George Hedley
Contractors continually ask me what the future holds – Recession, Boom Or Bust? If I knew the exact answer, I would be the smartest person in the world, and you would see me on all the news shows daily. As every project type and market is different, watch the economic trends carefully. Continually ask yourself what you’ll do differently if things change, or how can you take advantage of any additional construction opportunities or reductions ahead? Or should you start worrying about a potential slowdown? Most contractors have been focused on finding enough good help as their revenue has grown ten, twenty, thirty, forty percent or more over the last five years. And even better news, many contractors have experienced their bottom-line net profit increase at an even higher rate.
What Slowdown? We’re Busy!
Most construction companies are still looking to hire more project managers, superintendents, foreman, and crew workers to start and finish all the work they have on the books. To increase the pressure, employee compensation and benefit packages have grown at double digit rates making it cost a great deal more to build than what they have signed or committed contracts to complete. And some overloaded contractors are even paying more than market wages to poach or steal people away from their competitors. This momentum will continue to raise the cost of construction going forward and impact the future of new project’s ability to provide a financial return to end users, companies, investors, and developers. Many economic experts say the construction market has another year or two of positive growth.
It all depends on what you build, who you build for, and where your work is located. Many contractors are still booming and will continue to grow and make very high margins. While many construction businesses in certain areas of the country have already experienced slowdowns in new construction in their local economy which causes an increase in the number of competitors bidding on projects. This will create a downward pressure on contractor mark-up rates. As you look at the big picture going forward, housing and multi-family will slow down faster than most construction as homes and apartment prices rise to an unaffordable level for buyers and tenants. Commercial construction follows residential, and then government spending reflects their budgets and overall economy.
Now What, Going Forward?
Wherever you fit into this scenario, now’s the time to start reeling back your boom-time mentality and start planning for a potential slow-down starting in the next few years based on your location and local economy. The future is not certain, especially now! Many factors can quickly happen. I remember in 2008 through 2010 how the economy shut down in just a few days like a light switch shut off. Contractors who had bought lots of trucks and equipment, hired many new high-priced employees, and borrowed based on their future ability to pay were stuck with more assets and payments than the new slower economy could afford. They quickly learned that shiny new excavators, manlifts, or forklifts weren’t worth much when the market got flooded with a lot of slightly used equipment for sale. Work got slow, lenders stopped paying construction progress payment draws on projects, banks called their lines of credit loan balances, and contractors didn’t have enough money to keep their cashflow or profit wheel spinning. To make matters worse, developers couldn’t fill their projects with tenants or sell their projects, and therefore stopped paying builders and subcontractors.
What Could Happen When Or If A Slowdown Occurs?
If consumer purchasing stops, or homes don’t sell, or multi-family apartments don’t lease, or banks call in their loans, or bonding companies get tougher, or government funding slows down for new projects, new construction spending might stutter, shrink, and stop. If and when the economy gets worse, you want to have less overhead, expenses, liabilities, loans, and payments. You also want to have more liquid assets or cash available to survive a slowdown.
Are you ready to reel in risk, stash cash, be more conservative and fiscally responsible? Is now time to buy new equipment, hire more people, give everyone a raise, or hand out big year-end bonuses? I suggest you now plan and think twice before making large financial commitments and weigh the consequences of a worst-case scenario or if a 25% slowdown happens. Look hard at your cash, liquid assets, guaranteed payment requirements, breakeven sales at a lower mark-up, and what might happen to your project revenue flow and new work pipeline.
Priorities & Options
Before you get too depressed, remember the economy is still good in most areas and there is lots of work to complete and on the horizon to start. All I want you to do is plan for the future. IF something happens to reduce the flow of business into your world. Here are several things to consider and think about:
1. Stop Bidding Cheap Work! – Do you really need to go out and win another low bid job which will cause you to have to hire another project manager, superintendent, foreman, crew or fleet of equipment? Will this decision make a significant difference to your net cash position over the next year? Are there some jobs that are too risky for the low margins they’ll likely generate? Stop seeking low margin work against low priced competitors. Be more selective in what you pursue and only go after high margin projects. Go meet with your loyal customers and ask them to negotiate their next job at a lower margin than you normally get to insure you have a steady flow of good work with your best customers moving forward.
2. Sell Underutilized Equipment! – Do you own any equipment not being utilized or operated at a 65% usage rate? If so, now’s the time to sell any of your equipment with large loans or not being used much, even if it is paid for! Cash is king and today you can still get top dollar for newer and older equipment which will become hard to sell at any price if the economy tanks. You can always lease for the short term when equipment is needed for your jobs.
3. Plan Your Talent Plan! – Are there new people you need to hire to complete all the work on your books? Draft a manpower work planning schedule listing out all of your current and committed projects to determine how many field workers, supervisors, foremen and project managers you’ll need every week over the next 3 to 6 months. If possible, use a labor rental company, or subcontract some of your work. Realize that hiring new people costs a lot of money to find, train, and then hope they work out long term.
4. Generate Cash! – Are there some ways you can generate a stash of cash to build up a nest egg reserve to prepare for a potential slow down? What else can you sell? Do you have some inventory or supplies stuck in your storage year you really might never need. Watch cashflow and closely watch your working capital, receivables, and cash. Be conservative and make sure you can survive a big customer who doesn’t pay, or operate for 3 months without getting paid on any jobs. Also, do your best to get out of debt.
5. Get Some Help! – Have you met with your financial advisor and business coach to discuss your current condition and business health if things go south? Two heads are better than one! Discuss your options to make good decisions about your future.
6. Reduce Your Personal Expenses! – Now’s not the time to buy a new home on the lake, remodel, buy a bigger car or new boat, or take an extended vacation or trip. Now’s the time to reduce your personal expenses, save and prepare for a lower profit construction business market.
The Uncomfortable Zone!
For older construction business owners and managers, remember the line: ‘Stay alive until 1995!’ Well, 1995 came and went after going through a deep recession. Then it happened again in 2008 and it wasn’t great. Now we’ve had over 14 years of positive growth. People who don’t plan for the future and continue doing things the same way will get trapped in what I call the “un-comfortable” zone. They know they need to plan ahead, but don’t. They live with continuous hope in an unreal world, until it becomes reality. They make excuses like: ‘I don’t have time right now to make changes, I’ll start in a few months,’ ‘I’ll wait until after the elections,’ ‘I’d better not do anything different until I get these jobs finished,’ or ‘I’m not sure the time is right.’
Don’t Wait Until It’s Too Late!
Making decisions about the future and developing plans based on the unknown is hard. It’s even harder to change your business model, sell some equipment, postpone hiring, or reduce expenses. Get your management team together and have a deep discussion about the future. Set some goals, make difficult decisions, and implement some meaningful initiatives. Those who postpone reality might not fare well in the future. As another quarter approaches, look at your business and goals for the next 12 to 24 months. Think about your future and imagine what you want to happen versus what might happen. Consider the ideas explored above and be prepared to emerge stronger and better. Or wait until it’s too late and hope it all works out while the tide goes down leaving you stranded on the shore.
About The Author
George Hedley CPBC is a certified professional construction business coach and popular speaker. He helps contractors build better businesses, grow, increase profits, develop management teams, improve field production, and get their companies to work. He is the best-selling author of “Get Your Construction Business To Always Make A Profit!” available on Amazon.com. To get his free e-newsletter, start a personalized BIZCOACH program, attend a Profit-Builder Boot Camp, or get a discount at www.HardhatBIZSCHOOL.com online university for contractors, Visit www.HardhatBizcoach.com or E-mail GH@HardhatBizcoach.com.
Email: GH@HardhatBizcoach.com
Website: www.hardhatbizcoach.com