Preserve cash, rack up arrears, and target federal contracts in case a recession sinks the U.S. economy.
It’s the winning game plan for construction professionals in these uncertain economic times, sources told Construction Dive.
Whether it’s a the recession is here now or waiting in the wings, industry experts have suggested that now is the time for construction companies to start consolidating their businesses, just in case. Here are some of their top tips for preparing for the recession:
Build what you know. Facing a recession, contractors should aim for more than 12 months in arrears and “stick to their knitting,” said Joe Natarelli, construction services manager at Marcum, a national accounting and consulting firm. .
“Now is not the time to go and try different trades,” Natarelli said. “If you are a mechanical contractor or general contractor, stick to the jobs you have a track record with [and] where you did well.”
Monitor finances. Nick Grandy, principal construction and real estate analyst at RSM US, a Chicago-based accounting firm, said the most important thing a contractor can do during a potential downturn is maintain a professional approach. .
This means continuously monitoring the financial health of the business and projects to ensure profitability, communicating regularly with customers, contractors and employees, and staying focused on business specialties.
“The construction industry will likely feel the pain of managing the risk of potential insolvency,” Grandy said. “The separation of winners and losers really comes down to who is doing a good job of finding profitable projects and managing those projects to return to economic growth.”
Remember that cash is king. A recession would squeeze profit margins because “contractors would find themselves in more aggressive competition for work,” said Anirban Basu, chief economist at Associated Builders and Contractors.
“If contractor management is confident that a downturn is imminent, the primary goals are to preserve cash and solidify financial relationships,” Basu said. “This represents a moment to consider whether the company can cut costs and whether it makes sense to try and negotiate larger lines of credit.”
Hold back the big expenses. Postpone big expenses to conserve cash, Natarelli said.
“Make sure you manage what we call the work-in-progress schedule. It’s the timing of the work and how the work is progressing,” Natarelli said. “Make sure you’re making money on the job and if you run into any issues, make sure you make the necessary adjustments to make the jobs profitable.”
Think twice before laying off workers. With many U.S. companies considering layoffs during an economic downturn, it may prove a costly decision for construction companies, said Richard Branch, chief economist at Dodge Data & Analytics, who told Construction Dive earlier. this summer he expects a potential recession to be quite short.
“The knee-jerk reaction during a downturn is to lay off workers,” Branch said. “It’s a huge risk.”
Indeed, the current lack of available labor means that entrepreneurs may not be able to rehire quickly when the economy improves.
“In the past, contractors were willing to hire additional team members even during downturns, with the understanding that rehiring talent can be extremely difficult,” Basu said. “Entrepreneurs would likely react to a downturn by cutting back on their least productive staff, but strive to retain their most talented team members.”
Keep hiring. Indeed, experts say a downturn can sometimes improve entrepreneurs’ ability to hire and retain workers. Branch noted that successful construction companies will continue to hire when the economy recovers.
“Companies with a growth mindset will be on the lookout for any available labor, even if they don’t necessarily have the job for them in the short term,” Branch said. “What tends to separate winners from losers during a recession is that success is determined by maintaining a growth mindset.”
Reinforce the civil works. Grandy noted that work related to federally funded infrastructure projects will be a bright spot in construction no matter what happens with the economy.
“The infrastructure bill should help maintain job opportunities in the industry,” Grandy said. “Other non-residential construction opportunities will likely see offsetting declines as demand for services would likely slow in a recession.”
Be on the lookout for mergers and acquisitions offers. A tougher economy produces fewer mergers and acquisitions because such transactions require confidence from dealmakers and the availability of financing tends to be truncated during times of economic stress, Basu said.
However, once the economic recovery begins, “deals generally take off” as many companies find themselves weaker after the downturn and are therefore more willing to be acquired, Basu added.
Indeed, experts say there is a tendency to buy new work on the rise, which should translate into an acceleration of mergers and acquisitions.
So, a positive downturn could be the right opportunity to gain market share through acquisitions.
“Capital tends to dry up in downturns and with rising rates the cost of loans is more expensive,” Branch said. “That shouldn’t deter companies from looking to acquire businesses that fit your strategic growth plans.”