Construction Business Owner, January 2008 

Editor’s Note: Written by our regular columnist George Hedley, each monthly edition of Get Your Business to Work provides you with practical, immediately applicable business management tools to assist you on your path to building a successful, growing business.

Economists predict the residential slowdown will bottom out sometime in 2008 or 2009. But remember, the bottom is the bottom, and they don’t tell us when construction activity will return to the healthy level experienced in the early and mid-2000s.

Other factors play heavily in construction activity as well. The lenders are tightening loan qualification standards for home buyers and people refinancing their homes. This will eliminate a significant percentage of residential construction activity. Plus, new retail and commercial construction that follows the residential market will slow down as well.  

Our company develops and builds small industrial and commercial buildings for sale or lease in Southern California and Las Vegas, NV. In our markets, several factors are contributing to the inability to start new projects. The price of land has escalated to a level that makes buying land impossible to allow a new project to pencil out. Banks are not lending as much on projects as they once were. This increases the equity required to get projects started and thus lowers the return on equity needed to entice equity investors. Construction material costs continue to increase, which reduces the ability for projects to be affordable and financially feasible. In addition, cities are requiring more fees, longer approval processes, tougher standards for parking and setbacks, additional safety requirements and projects to be “green.” All of these factors increase total project costs beyond a potential buyer’s or tenant’s budget to occupy a new building.

These signs point to a slowdown in total construction activity for an extended period of time. This will affect almost every contractor and supplier in every part of the country. I know many of you are still busy and don’t think anything will reduce your workload. But even if you aren’t feeling it yet, get ready. In the slower areas of the country, many residential contractors and subcontractors have quickly moved into bidding commercial and public works projects. New homebuilders are attempting to open remodeling divisions. Some subcontractors in landscaping, electrical and plumbing are trying to start service divisions to weather the storm. Out-of-town contractors are beginning to move into busier markets to find work.  

Your Business Will Be 25 Percent Slower. Now What?

During the last major construction slowdown in the early 1990s, there was a slogan going around:

“Stay alive ‘til ‘95.” People would joke about the contractor’s prayer: “God, please give me one more boom time, and I promise I won’t mess it up next time!” Well, what did you do to not mess it up? We are just finishing the biggest construction boom time I can ever remember. Do you have a nest egg stashed away to weather the storm ahead? Are you fully invested in real estate or some other form of positive cash-flow asset?  Are you willing to make the tough moves now to get your business to survive over the next few years?

I took a survey at a national association’s annual meeting in January 2007. Only 50 percent of the respondents were worried about a future construction business slowdown. In November 2007, I took the same survey again, and the results changed. Over 75 percent of the respondents are now worried about their future and expect the total available workload to be at least 25 percent less than it was last year and into the future.  

I asked over 1,000 construction business owners and managers what they will do to survive a 25 percent slower economy in their marketplace. The responses are as follows:            

To survive in a 25 percent slower economy, we will:      Yes      No

1. Cut our overhead and fixed expenses by 25 percent  75%     25%  

2. Sell 25 percent of our equipment                             67%     33%

3. Eliminate 25 percent of our key employees               33%     67%      

4. Eliminate 25 percent of all field employees                60%     40%

5. Look for projects in other states                               75%     25%      

6. Find some new customers and project types              90%     10%

7. Move from residential to commercial jobs                  80%     20%

8. Bid some public works projects                                 75%     25%  

9. Add some new or additional services                         90%     10%

10. Do nothing different, and wait for it to get better      0%       100%

What Will You Do to Survive?

Do you think business will go up or down in the years ahead? What will you do to survive if your business shrinks by 25 percent or more? Shouldn’t you start doing something about your future right now? What are you waiting for?

It’s the last quarter in your last game of the season. If you win, you’ll get into the championship play-offs. Lose and you are eliminated. You are twenty points behind and only a few minutes remain in the game. What will you do to win? Is it finally time to change your game plan and try a new set of plays? Think about your business. Most business owners know a slower business market will become a reality in the future. But most don’t want to make a move and change the way they do business. They are waiting for something to happen.  

In the slowdown of the early 1990s, my business went from $50 million to $5 million in annual sales in only one year. It was hard to believe the construction business nearly stopped as quickly as it did. There weren’t any jobs to bid or build, and I had to reduce the number of employees from 150 to 10. I had to cut my overhead budget from $2 million per year to $500,000. As your business slows down, it is almost impossible to reduce your expenses as fast as your revenue diminishes. You have to keep people on staff to finish the projects and do the paperwork long after the work is finished. In other words, you lose money in a slowing market.  

 

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