The coronavirus has hit the construction industry hard – we are all searching for ways to keep our businesses afloat and our employees working. One of the best pieces of advice for recession-proofing your business is to diversify your construction business. Essentially, this means that you branch out with the work you do and the clients you serve. Now, diversifying doesn’t mean that plumbers should start framing, but your business may benefit from looking “outside the box” for your next client. Here are some ways you can diversify your customer and project pipeline, so you won’t be so vulnerable in an economic slowdown.
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Why diversifying your construction business matters
The coronavirus pandemic has shown how vulnerable the construction business can be to government orders and economic forces. In places like Pennsylvania and Washington, all but the most critical construction projects have been shut down. Contractors who padded their work portfolios with hospital and infrastructure projects are ready for an influx of new jobs. Construction businesses that specialize in residential construction or corporate, commercial jobs saw their backlog of projects canceled overnight.
The more you can diversify the types of projects you work on, the better position you’ll be in to weather any storm. If one source of income dries up or slows down, you can put more resources into another that you’re already working on. Diversifying might mean taking on multiple construction project types, like public or private jobs. It might also mean branching out into service work, or picking up a new trade or skill that you can add to your construction repertoire.
Let’s dive in to some of the ways that you can diversify, protect your cash flow, and survive in a recession economy.
Public and Private Contracts
Some contractors swear by working on only publicly funded projects. Others stick to private jobs, and stay away from public projects like they are the coronavirus! There are, of course, good and bad points to each.
Public construction contracts
Public construction work does tend to continue in a recession. Other than the current circumstances, projects don’t get shut down or scrapped very often. Public projects are budgeted for years in advance, so essentially the money is already “spent” before a project goes out to bid. Public projects can be a good source of regular work for contractors looking to keep busy. Public projects also tend to follow prompt payment laws in each state very closely.
There are some down sides to public work. Projects are strictly hard bid, so there’s little-to-no negotiating room. If you aren’t the low bid, you lose. That downward pressure on prices means that profit margins may be lower. Many of these projects require additional paperwork for payment applications, including certified payroll reports. Also, these projects are often more heavily scrutinized than their private counterparts, just because they are generally in government buildings.
Private construction contracts
Private construction work, on the other hand, is more volatile in a down economy. Many project owners require financing in order to make their dreams a reality, so they are dependent on loan availability at the time. Fears of a recession may keep a property owner from breaking ground on their new business until they see how things shake out. During a slowdown, residential jobs are likely to be the first projects that are shut down or placed on the back burner. They can also be slower to pay, since the funding isn’t always in place before the project begins.
The good news is private work is usually negotiated, or you are only bidding against a couple of contractors. There is more flexibility in pricing, too, as labor rates aren’t set by the government on these projects (unless they receive some sort of public funding or grants).
Balance your construction project types
A balanced approach is probably the best bet here. Public projects will generally continue once they get started, no matter what happens economically. And sometimes the government creates projects to help stimulate the economy, which is definitely good for business. However, depending on them as your sole provider means you have to be extremely competitive in your bidding, and you have to bid a lot of projects just to stay busy.
Adding a few negotiated private jobs would pad your income and give you a chance to run your business instead of bidding all the time.
Residential and Commercial Projects
The residential construction industry is fairly easy to get into. In fact, most builders get their start working on houses or remodel projects. There is little overhead, and one person can quickly start their own business and begin working with very little start-up money.
There is, however, a lot of competition in this industry. No matter what trade you are working in, there are always lots of other companies doing it too. This means your pricing has to be competitive and you have to look at lots of projects. This is one of the sectors that reacts quickly when the economy hits a snag. Developers will stop construction on spec homes and other projects, waiting to see what homebuyers are doing and what effect the downturn has on the market.
Commercial construction requires a bit more investment, of both time and money. Both the scope of the projects and the construction techniques are different. There aren’t as many bidding opportunities as with residential construction, but the competition is less, and the projects are usually larger and more profitable. Commercial construction isn’t usually too reactive to the economy, as it takes longer for the effects to be felt.
Many companies start out as residential contractors and work their way into commercial projects. This is a good way to broaden your skills and diversify your business. Both will be hit during a recession, but commercial construction will generally weather it better. Because the construction methods are so different, be careful when branching out from one to the other. You may want to look at hiring a supervisor with experience on the other side to guide your crews as you get acclimated.
Different project types and industries
If your company has been providing drywall services to mostly restaurant clients, you can look to other project types or industries to grow your business. By adding office buildings, churches, or other building types to your project resume, you can spread your income, so it isn’t dependent on what happens in one area. You can also look at more complex project types, like food processing or industrial buildings, to help you learn new concepts and diversify your client base.
How do you get jobs in these other industries? Talk to contractors or owners you are currently working with to see if they are doing other project types or know someone who is. Actively market your company as the solution to those industries you are interested in getting into. You may want to hire someone with experience working in that industry or building type to help you make that leap.
One type of work that doesn’t go away, even in a recession, is service work. Small repairs and projects can be the backbone of a successful construction business. These short-duration jobs don’t take much time or labor, and the mark-up can be good if you don’t have much overhead. Most trade work lends itself to service. If you’re having trouble making the jump, try teaming up with another contractor who provides a complementary service and see if you can make a go of it together.
Learn a new skill (or hire someone with one)
We’re not talking about going back to school to learn a new trade here. Think about the service you provide and see if there is another skill you could add to it that would add value for your customers. For example, a flooring contractor may be able to add finishing concrete floors without too much investment. Some training, the proper equipment, and new materials may be all you need.
Another way to add services is to hire someone with the skills you desire. Set them up with the proper equipment and materials, and then start selling.
You will want to provide services that go together somewhat, maybe even ones that will allow you to complete small projects without having to hire someone else for part of the work. Make sure you check with your licensing board to see if there are any additional requirements, especially when it comes to mechanical, electrical, plumbing, and fire work.
Diversifying means survival
If you find that your company has gotten into a rut when it comes to the type of projects you are doing, it might be time to look at other options. Whether it is public/private, residential/commercial, or a different industry or building type, diversification is going to help you ride out any downturn in the economy. There is always a need for construction work. Diversifying your construction business is a good way to make sure that no matter where the need is, your company can meet it.