How COVID-19 Affected Construction Financial Statements for 2021 and 2022
- Mar 6, 2023
COVID-19 had a huge impact on the construction industry. Closures and delays at international and national facilities dramatically decreased the supply of materials shipped to the U.S., causing building material costs to skyrocket. Labor costs increased as inflation hit wages, and many individuals out of the workforce due to mandated government shutdowns never reentered, exacerbating an existing labor shortage and putting even more upward pressure on wages. Despite the challenges of 2021, many construction companies reported positive earnings on their financial statements for the year. However, construction companies are likely to see the adverse effects of COVID-19 on their 2022 financial statements, especially those that had fixed-price contracts in place prior to the pandemic’s onset.
How COVID-19 may have affected your 2021 and 2022 construction financial statements
Historically, contractors have put together fixed-price contracts with the anticipation that costs will rise in a usual fashion, about a couple of percentage points a year. But the inflation that accompanied the COVID-19 pandemic was unprecedented. Luckily, construction companies with fixed-price contracts in place before the pandemic had some subcontract and material prices honored, shielding them from specific cost escalations and allowing them to avoid reporting those losses on their 2021 financial statements. In addition, many construction firms received funds from government COVID-19 relief programs such as the Paycheck Protection Program ("PPP") and Employee Retention Credit ("ERC") in 2021, which they reported as income on their 2021 financial statements. Both scenarios helped offset some economic challenges for construction companies for the year to reflect an acceptable financial picture in their 2021 financial statements.
2022 was a different story for construction. The industry responded quickly to rising prices and began building cost escalations into contracts. Hence, contractors were no longer partially shielded from inflation through fixed-price contracts like they were at the pandemic's beginning. Also, most companies ran out of funds from programs like the PPP and ERC in 2022 and did not have this income to report on their 2022 financial statements.
We expect more construction firms to show modest profits or losses on their 2022 financial statements. Contractors who had fixed-price contracts in place before the COVID-19 supply chain disruptions will likely have the most significant profit fade as they began to feel the inflationary impact of cost increases in 2022, especially in the subcontract trades. It's important to discuss why your 2022 financial statements may look dimmer than they had in 2021 with your bank and bonding partners, find out what comprised your company's profits, and how you can improve your construction firm's profitability in the future.
Contractor’s Edge: May 2023
- How COVID-19 Affected Construction Financial Statements for 2021 and 2022
- Government Contractors: Expect Extra Scrutiny on 2022 Overhead Rates if You Received PPP or ERC Funds
- Construction Work in Progress (“WIP”) Report: Impacts of Over and Underbilling on Bonding
- Tax Strategy Combinations – Cost Segregation & 1031 Exchanges
- How to Account for Contract Change Orders
- 3 Ways Activity-Based Costing Can Benefit Your Construction Company
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Donald N. Hoffman
Donald Hoffman is Partner-in-Charge of the firm's Maryland office. His expertise includes accounting, tax planning, business consulting, strategic planning, business succession, buy/sell agreements, and estate planning.
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