Not to be a downer—after all, many contractors are enjoying a surplus of work and near-record backlogs—but are we headed for a recession?
Depends which economist you ask. Some poo-poo the whole idea. Some warn a second Great Recession is in the offing!
Most economists agree that if Gross Domestic Product drops for two consecutive quarters then, by definition, we are in a recession.
What’s got many contractors nervous is that the economy shrank by an annualized rate of 1.4 percent in Q1 of 2022. One more quarter and we’re officially in a recession!
Construction is usually one of the hardest-hit industries during a recession. Many construction companies saw their project backlogs slowly fizzle away as customers were unable to find financing. While other industries bounced back quickly after the Great Recession, recovery was slow for many contractors.
So what can you do now to weather a recession? That’s what this post is about. We will consider several best practices to build a recession-proof business strategy.
Ready? Let’s go.
Protect your cash flow. Do you have an accounting professional you can turn to for timely information about the financial state of your business? When contractors get in trouble, it’s often because they run out of cash. Cash is king, it is said. The lifeblood of your business—especially in construction, where contractors rely on lines of credit to purchase supplies or make payroll. If a recession does hit, you want to have enough spare cash around to cover your operating expenses and overhead.
Keep your best skilled tradespeople. As we all know, there is a huge shortage of skilled tradespeople. A precious resource! The US Chamber of Commerce estimates that more than 90 percent of contractors have struggled to find workers. You’re probably one of them!
It’s been this way since the Great Recession of 2008, when a huge group of skilled tradespeople left the industry, never to return. Now many of the remaining skilled tradespersons are nearing retirement—and young people aren’t coming into the industry to take their place!
During a recession, when work is scarce, you need to be able to stand out from the competition—so keep your best skilled tradespeople happy. That means you’ve got to offer competitive wages and benefits. Paying more during a recession can sound counterintuitive, but you’ve got to keep your best people engaged if you’re going to make it out the other end of the recession.
And it’s more than just pay and benefits. A recent study by the Building Talent Foundation found that the key for construction companies in retaining their workers is that you offer opportunities for career advancement, training, and learning new skills. Your workers need to see a clear future for themselves.
Intimately understand your costs. The better you understand the exact prices for your labor and materials, the more effectively you can price your projects. Profits can become razor thin during a recession, so just a little bit can mean the difference between survival and shutting down.
Are you spending money on things that aren’t clearly tied to your business’s growth? Do you have equipment sitting idle?
Likewise, you may have to let go of employees who aren’t pulling their weight. The key to having these difficult discussions is treating people with respect—in person. Remain factual, honest and open, and actively listening to their responses.
A recession could be a perfect opportunity to try a temporary labor agency. Once you “right size” your team, you can supplement it through the use of temporary labor. Production increase? No problem, just bring in some temporary employees. When the crunch is over, you just tell the agency you’re done with the temporary employees. No fuss, no muss. See: Growing your construction business through contingent labor.
Stay close to your customers. All successful businesses are built on relationships. Check in regularly on how they’re faring during the recession. Ask how they are doing and how you can best serve them at this time. Maybe your sales force could call on every customer. This is a great way to fend off hungry competitors.
Try to lock up long-term contracts with your most important customers at more favorable terms. Offer prepayment incentives, for example.
If you’ve built strong relationships, customer loyalty will serve you well during a recession. If you haven’t, now’s a perfect time to start!
Remain vigilant on collections. It’s difficult to pay for your materials and labor when you’re not getting paid in a timely manner. In good times, a business can grow lax on collecting on receivables. This can bite you in the rear end during a recession. It is one thing to get the work, and another to get paid in full and on time for the work. All too often, you will have a customer that received your services, never complained about the quality, but became silent when it was time to pay the invoice. Good collections processes help minimize the impact of bad payers.
Play to your strengths. What sets you apart from your competitors? That’s what you want to focus on during a recession. Maybe it’s the quality of your craftsmanship. Maybe it’s your ability to deliver projects on time and on budget.
Are there certain projects that are more profitable for your firm? Go after these types of projects during a recession. Review job costs for completed construction projects. You may discover your company makes its highest margins projects of a certain size, scope or dollar amount. If you’re great at small to medium-sized projects, taking on a project that is too large could result in labor and equipment shortages.
Review your contracts and service agreements. A good construction contract is about sharing risk equitably. Make sure your contracts include sections on handling fluctuations in pricing and shipping delays. If you haven’t already, add a force majeure clause. It can protect you from liability for delays that aren’t your fault. An escalation clause can limit your responsibility for raw material cost increases.
Meanwhile, protect your lien rights. Project funding can dry up overnight in a recession. Make sure you send a preliminary notice, even if it’s not required by your state’s laws and you don’t foresee payment problems.
A recession might be right around the corner. Now’s the time to reevaluate to get lean and focus on your strengths, those things that made you successful in the first place. Contractors who go into a downturn strong have a better chance of coming out alive at the tail end. Maybe now’s the time to be proactive in streamlining your business.
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