Some states might be reopening, but with almost 30 million Americans out of work, U.S. companies may be in for a drawn-out financial slog. All businesses need a contingency plan for a protracted recession, but few need one more urgently than construction companies.
Contractors often determine their project pipelines far in advance, making promises about what they can deliver months or even years before they will start their projects. With global markets still convulsing, contractors must become even more judicious with the work that they choose to do — and which jobs they pass up.
“Construction margins are so tight right now that one bad project can ripple across to others and inflict lasting damage on a company,” said Courtney Davison, a senior tax manager at Baker Tilly who has worked closely with construction companies for over 14 years. “Contractors need a system to decide what work they can and should take on and cost-mitigation techniques that will give them a cushion if a project starts to go awry.”
Thanks to years of strong performance in the construction market, some contractors’ margins on projects have whittled down to as low as 1.4% before the coronavirus pandemic.
That means that contractors are operating with very little financial wiggle room. If one project becomes unstable, maybe if the client loses financing or if the project gets delayed indefinitely, the contractor may not be able to cover its costs with profits from other projects. In this way, Davison said, one bad project can negatively impact a whole construction pipeline.
Owners may be on much less stable ground than they were three months ago. They may have had a tenant back out, lost credit availability, or even have lost their funding, any of which could throw an ongoing construction project into peril. Contractors should be in constant communication with their clients, Davison said, to make sure their business plan is still sound.
Since the global pandemic is still underway, Davison also said it’s more important than ever that a contractor’s projects remain profitable. But how can contractors choose jobs to keep their pipelines financially safe?
Much of the battle is fought during the bidding process. If contractors can work with longtime clients who are willing to negotiate a price, they should be able to preserve a higher margin than if they participate in a hard-bid process against other contractors.
Contractors can also attempt to take on more projects that are within their expertise in terms of geography, size, asset class and type. Typically, Davison said, 80% to 90% of a contractor’s pipeline will be made up of jobs similar to ones it has done before — only a small portion of projects will push its boundaries.
“In preparation for a recession, that portion of exploratory projects might get even smaller,” Davison said. “It’s always a balancing act to fill your pipeline but not overextend yourself.”
Contractors should also speak to their own lenders and insurers to make sure that their underwriting and loan covenants have not shifted. Some banks may now want more regular financial reports, Davison said, and may take longer to approve lines of credit, so financial oversight is paramount.
Another reason that contractors may not want to overextend themselves: the shrinking pool for experienced construction workers, especially within the skilled trades. Contractors that sign on to large projects in the future but then aren’t able to round up the necessary talent may find themselves in a financial bind.
Even in trying economic times, Davison said, contractors have to be focused on investing in their employees’ advancement and company culture, as well as working to keep compensation and benefit plans competitive for construction employees.
Some employees may be facing economic hardships and struggles with home life, or they may just be exhausted and stressed. Checking in on employees’ mental health, thanking them for their hard work, and providing both emotional and financial support for those who are struggling may make the difference between retaining and losing a valuable employee.
“If they don’t feel appreciated and if they don’t see a path for growth at your company, your employees may start looking for another place to work,” Davison said.
Contractors may also work to give themselves more of a financial cushion by implementing labor-saving technologies. Software and digital tools can help trim costs on the job site — say, needing only one foreman with a tablet to guide deliveries instead of three dockmasters — and in the back office, where employees can spend less time on repetitive tasks like data entry and more time on value-add tasks.
But the more technology they implement, the more vulnerabilities contractors create for a possible cyberattack. Any investment in technology has to come with a corresponding investment in cybersecurity, Davison said. She noted she was aware of several cases where contractors’ operations had been stalled for weeks because of ransomware and phishing attacks.
Like cybersecurity, succession planning is also sometimes overlooked in times of economic hardship. But the company cannot function without leaders, Davison said, and especially in a pandemic that is hitting older Americans harder, proactive planning is key to avoid a catastrophic gap in leadership.
“A succession plan can sometimes take 10 years to implement, even if it’s passing along family lines,” Davison said. “Readiness is everything. The time to start thinking about all of this, from cost mitigation to succession to compensation, is years before it becomes truly urgent.”
Is your construction company prepared for recovery? Take Baker Tilly’s COVID-19 Recovery Assessment to find out. Upon completion of the survey, a complimentary report that details personalized results and provides recommended actions specific for their company’s recovery planning is sent to the respondent.
This feature was produced in collaboration between the Bisnow Branded Content Studio and Baker Tilly. Bisnow news staff was not involved in the production of this content.