Spring 09 - Being Surety Friendly, Today and Tomorrow
Can You Hold Out Until Recovery?
Recovery in the construction industry will come, and not so far down the road. The financial collapse, automotive catastrophe and widespread layoffs, on top of the housing disaster, are leading to broad government intervention. Tax cuts and massive spending are about to take place, and many billions of these dollars will go fairly quickly into “shovel-ready” construction projects.
The contracting pool, meanwhile, will shrink as some contractors fold. Of those that remain for a share of the new work, most will put their companies back on track to profitability. But some — especially those badly weakened by the downturn — will fail because they can’t qualify for bonding.
A huge infusion of government cash into the construction business may loosen the underwriters somewhat. But don’t expect surety confidence to reach pre-2001 levels again — two waves of construction defaults and the credit freeze have seen to that.
Meanwhile, more owners require bonding for more projects. Contractors who seek bonded work, today and tomorrow, must align their companies along surety-friendly lines. Not coincidentally, those are the same lines that help contractors weather recession storms.
Here are three of the most important:
Bid for the job, not against your competition. Don’t start with the “market,” or what it will take to win the job. Rather, start with what you need to earn on the job and what it will cost you to complete it.
This seems obvious, but in lean times — and coming out of them — it’s tempting to grab for any work at all. A take-any-job approach can weaken a company badly, because repeated low-margin work leads to endless borrowing and debt repayment. Even when the recovery comes, a backlog of cheap work can prevent a contractor from taking on profitable jobs. Focus your bids on “fewer but better.”
Also, unanticipated costs can easily turn a profitable job into a break-even one. That means taking a job at near-cost is asking for a loser out of the gate. Not many contractors can turn in great work at low margins.
So bid jobs at true cost, plus profit. That means strengthening your estimating capability — and your field management’s resolve to bill quickly and carefully.
Play to your strengths. When margins decline and competition increases, the grass in other pastures can look a lot greener. But taking a company into a new craft, or even a new subcraft, is difficult enough in good times. In lean times it can be the fastest way to lose money.
The same goes for new geography. Reaching far afield for work brings its own risks, among them hemorrhaging expenses and labor pools that may prove less reliable than the chamber of commerce advertised.
Neither of these moves is impossible, and one might be necessary to endure the recession. But don’t take the decision lightly and be sure you understand the risks and ramifications going in.
Streamline your cost structure. You’ve been doing that for years, right? But if there’s any fat left, it has to go. Discussing this prospect with your lender and your surety can help identify unnecessary costs.
It’s an economic fact: Sometimes laying off ten people can save a company, and failing to do so can doom it. Don’t wait until you’re almost under water, when panic and emotion are running high, to make contingency plans — review your workforce and identify the key employees who must remain. You may find you have options, too — shifting to a 30-hour week for a time has saved more than one contractor from having to lay off workers.
Put compensation issues squarely on the table. Delayed raises, reduced bonuses, tighter benefits schedules — and cuts to executive perks — can help a company through. Transparency can bolster morale, but only if sacrifices are shared.
Bring overhead in line with the new realities. If volume and personnel are reduced, overhead must come down as well. But use a scalpel, not a cleaver. You don’t want to undermine the quality work for which you’ve earned a reputation.
Push this approach down through the company. The better managers and employees understand the dire need for economy, the more they will find new efficiencies and drive out waste.
BMF is a member of ProfitCrew™, an association of accountants and business advisors dedicated to helping contractors build profitable businesses.
The Construction Advisor is produced quarterly by Bober Markey Fedorovich. For more information about our services, please contact Dale A. Ruther, CPA, CIT at 330.762.9785 or by email.
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