March 28, 2002
How to survive the construction recession
By LEE SMITHER and RICK DUTMER
The consensus is the nation is in a recession and has been since March of last year. There is no consensus on when the economy will dig itself out of the recession, but few predict a rebound for construction until later this year, and many are saying that the return to normal economic growth will be slow and uneven across the economy.
However, anticipating macro-economic trends is not enough for the vast majority of contractors that make their living in micro-economies, either confined to a region or state, or focused on one or two markets such as medical, entertainment, office buildings or shopping malls.
With lower interest rates and long-term vision, many owners in certain regions and markets are bound to see this as an opportune time to build, anticipating recovery. For the last decade, good contractors could make money and grow in most any market they chose.
As we enter 2002, that has changed. While we think that the trends and strategies discussed below apply to most general contractors, changing economic conditions dictate that you recognize the issues immediate to your business and the markets you serve.
In brief, the underlying message is that contractors will need to be more proactive and informed in order to lead their companies through difficult times. That means examining and modifying strategies to adjust to rapidly changing markets.
Indeed, some contracting companies won’t survive this recession. The question for those that will get through it is, “Will anyone be able to make a decent profit during the slowdown, let alone grow?”
A few companies will be just lucky enough to be in the right place at the right time with the right customers. Contractors who don’t count on luck are beginning to realize the results of good planning and strategies implemented months or even years ago.
To outsiders, good planning will look like luck, but companies with sound planning and good track records succeed even in downturns because they look good to their peers as well as to bankers, brokers and owners. Expect your accomplishments and business history to get greater scrutiny in the coming months, especially from the insurance and surety sectors.
The most alarming trend this year is the rapidly increasing rate structure being quoted by the insurance and surety marketplace.
According to Lanny Harer, an FMI director, “Property and casualty rates are probably going to go up 30 to 70 percent in the coming months. There are also indications that the rates that surety companies pay to reinsurers will go up by 100 percent, which means the rates that contractors pay for bonds and insurance could go up dramatically.”
No one would have guessed the extent of this problem last summer, but there were signs even then that there would be considerable rate hikes when renewal time came around. Record business failures, payouts because of the Sept. 11 attacks, and the sudden demise of Enron have combined with already high annual losses to make sureties understandably nervous.
Contractors that renegotiated policies early could save a bundle this year. Even if you are a contractor with demonstrated low risk, a history of few or no claims, and solid financial performance, you can expect substantially higher rates and reduced bonding capacity. If you haven’t done so by now, you should talk to your agent/broker for more details on this situation.
Planning and research
We talk a lot about planning, because we believe in it. Simply put, planning combined with implementation works.
While it isn’t clear if it is an industry-wide trend, most successful contractors have a business plan, a mission statement, and a rudimentary strategy for finding new business. For 2002 and beyond, a strategic plan will no longer be just something that is nice to have; it will be imperative for profitable operations.
One key to planning is preparation. It is important to get a thorough understanding of the marketplace and your current position among competitors. An independent survey of your customers and potential customers can provide invaluable information about your company’s image in the marketplace compared to the competition. Surveys of this sort are particularly useful if you are considering entering a new market.
Historically, contractors assume they know their markets and customers well, since the construction process requires constant communication with owners and their representatives. However, survey results often reveal unforeseen threats and opportunities and provide facts that help reduce poor assumptions that could lead to costly mistakes when deciding on risky strategies.
Strategic planning is important regardless of economic conditions, but when there are more companies chasing fewer projects, it becomes difficult to keep your company focused on long-term goals, and profits can start to slide. If you spend your time and resources bidding and building everything that comes your way, you may find you are working harder but profiting less.
Of course, just having a strategic plan doesn’t guarantee success; it must be implemented thoroughly to put your company on the right track for the long term.
Is construction a cyclical business? No doubt, your business will experience many of the same pressures and cycles as the general economy even though, currently, construction spending and employment is bucking the national trend. On the other hand, plans for new hotels, chain stores and airport expansions are being severely curtailed or put on indefinite hold.
While each company in the industry should have specific goals that suit their market and growth plans, we think an overarching goal for the industry should be to attempt to reduce the boom/bust and hire/fire cycles that have characterized it in the past.
Achieving that goal requires that a greater emphasis be made in the area of business development focusing on long-term strategic growth. It is our opinion that focusing on chasing the right customers is a much better use of time than chasing projects.
Once you get close to the right customers, you will have many projects to perform. Among other things, you will need to understand your competitive advantage and position your company with all appropriate influencers by forming close relationships at many levels of the company.
Marketing plans should be made in conjunction with your strategic plan and followed closely to assure you remain on target.
We often hear the phrase, “Contractors are in the risk business.” But many contractors are learning they don’t have to accept that as a truism that equates to a cost of doing business.
We mentioned our concern with the surety situation earlier, but there are risks throughout the construction process that can be managed and substantially reduced. Job safety is the most obvious area on which to focus risk management efforts, and the industry can point to improved numbers in this area, although there are still too many serious injuries and deaths on the job.
These efforts have been helped by the appointment of high-ranking safety managers and constant workforce training. However, few companies have risk managers for other types of risk, such as contract negotiations, financial decisions, disaster planning and human resource issues.
For mid-sized and smaller contractors, these managers sound like expensive additions to staff, but consider the savings if you have no loss-time accidents or reduced legal fees, not to mention the public relations value with the community and owners.
If adding staff is out of the question right now, consider management training to learn how to recognize and assess risk throughout your operations.
Industry image and recruiting
Immigrant labor and recruiting abroad will continue to be a growing problem this year and for as long as America is at war with terrorism. The good news is that the construction industry’s response in the aftermath of the World Trade Center and Pentagon attacks has raised America’s consciousness of the importance of the construction industry and the skills of its workers.
For the moment, construction looks to the public like a more desirable career choice and important work. Contractors knew this all along, but the public hasn’t received that message. In the end, contractors will still need to convince the next generation that construction is not a cyclical, unsafe, dirty, sexist business unfit for talented people looking for rewarding careers.
Your company image is tied to the industry image, so we recommend that you consider this image in your marketing and business development plans as well as human resource planning and training programs.
Training has become an integral function of doing business. Recognizing the importance of training, some companies have even started their own company-specific universities in order to formalize the process and bring together internal and external resources to provide a curriculum that supports various company initiatives and education needs.
Companies that provide continuous training find it easier to recruit and retain good employees.
Training is especially effective to support new strategies. Whether your strategy calls for sales and customer service improvement, a changing market focus, or increased productivity, training programs demonstrate your commitment to the strategic plan and help institute changes throughout the company.
Most contractors have learned to offer a variety of delivery methods to suit the needs of owners. The use of design/build continues to grow as both owners and contractors better understand and define their roles in the process.
While the focus of design/build has been improving time-to-completion, owners and contractors alike have found that the increased cooperation using techniques like partnering and high performance teams can greatly reduce conflict and miscommunication.
Whatever the delivery method, owners and contractors alike have become wary of the low bid process that all too often ends in poor workmanship, back charges and conflicts that delay completion of the project and result in withheld payments and litigation.
Cooperation is becoming the underlying focus of all delivery methods, but it will take some time to change old habits. From the owners’ side, one of the drivers of this trend is a prequalification process that looks at all aspects of your company, including your approach to cooperation and teamwork. It also means that you should choose or prequalify your customers, a challenging proposition if competition heats up.
Project management is one of the most critical and demanding functions in the construction business, and when the industry is busy, there are never enough talented, experienced project managers to go around.
Project managers must have both leadership and management talents, as well as technical knowledge and the ability to build positive relationships with customers and field managers.
Traditionally, project managers have been talented can-do people. That hasn’t changed, but now they must also understand the nuances of cash flow and the technologies available to improve productivity and communications.
Likely, you have a mix of seasoned veterans and newly minted college graduates without the experience needed to handle big jobs by themselves. One technique that can help combine experience with knowledge of the latest technologies is the use of mentoring programs. When tied to your long-term strategic goals, mentoring programs can help assure you have the talent to take on new jobs as you grow the company allowing for normal retirement and attrition.
Plans of this nature also help you grow depth in your most mission-critical positions.
As the industry faces a period of rapid change, many construction executives are turning to their peers to help share ideas and issues in a noncompetitive format know as peer groups.
Members of peer groups are noncompetitors from around the nation with companies of similar size and scope.
To work successfully, a peer group needs enough commonality to collectively discuss important issues, yet enough diversity to get a range of perspectives. Ensuring the right “firm fit” of each member is critical to the success of the peer group.
Peer groups generally range in size from six to eight member companies, and each peer group agrees on a set of ground rules for conducting meetings and inviting new members. Members are usually private firms willing to share information and ideas openly with other members of the group. One popular approach is the “peer review,” in which each meeting consists of a thorough review of one of the member’s operations from top to bottom. This process requires a high degree of trust and a willingness to share information. The free exchange of information leads to improved business results for each member in the group and to lifelong friendships.
In summary, for those of you who got into the construction business because you enjoyed the challenge of building structures and companies, the coming year should offer all the challenges you need and ample opportunities to succeed. An overriding key to success for the foreseeable future will be the formation of collaborative relationships with peers, customers, suppliers and the community at large. That effort will require both leadership and management to align your company toward common goals.
Rick Dutmer is a director and general contractor market sector leader for FMI. He works primarily with contractors west of the Mississippi. He can be contacted at FMI’s Denver office at (303) 398-7207 or by e-mail at email@example.com.
Lee Smither is a director and general contractor market sector leader for FMI. He works primarily with contractors east of the Mississippi. He is based at FMI headquarters in Raleigh, N.C. He may be reached at (919) 785-9243 or by e-mail at firstname.lastname@example.org.
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