Economists use the term “new normal” when describing what the recession has done to our economy. One segment of our economy which has been profoundly affected by this recession is the construction industry. To help our firm better understand what our construction clients are experiencing, we recently conducted a survey of over 300 contractors, banks, bonding companies, and others dealing with this unique faction of our economy.
As promised, below you will find the results of the survey as well as ideas, best practices, and techniques members of the construction industry are using to not only survive, but thrive.
The results are broken down into five main categories with the main issues bulleted:
1. Lack of Work & How Margins Work.
- True cost of low cost is yet to be known – poor quality has a long term consequence.
- Winning bids are coming in below costs. Some are accepting work just to “keep the guys working.” Some are bidding work at “break-even” on the job side, but leaving nothing to cover overhead.
- Many general contractors are bidding on the same project. There is more competition from out of town contractors or small start-up shops. Contractors that used to be “niche specific” are now bidding on jobs outside their areas of expertise.
2. Subcontractors.
- Financial condition of subcontractors is a huge concern.
- Prequalifying subcontractors is not taking place.
- Subs don't know which general contractors they can trust to work with and get paid timely.
3. Cash Flow.
- Banks’ lending constraints are restrictive.
- Pay when paid. Contractors don’t pay suppliers until they get paid for work they perform. They don’t have lines of credit to bridge the gap. Suppliers want paid in increasingly shorter amounts of time.
4. Economy and Politics.
- Government regulations including Health Care Bill and Card Check.
- Higher taxes.
- Falling real estate values.
- State and local government budgets.
- 25C tax credits expired.
5. Cost of Doing Business.
- Bonding difficulties.
- Cost of healthcare and benefits.
- Shortage of skilled craftsmen.
- Misplaced loyalties.
Following are some of the ideas and Best Practices that were suggested to not only survive, but to thrive:
1. Stop comparing current situation with the past. Have to understand that the economy will not go back to low unemployment and fast growth – the “new normal.”
2. Protect your margins. Avoid taking on bad business under the mistaken impression that any business is better than none. Cannot pursue new business that can’t begin to cover costs. If a new client can’t produce a positive cash flow, don’t accept as client.
3. Reduce costs and focus on LEAN and efficient.
4. Go Green. Construction is moving in the direction of being environmentally friendly. Position yourself to be a Green company and a Green Solution Provider.
5. Focus on niches.
6. Public sector money is the fat wallet.
7. Educate buyers on value added. Price is important, but even more important is to serve customers at a very high level.
8. Have risk transfer agreements in place. This includes surety bonds, subcontractor default agreements…
9. Aggressively pursue talent. The recession has forced many firms to release talented individuals or talented individuals are unhappy working for their current employer. If you don’t pursue these individuals, your competitors will.
10. Marketing is everything. Smart firms continue with a strong marketing effort even in difficult times.
11. Social Media. Embrace social media. Facebook has 500 million users. Twitter has 75 million users.
12. Solidify future business through mergers and acquisitions. First, firms should consider mergers or acquisitions in order to reposition themselves for the vast amount of new, post-recession business to come. Many firms will be unable to survive the long term effects of the recession, but a number of stronger, more dynamic firms will rise from the down economy.
We presented these results at our construction seminar this past Thursday and a summary of this event is posted on the Contractors Center Point blog. I encourage you to read the summary. Also, please contact me if you would like to discuss any of the points further or if you desire a copy of the hand out material from this event.
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