As 2022 closes and 2023 begins, we spoke with the members of our senior sales team for the construction industry to get their thoughts on the challenges construction companies will face in the new year.
These four gentlemen, Brad Bullock, Justin Mock, James Seela, and Tom Tornee have over 85 years of combined experience in the construction industry, and over 35 years with CCG (that’s a lot of experience). They have been through many business cycles and have seen construction businesses thrive, survive, and fail. Hopefully their insights will help construction company leaders recognize the challenges, take advantage of opportunities, and mitigate risks so their companies can grow.
There are many challenges facing the industry, but two challenges seem to loom largest:
While inflation, rising interest rates, supply chain issues, and equipment shortages have affected nearly every industry, construction is acutely affected because these challenges make it more difficult to bid jobs effectively. Brad Bullock put it succinctly when he stated, “Bidding jobs is difficult when costs are rising. Contractors have to balance between building enough cushion to absorb these increases and being competitive enough to win the bid.”
One of the keys to bidding responsibly is to know your strengths. Recognize what you do well and cost effectively, and understand the economic variables. The thin margins in construction only get thinner during inflationary times. Bidding at a loss just to have work is not a sustainable strategy for success.
The shortage of labor in the construction industry is certainly not new but has become exacerbated by the recent increases in construction activity. James Seela noted, “Industry leaders are working diligently to close this gap by partnering with local, regional, and national trade associations to provide programs to high schools, trade schools, colleges and universities in an effort to introduce the next generation to the vast opportunities the construction industry can provide.”
Short term, employers can do two things to help combat the problem, 1) work diligently to retain the good employees they currently have, 2) partner with local schools and programs to help identify young people interested in the construction trades and provide apprenticeship or intern opportunities for these folks to gain practical experience.
Economic trends can be external (macro – general economy) or internal (micro – within your own business) and while it’s not possible to control all the factors, understanding them and their impact will help you strategize for optimum success.
Macroeconomic Factors
On the macroeconomic level there are so many factors that affect the construction industry, most of which are out of the control of business owners. However, one must pay attention to these and understand how they can impact business opportunities, future work, and how you can shift your business to maximize the opportunities and minimize the threats.
Housing starts, interest rates, inflation, and trends in residential vs. commercial construction all give some insight into where the industry is headed. As these segments shift, it’s important for contractors to remain nimble and diversified so they can shift segments as the general economy and construction trends shift. Diversification can take the form of project type (private vs. public, residential vs. commercial) or services provided (site prep, road construction, utility work, etc.). Tom Tornee remarked, “It can be difficult to change focus, but in this environment, it is critical that construction companies be aware of trends that may require them to expand their reach and scope.”
Microeconomic Factors
Within their own businesses, contractors must manage variable costs (materials, fuel, labor, insurance) which can be difficult in an inflationary period. In any economic environment, companies need to closely manage cash flow, and by extension, their accounts receivable. This becomes especially important in a volatile economy. Accounts receivable is a leading indicator of your customers’ ability to pay and in turn, your ability to pay your bills.
Slow payments can have a profound negative impact on cash flow, add to the cost of doing business, and can quickly have a negative effect on current and future projects. Working with your customers and ensuring that submissions for payment are complete and comply with your contracts and your customers policies can help expedite potential payment delays. A simple paperwork error can result in an additional 30 to 60 day delay in payment.
As much as our team wishes we had a crystal ball and knew what was in store, we don’t. But we do keep an eye on industry forecasts and these forecasts and predictions vary widely. However, given the recent interest rate increases there has been a decline in private and residential construction investment, and we expect to see that continue. Additionally, due to the infrastructure bill we expect to see an increase in DOT and other public projects. However, these projects will take a while to phase in, as many are still in the developmental stages.
Contractors that are already working on public projects should be poised to take advantage of the shift in project type. As noted earlier in this article, companies need to be nimble and diversified to withstand market changes. Companies focused solely on residential construction and private investment projects, need to find ways to diversify.
There are three main strategies construction companies can use to help them in any economic situation:
Diversify
As noted earlier in this article, diversification is one of the most effective ways to combat economic changes. It’s essentially the opposite of having all your eggs in one basket. If one segment declines steeply you can supplement projects and income with other services or project types. Adapt and improvise – be ready for opportunities when other companies falter or exit the market. Understand the strengths and weaknesses of your organization and bid jobs carefully and responsibly.
Financial Management
It’s always important to manage your finances. But in times of economic turmoil, this becomes even more important. Keep a close eye on cash flow, and especially your accounts receivable.
Build relationships with and diversify the number of trusted partners - your bank, equipment finance companies, insurance agents, material suppliers, etc. Build relationships with partners who understand your business and the challenges you face. Be honest and open with them about your financial situation and any challenges or opportunities. They can be great sounding boards and problem solvers if they understand your situation, and in advance of a potential issue.
Build Equity in Your Equipment
Equipment accounts for a substantial portion of the assets of most construction firms. If you have equity in your equipment you have leverage and flexibility when cash gets tight. If projects slow down and some of your equipment is not being used, you have the option to sell it, pay off the related debt thus lowering your debt service and related equipment expense, and use the remaining proceeds for working capital, or to take advantage of opportunities. Justin Mock observed, “Any time there is a downturn and projects start getting scarce, you can sell whatever equipment you have that is not earning revenue. If you’ve not properly financed your equipment, there won’t be equity and you might be stuck.”
Even if you don’t want to sell off equipment, if there is equity in it, you can refinance to obtain working capital, which can be used for operational expenses to keep the business running through lean times.
While we don’t know exactly what challenges and opportunities 2023 holds, we do know there will be plenty of both. Let us know how we can help your construction company take advantage of the opportunities and weather any of the storms.
Best wishes for a happy, healthy and prosperous year.