Coronavirus & Construction: Subcontractors Are Only Good for 2-3 Weeks of a Shutdown

We may be heading to a complete shutdown of the country for an extended period of time. Construction is a cash-intensive industry. Can it afford to shut down its activity? What will happen to many contractors if they have to shut down for more than 30 days?

I talked about this with Tim Pickett, president and owner of Encompass AV, a subcontractor in Chicago. He shared some hard truths with us.

[Yves Frinault] I’m Yves, the CEO of Fieldwire and I am joined today by Tim Pickett, who’s the CEO of Encompass AV. Tim, we’re really proud to have you as a customer and we’re really happy to have you on the show today. I would rather talk to you about Encompass AV but obviously we’re gonna talk a little bit more about COVID-19 today and basically the impact it’s having on your business as a contractor.

[Tim Pickett] Sounds good. Yes. Great. I’m ready.

[Yves Frinault] Good. So Encompass AV is in Chicago. How are things in Chicago right now? What has been the short-term impact so far of the crisis?

[Tim Pickett] Well, it’s very similar to all the rest of the major cities, especially New York. I feel that Chicago is very closely following New York’s lead on... whatever New York does, Chicago does an hour later. Right? So they have closed all of the restaurants, all the bars, all the nightclubs, that scene is totally done. Restaurants can do door-side pick-up which is good. You know... at least they have — they can create some revenue generation there. But we have a tremendous amount of staff and employees out of work, completely out of work. Bartenders, servers, waiters, people that are hourly just sitting around, not making any money.

A healthy amount of our business is in hospitality. We do a lot of new construction, but we also do a lot of retrofits and restaurant upgrades, cleaning, maintenance, all kinds of different stuff for high-end restaurants in Chicago, so this is definitely affecting our business. We’ve had a bunch of jobs pushed, delayed, cancelled until further notice. Chicago is pretty strict. Things are shutting down and I don’t think it’s going to get better in the very near future, I think it’s going to get a little worse, first.

[Yves Frinault] Okay. I know in San Francisco we have a “shelter in place” order but construction is still considered an essential activity, meaning that they’re able to continue working on jobsites. So let’s talk a little bit about office-slash-jobsite shutdowns, whether it’s forced or not. Do you have any thoughts on that?

[Tim Pickett] A lot of the offices have been — we will talk a little about this space first — a lot of the offices have been working from home, that’s just the bottom line. It puts us in a tough position, because we do a lot of office technology. We do a lot of video conferencing systems and whatnot. When everyone is working from home, and just video conferencing from their Macbook, laptop, there’s not really much for us to do there. So that has kind of fallen offline. As far as construction goes... Construction as of right now — we’re still moving forward with the bigger stuff. We have a larger project, the Nobu hotel. That project is still going. It’s been delayed for a multitude of reasons, but they’re on a big push to open for July. Of course, now at a big job site like that, it’s a 12-story hotel, with hundreds of workers on any given day, it’s very nerve-wracking — wondering whether it will get delayed again, yet again, and if so, for how long. We haven’t had any official stop-work orders yet for construction, but there are talks of it. It’s a big concern for us right now.

[Yves Frinault] Yes. Even if the order doesn’t come directly straight from the government, are you afraid that maybe the unions could issue that order? Or the fact that the logistics might be disrupted? That you’re not getting materials on-site and that causes you to have to stop business?

[Tim Pickett] Yes, but so far, for now, all of the audio-visual stuff, which is well... 70-to-80 percent of our work. We haven’t seen a supply chain disruption yet. [Knocks on desk] Knock on wood. I know that some of my low-voltage friends who focus on life safety type stuff, like fire alarms systems and what-not, have had complete large vendors shut down, like Access Cameras. I’ve heard that their warehouse closed. There are product issues in the industry, not specific to us yet, but there are going to be delays for sure.

[Yves Frinault] How short is your supply cycle, usually, on those projects? Do you order two weeks ahead? A month ahead?

[Tim Pickett] It depends on the job, it’s typically three, four weeks ahead, but we like to get it in, if we know something could be a little more time consuming. If we have really high-end speakers, like Martin Audio, a lot of that stuff is made in the UK, so that stuff has to be ordered two months ahead, six-to-eight weeks. Most of our stuff, we can turn around in three-to-four weeks, and we have got a pretty decent inventory of what we need now, right? For the next couple weeks — but after a couple weeks, if our supply chains do close, that could absolutely be a problem. And it leads into cash flow issues, like we were talking about before.

[Yves Frinault] Let’s get into it, actually, because Boston — the city has ordered construction to shut down. I know that the AGC is reacting very strongly right now and we have to explain that any contractors are not going to be able to handle the cash issue if they are forced to shut down. They’re not going to be able to front payroll for many weeks. Talk to me a bit more about the cash situation with contractual work, and especially in your work, that of subcontractors and what it means to run those businesses.

[Tim Pickett] We’re going to be seeing exactly what we’re seeing in the restaurant industries. The restaurant industry, they’re completely out of work — these are hourly employees, they’re tip-based employees, too, a lot of them, and the restaurants are rumored, I don’t think rumored is the right word— whispered that a lot of restaurants, especially the mom and pop restaurants, aren’t going to be able to pull out of this and come back. They have got produce and food that’s going bad in freezers, they’ve got expenses that they can’t pay because they have no income.

This is going to be about the same thing if they shut down the construction industry. This is going to be another major problem. I don’t know if a lot of people know about construction sites, about how a lot of the money, a lot of the funding, is secured by the subcontractor in many ways. So when you have a GC that is building a big, large building, they hire a bunch of subcontractors, one for HVAC, one for plumbing, one for electrical, and so on and so forth.

These subcontractors, they have to go out and they have to buy all the materials, they have to put a bunch of labor in, and after thirty days of working and providing materials, they submit an invoice to the job site, mailed to the GC. The GC then has to approve this, and then they have to bump it up to ownership for approval. The ownership has to bump it over to the bank for approval, the bank has to approve it, and then the bank and the ownership have to approve it, and then the bank and the ownership actually have to fund what’s called a draw. So the minimum amount of time that a subcontractor from the day that a subcontractor starts to the time that they get paid is sixty days. It’s very typically ninety days. Anywhere in that period.

Subcontractors are really the core of funding for these big projects, so if construction gets completely shut down, it’s going to be hugely problematic for the small guys, which are the subcontractors. The subcontractor is always a small company, they’re not the massive GCs, they’re not ownership, they’re not banks. When they shut construction down and the banks stop paying money that is already owed — if that happens, it’s a major problem. Subcontractors won’t be able to pay their vendors, they won’t be able to make payroll, and everything will grind to a halt. If employees don’t get payroll, they’re not going to be able to pay their own bills. One thing leads to another and it’s going to be a tremendous domino effect.

[Yves Frinault] Yes. So what I have been hearing is that if the situation extends to basically more than two-to-three months, that’s where the cash is going to become really hard on the subs.

[Tim Pickett] I would say two-to-three weeks. I think the subcontractors, especially the small businesses, are going to be good for no more than two-to-three weeks. The larger firms, sure. People who have larger lines of credit can go further, can push further out. It all depends, too. The vendors have to be able to work with them. Also, all these guys are hourly out there. If construction is shut down, they won’t even have to be able to pay their employees. They won’t be making any money. It’s a lose-lose all the way around, except for the whole COVID-19 thing — not getting sick. I’m not a doctor, so I’m not here to speak to that.

[Yves Frinault] It’s interesting, what portion of the labor that you use on-site is actually not directly an employee on an income, that are basically like temp labor that you hire on top of your regular employees?

[Tim Pickett] We swing both ways. The only people we subcontract that we don’t use in-house are union electricians to pull our cable and sometimes install gear. In Chicago proper, when we are doing union jobs, those are subcontractors. Everybody else, all my other employees work in-house. We don’t hire day-laborers or anything like that. Yes, it’s going to be an issue. We have bank draws coming in over the next four-to-five weeks, so we’re good for a little bit, but those are going to stop if construction stops, and it’s going to be very problematic very quickly.

[Yves Frinault] Have you heard any response from them to that end? If the job has to stop, do they have a plan in place to support the workers?

[Tim Pickett] The unions, from what I understand — I am not a union representative or a BA by any means, this is what I understand — the unions are insured for this, so there should be some safety net of some sort for the union workers, some kind of out-of-work compensation. Of course it’s not going to be what they normally make, but there should be some type of Aflac-type plan — a safety net. So there will be some cash flow, from what I understand. Again, I don’t work for the union, I am an owner of a company and we just subcontract union work. That’s been whispered that it will kick in, and then the union is concerned for the safety of their staff and the union worker. I think if this thing becomes — if the numbers and the statistics become, “Hey, this is really dangerous that you have 250 people on a jobsite during the day,” then, I think, the union may exercise that option — it won’t come from the city, it will come from the union and they will pull off of the jobs. And the jobs will grind to a halt.

[Yves Frinault] We’re all trying to adapt as quickly as we can to this new normal, maybe as a closing argument, what are you doing to prep, at the tactical level, the strategic level, to make sure that should this last a little bit longer than we hope for, that you’re ready to deal with it and it doesn’t endanger the business?

[Tim Pickett] I think that it’s important to really look at your business, any small business owner. Now is the time to become extraordinarily efficient. That can mean many things. That can mean anything from getting maybe rid of some of the people who haven’t been performing, to trimming staff, to trimming hours. There’s a lot of things. That’s the negative side of it.

The positive side of it is, how do we become more efficient in our departments? How can we optimize and streamline our products, our performance line, so that things get done quicker and better. And that new structure can move into the future with you and you can become a better business. I truly feel that we are going to come out of this stronger. When this does stop, whether it’s eight weeks or two or three months, God forbid, we’re going to have a tremendous amount of work, because there’s going to be a lot of catch-up.

So you have just got to get through this timeframe, optimize your company, hold on to as much cash as you can hold onto, keep as many people employed as you can, and do the right thing. Cut expenses wherever you can, and work with your vendors, too — they are companies, they are in business, too: call your vendors and work out extended terms, I am sure they’re doing the same thing with their creditors. We all have to work together as a team in the business community, to be understanding of one another right now, and to help each other, and the majority of us can get through this if we’re all understanding and we work together.

[Yves Frinault] I certainly can relate to that. We’re coming out of a twelve-year boom cycle over here in Silicon Valley and being “efficient and profitable” have not been words that we have heard for a long time. Everybody is trying to adjust the same way. So — amazing content, amazing advice from you, Tim, today. Thank you very much for that and we wish you the best over the next few weeks and talk to you soon.

[Tim Pickett] Stay safe, stay healthy my friend.

[Yves Frinault] Absolutely. Bye, Tim.

[Tim Pickett] Thank you, guys.