Most state and local governments are being forced to cut their budgets due to huge tax revenue losses. It is estimated that states will experience a $173 billion decrease in state sales and income tax revenues in 2021 due to the economic impact of COVID-19. To put that into perspective, that’s nearly .5% of the country’s entire GDP.
All construction projects are struggling with funding in the wake of COVID-19, and capital improvement programs are no exception. Conceived and voted on with the good intentions of improving community infrastructure, CIPs are now struggling to get off the ground due to state and municipal budget cuts.
There’s no getting around it — the ripple effect of COVID-19 will have a long-lasting effect on capital improvement program budgets. Many municipalities will find it difficult to complete any projects they budgeted for early 2020, and hard decisions have to be made at the state and city level about which CIPs are worth priority and which need to be sidelined.
For construction managers, it may feel impossible to accommodate new government budgets without breaking the bank. But, if we learned anything from 2020, it’s the importance of adaptability. Changing course efficiently and affordably will be critical to the success of any CIP. Consider the following financial, procedural, and technological trends to help prioritize spending and get your CIP budget back on track.
Top 11 Budgeting Tips for Capital Improvement Programs Facing Cuts
1. Position your project as essential
Good intentions from early 2020 may no longer be feasible in 2021 due to new budget constraints. If you have a history of being contracted for non-essential projects, you might find it difficult to find work until the economy rebounds. However, exceptions such as a bridge repair or an ADA project can’t be delayed, so try positioning your construction team within this scope. The best way to reach the top of the priority list is to offer priority services — certain projects are legally required due to state or federal mandates or local ordinances.
2. Think toward the future
While your CIP might be stalled out today, it won’t always be that way. Most construction industry economic indicators are pointing up, and many sources show the potential for a strong rebound in the coming year. As you position your team for long term success, consider which services you can provide in the next two, five, or even ten years that will be valuable one day. Many CIP projects yield over four years of work, so think ahead to what will receive priority once the economy returns to normal and position yourself accordingly.
3. Reallocate spending
Governments struggling to budget their CIPs have to take a long, hard look at spending and identify priorities. Be proactive — by identifying must-haves, and reducing discretionary spending, you can better prioritize resources, anticipate cuts, and ensure your project remains on track. If you’re working with a city that has a fund balance, that might also be a short-term solution.
4. Leverage loan programs
Relief funds are available through the Emergency Capital Investment Program — a federal program within the CARES Act specifically designed to aid CIPs in areas disproportionately impacted by the economic effects of COVID-19. Up to $9 billion is available to certified Community Development Financial Institutions in the form of loans, grants, and forbearance. These funds can help jumpstart stagnant CIPs as long as certain criteria are met and an application is completed.
5. Restructure workforce
Furloughing doesn’t have to be drastic as long as it reflects newly prioritized projects. For example, if development in your city has slowed, construction contractors might have less need for inspectors. Look at your management-to-staff ratios to better reflect the needs of newly prioritized CIPs.
6. Restructure debt
While budgets are being cut universally, borrowing is actually cheaper than ever before. Now is a good time to reduce interest payments by restructuring debt. Talk with municipal leaders about increased borrowing, because there may not be another time when interest rates are this low.
7. Update cost allocation models
Your general fund may be incurring costs that benefit other funds, departments, programs, or related entities and that could be allocated accordingly. Re-examine how you allocate costs so you can better evaluate each service independently and make better decisions.
8. Use your fund balance
If you’re fortunate to have a healthy fund balance, now may be the time to use it. Keep in mind this is only a temporary fix, but it’s appropriate to use to address a short-term issue, such as a temporary reduction in income tax revenues.
9. Reduce manual processes
Do more with less — advancements in 3D modeling, automation, and AI have made certain construction processes exponentially more efficient. By reducing laborious, manual tasks and optimizing workflows with technology, you can not only reduce overhead, but also scale back overtime hours that would normally eat into a CIP budget.
10. Rethink offerings
Many construction companies are addressing the economic gap by increasing fees and repackaging existing services. Now might be the time to update fees, capture all allowable costs, and add fees that would normally be waived. As we all work to contend with the COVID-19 situation, the success of your CIP relies on adapting your company to current economic conditions.
11. Get creative
COVID-19 forced everybody to think differently. While it required large upfront investment, many construction companies underwent significant digital transformation and these new processes can prove useful going forward. Technologies that were once considered radical have become commonplace: Remote collaboration, cloud-based workflows, AI, and more — there are opportunities to improve productivity long term by leveraging the technologies and processes we once thought were a temporary fix during social distancing.
With recent cuts to city and state budgets, gaining traction with a capital improvement program might seem hopeless. However, with close collaboration with municipalities, and some creative thinking, construction managers can better position their CIPs as not only efficient but, most importantly, essential to the development of the community.
Learn more about prioritizing and spending wisely on capital improvement plans during the post-pandemic period with this free report, Government CIPs and the Pandemic Ripple Effect.