Construction Today

Worst Enemies

Do you really understand your firm’s strengths and limits? A realistic outlook can help you cope with slowdowns and avoid self-destruction cycles.

by Mike Rudd

The signs are there: The construction industry is experiencing a building cycle slowdown. Bidding has become more competitive and aggressive than ever before. Costs are skyrocketing, and, to make matters worse, payment for completed work is unrealistically slow. Add lower productivity from personnel, and you have a formula for disaster.

Bidding indicators assist business owners in analyzing their specific marketplaces. When bidding becomes tight – i.e., the bids are lower for the same amount of work with more companies submitting bids – then companies – yours and the competition – tend to accept work at or below break-even points. Additionally, the number of competitors bidding on work increases, and larger companies that previously did not compete in a given market now use their size and competitive advantage to take smaller jobs.

This creates a vicious cycle and pressure for companies to bid work at even lower prices to ensure cash flow. This situation serves as the impetus for a self-fulfilling, destructive cycle of desperation, regardless of company size or construction discipline.

Monetary Indicators

Monetary indicators can also represent a business slowdown: Working capital becomes scarce. The cash conversion cycle is elongated by slower pay from owners and contractors. When this happens, architects tend to scrutinize pay requests and deny or substantially reduce completion percentages.

In addition, subcontractors run into trouble with their vendors, and obtaining a lien release becomes more problematic. Ultimately, there is increased pressure on expensive credit lines, further eroding profit margins. Financial institutions tighten lending criteria for project while increasing interest rates and fees. Vendors become more difficult to work with, insisting on payment without terms and eliminating the extra services that have been customary in the past.

Employee Indicators

When employees sense an industry slowdown, they tend to stretch work out and do not complete projects quickly and efficiently. When jobs take longer than usual, without any real cause for the delay, some of the variable costs, such as labor, become fixed costs.

One option used by employers to combat this slowdown is by continuing to pay wages when there is little or no work, ensuring an adequate labor force when business picks up. Many times these hourly employees are converted into salaried employees. In other words, a variable cost is converted into a fixed cost that the owner really cannot afford. Instead of laying off laborers, the company finds busy work for them to do during a slowdown to keep skilled employees on board.

However, this practice leads to increased overhead in an already competitive market, which is a recipe for disaster. Instead of decreasing the labor cost during a work slowdown when funding is limited, the cost remains the same or even increases.

Business Basics

During a construction slowdown, business owners become their own worst enemies. Why? Because the decision-making process is shortened to crisis mode and perceived selfpreservation. This leads to poor decisions that in the short-run may mask the problems but eventually create bigger problems. It also contributes to an extension of any real or perceived slowdown. When the signs of a business slowdown become evident, the worst possible course of action is a knee-jerk reaction.

How does a business owner survive such a slowdown? By going back to the basics of the business. Here are several suggestions to help business owners insulate themselves from some of the effects of an economic slowdown:

• Understand what business you’re in and why. Realistically analyze personal and business strengths and weaknesses. Develop strategies to capitalize on what the company does best to prevent the dilution of its resources and expertise. Trying to be all things to all customers is a sure recipe for poor performance and the resulting problems associated with this strategy.
• Focus on the functions of the company. There are only three key functions in any company. The first is revenue generation. Without revenue, there is no company. The second is operations. Ensure that the company produces what it is supposed to in a timely manner. The third key function is to keep score. Establish accountability and responsibility for each of the business functions, and refuse to accept excuses for poor performance.
• Develop performance-based job descriptions. There will always be employees who excel at looking busy while standing in a corner. Therefore, the objective is to establish specific performance criteria for each key function in the company.
• Use excess profit-based incentives. Most companies have some type of an incentive program, but the most effective ones are based on excess profits.
• Capture and use the data. Develop a chart of accounts that accurately reflects the specific operations with the company. The revenue categories should relate to the different types of operations such as commercial, tenant improvement and residential remodel. This allows the business owner to track specifically what type of work is being bid and won.
• Understand the company’s overhead rate and break-even point. Without a true understanding of the overhead rate of the company, any bid represents a guess at best and a complete disaster at worst. Knowing when to decline an opportunity is as important as knowing when to take a project.

Business is cyclical in nature; sometimes the jobs are plentiful and other times they are few and far between. During a business slowdown, a successful company not only survives, but flourishes by possessing a thorough understanding of the business and its strengths and weaknesses.

Mike Rudd is director of client services with IPA and IBA. IPA and its related companies provide comprehensive business consulting services and business valuation services to companies in the United States and Canada. For more information, call 847-495-6786 or visit www.ipa-iba.com.