How to prepare for a potential work slowdown
INSIGHT ARTICLE |
After roaring back to life after the Great Recession, the overall economy has continued to show relative strength in recent years, bringing the construction industry on a profitable ride. But there are signs that the pace of growth in the construction sector is slowing.
Total construction spending declined in late 2018 and early 2019 for the first time in seven years. Rising interest rates could, and the tight labor market will, put inflationary pressure on the sector, and the long-running expansion is overdue for a correction. While the pundits aren’t predicting another Great Recession, the International Monetary Fund‘s most-recent World Economic Outlook predicts a global slowdown in growth through 2019 for 70 percent of the world economy, followed by a potential recovery by 2020.
The potential for slower growth in the near-term should not cause contractors to panic, but it should serve as an impetus for preparation. There are several moves contractors can make to set themselves up to ride out a less-profitable period.
Choose a niche
When business is booming, contractors may be more willing to take on jobs beyond the scope of their company’s core focus. With the future less certain, however, contractors should instead hone in on a specific niche or sector—such as health care, student housing or high-end homes—in which they have experience and a history of productivity. Contractors who don’t have this option should consider a broad, strategic plan outlining which market sectors they want to attack. They then should focus on carrying out that plan, even if it means sacrificing other aspects of the business.
Contractors who succeed in strategically aligning themselves at the top of a specific niche differentiate themselves from the competition, creating a buffer against the impact of a slowdown and allowing for continued gains in market share and profits. For example, they can focus on networking strategically within their field and building key relationships with everyone from subcontractors to potential clients that are necessary for success.
Niche-focused builders are better able than their competitors to understand market-specific trends. That knowledge can allow contractors to create higher-priced, customized services and to generate word-of-mouth referrals, which are even more valuable when business slows. They’re also able to be more efficient with their marketing dollars, targeting particular clients with more concentrated messaging.
Shore up financing
Managing cash flow is important for contractors no matter what the economy is doing. But when credit gets tight, it’s imperative to retain access to financing. Having cash available for both working capital and long-term initiatives can make it easier to deal with fluctuations in payment and projects that occur during a slowdown.
To retain that access to capital, contractors should be in touch with lenders now, confirming their relationship and ensuring that they’ll maintain liquidity even if work starts to slow down. That may mean asking to increase an existing line of credit while credit is readily available, rather than risk having to ask for the increase when lenders are tightening up. Contractors with a less-than-perfect credit profile should focus on improving it before lending standards tighten.
In addition to shoring up their own financing, contractors should examine the entire finance chain for signs of weakness. That may mean ratcheting up prequalifications for subcontractors and vendors, focusing on building relationships with those who have the strongest financial positions and appear best able to weather a storm.
This is also a good time to establish other means of raising capital for projects. This may mean looking beyond a company’s traditional sources, and exploring others such as life insurance companies or investor groups. Forming and maintaining relationships in capital markets is especially important during a slowdown, because they may be the lifeline in the future when other sources of funding start to dry up. This can be particularly true for opportunistic investors looking for a return on their money outside of the equity and bond markets.
While it’s important to conserve cash ahead of a slowdown, spending money wisely now can better prepare contractors to deal with shifts in the market. One area ripe for strategic investment is information technology. Many contractors did not invest in IT during the last slowdown or as a result of tax reform, and find themselves with an aging and inefficient IT infrastructure. But it’s an area that can create significant cost-saving efficiencies and competitive advantages. New purchase order and accounts payable systems, for example, can automate areas that previously required additional personnel. These systems can be quite flexible, allowing contractors to leverage up and down without the need for additional staff.
In today’s tight labor market, it’s vital to make sure that key employees remain with a company. To do that, contractors should consider competitive compensation structures, like a deferred compensation plan that can keep those workers in the business over the long term.
This also may be a good time to look at the company culture, and if it is helping or hurting the company’s ability to retain key employees. Employees today want more than a paycheck, and it may be more effective to invest in your culture rather than just increasing compensation.
Even if a slowdown doesn’t occur this year, the cyclical nature of construction means that one will come eventually. But given the length of the current expansion, the next slowdown will likely come sooner than later. Contractors who can prepare themselves now for leaner times will find themselves even better positioned for the boom that will follow.
Technology is serving as a catalyst to reshape the economy and the construction industry is not immune to this digital transformation.
As construction companies continue to deal with the fallout from COVID-19, they should look toward technology to help grow their operations.
Provides more time to elect out of 163(j) interest deduction limitation for taxpayers with certain real property or farming businesses.