When the tide goes out, you’ll see who’s skinny dipping. When most business leaders are asked about their perspective on the current market conditions, there’s a double-edged answer.
On one hand, leaders are enjoying the prosperity, and, in many cases, seeing record-high margins. Conversely, leaders also seem to have their skepticism at the ready when asked about how long they think this series of market conditions will last.
These are good assessments, and a healthy dose of realism probably does a firm good. However, strong market conditions also tend to mask many sins. For instance, profitability can be confused for productivity.
Additionally, there are many bad behaviors that get lost in the shuffle, such as disciplined cash management, risk management relating to client and vendor selection and the ever-present issue related to staff complacency. Everybody looks good right now, but what happens when market conditions shift? Will a firm’s “nakedness” be exposed and on display for all to see?
The Bad Behaviors
Many firms accept the bad behaviors during the bright times because it is simple to ignore them when they are making money despite their shortcomings. Short of life safety, many processes get discounted because team members are “too busy” and “too stressed” to follow through.
Below is a list of the tasks and processes that often become left by the wayside simply because construction teams are too busy:
Collections—It is not uncommon to see average collection times (without retention) creep from 45 days up to over 60 to 70 days.
Change order management—Unsigned or unapproved change orders slip because customers may be dangling future opportunities and using that as leverage.
Hiring practices—When firms have robust backlogs, hiring a warm body that can fog a mirror is a distinctly better option than having no body.
Performance development—Training and developing when everyone is working 40- to 60-hour workweeks is impossible, right?
Performance reviews—Evaluating current talent and culling underperformers is difficult. It’s often better to work with mediocre talent than no talent at all.
Closeout—With projects coming online quicker than they finish, the closeout activities tend to get relegated to the back burner. However, collection of retention is also on that back burner.
Inability to focus on productivity—Everyone is working as hard as they can, but are they working as efficiently as possible?
The issue? There is no single smoking gun. Each item above contributes to the overall delinquency of the firm. However, it is not uncommon to see a firm bidding projects at 35% to 40% and bring them in at 15% to 20%. Assuming overhead is “normal,” the argument that can be made is, “Well, we are still making money, aren’t we?” But what if the market shifted? Could this same contractor be competitive and profitable at the same time?
The common thread that connects the aforementioned items is a lack of discipline and lack of control. Obviously, hiring missteps and process hiccups are often viewed as a lack of control, but does the lack of control begin at the top? Volume obsession or simply lacking a governor switch to provide control is a leading contributor to contractor failure when times are strong.
Note the choice of words. Strong markets contribute to more contractor failures than down markets. The extra risk that a contractor will take during a strong market gets exposed when the market recedes—uncollected funds that can’t be paid because of owner default; subcontractors that are overextended and fail to meet these obligations; etc. Put another way, when the music stops and there is no chair to sit on, many firms will fall flat on their faces.
The Bad Strategies & Tactics
Managing risk is an everyday component to all businesses. Risk in construction is often viewed through the lens of life safety and surety. However, risk management should be extended to the proper selection of trade partners, customers and associates. In fact, all decisions should require some level of vetting.
In the world of finance, the terms “internal rate of return,” “net present value” and “weighted cost of capital” are used to measure and compare investment decisions. It is easy to look at two potential projects—one that could yield 10% and one that could yield 15%—and make that binary decision. However, the world of construction is hardly a vacuum, and projects often have many other variables to compare against.
The best decision-making comes from using a combination of objective and subjective data to support a hypothesis for any decision. Often, gut decisions lead to poor project selection, weak customer vetting, an award to an unqualified low bidder or hiring simply to fill a seat. This is certainly not an anti-growth message, but rather a cautionary tale for leaders to get back to the basics, revisit their strategic plan, and stick with it.
Lastly, it is important to also use the rising tide to send the ships out on an exploration voyage. It is easy to look at the profitability of a current market or niche and ride the market, similar to a ship riding a wave from crest to trough.
However, is the firm better served by deploying a small portion of the team’s time, energy and resources to find the next big thing and, therefore, avoiding the trough entirely? Similar to squirreling away a portion of a paycheck for the impending rainy day, the firm’s investment in a new business venture allows for critical companywide diversification.
From there, the same discipline and control applies to governing and managing the construction business to ensure there is a companywide consistency to process, tools and metrics in order to avoid overall misalignment.
There is no doubt that sometimes the tide may even feel like a tsunami, wreaking havoc on all aspects of a business. Discipline and controls are essential to avoid over saturation and overtax a team’s resources. Thinking about and working on the business is imperative for all leaders, regardless of a good or lackluster economy. In the end, no one wants to see our tan lines when the tide goes out.