Everyone in construction is looking for the light at the end of the recession tunnel. The novel coronavirus has crushed progress across most industries, and construction is no exception. Companies are making the hard decision to lay off employees and funding has become very difficult to secure. Everyone in the building industry is struggling. The good news is that the economy looks ripe for a construction boom on the other side of this downturn.
Construction booms can bring a feeding frenzy
After months or years of struggling to book new projects, contractors are hungry for any project they can get. Many companies treat a post-recession construction boom as a feeding frenzy. This game plan is more akin to a child’s board game than a profitable strategy for recovery. When jobs become available, companies engage in aggressive bidding practices, looking to get as much work as they can. Many construction companies fail to account for the risks that an economic rebound brings with it.
During an economic recovery, contractors often try to gobble up as many jobs as possible. This will inevitably lead to undercutting their own prices and minimizing their own profitability. Also, taking on too much too quickly will spread resources too thin. That means making progress will be an uphill battle.
Construction companies are three times more likely to fail during a recovery than a recession. Recognizing the risks and developing – and sticking to – a clear strategy are key to successful growth.
Fast & Furious: Why construction companies fail in a recovering economy
It may seem counterintuitive, but construction companies run a real risk of failure in a recovering economy. Struggling companies are already hungry for work. By the time that jobs become available for bidding, they’ll be even more likely to bite off more than they can chew. There’s going to be a shift in focus on the number of jobs over the quality of these projects.
Diversifying the workload can be a smart move for survival, but it can also be a slow route to take for rebuilding a company.
Once jobs become plentiful, manpower will become a difficult issue to handle. The construction industry already has a shortage of qualified workers. Many construction companies had to lay off their good employees already. At the point the boom takes off, those employees will find work immediately, leaving their former companies scrambling to fill ranks. With low manpower and a high number of jobs, construction companies will be attempting to do more with less.
Taking on several jobs at once will require floating a lot of cash. It’s an accepted fact that construction companies are expected to front the startup cash on most jobs. Contractors need to factor in costs related to mobilization, materials, and payroll.
When multiplied over several jobs, this amount of cash going out will far outweigh the first progress payments these companies receive.
These jobs are most-likely less profitable than the jobs these companies are used to. Quickly-depleted accounts can bring progress to a grinding halt.
After recession, starting slow is a sustainable construction strategy
Taking a slower, more methodical approach to recovery in construction can mean the difference between survival and failure. The likelihood of maintaining the same profit margins as before the recession is slim, at least initially.
Knowing this, contractors need to be careful not to take themselves out at the knees. Mustering the vigilance to submit fair bids and only accept profitable jobs will be a difficult but necessary policy for companies hoping to recover quickly.
A contractor overestimating their work capacity is a fast route to failure. It’s near fact that contractors won’t be able to operate at full capacity right away. They’ll need to increase cash flow before they’re back in full swing. Contractors need to be ultra-discerning when spreading their cash, manpower, and other resources.
Accepting fewer jobs initially will allow them to focus on cash flow and profitability. Construction companies that have good job costing reports to look back on will be able to easily identify worthwhile jobs – and those to avoid.
Government and public jobs have their own challenges
Public and government projects will play a large part in the construction industry’s recovery. The various bills on the docket will infuse the construction industry with more cash. This is great news, but these jobs have their own issues.
Contractors need to be aware that these projects will have different requirements than their typical private job. Negotiating contracts on government and public jobs will require a comprehensive understanding of the bonding process. Also, employees are likely to be paid prevailing wages, which may be considerably more than contractors are used to paying.
Even smaller construction companies need to understand the construction bond process and what’s required. To take advantage of the government-funded recovery efforts, contractors should familiarize themselves with these terms:
- Performance Bonds are an agreement between the GC, the subcontractor, and a surety company (similar to an insurance company). The performance bond ensures that the sub’s work will be completed on the project, and if not, the surety company will pay the cost of completing the job.
- A payment Bond is a surety bond that is typically posted by the prime contractor on a construction project to help guarantee payment to all the subcontractors and suppliers below them on the project. If a payment issue arises, contractors can make a claim against the payment bond instead of filing a mechanics lien.
- Bid Bonds guarantee that a contractor will accept the job as they originally bid it. If the contractor doesn’t move forward under the terms of the bid, the government or public entity that awarded the bid can make a claim against this bond. If applicable, this may be the most important bond to be familiar with as there can be a lot at stake, including any profitability at all.
Use your credit and collections policy to improve cash flow
Even during the more manageable times of 2018, the average time to get paid on a construction project was 83 days. Payment windows could become even longer than normal during the boom, as cash flow problems mount for contractors.
Construction businesses that are unprepared for the cash flow strains of a booming economy are bound to fail. A construction company’s credit policy and collections procedures will be critical to protecting payment, and making sure that an insolvent customer doesn’t take you down with them.
Prioritize preliminary notices
Sending preliminary notices on all of your jobs is a great practice to get into – in any economy. Preliminary notices are an excellent way to make a professional first impression to the managing party on a job. These notices make sure the GC and/or property owner are aware that you’re on their job. It lets them know what work you’re doing, and sets your expectations about getting paid on time.
In many states, sending preliminary notice also protects your right to file a mechanics lien if you’re unpaid.
Preliminary notices will keep your company’s interests from blending into the mix. When a contractor or owner has a preliminary notice come across their desk, they’re less likely to misplace it or shrug it off. This can dramatically reduce the amount of time it takes to get paid on a project.
Monitor your customers to spot problems early
Not everyone will be well-prepared to manage the cash flow challenges of a post-recession construction boom. Monitor your GC’s contractor payment practices to keep a close eye on any payment problems. If your customer goes bankrupt, and you didn’t protect your lien rights, you could be left out in the cold.
When subcontractors and suppliers are filing mechanics liens or sending payment warnings on another project that your GC is managing, your payment could be at risk. If the GC is having cash flow problems, and can’t pay their subs on a different project, it’s important to take action to protect your own invoices.
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Protect your lien & bond claim rights
When it comes to getting paid in construction, nothing is more powerful than the mechanics lien process. Because a mechanics lien claim attaches to the property, it outlives your customer’s business. If your GC gets caught up in the post-recession feeding frenzy and stretches themselves past the point of failure, a breach of contract claim won’t protect you. A mechanics lien or bond claim will.
The good news is that few payment problems ever get to the point where you need to actually file a mechanics lien. Every step you take to protect your lien rights – from sending preliminary notice to a notice of intent to lien – is incredibly effective on its own. The simple threat of a future claim on their property is often more than enough to spur the property owner to make sure you get paid on time, every time.
Contractors will notice a fast increase in cash flow on the jobs that they protect. Protecting your payment rights is a key component in your strategy to growing efficiently during the construction boom without overextending your company, your cash, or your manpower too soon.