Best practices for managing risk & worry in a fluctuating economic climate

Many construction firms have a great deal to celebrate as they reflect on 2019. Positive operating results, lean operations and strong backlogs resulted in a professionally rewarding and profitable year for most. But, even for those who are optimistic about what 2020 will have in store, it is difficult to ignore the feeling of looming uncertainties—political uncertainty, pricing uncertainty, labor uncertainty, financial uncertainty.

If given the chance, these fears can create tremendous anxiety and cause illogical decision making. A key factor in preparing is to have a strong business strategy focused on your firm’s core competencies that also allows for flexibility and real-time adjustments to the plan. The following are some items to consider when planning to position your firm for success in an uncertain marketplace.

1. Define Your Business Strategy

A defined business strategy is the most crucial piece for ensuring the long-term viability of your construction firm. Due to the daily demands and fire drills of running a company, many overlook this step. Those who do develop strategies often diminish their success by mistaking the task of strategizing for budget preparation, and ignore other crucial operational components of the business, rendering the strategy obsolete as soon as it’s completed. A properly designed business strategy weaves the mission of the company into the monthly, weekly and even daily activities of employees tasked with carrying out the corporate mission, and includes:

  • Adequate input from relevant company stakeholders
  • A realistic assessment of the company’s short- and long-term objectives
  • Identification of achievable steps toward specific objectives and a system to measure progress
  • Periodic review of the progress toward objectives and immediate steps for alteration where appropriate
  • A means of communicating the evolving plan to employees


 

When possible, construction firms should obtain outside input throughout the strategic planning process and as the plan moves toward completing short and long-term goals. This input could come from an informal board of advisors familiar with the sector(s) in which the company operates, a professional business advisor, or an internal executive who is charged with the performance of an unrelated geographic location or sector. A well-developed strategy helps identify internal and external risks to avoid financial strain.

2. Get Your Team on Board

Even the most strategic plan will only be as successful as the individuals who work toward its goals. Employee buy-in and ownership of the plan during daily responsibilities are critical to its success. And, at this time, a large uncertainty for any construction firm is labor retention.

Developing a culture in which the rank and file understand the mission and why things are done the way they are will go a long way in retaining employees. Arguably, an executive’s most significant responsibility is to create an environment in which each employee has the resources to contribute at their highest level, including technical, safety and appropriate financial training, all helping employees recognize their daily tasks and how they contribute to the corporate mission.

Employee satisfaction directly affects your bottom line, and creating an environment in which the team can thrive is key to achieving financial success. If your employees are leaving or underperforming, it becomes harder to compete in an economic climate in which unemployment and qualified employment are scarce.

Executives also need to be mindful of how existing compensation packages motivate employee behavior as the business and industry evolve. Many firms have a standard compensation package that has been in place for years, despite significant changes that may have taken place in their industry’s competitive landscape.

 

Oftentimes, these dated compensation packages limit growth or are even detrimental to the overall goals of the company. A review of how the firm motivates individuals through compensation, in appropriate detail, may result in a better use of the firm’s assets in achieving the strategic mission. A properly aligned compensation program will improve company culture and create a sense of ownership, which increases participation from those who have firsthand knowledge of how to improve the day-to-day processes.

3. Understand the Impact of Technology

An unavoidable consideration for any construction firm is the use of technology for effective estimation, accounting, project management and general communication. The proper use of building information modeling (BIM) collaboration, cloud computing, mobile data, drones and robotics can be a major asset that allows companies to maintain ideal cost structure by delaying or replacing personnel costs and maintaining the company’s ability to achieve proper margins.

Technology can improve the experience and understanding of clients, employees, vendors and other contractors. 3D scanning, virtual reality, modular construction and subassembly should all be considered to see how they can contribute to the business strategy.

Focus on solutions that will allow for timely and accurate sharing of information, which can help limit excessive remediation costs should a major problem surface. But, ultimately, technology’s effectiveness depends on the buy-in of the executive team and the customizing of solutions to meet the needs of stakeholders.

4. Monitor Your Cash Flow

Periodic financial results are usually communicated to executives and outside stakeholders on the accrual basis of accounting. Although these financial reports are useful in determining the financial health of the company, they are based on historical results.

 

Construction firms should develop and regularly analyze a cash-flow model, which incorporates seasonal or cyclical trends, anticipated market conditions, changes in key customer and vendor relationships, known capital investments or expansions, costs to comply with new regulations, merger and acquisition opportunities, and tax consequences to the firm’s owners. The model should then be compared to the firm’s rolling budgeted results to help leadership identify necessary changes to the existing budget for the future.

Perhaps the most important component of the cash-flow model is understanding available financing options. Having proper financing when the firm is not under financial strain makes navigating a bump in the road more manageable and allows for the negotiation of financing options from a position of strength, not desperation.