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April 28, 2020 Article 6 min read
Construction businesses that received or are applying for an SBA Paycheck Protection Program loan may face challenges to their certification. Here are six things to know about PPP loans for contractors and the documentation you should have.
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Construction businesses have been the leading recipients of loans through the Small Business Administration Paycheck Protection Program (PPP), borrowing $44.9 billion or over 13% of total funds. The PPP was released with as little red tape as possible to get dollars into the hands of small businesses quickly. In addition to meeting the definition for “small business” defined by the SBA and expanded by the CARES Act, companies applying for loans had to sign off on numerous certifications, including:

  • That current economic uncertainty makes the loan request necessary to support ongoing operations.
  • That funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. Using funds for unauthorized purposes could lead to criminal charges of fraud.

Many contractors signed these certifications, thankful and relieved to have gotten a loan that enables them to focus on current challenges — keeping job sites safe, continuing operations to the extent possible under stay-at-home orders, and keeping valuable field employees on the payroll even if job sites were fully or partially closed.

This brief moment of relief has taken a hit today, due to the most recent SBA FAQ document. Many business owners and company leaders have seen discussion in the news about companies receiving PPP loans even though they’re publicly traded and have access to capital. Q&A #31 is now causing significant concern among construction contractors who took a loan — or applied for one in the second round of funding — that they will be faced with an examination or investigation challenging their certification of the two items noted above.

Q&A #31 is now causing significant concern among construction contractors who took a loan.

The last thing the construction industry needs is more uncertainty. For clarity, consider taking the following five steps.

1. Refer to the guidance directly.

First, stay grounded in the guidance, and look to the rules themselves. You can find an index of key releases from the government here. These are released frequently, so stay up to speed. The guidance notes that contractors should be documenting in a memo, with additional support, their rationale behind signing the certifications above. Speak directly to the narrative in the certification. If you have financial or other information you can use as support, all the better.

2. Note the uniqueness of construction in your documentation.

Construction is a lagging business. Successful contractors must look far into the future to proactively make significant changes that preserve capital and ensure sustainability. This often means trimming workforce and expenses in advance of revenue declines.

Best-in-class contractors (and employers with significant payroll) require significant capital. Significant capital in the form of working capital and equity are required to obtain a finite amount of bonding credit, which allows contractors to obtain a finite amount of construction work, which then allows the contractor to employ a finite number of workers. It’s important to note in your documentation that although contractors may often appear to have healthy amounts of cash, working capital, and equity, these dollars are often “spoken for” to support bonding credit for ongoing construction and to acquire new work to support jobs.

The guidance notes that contractors should be documenting in a memo, with additional support, their rationale behind signing the certifications.

Said another way, every construction company leverages its capital on hand to the tune of 10 to 25 times, depending on the trade. Note this phenomenon in your documentation since it supports the fact that, if significant work is lost, contractors have to move quickly on job cuts to preserve the company balance sheet. If they don’t, they risk not being able to continue work at current levels or keep existing head counts.

3. Document earmarked funds.

You should also note earmarked dollars in your documentation. This can include retirement obligations, pension obligations, ESOP funding, succession plan commitments, contingent liabilities, or other relevant earmarked uses that, if reduced, would challenge your company’s ability to continue ongoing operations in the face of current uncertainty.

4. Revisit your loan application and certification.

Every construction company should look thoroughly at its recent or upcoming certification, including in relation to Q&A #31. Companies that don’t feel they met the certification requirements are allowed a safe harbor if they return their loan funds by May 14, 2020. Q&A #31 explains that companies with access to capital, such as public companies, would have a challenge qualifying. Contractors with excess capital on hand could face a challenge supporting their certification if they don’t have documentation as to why that capital — and the risk of its loss — would interfere with their ongoing operation and put jobs at risk. Continue performing analysis to support whether layoffs, furloughs, or missed payments may have occurred, were it not for the PPP funding. It’s also important to document how the company curtailed nonessential expenditures during this period. Note that the SBA doesn’t appear to consider dilution to existing shareholders as a threat to “ongoing operations.”

Companies that don’t feel they met the certification requirements are allowed a safe harbor if they return their loan funds by May 14, 2020.

5. “Credit elsewhere” and guidance issued after April 2, 2020.

You can look to two other items in the CARES Act and SBA Q&As to help with decision-making and documentation.

First, the CARES Act itself waived the “credit-elsewhere” requirement usually applicable to an SBA loan. This means companies aren’t required to certify that they couldn’t get credit elsewhere.

And second, Q&A #17 notes that companies don’t have to reevaluate their certification based on new guidance or Q&As that came out after April 2, 2020. In other words, you can rely on the rules and guidance available at the time you submitted your application.

6. Prepare now for a future audit and loan forgiveness.

Treasury’s intent to audit any company that received more than $2 million in PPP loan funds has been widely reported. Construction companies should consider the optics of business decisions made during this time and whether they might be scrutinized — items such as new vehicle purchases, excess distributions to shareholders, or excessive travel items might be deemed nonessential and should be deferred or documented as to their necessity. Presumably, spending on these items could be viewed as using available capital that may have been used for payroll. 

The same scrutiny should apply to loan forgiveness. Many questions still remain: Will related party rent be allowed, and will it be scrutinized for market rent amounts? Should bonuses be paid in the eight-week period in order to spend 75% of the loan on payroll? Companies should exercise caution given the lack of clarity. 

In summary

Contractors and other construction businesses should be clearly documenting their rationale and supporting details for how they met the certification requirements for their PPP loan.

Be sure to include details about the unique nature and financial capacity requirements of the business as well as the need to look well into the future to make decisions about necessary cuts in order to protect capital for ongoing operations and employment.

Your analysis also should point to the actual guidance in place on the date of your certification.

In the face of uncertainty, it’s best to assume you will have to defend your rationale to a reviewer, since this will help ensure you’ve built a solid case for your position. If you don’t feel you meet the standard after further review, take advantage of the SBA’s no-penalty repayment option and opt-out of the PPP program by May 14.

As always, if you have questions, feel free to give us a call.

We’re here to help. Visit our COVID-19 real estate and construction resource center.

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