In an up construction market like today, you’re pretty much guaranteed to make money. So usually this is not the time that many contractors are thinking about how they would scale back their businesses. But if there’s one thing you can go to the bank with in construction, it’s the industry’s continual cycle of growth and contraction. Being prepared to scale for the next slowdown, as well as for today’s growth, is simply good business.
Hopefully we won’t go through a contraction like what we saw in the most recent recession. As many of us in this industry remember, things didn’t just slow down. The cash machine that funds construction stopped. During that time, I heard a lot of contractors say that they should have acted sooner.
Whether the industry continues its upward climb or the next contraction happens in a fast or controlled fashion, there are several factors to understand that can help you prepare for whatever comes our way.
Fixed costs versus flex costs
A high percentage of fixed costs gives you little room to respond in a downturn—or take advantage of new opportunities when times are good. While a set amount of fixed cost is necessary, looking for a good balance between fixed and flexible costs will give you more options to scale your business.
Take, for example, one of the biggest fixed costs for construction companies—equipment. Many contractors lease or own their equipment because it is less expensive in the short-term. However, leasing can also lock you into a longer cost commitment than if you would rent.
Depending on your equipment usage, you may also want to consider renting over buying or leasing equipment to allow for greater flexibility. Say you borrow against your company and use that credit to fund your equipment. If things turn downward, there won’t be the available market to sell the equipment. In essence, you’ve just traded a liquid asset (corporate capital) for an illiquid asset (the equipment), which will be at best difficult to dispose of.
The ability to effectively scale your operations often comes down to developing good insight into all the key levers that drive your business, including truly understanding your company’s cost structure and key performance indicators (KPIs). This is where your banker and CPA can provide good advice. Marrying their financial knowledge with your operations expertise will help you make the best decisions when it comes to strategies around capital utilization, expansion, and retraction.
Perhaps your most important drivers, however, are your employees. Investing in finding the right people will not only help you take advantage of growth opportunities but also weather tough times. As painful and difficult as it is, when things go south, you will need to lay people off. If and when that time comes, make sure you know who are the people at the core of your business—those team members who are indispensable, difficult to replace, and who hold the collective operational wisdom of your company.
Reducing your risk to allow for growth and minimize setback is a cornerstone of long-term success. Here are a few risk-reducers, you may want to consider to give you more leeway to scale:
- Look at joint ventures on projects where you share both risks and the rewards. It’s another method to expand and scale while mitigating risk.
- Consider setting up a small consortium to cost share on things such as high-cost equipment. Of course, the success of this approach depends on you knowing clearly what your effective utilization is and it may be a little inconvenient, but it can really help you manage your downside risk and free up additional working capital.
- Make sure you allocate relevant fixed cost—such as equipment and small tools—to your jobs. This will better inform your decision making and accurately reflect the true cost of performing the work and your job’s real profitability.
There are many surveys and economic predictions that can serve as leading indicators of construction’s expansion and contraction. Some of this information is even regional and contains breakdowns by type of construction, such as healthcare. While not the perfect crystal ball, they can give you a good indication of where the industry is heading.
Ultimately, the key is implementing smart growth strategies and, in the case of a recession, understanding what you can unwind relatively quickly with little penalty to your business.
Editor’s note: Want to understand what construction’s chief economists say about the economy? Check out our Where’s the Work infographic.
About the Author
Jon Witty is VP and General Manager for Sage Construction and Real Estate. A former Microsoft executive with more than 25 years experience in the technology and ERP markets, including construction and project management, Jon is responsible for driving Sage’s business strategy and initiatives in the construction and real estate market. Connect with Jon on LinkedIn.