- Economic downturns are inevitable, but some strategies can help you weather them successfully.
- Building cash reserves and reducing your fixed costs will give you leverage and keep your operations lean.
- Diversification opens doors when jobs in your niche come up short or are too spaced out.
The handwriting is on the wall, and voices from many quarters are starting to talk about the economic recession. The longest peacetime economic expansion since the 1940s is facing old age, suggesting the cycle is prime to turn bottom up. This is the normal course of things, however. Luckily, there are things contractors can do to get ready.
Russell Investments’ mid-2018 U.S. economy assessment is one of clear sailing, at least for the next 12 months. After that, the company sees “significant risks lurking”, with a global trade war topping the list of threats. Other “seeds of the next downturn” include rising interest rates corresponding to the drop in economic lift from the recent tax cuts as well as runaway corporate debt sapping company bottom lines as the Federal Reserve raises interest rates to offset inflation. There’s also the scenario where the government’s borrowing to offset the rising tax cut deficits could reduce available capital, increasing interest rates even more.
From 1854 to 1938 there were 21 recessions, including the Great Depression, and there have been 12 from 1945 to the present day. Add to that construction’s cyclical business patterns, and you get the idea that it’s probably best to be prepared for the likelihood of an economic downturn. Consider these strategies for weathering economic challenges, whatever they are and whenever they come.
Build cash reserves
Cash is king in troubled economic times. That doesn’t mean you need to convert everything to cold, hard cash, but it does signify you need to build up cash reserves. There’s always a rush to credit when times get tough, so with your banking accounts flush, you have more leverage.
With cash reserves, you have leverage for purchasing materials and equipment. You also have leverage for bids. The cushion you get from extra cash can allow you to take in less profit (assuming you don’t rely on profit for your overhead or your salary). That can push your bids higher up in the stack. It’s not ideal, but when times are tough, someone’s going to get the job—so why not you?
With cash reserves, you have leverage for purchasing materials and equipment.
The other good thing about cash reserves in a downturn is how they help you stay afloat. Those reserves can fund your overhead and salary in the case of a longer stretch between jobs.
Reduce Fixed Costs
Your overhead is there no matter how much work you have. It’s never good to carry more overhead than you need, and when times are hard, it’s a drag on your performance. If you regularly review your overhead costs—looking at them critically to assess whether or not you need them] or how to reduce them—you will keep overhead lean.
The caution here is not to strip out so much overhead you end up compromising your operations. Your overhead should harmonize with your business, not overpower it. If you reduce insurance coverage, you might not have enough coverage for that super-sweet project that comes along. If you unload equipment that’s paid for, not only will you have to rent it when needed on the next job, but you also lose the ownership advantages.
There are many ways you can diversify to make your construction business more resilient to economic ups and downs. One way is to increase the types of projects you take on. A good option is to expand into project types closely related to your core offerings. For instance, a home builder can expand into multifamily work. Another is expanding into corporate restaurants if you’ve been doing retail. The point is to spread yourself out across multiple construction types so if your main niche takes a hit, you have opportunities elsewhere.You can diversify in case of a downturn by adding products or services to your existing line. Click To Tweet
Another way to diversify is to add products or services to your existing line. If you do house painting, consider adding weather sealing, or tub and tile refurbishing. If you do concrete flatwork, consider adding concrete etching and inlaid designs. If you install systems on new construction like plumbing and electrical, then consider adding maintenance services.
You can also diversify your offerings by expanding into different types of project delivery. If you normally work on design-build projects, consider trying integrated project delivery. If you’ve usually built under the design-bid-build method and have a lot of contracting experience, consider construction manager at risk.
Going from design-bid-build to any of the collaborative delivery methods is a little more challenging for contractors who have only experience with D-B-B. If that’s you, then try getting involved at a low level, like handling final cleanup or managing the waste stream. You might also partner with a related trade and bid as a team. The idea is to get your foot in the door and gain some experience.
You don’t have any control over the economy. However, you do have control over how resilient you make your business. Timely planning and action will keep your business lean and help you weather uncertain economic times whenever they come.