From the Great Recession of more than a decade ago to the ongoing COVID-19 pandemic, construction companies have endured some tough lessons over the years. To help you avoid learning some things the hard way, we’ve compiled a list of what contractors have generally done right and wrong when these and other crises have hit.
First, let’s explore some dos:
DO develop a contingency plan. When COVID-19 hit in March 2020, many of the companies that survived the recession years of 2007 through 2009 had both short- and long-term action plans crafted and ready to implement for the next economic crisis.
These written plans included where to reduce costs and the types of scenarios that would warrant making deeper cuts, such as slashing budgets related to:
- Business travel,
- Payroll (furloughs/layoffs), and
- Underperforming or breakeven profit centers.
Many of these contingency plans also noted more aggressive cost-cutting measures, such as pulling out of markets or regions — even eliminating entire units.
Think back on what your construction company did to weather the Great Recession, if it was operating back then, or how you coped with the initial shock of the pandemic. Articulate and document these things so you can create a contingency plan for the next big crisis.
DO act quickly. Thanks again to hindsight from the Great Recession, many best-in-class construction companies acted promptly to make cost cuts and operational changes early in the pandemic as opposed to waiting until it was too late. Generally, these weren’t knee-jerk reactions. Rather, proactive contractors actively engaged in financial reporting, crisis management and strategic planning.
Be sure you have strong leadership teams and advisors around you to stay informed about current events and what’s happening in the national and local economy, the construction industry, and= your primary markets.
DO forecast your cash flow regularly. When a construction company gets in serious financial trouble, the culprit is typically a gradual, not sudden, lack of cash. The good news is today’s contractors have the financial tools available to track cash flow and project costs in real time and pinpoint when issues can or will arise.
Prepare for pending cash flow and working capital challenges by spending conservatively, staying on top of accounts receivable, verifying that backlog projects are properly funded, renegotiating loans and financing, building cash reserves, and improving access to liquidity.
DO leverage technology. Just as the Great Recession compelled many construction businesses to adopt new tech so they could do more with less, the pandemic pushed companies toward cloud-based and mobile tools to work, share information and collaborate remotely.
For example, many HR and payroll departments switched to software-as-a-service platforms to facilitate fast and secure electronic document delivery. They also significantly reduced the time and money spent on manually processing HR benefits and payroll-related transactions.
Similarly, consider investing in analytics tools that provide deeper financial insights to garner a real-time view of sales, job progress, labor and equipment use, and other key data points. This will enable you to safely take on more projects.
DO invest in your construction business. An economic crisis, or even just a slowdown, is no time to spend money on risky new ventures. During tough times, look inward and invest in new tools, processes and your own people to weather the storm until pent-up work becomes available. For example, the Infrastructure Investment and Jobs Act that was signed into law Nov. 15 could mean a wave of new projects for contractors in many specialties.
DO engage in strategic planning. Pandemic-related shutdowns gave executives time to step back, look at their strategic plans and re-evaluate. Some of those companies were able to pivot as necessary and move forward with great success.
There’s no doubt that it can be difficult for construction business owners to take time out from overseeing multiple projects and bidding on new ones. However, regularly holding strategic planning meetings with your leadership team and advisors is critical to ensuring your ongoing success.
Now let’s look at a few don’ts:
DON’T rely on backlog. A strong backlog has always been one of the hallmarks of a healthy construction company. This still holds true to some extent but, in a crisis-afflicted environment, contractors can’t always count on their backlog because projects could be delayed or even canceled.
Instead, continuously strategize about how to keep work coming, either by focusing on your niche or carefully, thoughtfully expanding into a healthier specialty or market. You also may want to consider offering reasonable discounts to keep your backlog and win new work.
DON’T get pressured into “survival” bidding. When projects start getting paused or shut down permanently, a natural reaction is to want to bid on every job available just to build up a backlog and retain as many workers as possible. Unfortunately, if the project is unprofitable or even potentially costly, the ultimate price of taking it on could lead to disaster. Stick to bidding on profitable jobs that you’re likely to win.
DON’T neglect the fundamentals of a successful construction company. All the things that got your business off the ground and helped it grow are the same fundamentals you must maintain with added vigor when the going gets tough. This includes:
- Establishing safeguards related to cash flow,
- Tracking key performance indicators,
- Reviewing contract language and lien/bond claim rights,
- Looking for ways to mitigate supply chain disruption and pricing volatility, and
- Searching far and wide for talent.
Need some help? Check in with a trusted advisor, such as your CPA, for advice on how to gather and analyze financial information as part of your effort to develop a strategic plan and a contingency plan.
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