as federal initiatives keep moving construction forward in 2023, keep a careful eye on compliance

By: jack callahan, cpa

Iwant to start off thanking the amazing staff at UTCA for the support they provide to their members. It is always a pleasure working with them to advance the efforts of the New Jersey construction industry. Each year I utilize this forum to provide my insights into what the coming year might hold and provide guidance on how to prepare your accounting and tax teams to face the challenges ahead.

The past three years have certainly been unprecedented. The pandemic brought challenges none of us had faced or prepared for. The fact that you are reading this indicates that you have survived the challenges and, in some cases, have thrived. Not surprisingly, the results are very uneven, with certain segments and contractors doing very well while others struggle with consistent backlog and reliable workflow.

As we begin 2023, the construction industry as a whole is seeing the largest backlog ever recorded. As UTCA and other advocacy groups continue to report, all agencies have increased funding, and the commitment is to award larger work programs than ever. N.J. still retains substantial unspent CARES Act and American Rescue Plan funds that have now been supported with funding from the Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA). How effectively and efficiently those funds turn into construction starts will be the key to a successful 2023.

Tempering the positives of large funding mechanisms are the inflationary concerns that continue to drive up construction costs. These are further exacerbated by supply chain challenges that will likely worsen with increasing “Buy America” requirements. Contractors will need to be very aware of where the work programs will be focused and make sure that their organization is aligned with the opportunities that will be funded. This will include traditional road, bridge, and sewer work, but will also encompass broadband, airports, alternative energy, and waterfront resiliency projects.

Maintain careful compliance: 3 areas to watch

When I reflect on how we have collectively survived these past few years, I am reminded of a 1986 quote from President Ronald Reagan: “The nine most terrifying words in the English language are, ‘I’m from the government, and I’m here to help.’” That’s not to say not to trust the government; I just think it fits to highlight that as a whole, the construction industry is becoming more complex to navigate, given the compounding regulations and opportunities legislation is creating. Contractors must be their own advocate in terms of keeping on top of what is available to them and what they must do to remain compliant.

Since March of 2020, contractors have been the recipients of some of the largest public assistance programs ever endeavored:

• Paycheck Protection Program (PPP) Loans

• Employee Retention Credit (ERC)

• CARES Act

• American Rescue Plan Act

• IIJA

• IRA

While all these programs have provided direct or indirect benefits, they all come with an increased level of risk in federal and state oversight that contractors must be aware of and build a system of compliance measures to address. I will set forth below my observations and concerns.

PPP loans

Many UTCA member firms benefited from Paycheck Protection Program (PPP) loans and have received subsequent forgiveness from the Small Business Administration. While there is an inclination to deem these loans as closed, I continue to have concerns about what I am seeing as increased audit concerns around these loans. On Aug. 5, President Biden signed the PPP and Bank Fraud Enforcement Harmonization Act of 2022, which established a 10-year statute of limitations for criminal charges and civil enforcement against a borrower who engages in fraud with respect to a PPP loan. The headlines are full of reported fraud, and the title of this Act makes clear that a great deal of fraud occurred. I spoke with multiple bankers over the holidays, and it was clear that the SBA is beginning to expand audits of these previously forgiven loans.

While loans have conditionally been forgiven by the banks, we have experienced the SBA coming back to loan recipients to have them validate their Maximum Loan Amount that they received. The Paycheck Protection Program implementation was fast and furious, with very little guidance given to both the banks and the recipients on how to properly compute the Maximum Loan Amounts. Many unintentional mistakes were made during the application and disbursement phases, leading to some recipients receiving excess loan funds. This has resulted in either unintended loans or recipients choosing to return the excess funds.

With all this in mind, it would be wise to think carefully about document retention when it comes to all the supporting documents for your PPP claim. Records of how these funds were utilized and how your company was impacted will be critical to retain. We have seen federal agencies come back 8-10 years later, requesting specific information provided for the original loan. Given the fact that construction was one of the top industries to receive PPP loans, we can expect our share of audits.

Employee Retention Credit (ERC)

None of us can get into our car without hearing multiple ads for employee retention credit (ERC) refunds. We can’t avoid the ads, and neither will the IRS and other enforcement agencies. While the receipt of PPP loans required an application with a bank and review by the SBA, contractors were able to claim the ERC up front without approval. However, they are subject to audit, and the American Rescue Plan Act extended that audit period to five years. So, especially with the massive increase in funding provided for the IRS in the IRA, there is always the possibility of an IRS audit of an employer’s ERC’s. Claiming the ERC and supporting the legitimacy later involves far more than just number-crunching. Employers must navigate a complex web of guidelines including qualified wages, employer size, partial suspension of work, “more than nominal impact,” and more, plus meet documentation requirements. As you can see, there is an element of subjectivity. Be sure to maintain clear and detailed documentation and retain it for five years.

Impact of federal grants funding large NJ construction contracts

The Biden administration has allocated a great deal of funding through the various impetus packages, including the CARES Act, American Rescue Plan Act, IIJA, and IRA. These federal funds will be distributed to the State of NJ by way of federal grants. A federal fact sheet says that New Jersey is expected to receive:

• $8.1 billion over five years in federal funding for highways and bridges

• At least $100 million to help ensure high-speed internet

• $168 million to provide clean and safe water

• $4.5 billion over five years to improve public transportation

• Additional funding will be available for electric charging stations, airports, clean energy and power, resilience, and legacy pollution clean-up.

Federal and state agencies awarding contracts and grants will subject awardees to a long list of federal compliance requirements. Federal awardees are subject to Davis-Bacon provisions, “Buy America” requirements, federal diversity and inclusion requirements, and certain compliance issues such as cybersecurity. The time is now to familiarize yourself with the federal compliance provisions and terms like FAR (Federal Acquisition Regulation) and CAS (Cost Accounting Standards). It may not be clear in the bid documents, but you can be assured that when the government auditors come out to the project, they will be looking to confirm that compliance measures are in place. Review the contract and grant compliance requirements now and assess how they will apply to the awards you will look to pursue.

In conclusion

2023 should prove to be another year of challenges and opportunities. Take some time now to revisit where your company has been – the people, processes, and products you have put in place to weather the last three years – and assess what you will need as we move forward.

All the best for a successful 2023.

About The Author. . .With more than 35 years of experience, Jack Callahan serves as CohnReznick's Construction Industry Leader overseeing a team of 200 professionals across the United States. He has served as a trusted advisor to contractors throughout their entire lifecycle demonstrating exemplary client satisfaction building a reputation as a results-oriented leader dedicated to driving company growth and transformation. Jack and his team have worked extensively with both private developers and public agencies to develop and implement fiscal and integrity monitoring programs to successfully mitigate the costs of fraud, waste, and abuse on large development projects. Jack was the lead partner for CohnReznick on the monitoring and investigative work performed at Ground Zero and continues to spearhead the ongoing initiatives at LaGuardia and O’Hare airports. Jack has extensive knowledge, insights, and experience in accounting, corporate taxation, and business consulting matters within the construction community and values his well-earned role as trusted business advisor.