Editor’s Note: Written by our regular columnist George Hedley, each monthly edition of Get Your Business to Work provides you with practical, immediately applicable business management tools to assist you on your path to building a successful, growing business. To read the next article in the series, click here.
Do you think 2008 will be great? As I travel around the country and speak to thousands of business owners and managers in the construction industry, I get lots of different answers to that simple question. In some parts of the country, commercial and public works construction is still going strong. Other parts have begun to feel the residential slowdown impact and are starting to cut their capital improvement budgets. Most national homebuilders have stopped nearly all new construction across the country. But some smaller and local builders are still experiencing some demand for new low-end tract or high-end custom homes. And many remodeling contractors are not getting as many calls as they used to for bids and estimates.
Economists predict the residential slowdown will bottom out sometime in 2008 or 2009. But remember, the bottom is the bottom, and they don’t tell us when construction activity will return to the healthy level experienced in the early and mid-2000s.
Other factors play heavily in construction activity as well. The lenders are tightening loan qualification standards for home buyers and people refinancing their homes. This will eliminate a significant percentage of residential construction activity. Plus, new retail and commercial construction that follows the residential market will slow down as well.
Our company develops and builds small industrial and commercial buildings for sale or lease in Southern California and Las Vegas, NV. In our markets, several factors are contributing to the inability to start new projects. The price of land has escalated to a level that makes buying land impossible to allow a new project to pencil out. Banks are not lending as much on projects as they once were. This increases the equity required to get projects started and thus lowers the return on equity needed to entice equity investors. Construction material costs continue to increase, which reduces the ability for projects to be affordable and financially feasible. In addition, cities are requiring more fees, longer approval processes, tougher standards for parking and setbacks, additional safety requirements and projects to be “green.” All of these factors increase total project costs beyond a potential buyer’s or tenant’s budget to occupy a new building.
These signs point to a slowdown in total construction activity for an extended period of time. This will affect almost every contractor and supplier in every part of the country. I know many of you are still busy and don’t think anything will reduce your workload. But even if you aren’t feeling it yet, get ready. In the slower areas of the country, many residential contractors and subcontractors have quickly moved into bidding commercial and public works projects. New homebuilders are attempting to open remodeling divisions. Some subcontractors in landscaping, electrical and plumbing are trying to start service divisions to weather the storm. Out-of-town contractors are beginning to move into busier markets to find work.
Your Business Will Be 25 Percent Slower. Now What?
During the last major construction slowdown in the early 1990s, there was a slogan going around:
“Stay alive ‘til ‘95.” People would joke about the contractor’s prayer: “God, please give me one more boom time, and I promise I won’t mess it up next time!” Well, what did you do to not mess it up? We are just finishing the biggest construction boom time I can ever remember. Do you have a nest egg stashed away to weather the storm ahead? Are you fully invested in real estate or some other form of positive cash-flow asset? Are you willing to make the tough moves now to get your business to survive over the next few years?
I took a survey at a national association’s annual meeting in January 2007. Only 50 percent of the respondents were worried about a future construction business slowdown. In November 2007, I took the same survey again, and the results changed. Over 75 percent of the respondents are now worried about their future and expect the total available workload to be at least 25 percent less than it was last year and into the future.
I asked over 1,000 construction business owners and managers what they will do to survive a 25 percent slower economy in their marketplace. The responses are as follows:
To survive in a 25 percent slower economy, we will: Yes No
1. Cut our overhead and fixed expenses by 25 percent 75% 25%
2. Sell 25 percent of our equipment 67% 33%
3. Eliminate 25 percent of our key employees 33% 67%
4. Eliminate 25 percent of all field employees 60% 40%
5. Look for projects in other states 75% 25%
6. Find some new customers and project types 90% 10%
7. Move from residential to commercial jobs 80% 20%
8. Bid some public works projects 75% 25%
9. Add some new or additional services 90% 10%
10. Do nothing different, and wait for it to get better 0% 100%
What Will You Do to Survive?
Do you think business will go up or down in the years ahead? What will you do to survive if your business shrinks by 25 percent or more? Shouldn’t you start doing something about your future right now? What are you waiting for?
It’s the last quarter in your last game of the season. If you win, you’ll get into the championship play-offs. Lose and you are eliminated. You are twenty points behind and only a few minutes remain in the game. What will you do to win? Is it finally time to change your game plan and try a new set of plays? Think about your business. Most business owners know a slower business market will become a reality in the future. But most don’t want to make a move and change the way they do business. They are waiting for something to happen.
In the slowdown of the early 1990s, my business went from $50 million to $5 million in annual sales in only one year. It was hard to believe the construction business nearly stopped as quickly as it did. There weren’t any jobs to bid or build, and I had to reduce the number of employees from 150 to 10. I had to cut my overhead budget from $2 million per year to $500,000. As your business slows down, it is almost impossible to reduce your expenses as fast as your revenue diminishes. You have to keep people on staff to finish the projects and do the paperwork long after the work is finished. In other words, you lose money in a slowing market.
Consider Your Choices
The choice is yours. You can continue to charge ahead doing business the same way you always have and hope the economy continues to boom ahead. Or you can make some strategic moves to get ready for a business slowdown. In the late 1980s, we anticipated our core industrial building construction business market to slow down in the upcoming future. To weather the storm and diversify, we made a decision to invest in the future and hired an experience retail construction division manager to seek major retail construction work. We also tried bidding public works construction at the state universities. The retail decision worked out well, and we soon become a major contractor for many of the national retail chains including Mervyns, Costco and Wal-Mart.
What moves will you take to prepare for your future? Consider two parts of your business as you decide what to do. Look at both your target market and cost of doing business.
Look at Your Target Market
What types of customers have you built your business with? Do you have a short list of customers you have targeted to obtain new or repeat business over the past several years? What other customers have you ignored as your backlog has stayed full? Which customers need what you offer even as the economy might slow in the future? What other services can you do for your existing customers? Which potential customers will gladly consider your company for their bid list?
I have noticed I am getting a lot more phone calls from new subcontractors seeking projects to bid. They cold call and ask if they can get on our bid list. There is kind of a desperate tone in their voices. They must get work or they’ll go out of business. They aren’t looking to build a long-term customer base. They’re looking for work to survive until their regular customers call them again.
Before you start blindly calling every new customer target you can think of, have a strategic plan of attack. When I get those cold calls, the salesperson doesn’t have a clue about our company or what we specialize in. Research your targets. Find out what kind of work they do, how they do business and how your company can help them meet their goals. Pick only potential customers you want to create long-time relationships with. Building and growing a loyal customer base takes time and commitment. It’s not a short-term fix.
To enter a new target market, you’ll have to convince potential customers that your company is qualified and experienced in the type of work you’re proposing. You’ll also have to demonstrate how your company can help new customers build faster, better or cheaper than the subcontractors or contractors they are using now. Be ready to show how you can solve their problems and become a team player. Show them you are in it for the long haul. You are not there to just get on their bid list. You are there to build a relationship, and you know relationships take time.
Also, consider what other types of project types, locations, sizes or services you can go after. If you are in the heating and air conditioning business, why not offer a monthly service as well? If you specialize in building new commercial projects, consider offering development and construction management services. If you are a drywall subcontractor, consider adding metal stud framing, acoustical ceilings, insulation, painting and door installation to become a full-service tenant improvement contractor.
Look at Your Fixed Costs!
Another part of the equation is your fixed cost of doing business. What things do you need and what things can be postponed or eliminated from your ongoing cost of doing business? If you think your business volume will go down by 20 percent in the future, start cutting your overhead by 25 percent now. Cut more than you think you’ll need as profit margins will also go down in a tight economy.
Start with your largest expenses first—your equipment, backhoes, forklifts, cranes and trucks. If you aren’t using them on the jobsites at least 24 to 32 hours every week, they’re costing you more money to own than they make on the jobs. Sell what you don’t need, and lease the equipment you need when you need it. Getting rid of old unused equipment will free you to focus on getting more profitable business instead of keeping your equipment busy.
Take a hard look at your management, supervision, administration, foremen and field personnel. Now is the time to eliminate every “C” player, keep the “A’s” and warn the “B’s” that they need to improve. As work slows, you will be able to replace poor workers with quality employees who will be readily available. Don’t accept less than the best now. It is an employer’s market, so take advantage of it.
Get your team together, and let them help you reduce fixed expenses. State your goal to cut your fixed cost of doing business by 10 percent, 20 percent or more. Let them come up with ideas. By making cost reduction a team activity, everyone will feel a part of keeping your business running as costs go down. Be sure to look at every major cost item including job costs, production, benefits, training, receivables, payables, banking, insurance and technology.
Don’t Just Survive!
I hate business owners who tell me their goal is to survive. To me, survival is slow death. Great business owners and managers do everything in their power to make their companies profitable in every market environment. I’m sure you want to do more than survive. Be proactive—go out and make something new happen. You can’t cut your way to prosperity. You’ll have to see new customers, try new markets, bid new projects and offer new services to grow your business in a slow economy. Send me an e-mail with your success stories explaining what you’re doing differently to make 2008 great and 2009 mighty fine.
Construction Business Owner, January 2008
George Hedley owns Hedley Construction and Hardhat Presentations. He is the author of The Business Success Blueprint Series available in eight workbook and audio CD sets. He is available to speak on his system to build profits, people, customers and wealth. Call 800.851.8553 or visit his website at www.hardhatpresentations.com.
