2023 construction industry perspective bracing for uncertainty, planning for success

By: marty mccarthy, cpa, ccifp, mcarthy & company

For organizations that made it through 2022, the shift from surviving to thriving hasn’t been seamless, as many may still find themselves victims of circumstances outside their control. A one size fits all panacea for the construction industry is impossible. Each sector faces unique challenges while balancing compliance and legalities and adapting to new industry trends.

The last two years have been turbulent for the construction sector. But experts at Dodge suggest the needle will move, and momentum will pick up for the industry in 2023.

Even in the face of optimism, the fact remains that current market dynamics suggest 2023 will experience variable growth rates across different industry segments as the country, as a whole, teeters on recession. For those industry experts expecting a 2023 recession, there remains to be a determination as to how prolonged or severe the downturn will be. Still, current economic trends and aggressive federal interest rate hikes suggest the recession won’t be long-lived. In addition, while increased costs and supply chain issues still hinder many businesses, our clients cite the labor shortage as their primary challenge, indicating they have work in the queue but not enough staffing.

With the global economy slowing down and the 2023 projected growth of the US economy lingering beneath 1%, a thorough understanding of the cyclical nature of the construction industry is paramount, as threats to bottom lines range from mild to severe, depending on industry segment, size, and location. In addition, supply chain issues, labor shortages, and increased fuel and material costs continue to impede progress for many organizations.

The Inflation Reduction Act (IRA) will significantly impact companies that work on infrastructure projects, especially those that do roadwork. The IRA contains $3B to fund Neighborhood Access and Equity Grants, a program that aims to rework overbuilt arterial roads to help make them safer. With the increased focus on infrastructure and additional funding, we expect to see increased demands for large-scale projects.

With the increased demand for projects, we expect many construction companies to look to hire additional workers. As a result, the IRA included provisions allowing enhanced tax credits if prevailing wage and apprenticeship requirements were met. The IRA’s prevailing wage and apprenticeship requirements apply to the advanced energy project credit, alternative fuel refueling property credit, clean fuel production credit, credit for carbon oxide sequestration, credit for clean hydrogen, energy efficient project credit, investment tax credit, and production tax credit. With the supply chain disruptions and the employee shortages, these increased tax credits will hopefully help the construction industry level out and recover.

While eliminating obstacles in each sector may only be possible in some cases, there are ways to ease their burden. Although there may not be a one-size-fits-all solution in the construction field, laying the foundation for a successful 2023 starts now by identifying opportunities for efficient tax planning and implementing proactive strategies for the year to come.

Tax Planning

Tax laws are evolving to meet the needs of new trends and business models. Therefore, organizations should consider how to maximize the opportunities or minimize the implications of both new and existing policies, such as:

* Bonus Depreciation – Section 168(K)

* Employee Retention Credit

* Research and Development Expenses

* Excess Business Loss Limitation

* Inflation Reduction Act

* Meal and Entertainment Deductions

* Net Operating Losses

* Pass-Through Entity Tax Election

* Section 163(j) Business Interest Deduction Limit

* 179D Deduction

* 45L Tax Credit

In addition, the Tax Cuts and Jobs Act of 2017 significantly changed the tax consequences of business structures. Therefore, depending on a business’s financial health, it may be time to consider if a change in structure is warranted.

Careful attention should also be paid to retirement savings plans, which could reduce modified adjusted gross income and help reduce or avoid the Net Investment Income Tax. Finally, exit planning should be a top priority for those considering retirement. Getting a company ready to sell or conduct a family succession could take years, and estate tax implications are due to sunset in 2026.

A solid tax plan could be a differentiator between success and failure, especially on the heels of the last two years in the construction industry.

Business and Operational Planning

Efficiently and effectively monitoring and controlling investments and construction costs helps businesses stay competitive. Taking inventory of current processes and improving internal controls to improve cash flow, increase profitability, and boost financial security should also be part of planning for 2023. For some organizations, digitization through automation, AI, and even robotics will significantly impact safety, design, and efficiency, thus increasing bottom lines over time and presenting opportunities for R&D credits.

For companies looking to grow and for companies struggling to stay afloat, planning for strategic acquisitions and mergers may be a winning solution, especially with interest rates on the rise. A word of caution, however, is that 2023 may not be the time to branch out into a new construction sector. Instead, organizations should focus on procuring profitable projects in their niche and doing what they do best.

This does not mean, however, that construction companies shouldn’t consider ways to embrace new trends. For example, with the cost of building materials, such as concrete and gypsum, rising and increasing demand for green construction, smart buildings, and structure rehabilitation, companies will need to factor in how to reduce building material costs while sourcing sustainable materials. If this isn’t possible, now is the time to consider how to stock/ store materials in advance. Making this transition takes careful planning and budgeting and should be part of any robust 2023 tax plan.

In addition, it’s an ideal time for teams to perform a thorough internal audit. Organizations should take inventory of their subcontractor prequalification process, job costing processes, internal bookkeeping, employee management systems, cybersecurity, and financial reporting procedures. Where is there room for improvement? Are there metrics in place to capture relevant data? Are KPIs pertinent and useful? An all-encompassing tax plan will shore up weaknesses and provide strategic solutions for future growth.

Final Thoughts

It has yet to be determined what will ultimately happen in 2023. But with the current economic indicators pointing towards a recession, it is imperative to be diligent with business plans. These uncertain times call for strategic preparation and planning.

A proactive tax plan is not just about filing taxes, deferring large expenditures, and limiting lines of credit; it's an investment in strategies (including keeping a healthy cash reserve) that can carry an organization through difficult economic times.

It’s important to remember that even with the most efficient technological advances, it is still the workforce that enables the construction industry to thrive. In the face of the current labor shortage, organizations need to accomplish more with fewer employees. Incorporating the costs of training, apprenticeship, and certification programs into 2023’s tax plan can pay off in the long run by helping reduce turnover and securing more engaged, committed workers.

The Construction Services Team at McCarthy & Company is uniquely positioned to advise clients within the construction industry. Our team of industry-leading advisors helps clients manage their businesses more efficiently, control operating costs, improve cash flow, obtain financing, and meet surety bond requirements. Always in the know, we deliver up-to-date, proactive solutions that will enhance our client’s profitability.

About the Author. . . Marty McCarthy, CPA, CCIFP, is the managing partner of McCarthy & Company. Sureties and bankers respect Marty for his high-quality work and profound understanding of the construction industry. Marty helps clients by giving them the insight needed to grow their businesses. He can be contacted at 610.828.1900 or marty.mccarthy@mccarthy.cpa.

The material provided in this post is solely for informational purposes and should not be relied upon for tax or accounting advice. Please consult your tax advisor regarding your situation.