How to Avoid Risk and Stay Lean in the 2015 Construction Boom
By Wiss Associate
Historically, the U.S. construction industry trails the economy by about a year. So when the economy tanks, the industry hangs on by finishing existing projects. And when things begin to improve, construction firms lag while investments are made, new projects are green-lighted and contracts are signed.
Today, the economy, from the viewpoint of the construction industry, is 80 to 90 percent back to where it was before the recession. So now it’s time to figure out how to do things differently this time — how to take advantage of an economy that’s rapidly coming into its own without overextending resources when it inevitably cools down again.
The boom and bust cycle in construction is as dependable as death and taxes. The challenge is to not overspend during boom times so you have some protection when — not if — things go bust. Here are some tips.
- Prepare forward-looking budgets. When in the heart of a boom cycle, it’s tempting to think that the bubble will never burst. Ever the optimist, you’re positive you have half a dozen huge projects about to go on the books for next year. After all, look at what you’ve accomplished so far this year. Now ask yourself how that budget holds up if those practically assured projects go bad because the economy suddenly sours.
- Ignore the frenzy. Times are good, and your competitors are staffing up and doubling down. You’ll get lost in the dust if you don’t bid on more work and take on more debt. You get caught up in the frenzy and find yourself moving rapidly forward, but you may have to push back. Heed the growing whispers of trusted economists as the bubble continues to inflate. Don’t spend everything. Sock money away for the inevitable harder times, even if you think your company is the only one doing it.
- Invest short term. Explore your options for leasing equipment instead of buying. Short-term leases allow you to walk away much faster when the equipment feels more like anchors than profit-enabling tools. With most labor contracts on larger projects in the Northeast being union/prevailing wage, it’s relatively easy to hold down costs in this area when the economy cools. But can you do the same with your office staff? Hold down fixed costs by hiring less energetically during the good times and consider the use of temp workers wherever possible. This allows you to trim employee costs quickly and painlessly if the situation suddenly requires you to do so.
Best of luck as the economy seems to be finally moving into a period of greater opportunity since 2008. Just remember, don’t take too much advantage of the coming boom times.