Contractor’s Guide to PPP Second Draw Loans

If your construction company applied for a second Paycheck Protection Program (PPP) loan, you may have noticed the approval and funding process is moving at a slower pace this time around. From all appearances, this is related to the SBA implementing more front-end compliance and eligibility checks, as well as the evolving nature of the documentation required to prove need for this COVID-19 relief. This tightened verification process has resulted in application decisions being delayed for up to two weeks or flat-out denied.

Stricter Eligibility Requirements

If you have not yet completed your PPP second draw loan application or are unsure if your application will pass the stricter eligibility requirements under the Consolidated Appropriations Act, 2021 (new law), it is important to understand the calculation methodologies and industry-specific considerations affecting contractors’ eligibility.

The new law limits PPP second draw loans to businesses that experienced a 25% or greater decline in gross receipts and have 300 or fewer employees. Specific rules apply to how a borrower determines these qualifications.

Revenue reduction

A revenue reduction of 25% or more can be determined by comparing quarterly gross receipts for one quarter in 2020 to the gross receipts in the corresponding quarter of 2019. Alternatively, borrowers that were in operation all four quarters of 2019 may choose either an annual or quarterly basis for this comparison.

When calculating gross receipts for PPP purposes, start with the normal procedures you would take to compile this information for your CPA in preparation for the annual audit. Include costs-to-date, billings-to-date, the value of new contracts and current period over- and under-billings and make all necessary adjustments to the books.

The simplest place to start when comparing gross receipts is the annual comparison. If your books are showing a greater than 25% reduction in revenues in 2020, as compared to 2019, you are in a good position to move forward with speaking to your accountant and gathering your documentation.

If the annual comparison does not show an obvious 25% or greater revenue reduction, you will want to pivot to the quarterly comparison. Start with comparing Q2 2019 to Q2 2020, when most of the mandated shutdowns took place. While any quarter can ultimately be used, Q2 2020 is the quarter that is most likely to reflect the highest reduction in revenues.

For the construction contractor, calculating gross receipts is complicated by several industry-specific factors, such as accounting methods that vary from project to project, income tax deferral strategies and other elections.

Employee Count

Many businesses that were eligible for the first round of PPP relief under the 500-employee threshold in the CARES Act are now recalculating their headcounts to determine if they qualify under the new law’s 300-employee requirement.

The SBA allows for all individuals employed on a full-time, part-time, or other basis to be included in the count, including employees obtained from a temporary employee agency, professional employee organization or leasing concern.

The new law applies the same affiliation rules and waivers as the CARES Act when calculating employees. Generally, a borrower must include all affiliates in the total headcount number.

Strategies while you wait

So what can an eligible construction company do as they wait for the verdict on their second – or even first – PPP loan application?

  • Press on getting receivables collected. The construction industry lags behind the rest of the economy, and cash collections is no exception. Normally, getting paid in 60 days is acceptable, but the extended downturn caused by COVID-19 is causing many accounts to lapse past 120 days. Impress on employees the importance of cash flow and how it impacts the entire company.
  • Prepare a cash flow forecast on a project-by-project and enterprise-wide basis. This financial management tool will help you identify peaks and valleys in cash flow and quantify immediate and future cash needs.
  • If you decide not to proceed with a second draw loan or are denied, consider utilizing other sources of cash. The cash flow forecast will help you assess the need to tap into a line of credit, obtain a loan from ownership or look to alternative solutions such as equity from real estate or an equipment fleet. In other words, have those other capital sources available to your business.

Even if the second round of PPP funding never comes, employing these cash strategies will be time well-spent, especially in a “cash is king” industry like construction.

This article was originally published in New York Construction Report on February 4, 2021.

Carl Oliveri Carl Oliveri is the Construction Practice Leader and a partner at Grassi. He has over 25 years of experience advising owners and executives in the Construction industry, particularly in project-centric and companywide financial modeling, operational strategy development, financial statement accounting services and income tax method analysis. This extensive industry experience allows him to provide insight and advice to construction clients on marketplace trends and... Read full bio