Even before the coronavirus upended construction, and effectively threw a wrench into the engine of the US economy, experts were predicting that a recession was just around the corner. If that was true, COVID-19 certainly sped things up. While the construction industry hasn’t been in the economic storm’s direct path, it is definitely feeling the effects. While in some states and cities, construction has been deemed “essential business,” in others, projects are being delayed or cancelled. To ensure that your company will survive a recession, no matter the cause, you need to start preparing now. These 5 steps will help prepare your construction business, whether a recession hits or not.
The contractors and suppliers that take the right actions now will have the best chance of surviving.
Economic & construction experts agree: A recession is here
With the construction industry booming over the last few years, many contractors have been enjoying a surplus of work, and near-record backlogs of future work. The steady flow of available projects has allowed many contractors, and material suppliers alike, to increase in size and profitability.
However, with greater potential profit comes a greater potential for loss. This is especially true when there is a recession looming on the horizon. Recent world events have shown how quickly everything can change, without any notice whatsoever.
“Whereas 10 days ago there was some legitimate uncertainty about whether the global economy was in the process of going into recession — 10 days later, there’s no question that it is,” David Wilcox, former head of research and statistics at the Federal Reserve Board, told CNN Business.
“The odds of a global recession are close to 100% right now,” Kevin Hassett, the former top economist in the Trump administration, told CNN’s Poppy Harlow.
According to Anirban Basu, chief economist of the Associated Builders and Contractors, “Businesses should be raising cash, determining if their lines of credit are large enough, considering staffing models and ensuring the good graces of bankers and insurers.”
In a recession, money seems to get extremely scarce, and that’s when contractors get in trouble. It’s difficult to pay for your materials and labor, when you’re not getting paid by the owner or general contractor of the project(s). There are steps you can take today, to minimize the negative effect of a recession on your business.
Video: 6 Documents to Get Paid in a Recession
5 Steps Construction Businesses Should Take to Survive a Recession
1. Determine your “ideal project”, and then actively pursue those types of projects.
Whether the recession is on the horizon, or already here, your first step should be to review job costs for completed construction projects over the last two years. You may find that your company excels on projects of a certain size, scope of work, or dollar amount. You might discover your niche is jobs that last no more than 3, 6, or 12 months. Analyze the data, and then actively seek out jobs that match that criteria.
By focusing on projects that meet your “ideal project” criteria, you minimize the potential for problems on the project.
- If you excel at small to medium sized projects, trying to take on too large a project could result in staffing and equipment shortages. You may need to bring on temporary employees, or possibly need to rent/buy the additional equipment to complete the job.
- Conversely, if your ideal project is 100,000 square feet or more, and you are trying to land tenant improvement jobs of 5,000 – 10,000 square feet, this means you aren’t using the same manpower and equipment effectively enough. This can also cost you time and money.
- If your specialty is professional/retail projects, jumping into food service projects could be very problematic. This is due to the fact that food service projects require certain components, materials, or assemblies to meet local health department guidelines.
During a recession, it is crucial to focus on projects that hit your “ideal project” guidelines. This will help your company maximize potential profits, and minimize the risk in a difficult economy.
2. Review your contracts & service agreements for potential protection issues
The construction supply chain has already started feeling the effects of coronavirus. Chances are that material prices will increase either due to a production slowdown/stoppage, or the inability to transport in a normal and timely fashion.
Your construction contracts should include sections about how to handle fluctuations in pricing, shipping/transport delays, or schedule delays caused by others, nature, or other uncontrollable circumstances. Adding a force majeure clause can protect you from liability for delays that aren’t your fault. An escalation clause can limit your responsibility for material cost increases. Without contractual protection, you may end up spending more money on a project than you budgeted for, with no means to recoup those expenses.
It’s also important to decide if you will charge late fees for any unpaid invoices. Determine the amount, and if it is calculated on a daily, weekly, or monthly basis.
Always remember, a good construction contract is always about sharing the risk equitably, among the parties involved.
3. Adjust your scheduling to avoid the “slowdown bottleneck”
When it comes to revising your project schedules, keep an open mind and be flexible.
- The “busy bottleneck” typically happens in a growing economy, when you don’t have enough manpower to meet the demand of current projects and schedules.
- The “slowdown bottleneck” occurs when the economy is slowing down due to production decline or stoppage. A limited supply of materials means you will have to decide which project gets priority, and which ones will have to wait a while.
Depending on the cause of the bottleneck, you might consider working “off hours” to keep a project on schedule. You have the option of working either a day, swing, or graveyard shift so you can still hit those milestones and meet those deadlines.
Another option is to have some employees have their days off during the week, so they can be working on a project over the weekend. By shifting when the “weekend” happens, you have effectively added two more production days each week for the specific job.
Whether you are dealing with a work slowdown, or a ramp up, this is an easy way to get more done, without needing to pay overtime to make it happen.
4. Adopt processes that will get you paid faster and protect your lien rights at the same time
During a recession, the funding for your project can literally disappear overnight. It’s not uncommon for projects, especially large or expensive ones, to get shelved indefinitely, until the economy improves again.
A recession can also impact progress payments from your ongoing jobs. When the job is halted, everything stops. Not just the work on the project, but the funding as well. It’s not uncommon for the GC or lender to have to decide who gets paid with the currently available funds. The contractors with their paperwork in order are the ones most likely to be paid first.
If you haven’t sent a preliminary notice, in many states, you cannot file a mechanics’ lien to get paid at some point in the future. When you don’t protect your lien rights, the GC or lender can wait to pay you, because you can’t file a security interest in the property. You can’t even leverage the threat of a Notice of Intent, because you didn’t protect your lien rights with the GC, owner, or lender.
It’s important to have a clear understanding of the deadlines for the construction industry. In some cases, if you miss the date by a single day, you may as well have missed it by a hundred days.
You should always send a preliminary notice on every single job, even if it is not a legal requirement in your state. Following notice requirements in your state will allow you to file a mechanics lien in the event you don’t get paid for some or all of the work you perform.
Send invoice reminders for any unpaid billings the week before the next progress billing is due on the project. It’s also helpful to remind them of any “late fees” that will be incurred, if not paid on time.
Always include copies of your warranty for materials and labor with your final billing, and set the time period (1 year, 2 years, etc.) of your warranty. The timeframe can start with the completion of the work, or upon acceptance of the project owner/lender/GC, or the date that a certificate of occupancy is issued by the city/county.
Lastly, don’t be afraid to file a mechanics lien or bond claim if you don’t get paid. During a recession, every dollar can make a difference. Late payments actually cost you money. When the GC or property owner delays your check, they’re essentially asking you to lend them the money for free.
5. Improve your office productivity and lower your overhead costs
Every contractor has to deal with overhead expenses. They are the cost of doing business, but the overhead rate varies wildly from one contractor to another. In good economic times, lower overhead costs allow you to increase your profit margins, and still get the project. In a less favorable economy, a lower overhead will allow you to remain competitive, without the need to lower your profit margins.
The smartest move is to reduce your overhead costs, by getting the same amount of work done in a shorter timeframe. For most contractors, overhead expenses are made up of the same 3 components:
- Accounts receivable
- Accounts payable
Save time on every project you bid by moving as much of the bidding process as possible onto your computer. There is no shortage of online plan rooms in most areas, and the plans and project info are accessible 24/7.
Another huge time saver is using an estimating program, which can perform the take-off, and calculate your material needs at the same time.
Digitize your old bid files and save them to your server. Now everyone can access them via computer, tablet, and smart phone, anytime they are needed.
Expedite your accounts payable process by taking advantage of company/agency websites for filing necessary paperwork and making payments. Never miss a deadline or get hit with a late fee caused by snail mail again. You can also save on printing and postage costs by filing your form and making payments online.
Virtually all of your taxes (state and federal), worker’s comp, and unemployment insurance can all be filed and paid, via the internet.
You can even use an online payroll service to handle all of your payroll needs. Simply enter the hours for each employee, and then print the checks. They also handle 1099 and W-2 forms and filings to boot.
Your accounts receivable process is absolutely crucial to your cash flow, and your company’s profitability. When a project’s funding stops, the GC or lender will have to decide who gets paid and who doesn’t.
If you didn’t file a prelim notice, you will most likely have to wait to get your money. The GC or lender knows that you have no real recourse to get paid, since you don’t have the leverage of a NOI, and you can’t file a lien against them either.
You should always submit a prelim notice, submit accurate billing statement and provide the needed lien waivers, to make sure you get paid on every project.
Take steps now to keep construction cash flowing during a recession
Cash flow is crucial to the success of a construction in any economy, whether we’re in a recession or not. During a recession, your ability to manage your cash will determine whether or not you survive. These 5 steps will provide you with the best protection from the looming recession, and keep your cash flowing. While you might not be able to implement all of these ideas right away, start where you can. Every step counts, no matter how small it is. Look at your accounts receivables, and see if you can reduce your days sales outstanding (DSO) by a week or more. Start sending preliminary notice on every job, and see what happens. After all, none of these steps will kill you – and one of them just might save you.