Don’t Get Bulldozed by a Recession: 3 Actions to Take Now
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Regardless of your sector in the construction industry, you are almost certainly battling inflation, supply chain issues, labor shortages, and now a potential recession.
Associated Builders and Contractors Chief Economist Anirban Basu said “the Federal Reserve’s tightening policy to fight inflation will likely drive the economy into recession either later this year or at some point in 2023. Based on the historical lag between the performance of the economy and non-residential construction spending, more difficult times could be ahead for contractors in 2024 or 2025.”
Over the years, I have spoken at various surety and construction association events. Mostly, I present the usual topics of the state of the surety industry or the basics of bonding, but I have also given presentations on Why Contractors Fail.
Ironically, I was reviewing one of these presentations recently and it hit really close to home. Contractor failure is usually the result of multiple causes, but here are some reasons that stuck out given the current environment:
So, what now?
It sounds like we might be in for a bumpy ride. However, consider taking some precautions now that might lay the groundwork needed to ride out the storm. ???
Stay in Your Wheelhouse
A wheelhouse is exactly what it sounds like: the little “house” on a ship where the captain stands and steers the ship. This is where the captain should stay for the sake of the ship.
If work starts to dry up, you’ll want to lean into your core type of work or service. Historically, now is not the time to venture into riskier projects. Moving into new types of work, new sectors, and/or new geographic locations, has been the beginning of the end for many construction firms.
Define your company’s core competencies and stick to them. This doesn’t mean you shouldn’t grow or expand your business, but it should be carefully mapped out. Don’t overextended yourself or veer too far off the path of what makes your company successful.
Right now, we are seeing high and strong backlogs. Your job should be to burn off those backlogs. During the last recession, many construction firms saw backlogs slowly disappear as projects were delayed or canceled and not replaced.
Now is the time for contractors to inventory their overhead and their ability to easily ebb and flow with the marketplace. A portion of your overhead should be flexible enough to ride the highs and lows of your backlog.?It is the bottom line, not the top line that really matters. When the backlog starts to dip, contractors quickly abandon their risk management strategies and desperately chase work. This can lead to a less profitable and an inherently dangerous position for the company.
Work ahead of the curve to planning on how you’ll manage overhead and keep work coming in when things get tight.
Cash and Cash Flow Is King
One of the most important things a contractor can do during a potential slowdown is to maintain a practical approach. By this, I mean to constantly monitor the financial health of the company and projects to ensure profitability.
Everything from the estimate, contract terms, billing, change orders, retainage, to closing out the project is instrumental to cashflow. A contractor should have a solid accounting and financial practice in place to help them manage cash flow. They should be reviewing these statements and reports frequently.?
Through economic downturns, competition usually increases and profitability decreases. If work gets scarce you need to have enough cash reserves to supplement the shortfall amd cover your operating and overhead expenses. When cash flow is negative, companies often make hasty decisions and take on jobs that aren’t well suited to their company’s needs. They abandon their Wheelhouse!
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Maintaining a positive cash flow allows you to pay debts and expenses, reinvest in your business, and maintain a buffer for emergencies. When cash flow slows or if you have more money going out than coming in, it can quickly lead to issues. Slow collections and low profit margins, followed by insufficient capital, are major causes of financial difficulties among contractors.
As I commonly say, “Contractors do not fail because they don’t know how to complete the project, but because they run out of cash. One bad owner or project can severely impact cash and cash flow.”
Private Dollars vs Federal Dollars
One must believe that non-infrastructure related work, particularly private construction, will sustain the brunt of any economic slowdown. Private owners and investors will ?reevaluate projects and strategies as interest rates hike and inflationary pressures point to a potential looming recession.
FMI’s most recent CIRT Sentiment Index shows the following results:?
Per FMI, “their members are becoming more selective and less aggressive on bidding and many are increasing their pursuits of segment expansion and alternative procurement opportunities.”
Again, I believe the companies that are intentionally strategic in their project selection and potential expansion, will be best suited for this. A proactive approach versus a reactive response to the market cycles will allow companies to maintain profitable revenue streams.
The current Administration has implemented the Bipartisan Infrastructure Law, and to date, nearly $1.7 billion in funding has been announced and is headed to Tennessee with over 90 specific projects identified for funding. This year alone, Tennessee will receive more than $1.4 billion for transportation to invest in roads, bridges, public transit, ports, and airports, and over $120 million for clean water. Additionally, Tennessee will also receive $8 billion between now and 2026.
However, if you are not a heavy highway, wastewater, or port contractor, how much will you really see of this money?
The Moral of the Story
Now is the time, for you and your company’s leadership team to sit down and discuss what the future might bring. You can prepare for events like a pandemic or an economic downturn. The key is to begin when things are going well and not wait until you are forced.
Some Good News from the TIS Bond Department
If your company’s growth is tied to its bond capacity, TIS Insurance Services, Inc. offers a collaborative and proactive relationship that will help you meet your long-term operational and financial goals.
If there is anything, we can do for you, please let me know!?Thank you.
Chad Martin | VP, Construction and Bond Division