs. Businesses with a current plan may consider reviewing it periodically as well as if business conditions change or a disaster occurs, to ensure the plan’s effectiveness.



2. Revisit your insurance coverages.

   Businesses should review their insurance coverages at least annually. This review should not just focus on the coverage and its financial limits. It should also include changes made by the insurance carrier to the plans, trends in manufacturing as well as in the insurance industry, and needs of the business that may not be addressed in the current plans. For instance, manufacturers located in a hurricane-prone geography should be aware that typical flood or property insurance may not cover devastation due to a hurricane unless proper riders are implemented. Similarly, goods damaged in transit due to severe weather may not be covered by general policies, without similar riders. It is important to understand the limitations of your insurance coverage.



3. Evaluate your supply chain.

   Do you have suppliers located in high-risk areas? If so, do you have plans in place to obtain critical goods in the case of a disruption? Know alternative ways to obtain critical materials. Also, stay abreast of major storms and their anticipated paths. Some suppliers may be able to supply extra goods on short notice or expedite future deliveries if a storm may be approaching.



4. Consider your inventory metrics.

   Many manufacturers work actively to maintain certain inventory metrics, such as inventory turnover ratios or days sales of inventory on hand. However, there may be good reasons to forgo the metric in the case of potential supplier disruption. During times of severe weather, consider changing your metrics – therefore allowing higher inventory levels – to ensure your ability to supply in the case of a storm.



5. Think about your IT infrastructure.

   If you are in an area that often experiences severe weather, thinking about your IT infrastructure and the preservation of data is especially critical. Physical storage can become damaged, heightening the importance of offsite storage or other cloud-based storage options. If you are not located in these geographic areas, you may not think about a storm’s potential impact on your IT infrastructure. The frequency of scams, phishing attempts, and other cybersecurity attacks often heightens during and after a natural disaster. Ensure you have proper training, protection, and other protocols in place to protect from an attack. .

To discuss the impacts of severe weather on your manufacturing business, contact a member of HBK Manufacturing Solutions or your HBK Advisor.

As COVID-19 cases decline in many areas of the country, manufacturers are turning their focus from recovery to growth. Challenges remain; labor shortages, supply chain issues, and rising costs threaten manufacturers’ abilities to capitalize on growth opportunities. However, with the right actions, many manufacturers are positioned for a strong year.

Consider six questions that manufacturers should ask they focus on growth:

1. Does your lender provide solutions that help you grow?

Having a strong lender relationship can provide manufacturers with benefits, including flexibility and increased borrowing power. This is especially crucial in times of growth as manufacturers may require capital to invest in improvements to their capabilities. Lenders offer a variety of solutions, including traditional loans, asset based lending arrangements, SBA loan access, and revolving credit lines. No matter the solution that works best for your operations, having a lender that understands your business – including its plans, seasonality, risks, and opportunities – is critical.

2. How will your business attract and retain workers?

Manufacturers are competing with all industries for new employees. There is no easy solution to finding available workers, especially those for skilled positions, so manufacturers must think creatively about their recruiting and retention strategy. While increasingly popular flexible working arrangements may be difficult to offer shop floor employees, competitive pay, incentives, training opportunities, and a culture with clear expectations, collaboration, and accomplishment recognition are some ways that manufacturers have grown or maintained their workforce.

Further, manufacturers may consider their long-term labor needs. According to The Ohio Manufacturers’ Association, “earn-and-learn solutions, like apprenticeships, have delivered measurable results for manufacturers, including accelerated learning and improved retention.” These programs, along with cross training, online training programs, and incentives to obtain external education can help employees develop skills and help the company continue critical operations in the case of employee turnover.

3. Will Biden Administration policies impact your business?

The Biden Administration, through its American Jobs Plan, introduced several proposals that could benefit manufacturers who produce goods for infrastructure, construction, and electric vehicles. These manufacturers may find growth opportunities if the plan is enacted.

However, manufacturers could also see their tax deduction opportunities reduced if Congress allows bonus depreciation to begin phasing out in 2023. In addition, the Biden Administration is proposing higher tax rates for certain corporations and high earning individuals, which may impact these businesses’ profitability and cash flow. As a result, it is important that owners and top management stay abreast of governmental proposals and legislative change.

4. What have you learned during the pandemic that can strengthen your operation long term?

During challenging times, businesses often look for opportunities to reduce costs. Many took these steps during the pandemic. Now, as many manufacturers pivot their focus from survival or recovery to growth, they can revisit these reductions.

Some reductions may reduce or eliminate certain internal controls, limit cross-training opportunities, or create other limitations for the operations environment. These reductions should be revisited; the cost reduction may not be a good one to make permanent. However, other reductions may have created inspiration to create a leaner, more productive, or more efficient environment. These reductions may be able to be made permanent. For each reduction implemented, analyze its pros and cons to determine which should be made permanent.

5. How do changing consumer demands affect your operations?

During the pandemic, some manufacturers pivoted capacity to support illness mitigating products, such as face shields, face masks, or workspace partitions. These manufacturers may consider reevaluating demand to determine whether to continue manufacturing these products. Manufacturers may also consider other consumer demand changes, even for those selling B2B. For instance:

• Contactless (or less contact) interactions may replace some face to face sales calls.
• Some administrative personnel could transition to a remote work environment, increasing the importance for electronic invoices or payments.
• Health conscious products and materials like antimicrobial additives could replace more traditional products.
• Robotics and automation may become more widely adopted, leading to the need for tighter, more consistent tolerances.
• The importance of rapid prototyping has been magnified by the pandemic, which could encourage adoption of technologies such as additive manufacturing.

6. Is your supply chain strengthening or threatening your business?

Suppliers should be partners to your business, offering goods and services that help you effectively service your customers. Recent supply chain disruptions due to pandemic related shutdowns and weather events have caused long lead times and rapidly rising costs. Further, as we approach hurricane season, the possibility of weather events further disrupting the availability of certain materials (especially plastics) , interrupting transportation, and increasing oil and gas prices is rising.

Secondary sources and alternative products can provide options that give manufacturers flexibility. Strong vendor relationships can help you identify these options as well as potential market turmoil that could threaten your ability to grow. In addition, as you adopt new materials or products, think about those products’ availability. If the material or product is subject to volatility, exploring other options during the R&D phase may provide a better solution long-term.

To discuss your company’s growth strategy, contact a member of HBK Manufacturing Solutions at manufacturing@hbkcpa.com or 330-758-8613.

Advances in technology are rearranging the relationships between entities in supply chains. Entities that produce, manufacture or distribute products are more connected than ever with their suppliers, customers and business partners. There are advantages as well as disadvantages to this new way of conducting business.

The efficiencies introduced by technology have increased revenues, reduced costs and presented more opportunities, but technology has also introduced major risks to the entire supply chain. Accordingly, stakeholders – suppliers, customers, business partners – are considering these risks, and as a result, vetting their partners more diligently.

Routinely this is accomplished by requesting attestation reports on the entity’s system and the controls relevant to security, availability, processing integrity, confidentiality and privacy. Third-party, independent assurance is ideal. Such requests will likely soon become requirements.

In an effort to facilitate and provide a common set of criteria, the AICPA has developed guidance for a new examination-level service referred to as an SOC (system and organization controls) for Supply Chain examination.

An SOC for Supply Chain report provides information about the “system” used to produce, manufacture, or distribute products and the relevant “controls” within that system. The report is designed to provide users with information they need to identify, assess and manage the risks that arise from their relationships with the entity. Users include:

• Business partners, such as customers or suppliers who need the information to manage and assess the risks associated with doing business with the entity
• Business customers, including immediate customers or similar business entities further down the supply chain who may need to (a) integrate controls with the controls within their own systems, and (b) determine whether those controls are sufficient to mitigate their own business risks
• Others, such as prospective customers and business partners who need the information to supplement their supplier selection processes or ensure the supplier’s compliance with regulatory requirements

As supply chains evolve and vendors and business partners are increasingly scrutinized, SOC for Supply Chain examinations will provide marketability, convey trust and distinguish organizations. A chain is only as strong as its weakest link.

HBK CPAs & Consultants has vast experience conducting SOC Attestation reports. We are poised to assist your organization in achieving success.

What can you do to help your business negotiate the turbulence associated with the coronavirus? Some small business owners and operators are concerned about the long-term future of their companies, while others, strapped for cash and operating on slim margins, are more concerned about surviving into the immediate future. First things first. Here are a few initial steps you can take to put yourself in a better position to limit the damage of what could be an extended period of troubling challenges:

• Assess your exposure areas. How reliable is your current supply chain, your orders for inventory or supplies? Even if your current suppliers look dependable, it is good to identify alternative sources for the products and services you need to do business effectively.
• Examine your sales forecast and cash flow projections. Develop the worst case, best case and expected scenarios, and develop strategies for operating under each.
• Consider your strategic initiatives and how you will continue to make progress toward achieving those most important objectives. What can you do to alleviate issues that might arise in this environment that could prevent you from reaching those goals?
• Cost-containment is imperative. Evaluate the risks inherent in your fixed and variable costs. How will you prioritize cuts if you need to make them?
• Determine your minimum staffing requirements. Identify those who are most critical to your business. While you’d like to keep everyone, you might not be able to. Don’t be short-sighted. This environment will eventually turnaround, and you’ll need to have your key employees onboard to propel your recovery.
• Keep aware of Federal and state law changes that can benefit your business. For example, President Trump just signed into law the Families First Coronavirus Response Bill that would provide significant relief through refundable tax credits for paid sick, family and medical leave. Additionally, states are considering incentives to assist businesses dealing with the disruption and uncertainty caused by the coronavirus. HBK will provide updates on these Federal and state relief efforts.
• Maintain open communications, with your employees but also externally with your customers and suppliers. Be proactive if there are going to be problems, such as late deliveries. Communication is the key to keeping customers satisfied that you are doing the best you can to address their needs.
• Talk to your bankers about access to more resources, like a bigger credit line, to help you through a less than ideal business climate. If you have existing bank debt or loan covenants, and anticipate missing a payment, talk with your banker early on rather than at your reporting deadline. Bankers hopefully will be sensitive to these difficulties.
• Talk with your HBK advisor for recommendations on mitigating your business risks. The good times of the past years might have hidden some inefficiencies that we can help you address the current business environment and be prepared for recovery.

  Troubling times can also present opportunities for your business, Keep your long-term prospects and objectives in mind while addressing the things you have to think about for tomorrow.

This document provides a guide on how drop shipping relationships have changed following the new tax laws and regulations after the decision in South Dakota v. Wayfair.

Drop shipping is a fundamental aspect of the supply chain and represents two separate and distinct transactions. The seller accepts orders from their customers, invoices the customers and receives a shipping address. That shipping address can be in a state in which the seller has a presence or any other state that the seller is not located in. The seller then places an order with the supplier to fulfill the customer’s order who will ship that product directly to the shipping address provided. The supplier never invoices or deals directly with the customer; they engage in a sale solely with the seller.

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