Should We Close Our Construction Business?

Q:
Over the last few years, I have been reading Construction Business Owner magazine and like what you have to say. I have also seen you speak at a national convention last year. I am the president of a forty-two-year-old family construction business. We do rough carpentry and framing on multi-family and housing projects for all the big builders in Florida. Over the last fifteen years, we have stayed very busy, have grown our business 200 percent, and made a nice profit along the way. Unfortunately, the housing market in Florida has all but stopped, and all our customers aren’t building now. To keep our doors open, we have had to go after government and public construction projects. But these jobs have too many bidders and are being awarded to contractors at less than our cost. Over time, this has also caused many of our competitors to go out of business or close their doors.William Powers,
Powers Construction

A:
I don’t have a magic wand or crystal ball, but I do believe that a construction business recovery to 2007 levels will take at least five to seven years. The current statistics show all construction starts across the United States have dropped 43 percent since their peaks of late 2007 to now. I believe 2010 and 2011 will get much worse. The problem? The number of competitors currently chasing 43 percent less jobs has wiped out any potential to make a profit in most markets. In the meantime, most contractors have failed to make enough changes to “right their ship” and do what’s necessary to stop the bleeding or make any money. Cutting your expenses and lowering your prices to keep busy is not enough to survive.

If the number of jobs available is 50 percent less, the number of competitors double and your markup gets cut by at least 25 percent, this means you would have to cut your overhead by 75 percent, your markup by 25 percent and hope to land 50 percent of your 2007 volume to break-even. These numbers won’t work in a world where your competition will do anything to keep busy and pretend they’re still in business.

So now what? Try to break-even and not lose money for several years, change how you do business, close, or take your money and invest it in growth opportunities. These are tough decisions. The economy and the stimulus plan may help a little but not enough to keep trying until you are completely out of money.

Can you shrink your operations into one crew to keep your doors open?
Can you seek joint ventures and strategic alliances with large national construction companies who may need your experience as they take on more stimulus work, clean water jobs, energy and green projects?
Can you merge with another contractor who doesn’t do what your company does (hospital interiors or bridges and dams) to cut your overhead in half?

Or can you sell all of your equipment at a discount, continue in business by leasing equipment on an as-needed basis, and then take the money and invest it in distressed real estate properties or other businesses?
Now is the time to make the tough decisions. The longer you wait, the less you will have to work with in the future. Call me if you want to have me mentor you or your management team.

Construction Business Owner, October 2009 Issue