Clifton Gunderson

Critical Issues

While the economy is in better shape than it was six months ago, the construction industry is not out of the woods. Two critical issues facing the industry are both related to lingering economic ills. 

The first is the backlog of work-or in many cases, the lack of a backlog. Some contractors were able to stay busy by working off their backlog over the past year during the worst of the economic downturn. Unfortunately, back logs are drying up. Even though there are glimmers of hope on the horizon, little work has been generated recently which is preventing contractors from replacing their backlog. Without a cushion, the real drought is just starting to kick in and has many contractors worried about 2010. Federal stimulus dollars are launching a few projects, but the impact of federal spending has not been as strong or as quick as anticipated.

Another closely related issue is the credit market, which remains tight going into the new year. Without open lines of credit, even the largest projects are stalled.

Current Trends

The expectation is that dire financial performance for construction companies could continue for six to eighteen months. Even when the go-ahead for a project is given today, it can take architects and engineers at least six months before the first shovel of dirt is turned.

Looking Forward

In the next eighteen to twenty-four months, contractors that have not already done so need to adjust and downsize to meet demand levels and the new realities of the marketplace. The key to survival is to continue bidding on new work and to stay competitive. When the market does improve, those that have remained active and visible will be better positioned to move forward.

Additional Insight

Federal government spending on buildings, roads and other infrastructure comes as welcome relief for companies already familiar with "the system." For newcomers to government contracting, the dollar amounts are tempting, but there is more to it than simply signing a contract. Layer upon layer of new regulation and compliance obligations have been piled on top of an already dense and complex system. For the uninitiated, jumping feet first into government work without an understanding of what it takes to do business with Uncle Sam can actually be dangerous.

Best Practices

Survival generally requires not so much new practices as it does best practices-the kind of financial management that is smart in any economy.

•  Know that cash flow is always critical
•  Understand your business, its cost structures and overhead costs
•  Use your knowledge and experience to generate smart bids
•  Avoid taking marginally profitable jobs, or jobs that are too large or too specialized for your usual workforce
• Stay within your usual geographic region-venturing too far from home can be disastrous
• Maintain and strengthen relationships with clients, prospects, suppliers, bonding companies and financial institutions

Fortunately, construction is cyclical and almost invariably returns with the same or greater strength. It is the contractors who manage cash flow and use good business sense who will remain strong and still be around to enjoy the next upturn.

 Construction Business Onwer, February 2010

Tags: 2010 January Issue , Executive Insights