When the economy does begin to recover from our nationwide lockdown, one certainty is that it will not be as simple as “turning the lights back on.” Companies may have a long road back to full strength as they go through the process of restoring their workforces, rebuilding supply chains and planning for growth in a new, unfamiliar economy. One certainty, however, is that government contractors will be in high demand as agencies face a backlog of project work as well as new initiatives grown out of coronavirus recovery plans. Taking the right steps now will be essential to aligning these resources with expected need.
When the shutdown ends, contractors will be busy
So why will government contractors face a surge in demand when COVID-19 restrictions lift? One reason is that many projects that were underway in the spring, particularly construction projects, will once again come back online after being placed on hold due to social distancing guidelines. Construction on roads, bridges and highways is expected to peak as state and federal agencies race to catch up on work planned and postponed for the spring and summer periods.
At the same time, reduced state and federal income from decreased collections on fuel taxes, tolls and other user fees could have an impact on which projects are activated – and what price point is offered to government contractors. Payments to contractors may be affected as budgets are rebuilt and government staffing is restored. Contractors will inevitably face the same delays in payment that are intrinsic to the state and federal systems. As a general rule of thumb, government agencies pay their contracts in full, but take much longer to do so than in the private sector. The aforementioned shortfalls in state revenue will make these timing delays all the more common.
Contractors should take necessary steps now to get their financial house in order so they may participate in the expected surge. Preparing lines of credit will allow contractors to hire the necessary people, purchase materials and complete the capital projects needed in a post-COVID environment.
Where will the financing come from?
Banks have been stretched during the pandemic and will be reluctant to extend credit to government contractors. Banks are also less likely to partner with contractors due to the complexity of the government procurement system itself. For many, managing the necessary paperwork and changes to procurement standards makes the endeavor less profitable.
Private credit is in a much better position to assist government contractors during this period – providing bridge loans to cover payment gaps as well as loans to help these companies get a fast start once the economy reopens.
More than anything, government contractors need liquidity to provide the capital and flexibility to accept and execute government contracts. Private capital bridge loans are a viable solution, but steps should be taken now to prepare for the expected surge.
Contractors and agencies should prepare for a restart now
Government contractors should be taking steps now to prepare for restarting projects to ensure a swift and effective recovery. The first step should be to take a full accounting of projects that were delayed, planned or cancelled due to the pandemic. Agencies will be short on resources for quite some time and will appreciate proactive communication from trusted partners that may lead to quick execution and project completion. Contractors should also take stock of their workforce, both retained and furloughed because of the crisis. Once the economy does restart, there will be an intense war for talent that may leave some contractors unable to execute as planned. Finally, now is the time to open your “Financial Go Bag” and tap capital and resources necessary to position your firm to start work immediately. Preparing lines of credit will be essential, especially with terms that are flexible enough to make expected adjustments in a recovering economy.
There may be no clear path yet on how the economy will restart, or the precise roadmap that contractors should follow, but these preparations will provide a distinct advantage over competitors who prefer to take a “wait and see” approach to the recovery.
Doug Monticciolo is founder and CEO of Brevet Capital Management.