Economists have been warning American businesses of an impending recession for more than a year now.
We’re not there yet, and maybe we never will be. But economic woes are certainly prevalent: inflation, rising material costs, supply chain disruptions.
For trade contractors, the important thing isn’t recognizing whether the economy officially enters into a recession. The important thing is ensuring your business is prepared to weather whatever economic downturns come your way.
Below are four steps you can take right now to recession proof your construction business.
Get a Clear Picture of Your Company’s Finances
Many business owners have a sense that there’s money going out the door, but they don’t know how much or where.
When times are good, you can make peace with that feeling. When times are not good, you need to get a handle on your expenses.
Zaid Rahman at Construction Executive cites research from 2022 that found construction companies making more than $3 million annually should set aside 15 percent of that revenue figure for their fixed expenses. That’s about $450,000 for a company earning $3 million per year.
“And that number shifts exponentially depending on company revenues,” Rahman writes. “Making educated guesses about very real numbers in the months and years to come will enable construction companies to continue operating even amidst a recession.”
The team at Freshbooks has a useful list of what fixed costs a business in the construction sector could have:
- Labor costs like salaries and benefits.
- All insurance coverage, plus general liability coverage.
- Government fees, licenses and taxes.
Following Rahman’s advice, it will be helpful to know each of those fixed costs, or at least to be able to look those up quickly so you can start to make strategic decisions about your variable costs.
From there, you can begin to look at your supplier contracts and all of the costs associated with those. Yohaan Thommy and Alex Levin, partners at the Canadian accounting firm MNP, suggest asking the following questions in your review:
- Which costs are locked in, and which could go up?
- Is there room to fix prices for a set amount of time, or to pre-purchase certain materials?
- What trust do you have that your suppliers will be able to provide the agreed-upon services or maintain their inventory levels during a recession?
- Will those businesses survive challenging economic conditions?
Throughout all of this planning, look for ways to ensure your treasury is full of cash, not payments receivable. “One of the most fundamental and important rules of survival is certainly applicable to running a construction business… Keep cash handy,” the team at Equipment & Contracting magazine writes.
“During a financial collapse, cash will take you far. Whether you’re renting a piece of equipment, buying some materials, or hiring employees–consider how a vendor will be more willing to negotiate when you’re working with cash.”
Be Selective About the New Projects You Take On
A recession is not a good time to branch out or to take on riskier work. Instead, focus on delivering the highest quality of work in the trade you specialize in, and look for stable projects to fill your pipeline.
Nick Grandy, construction and real estate senior analyst at the Chicago-based management consultancy RSM US, says to prioritize public-sector projects during lean economic times. Specifically, Grandy points to the Infrastructure Investment and Jobs Act, which will make available $350 billion in public infrastructure spending through September 2026, as an important opportunity.
This is something we’ve identified as an important trend that will shape the industry. What’s more, other bills like the CHIPS Act and the Inflation Reduction Act are creating further opportunities, says Brian Turmail, vice president of public affairs and strategic initiatives at the Associated General Contractors of America.
Turmail points to investments in electronic vehicle manufacturing facilities in Tennessee, Kentucky, Georgia and Texas as places where construction demand could remain strong during and after a recession.
Just be sure you continue to seek out those opportunities and not count on backlog work to sustain your business through a recession. “During the last recession, many construction firms saw backlogs of nine to 12 months slowly disappear as projects were put on hold or canceled altogether because no one could get financing,” Kendall Jones at ConstructConnect writes.
“Now’s the time to start strategizing how you’ll keep work coming in when things get tight.”
Think Twice About Layoffs as a Way to Cut Costs
Labor is the biggest cost for most businesses. It’s natural for business owners to turn their attention to headcounts when they need to find ways to cut costs.
And that’s what many small businesses are preparing to do in 2023. According to one survey from insurance carrier Nationwide, more than a third of small business owners say they have either paused hiring or plan to do so.
Historically, though, making cuts to a business’ workforce during a recession can be like carving off a pound of flesh. In 2019, Walter Frick at the Harvard Business Review reviewed data from the last recession and found that while most businesses struggled, nearly 1 in 10 found ways to grow and thrive.
One common thread among those companies: They opted for operational improvements over layoffs to save money. “Layoffs aren’t just harmful to workers; they’re costly for companies, too,” Frick writes.
“Hiring and training are expensive, so companies prefer not to have to rehire when the economy picks back up, particularly if they think the downturn will be brief. Layoffs can also hurt morale, dampening productivity at a time when companies can ill afford it.”
If cutting labor costs becomes necessary, Frick suggests that companies consider hour reductions, furloughs, and introducing performance pay rather than hourly pay or salaries.
“Nothing can replace a skilled employee who’s great at their job,” writes Gene Marks, columnist and head of the consultancy Marks Group PC. “Find me someone like that and I’m going to hire that person, regardless of whether or not we’re in a recession. I know that, if treated well, that person will add long-term profits to my company regardless of the short-term investment.”
Right-Size Your Tech Tools and Recession Proof Your Construction Business
An important part of creating operational efficiencies is to make sure your teams are using the right digital tools for their jobs.
Software that’s too big for the job comes with unnecessary features, and users have to customize the tool too heavily or create cumbersome workarounds to make the software fit for purpose.
We have a guide to selecting right-sized software for trade contractors, but for recession planning it’s worth highlighting three tips from that guide:
- Understand and sketch out your team’s normal operations. When you know all of your tasks, responsibilities and workflows, you’ll know as soon as you demo a piece of software whether it will be a good fit for your team.
- Map those operations onto specific features. This way, you’ll be able to compare software offerings at a glance.
- Make sure any new software you buy is easy to use. You’ll lose any efficiency gains by investing in tools that your team members struggle with.
If making operational improvements are part of your recession-readiness planning, have a look at the eSUB Cloud solution for trade contractors. We designed our software with trade contracting specialists in mind. There are no unnecessary features, no workarounds needed — just tools to help you manage your project documents and field communications more effectively.
If you would like to learn more, schedule a demo today.
Images by: Ivan Bandura, jmimagefactory/©123RF.com, Scott Graham