The Shakeout is Coming

By Matt Stevens

More than a decade ago, our industry suffered a recession. It was a hard but, valuable lesson to us all. We certainly went back to the basics and found when the economy improved afterward, we were better for it. Expense discipline was high, work methods were planned in great detail and we certainly were more vigilant of pay habits of our clients.

Just as some in our country have forgotten about September 11 and its lessons, some contractors (typically younger) need to be reminded that a recession is a real thing. These days of careful vocabulary, we might call it an “economic correction”. Whatever term is deemed appropriate, it will lead to a “financial reversal” for some contracting firms.

In all this, we see a shakeout in contracting. Just as structural steel fabricators and erectors were affected by that industry’s particular issues in the past decade, the overall construction contracting business will experience the same.

The real estate business is experiencing a shakeout. A growing number of people chasing the same number and size of transactions, then the real estate market “cooled”. The Wall Street Journal noted in a recent article that the slowing market has had some unusual effects.

A couple of issues cited:

• There was “a race to the bottom for fees”. That is, those who couldn’t deliver value, used price as a weapon to attract clients.
• The experienced agents are happy for the shakeout. Lesser competition is always welcome for an experienced business.

Does this apply to the construction industry? We say yes to these two points and want to add a couple more.

• Owners have the option of
  1. Delaying the project
  2. Doing the minimum work needed
  3. Doing all or part of the work themselves (Government, Homeowners)
• In the short term, the number of contractors will decrease slightly but not in proportion to the % decline in the Gross Domestic Product.

As an example, the 1991Construction Put-In-Place Volume in the United States decreased 7.58% in constant dollars while the number of active Construction Contractors shrunk only 1/10th of 1%. The following year the economy  grew 5.2% and the number of construction firms (NAICS 23, SIC 15, 16, 17) rose 1.2%.

There is no question that the “correction” will come. Any person can predict one. The issue is when. (Other people who predict such things are right a minority of time but, when the slow down happens, they never let you forget their prognostication.)

Shakeout by definition is marked by decrease number of active firms from one year to the next. We see this happening in the near future for the reasons cited above and a few others.

Revenue does not pay salary, expenses and dividends, gross profit does. If your projects are returning a significant payoff, your company will enjoy financial options. Your challenge is to make the gross profit grow as a percentage. In the least, it is to raise the quality of existing earnings, meaning less wear and tear in making it.

When this predicted market correction occurs, we believe you will see some unusual market pricing. People who have never met a payroll during a slow economy may panic and it will show in their bid or proposal pricing with terms and conditions. There is no preventing it.

We are all as skinny as we dare on overhead. Even bottled water and printer toner are still subjects of overhead discussion. There are no sacred cows. Most contractors understand the danger of losing focus in this area. The trip between gross profit and net profit can be a long or short one. You decide the length. Again, most construction companies have made it a brief one and are still looking for shortcuts.

Do we batten down the hatches now? I think not. To do so would be to create your own personal recession regardless of the economy.

There are several strategic and business options to address the looming problems of a slowing construction economy.

One of the approaches I advocate is to know exactly where you are in acquire work – build work – keep track cycle. These are business functions all construction contractors must perform. Good contractors know where great profit opportunities are and areas of risk reside in these three areas. Having an exact understanding of your business allows you to manage it proactively.