Ten Strategies Contractors Can Use to Prepare for an Economic Downturn
By Remmie Butchko, Construction Executive
There have been many changes in the construction market over the decades. Sometimes the changes are gradual, but frequently they can be swift in both upswings and downturns.
Most would contend that current conditions are strong, as one contractor noted, “If you can’t make money today, you’ll probably never make money.”
While those within the construction industry all hope that current conditions will continue for a long time, it is inevitable that it cannot continue forever. The time to prepare for change is now.
There are 10 strategies contractors can use to weather darker days. Contractors might even want to make these strategies a fundamental part of business, regardless of economic conditions.
- Identify the most profitable niches, jobs, etc. and replicate them. Discontinue any unprofitable areas that may be “masked” by more profitable endeavors.
- Avoid overstaffing, no matter how tempting it may be to do so. Especially avoid this if additional staff is being considered to support lesser-profitable, or even unprofitable, ventures as mentioned above. This will reduce overhead for all benefit expenses, employer payroll taxes and workers’ compensation premiums. While it sounds obvious, this is a common mistake.
- Conserve cash. Do not pay bills before they are due. The only exceptions would be if there is a discount being offered for early payment or a discount can be negotiated by pre-paying future installments early.
- Control entertainment expenses. Sure, those “Club Level” seats are much more attractive in a strong economy, but they become expensive when things get slow. If this is important to a key customer or two, buy a few games without committing to an entire season, or even worse, multiple seasons.
- Be practical when it comes to auto expenses. If purchasing or leasing trucks on four or five-year agreements, the last few years of payments will be brutal if there is a quick downturn. The situation is amplified if there is also over-buying for partners and/or key employees. Employees would rather drive a F150 for 20 years than a King Ranch for three years than have no job.
- Secure a Line of Credit. Most contractors are stronger financially now than they have been in nearly 10 years. It is best for contractors to establish a line, or improve on a current line, when they don’t need it.
- Sell idle assets and unused inventory. Even if a contractor needs to “unload” unused assets (trucks, equipment, etc.) or inventory at a reduced cost, in today’s environment there is probably a market for them. In a downturn, there will likely be no market, rendering them worth much less, or even worthless. The longer a business holds on to an unused asset, the faster the value decreases. Additionally, unloading assets will decrease insurance premiums, leaving more liquidity in the company now.
- Overtime should be kept to a minimum. While it is still a better option than over-staffing, it should be a priority to minimize overtime hours. The extra payroll can eat into hard-earned profits quickly.
- Establish a marketing budget. Marketing expenditures tend to swell when times are good. It is a bit counter-intuitive that companies tend to spend the most on marketing when they need it the least. If a contractor is having a hard time finding employees, or maybe even turning away work, then why spend more on marketing? It doesn’t typically make sense, but it is a common occurrence.
- Solidify relationships. If work is strong and a contractor has enough, or maybe even more work than he can handle, he should spend time solidifying relationships with vendors and customers. It may very well pay off in a bad economy.
Just remember, everyone is a great sailor when the wind is at his back!