When is the downturn coming? It’s the million-dollar question causing consternation in construction company boardrooms. Whether the next downturn is a depression, recession or simple market correction, there will be ripples experienced across all industries, but perhaps none more than construction.
Undoubtedly, the damage from the last recession is burned indelibly in every leader’s mind, causing varying levels of anxiety. However, it shouldn’t take an economic correction to prompt businesses to shape up. Financial and workforce management, market differentiation and process adherence are surefire ways to absorb any impact and maintain a healthy business.
Financial Management
If the Great Recession taught businesses anything, it was the importance of superior financial management, particularly cash flow and collections. Accounts receivable are only good if they generate cash flow in a timely manner. Top firms have a keen eye for collections and adopt a disciplined process for handling risk-prone accounts and customers who slip in the murky waters of 60-days past due.
Additionally, top contractors ensure their cash management through a healthy working capital and ethical, positive overbillings value. This does not mean they lose all semblance of customer service and strong-arm customers, but rather, proactively monitor customer behaviors and ensure managers are doing their jobs. Great leaders should routinely ask themselves:
- What is the age of our average accounts receivable invoice?
- What month-to-month trend do we use to measure client payment reliability?
- Are we cash-flow positive or serving as a no-interest, low-risk lender for customers and clients?
People Management
Another lesson from the Great Recession was that talent development waits for no market. Many organizations decided against investing time or money in talent development, even culling team members who no longer made sense. Employee reductions came about as a necessity, rather than as a routine part of doing business. Additionally, many companies paused training and development because budgets didn’t allow for it, and that focus was better applied to work that kept the lights on.
Many business owners and key leaders, now a decade older and wiser, wonder if this pause in training may have stunted the growth of their teams long term. It’s important to decide for your business what resources should be cut in order to stave off mediocrity, and what resources should be developed and cultivated no matter what. Some key questions worthy of reflection on this topic include:
- Do we hold people accountable?
- Are we developing at all levels?
- What skill gaps exist?
- Who are our top performers, and why?
- Who composes our middle tier, and do they regularly receive feedback to improve their performance?
Market Differentiation
If your biggest client left you tomorrow, what would you do? Don’t panic yet, but many firms experienced this real concern when the economic collapse occurred, leaving them stranded.
First, it is important to constantly examine the current workload and the quality of the future backlog. Examining a rolling, 12-month backlog projection is one way to provide an illustration of what the future holds. Then consider the actions required when specific triggers are hit.
For instance, if your firm’s backlog 6 months from now is projecting a 12% dip, what steps must you take to hedge against the repercussions? Simply looking at projected billings 30 days out is too myopic and barely provides enough reaction time.
Secondly, a firm can examine peaks and valleys in its backlog relative to market niches or sectors. Private/public, commercial/government, hard-bid/negotiated, etc., are all tranches that provide insight and validation to forecasts. As with any projection, there is some level of variability or uncertainty. Handicapping longer-range targets is one approach.
For example, if a strong client has on average 10 opportunities per year and the firm usually wins 50% of those bids, a conservative estimate might project a future backlog of three potential projects for an approximate revenue stream. Questions to consider here include:
- What would happen to our business if our largest account or source of revenue dropped by 50%?
- What group or individual in our firm is seeking new markets and customers?
- What tools or indicators provide the clearest view into our next 12 months?
- If we can’t predict our revenue stream, how are we ensuring we don’t have to live hand-to-mouth?
Process Adherence
Sticking with a set of operational best practices serves a firm well, both when times are challenging and when times are good. Posterity measures along with massive behavioral change create a certain level of organizational inertia that is difficult to overcome, making hunkering down during an economic downturn even harder to apply and enforce.
Performance should be routinely evaluated, and internal processes measured to ensure there is one defined way to do things, and it’s the only way accepted. Ponder the following questions to ensure the processes and tools are the right ones used.
- Do we measure efforts like preconstruction planning and closeout planning and provide routine feedback on that process adherence?
- How many different versions of a meeting agenda exist within the firm?
- What is included in the recipe for a successful project, step by step?
- How well do we do at finishing projects expeditiously and profitably?
- Is our current operational model working, or are our processes fractured by too many new ideas?
- Is our current operational model germane to the new business we are doing?
