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Beware DE-flation
Industry prognosticators are predicting a slowing of the construction market in 2023 and possibly beyond. This “slowing” may actually be a flattening and many contractors, in order to keep the cash flowing are bidding on more and more projects with less and less room for profit. Couple this with an 15% or more increase in wages and materials and what is left is a recipe for disaster. To withstand the disaster, construction professions need to “manage for profit” not “manage for growth.”
Can You Be Flexible?
The construction business does not fit the traditional management theory taught at all the nation’s prestigious business schools. The construction business is performed through a partnership of independent specialists over which there is limited control by the contractor. When the top line growth chart slants downward, the contractor can rarely trim overhead fast enough to maintain profitability. This peculiarity within the construction business give rise to the concept of “Flexible Overhead.”
Cash is King
Contractors rarely have enough cash on the balance sheet to see them through down markets, particularly if banks pull back on their lines of credit which happens in market downturns. Borrowing against receivables shrinks to a trickle with less new business coming in and the common practice of front-loading payment requisitions drains cash out of ongoing work so the cash crunch can happen almost immediately upon a market downturn.
Navigating Stormy Seas
To paraphrase Rudyard Kipling…” If you can keep your head when all of those around you are losing theirs…” this has never rung more true than today in this economic downturn. Will you grab up every job available whether you have the manpower or experience? Or will you sit back and enjoy a brandy and engage in some strategic thinking?
CLEAN UP YOUR BOOKS
As we have discussed before, the shrinking recessionary market, profit margins are shrinking and contractors who are undercapitalized will be in jeopardy. Thirty years of research has shown that the inability to produce dependably accurate financial statements is a consistent theme in business failure. If you feel uncomfortable with the accounting reports you are receiving, you must “clean up your books.” This is where a professional CFO with real construction experience can keep your company on an even keel and move forward through the waves of the disorderly market we are facing.
Consolidation
This post-COVID economic environment is not a normal market. It is a disorderly market that will haunt construction for years. The normal routine of chasing any work that will keep the company busy in a future of rampant cost inflation, supply shortages, labor shortages, and inflation-fighting interest rate increases by the Fed (that may bring on recession) will only serve to gradually force many small and mid-size firms into financial distress or worse. We are in an unstable economic environment that demands new strategic thinking.
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