Federal Reserve Chair Jerome Powell recently sent a tentative signal that interest rates may finally fall from their longstanding highs by September.* But amid broader economic headwinds, including stubbornly high inflation, a seemingly endless labor crunch, reluctant lenders and a slow-burning crisis in commercial real estate, there’s still good reason to remain wary.
Contractors are looking for ways to keep their heads above water over the next few months, so here are 10 areas of focus that may help businesses sail through potential troubles ahead.
1. Focus on Cash Flow
Know your overhead — that means the working capital (in cash) you need to pay your business expenses not directly attributed to your projects. That’s your target, and hitting it means you and your team can continue working uninterrupted and convert contracts to new cash. Make sure your plans to maintain this amount on hand are self-sustaining, and you aren’t taking anything, like financing or windfalls, for granted. Keep in mind the lag time, which is usually between 30 and 90 days, between the completion of the work itself and receiving its value as cash in hand. In an emergency, a line of credit may be useful as a safety net, but do not consider this as your cash — it must be repaid.
2. Refine Billing Practices
Each and every project — whether profitable or a money pit — starts the same way: with a bid.
Enhance internal controls around estimates and bidding to help ensure you’re not unintentionally subsidizing your clients by incurring expenses or charging less than your work is worth. If there are perennial bidding and estimating issues, ask yourself if your existing team is experienced enough to be tasked with this responsibility, which has an outsized impact on your financial performance.
Be sure to review bid spreads to gauge your alignment with market rates, request quotes from multiple vendors and subcontractors whenever you’re using them, and update cost assumptions to align with current values.
Finally, review projects after they’re complete. You should look for efficiency gaps, waste, unused resources and other issues that can be corrected to improve performance on future projects.
3. Explore New Markets
Your diversification efforts should be slow and carefully considered. But with backlogs dwindling and certain sectors drying up more quickly than others, expanding your scope of services or geographic reach may be a worthwhile investment of your energy. Start seeking new opportunities by putting your experience in context. You may not want to jump from residential construction to large-scale infrastructure. However, with the industry more amenable to collaborative structures like joint ventures and the tight labor market incentivizing partnerships, there are opportunities to earn experience in new areas. Make sure you know any industry regulations if you’re entering new geographies or industries, and be diligent about doing your homework before taking a step into the unknown.
4. Grow Responsibly
Be careful about biting off more than you can chew. Aggressive growth strategies are tempting, but conflicts, reputational damage and other hidden costs can be the price of taking on projects you don’t have the skilled resources or infrastructure to properly support. Chasing large projects can be risky in the best of times. It can be even more fraught in tough economic times when tensions are already high, so consider pursuing a more modest but potentially safer growth plan.
5. Reduce Turnover
In construction, a business is only as good as its people. That means success depends on the ability to staff projects with skilled, capable, reliable professionals with the experience and diligence to meet high standards. If your business is losing talent to competitors, consider the savings that can be generated by shifting your focus to retention. That will not only save costs associated with onboarding and training, but it will also help ensure your workforce is available to staff jobs without interruption and enable you to build relationships with your top-performing employees based on mutual trust.
6. Site Supervision
There’s no better way to get a sense of business performance than supervising the work as it’s underway. Projects can’t be completed from the office. Showing up on-site to observe progress enables you to interact and develop better relationships with field personnel and review actual costs versus estimates firsthand. As an exercise, consider “bidding” the items/amounts required to complete your work in progress, and see if your estimates of costs to complete are in line with your new “bid.”
7. Accounting Improvements
Compare your projections to historical performance to ensure your revenue recognition and percentage of completion calculations produce results reliable enough to guide future decision-making. If you don’t already have an enterprise resource planning (ERP) system, invest in that technology and ensure your employees are trained to get the most out of it. Allocate time in your schedule to review financial statements and contract schedules with your management team monthly. Finally, any outside advisors you use need specialized knowledge and experience serving contractors and the construction industry. That means a demonstrable command of pertinent and pragmatic issues like surety, licensing, construction tax methods and more.
8. Debt Servicing
In tough economic times, the impact of any drag on your cash flow will be magnified. That’s why it’s so important to minimize your debt payments. Investigate ways to make your debt repayment more manageable in the short- and midterm, and only pursue upgrades or new equipment purchases when necessary. Carefully weigh your “wants” versus your actual “needs,” and err on the side of maintaining cash on hand.
9. Control Costs
Following the same train of thought we just touched on with debt, controlling costs is essential in the tough times when every dollar counts. As noted above, you should be receiving multiple quotes from vendors and subcontractors whenever you put work out to bid. Relationships are important, but now is not the time to play favorites, which can be prohibitively expensive. Try to reduce overhead by keeping a close eye on any inefficiencies relating to fuel costs, travel and other expenses. Finally, enforce tight controls over the spending and transferring of funds. If you have yet to establish strict controls or investigate their efficacy, there is no better time than now.
10. Nonoperating Assets
Minimize exposure to nonessential and supplemental markets. Discipline and fiscal responsibility should be the driving philosophy in troubled times, and leaders need to be exemplars of this attitude. Not everything that glitters is gold. That’s why total focus should be applied to the core business, and any “nice-to-have” but nonessential supplemental investments should be put off until that core business is thriving. Keep this proverbial saying in mind: A bird in hand is worth two in the bush. It’s proved true in the best of economies and can be downright indispensable when markets and industries are volatile.
*At the time this issue went to print, the rates had not come down.
