How Lean Gets Done

In its early stages, the coronavirus pandemic forced dozens of major cities and even entire states to put a hold on construction to reduce the spread of COVID-19. While the moratorium has lifted, supply chain logjams in the construction market continue to drive up the cost of materials.

Adding to the volatility, we’ve seen many businesses table their construction projects to prepare for the likelihood of a global recession, as well as a fundamental change in the use of commercial real estate.

For many contractors, these disruptions have fueled anxiety and a tendency to overcompensate for lost contracts by pursuing projects outside their realm of expertise. During this unprecedented time, the smarter move may well be to pivot the other way — to go lean if your usual market does not present itself.

What the past 18 months can teach us is that the flip side of crisis is opportunity. The following explores six strategies contractors can employ to help get lean, avoid unnecessary risk and survive an unpredictable market.

A Leaner Approach & A Greener Outlook

Since March 2020, a steady decline in nonresidential construction spending has contributed to today’s depleted market, particularly in the hotels and lodging sector. It’s a trend that current indices suggest will continue.

By using this time to refine practices and priorities, contractors can set themselves up for success. Rather than diving into risky projects, try taking a
leaner approach focused around the following six strategies.

1. Maximize Efficiency

Slow periods are a great time for contractors to raise the level of workplace efficiency. While you have fewer commitments, take the opportunity to improve aspects of your operation.

The standard key performance indicators (KPIs) of the construction industry may be lower during the market slowdown, but it’s possible to compensate for that decrease in productivity by shoring up less effective construction methods.

Prioritizing safety on the jobsite can also help increase the quality of work, helping increase productivity and revenue per hour. Take a close look at your KPIs, evaluate for the current market and prioritize achieving those goals.

2. Consider Compensation Alternatives

Labor costs are a huge expense for many contractors, especially if they provide healthcare and other benefits. It may make sense to explore a flexible compensation structure that will keep workers gainfully employed during slow periods and remain on your roster once business picks up.

Paying a lower base salary and rewarding employees with bonuses or incentives can help the company weather lean times, yet still provide them with commensurate wages. If your business is really struggling, universal pay cuts may be the only option. While unpopular, it will be easier to accept if managers and leaders are included in the plan. Smart contractors should also use extended downtime to consider adjusting the size of their workforce to align with current and projected needs.

3. Eliminate Excess Waste

Material costs have skyrocketed which means it’s more important than ever for contractors to reduce waste. This involves careful planning, accountability and streamlining of end-to-end processes whenever possible.

Being capital-intensive, a construction company needs a favorable return on assets to turn a profit. When you spend more time planning a project, you are less likely to order too many supplies or lose money on excess materials during the build. Take a look at your equipment costs and pare down where you can.

4. Curb Debt Through Lower Interest Rates

Debt can be a crushing burden to any enterprise. Because of the federal stimulus money pumped into the economy to support small and medium-size businesses, commercial interest rates have decreased considerably since March 2020.

Take advantage of the fact that rates remain low to support small business growth and consider refinancing now, if you haven’t already. Besides potentially saving money in the long term, a lower interest rate can reduce monthly costs.

Given the variables in the construction industry, you should investigate increasing the terms of your loan. Ideally, longer terms allow contractors to plan better, minimize payments, improve cash flow and weather the unknowns in years to come.

5. Optimize Supply Chain Inventory

Hold-ups in the global supply chain have hampered many industries, and the construction business has been hit particularly hard. According to one survey, 75% of contractors reported delays or disruptions because of a shortage of materials during the pandemic.

The key to meeting this challenge is to strike a balance between keeping a stable inventory supply and reducing overhead costs associated with materials. By evaluating the level of risk in your supply chain, you’ll be better able to manage inventory and cut back on lost time due to resource shortages.

It’s a good idea to work with project owners to coordinate schedules with needed material prices and availability.

6. Know Both Your Direct & Indirect Costs

Understanding your costs will allow you to identify further areas of improvement discussed above. It is not uncommon to hear contractors say they are making 30% gross profit, and then the net income reflects 2% to 3%. A contractor may have a 10% gross profit while net income reflects 5% to 6%. This is likely a byproduct of how each contractor allocates direct and indirect costs.

Overhead is a common dumping ground for construction expenses that contractors do not know where to place. Allocating indirect expenses such as insurance and office salaries to jobs can help a contractor understand their true costs and what margins are needed to make money while bidding. Furthermore, employees in the field tend to operate with more discipline and focus when the illusion of room for error is smaller.

Reviewing your costs from top to bottom, in the field and at home, is essential to bidding and managing projects when the construction market contracts.

Do What You Do Best

Before COVID-19, the construction industry experienced one of its most lucrative periods ever. Now, as we emerge from the pandemic, having a clear strategy in place can help contractors navigate a more volatile market environment. And a sound strategy starts with sticking to your best practices and refining them. In this new reality, with the potential of stimulus trickle downs, the need to address backlogs and pent-up demand and material pricing at all-time highs, there is no precedent to fall back on.

When contractors seek out work that falls outside their normal geographic territories or is beyond their typical scope, they are increasing their risk — a dangerous game in an uncertain market.

Adopting these six strategies can help you stay ahead during a difficult period for the construction industry and be better prepared for more prosperous days ahead.