Construction Companies and Today's Economy

Through the second quarter of 2012, economic symptoms are still indicating weakness rather than health, and the symptoms are basically the same as the past two summers.  Europe is in default, and the question, is how much forgiveness is needed to keep the EU together.  Employment growth has halted, with more than half the jobs lost in the recession still unrecovered.  Action on the debt ceiling appears to be another half-year away, but in its place is a bigger question mark: the presidential election.  Like the previous two summers, the real drag on the economic recovery is more emotional than economic.  It is uncertainty. 

Uncertainty, however, should not be used as an excuse not to plan.  Contractors must still develop short-term and long-term strategic plans for their business.  These plans may need to be revised as events unfold, but the having an initial structure in place to work off of is critical.  Many of today’s most successful contractors took advantage of previous recessions with a strategic plan to emerge better positioned and stronger than the competition.

Some things to consider when developing your strategic plans:

1.  Focus on the balance sheet

• Set benchmarks and financial goals to improve key ratios and measurements such as Debt to Equity and Working Capital.
• Eliminate significant under-billings – under-billings are bad for cash flow, and at times, are an indicator of profit fade.
• Manage accounts receivables and retainages – focus on collecting retainages when job is complete; avoid claims and unapproved change orders.

2.  Keep overhead costs in check

• Prepare a budget and monitor frequently.
• Be prepared to take quick action to reduce and keep in line with revenue.
• Eliminate unallocated job costs.

3.  Assess your business mix

• Prepare a five-year schedule segregating contracts by customer, type, location, project manager, estimator, etc.
• Identify what segment of work is profitable – focus on this work.
• Identify what segment of work is not profitable – discontinue this work.
• Analyze the profit gain or fade from original bid to final profit.

4.  Focus on profit, not revenue volume

• At the end of the day, the bottom line pays the bills, not the top line.

5.  Keep succession in mind

• Identify key employees and individuals being developed to fill those key positions.
• Are there merger or acquisition opportunities?

6.  Manage labor

• Improve phase-code labor input.
• Provide weekly detailed labor reports to PM.
• Use field reporting technology – scanner, smart card, remote access, etc.

7.  Review internal controls

• Ensure proper checks and balances are in place.
• Controls over contract costs - daily time reporting, equipment, tools, fuel usage, etc.
• Claims and change order processes – ensure all costs are getting properly captured.
• Bidding and estimating – bid reviews, estimator/supplier relationships, use of current standard unit prices and labor burden rates, etc.