What to know & what to do to be ready when the next downturn hits

During the Great Recession, small contractors (companies under 10 employees) failed at a far higher rate than non-construction businesses. Big businesses like banks and car manufacturers got the most publicity. However, given the 200,000 business failures, the almost complete collapse of profitability and the immeasurable human cost—our industry was at ground zero and will be again in the next recession. According to the Harvard University Joint Center for Housing Studies, just over 50% of residential builders failed during the Great Recession, while profits for the survivors were practically non-existent.

Will we have another recession? Yes. When will it start? No one knows. But the closer we get to the start, the more reliable predictions become—kind of like predicting the weather.

How do we know the next one is near? Recessions happen after an extended period of economic expansion. This happens because during the boom times, business productivity drops, business processes deteriorate, and both consumer and business debt increases. 

  • We are now in the most prolonged continuous period of economic expansion in history—now exceeding 120 months. No contractor alive has experienced a longer boom period.
  • Consumer debt is now at over $1 trillion, which was higher than the consumer debt level in December 2007, the start of the Great Recession.
  • Total business debt in 2008 was $9.2 trillion, compared to $15.5 trillion today.

 

 

Recessions are inevitable. We’ve had eight of them over the last 60 years, and the general contracting business is always hit hard. To quote the famous American philosopher, Jim Morrison of the Doors, “Nobody gets out alive.”

Don’t be seduced by retail sales activity—retail sales always peak before a recession. Some industries (like ours) will feel an economy cooling while consumer retail spending is strong. Be cautious about where you get your recession forecasting information. People who sell stocks or real estate, those who write pop economics books, and several other groups have a bias. 

The political party not in office will want you to believe that the economic sky is falling and you need to put them in power to save yourself. The party in office wants to paint the most optimistic picture possible of the sustainability of a boom economy. That has always been the way it is and will probably always be the way it is.

The oncoming recession may be inevitable, but its negative impact on you, your family, your team and your business is not. The key to prospering through the next recession is about having a plan. Make real changes in your business model now to insulate you and yours from the stress and financial damage that almost every contractor felt during the last one.

The Bad News

  • A recession is coming. No one can accurately predict the timing, but it’s coming. The majority of unbiased experts predict the next one will kick off within the next 18 months. 
  • Recessions always affect GCs. Don’t live in denial, and don’t hope this next one treats you kindly. Denial and hope are not good strategies.
  • It takes a while to implement the changes necessary to prosper through a recession; probably a year, maybe more. So you need the discipline to start preparing while things are still booming.
  • Be prepared to make some compromises. Tradeoffs will be required.

The Good News

The things you need to do to prepare in order to prosper though the next recession are the same things you need to do to ensure consistent, exceptional profits through all economic cycles.

 

The theme of GCs during the last recession seemed to be, “There’s no work!” That is the theme of surrender, and GCs can do far better than to give up. If there is no work, then there is no strategy for prosperity during the recession. However, there was work—a lot of work—during the last downturn, as there will be during the next one.

In the very worst year for the construction business since 1970, our industry generated more than twice the total revenue as did several key industries in their very best year since 1970. Some of those industries include:

  • All new car sales
  • All consumer electronics
  • All gas and oil sales
  • All computer sales

In its worst year, our industry generated about a half-trillion dollars in construction revenue. So, there is revenue out there even during the worst economic cycles. You simply need to do a better job than your competitors at claiming the share you need to prosper. It's kind of like that old adage—you don’t have to outrun the bear, you just need to outrun one other person.

Key Takeaways

  1. Learn how to become margin driven. Margin management is a business philosophy, not merely a different way to multiply cost to get to price. Set margin targets for each income category including self-performing labor, subcontractors, materials and change orders. Margin targets mean the percentage of generated revenue retained after paying all costs of producing that revenue category. It's not about how much revenue you generate; it's only about how much revenue you keep.
  2. Plug your profit leaks. Every contractor loses profit through profit leaks. The most common and costly leaks include estimating deficiencies, wrong pricing strategy, change order management, failing to secure preconstruction agreements, and a lack of job mix management.
  3. Expand your marketing knowledge. Become more effective at differentiating your business from that of your competition. GC marketing is so much more than simply trying to get enough leads to keep your crew busy.
  4. Stay nimble.
    • Reduce any personal or business debt load during the remaining time of this boom period.
    • Keep fixed costs to a minimum.
    • Don’t ramp up self-performing functions and team. The trailing edge of a recession is a great time to expand self-performing work as staff is easy to source and high margin work is available. In the leading edge of a recession, you’ll end up with more mouths to feed and find yourself taking jobs at cost or a loss to keep everybody working. This doesn’t mean you shouldn’t fill open and needed positions. You should if you find the right people in this challenging labor market. 
    • Get rid of any profit centers that aren’t really profit centers. Any breakeven or less work categories should be dropped. Marginally profitable business endeavors will drain cash in a recession.
  5. Reconsider your profit center mix. How do your profit centers hold up in a recession? Here are some GC profit centers in order of robustness in the thick of a recession.
    • Disaster recovery
    • Maintenance
    • Aging in place
    • Government contracts
    • Highest end of anything
    • Remodel specialty
    • Remodel general
    • Custom homes
    • Commercial—situation dependent
    • Development, spec, flipping

 

Successful business strategy always demands tradeoffs. If you want to prosper through the next recession, you must reshape your business from what it has been. If you choose to operate your business without changes for a different economy, so be it, but expect to endure much higher stress and financial hardship. Happily, the right adjustments to prepare for the oncoming economic down cycle will also set your business up for sustained exceptional profits, regardless of what the economy throws at you in the future.