Managing a Construction Firm in a Down Economy
By Matt Stevens
As we tend to be slightly negative as an industry and as a society, it is important to look objectively at the current turmoil in the U.S. construction market.
Whatever your informal view is of our current economic situation, remember that business markets expand and contract but rarely stay the same. In the future and in the past, economic recoveries occur.
For each contractor, though, the current economic event has to be a concern. It portends some change in the business environment. As we solve for our own personal wealth building, we are sensitive to years of negative profit. Bad years are hard to make up.
Contractor’s response will have to be the same today as in the past – a renewed focus on financial conservatism, planning at all levels, marginal employee reductions, careful marketing, detailed estimating and the like. It is ironic and also comforting that this will never change regardless of the causes of the slowdown.
Contractors cannot be speculative in their business. There is too much uncertainty. The market can move in 360 degrees of direction and you can only move in one. Companies will go back to working closely with their surety partners, insurance professionals, financial institutions, attorneys and others to stay away from owners who are “kicking tires,” developers who want to “share” their risk and other difficult clients
Currently, most contractors' client lists are being pared down to a valuable few customers. That is, those who want good construction services, pay well and are serious about using the contractor’s end product.
Ultimately, the current environment will be healthy for the construction industry. Some of the companies who are late arrivals and don't love this business will go away. That is great news for those who enjoy the challenges and the unique nature of construction. (Lately, I know several older contractors who are smiling more than you would expect.)
For the construction contractor, there are several approaches and philosophies to consider. Here are a few:
- Make sure where you are financially. The stress of a cash flow problem is not the singular reason to lay off core employees. Another important measure is gross profit per manhour. Since we are in a variable-cost businessm this makes economic sense.
- Keep core employees together - both field and office. This is your means of production. If you see a bleak outlook and a decision has to be made, most people I know cut back on their personal financial needs, including paying themselves last. This ensures that when the economy improves, they will be quick to catch the wave of growth again and thus profit. Contrast this to others who, once they have contracts in hand, will have to rehire or, even worse, find new employees. (All of whom will need training and will make a higher number of mistakes.)
- Collect your accounts receivable as much as you dare. Mature business people know that money is a company's life's blood and your legal and ethical attempts to collect it are forgivable. Your fair pursuit should be forgotten in the months to come. Any firm who might have an issue with this is an indication of something. As has been stated before, there are 10 rules of business. The first is to not run out of cash – and the rest don’t matter.
- Use your financial ability to pay as a strategic weapon. Some firms have the ability to pay in a timely fashion regardless of the economy. This is stellar financial management in action. However, in any economy, it should be considered that payment should be made differently. Not all of your project partners act the same toward to you. So treat them differently. Don’t pay them the same, especially the ones who are a drag on your business. Negotiating on the basis of your strength to pay is not a new idea.
- Build a high wall around current clients. Raise the bar of what they should expect from any new entrant. Some of this is just communicating all that you do for your clients. Some of this is adding a new benefit. Of course, the former is less expensive.
- Don't participate in the economic slowdown mentally. In any business, you have to believe your best days are ahead of you. Construction is no different. Conversely, not believing this makes it true. Remember, your employees and their families are looking extra hard for any signal of trouble.
- The number of qualified leads is the reason you will land a good project. Keep conservations going with people who are decision makers and have budgets, needs, wants, and treat you with respect. At some future date, they will have a deadline to meet for constructing a project. Keep yourself at the client's table. Talking does not cost you a dime.
About the Author
Matt Stevens is management advisor to construction contractors and author of Managing a Construction Firm on Just 24 Hours a Day, published by McGraw Hill. He can be reached through his website, www.stevensci.com.