Recession-Proofing Your Construction Business
Print this article
0%
Let’s not dispute whether or not a recession is coming—the ifs and buts about it aren’t worth the time. What we know, however, is that recessions usually come along every 5 to 10 years. They’re hardly the Halley’s Comet of economic events, so it makes sense to prepare for a recession regardless of whether one is lurking around the corner in the near future or not.
Recessions happen. They’re part of the economic cycle. Recession-proofing your business just ensures you’re prepared for the next one, regardless of when it happens. This guide will explain some of the best ways to shore up your bottom line in the event of a recession.
Why You Need to Recession-Proof Your Business
Recession-proofing your construction business isn’t doomsday prepping or shuttling your executive board into a bunker. It’s a solid business practice that ensures your company is structurally sound any time the broader economy takes a few steps back. With current and recent U.S. GDP readings, we're far from that—but there are always proprietary models and economists that showcase the "indicators" one could be coming sooner rather than later.
Recessions typically last 12 to 24 months, and may or may not include a bear market in stocks. Only the National Bureau of Economic Research (NBER) can call a recession—and only in hindsight. Prior to the short-lived Covid recession in Q2 of 2020, The Great Recession was our most recent "normal" recession, beginning at the end of 2007 and continuing through mid-2009 (though the impacts on the construction industry lasted longer). Many industries were impacted, but construction especially took a brutal blow. The housing market collapsed, demand for new construction projects flattened, and finding financing became a needle-in-a-very-crowded-haystack situation.
A nearly 10-year-old report from the NAHB stated residential builders alone dropped 50% from 2007 to 2012.
Housing still hasn't fully recovered, despite the ongoing demand and persistent supply shortages that have underlined the current growth in home prices. And while the impact of The Great Recession is an outlier—its was wider-reaching than most other recessions, from a historical perspective—it’s still a cautionary tale from recent history, and there are still reverberations throughout the industry. Companies need to protect their bottom lines and not forget that the right combination of circumstances can become a tinderbox that can burn unprepared construction companies to the ground. Preparing for these situations is the best way to survive them.
7 Keys to Recession-Proofing Your Business
Many companies think that the only practical response to a recession is cutting costs and praying for the best. But rather than the reactive approach, prepare for a potential recession and minimize its impact on your business with the following tips.
Assess Your Financials
You have to understand how much money is going out each month before you can put a plan together for recession-proofing your business. Sit down with your accountant or team and discuss everything from accounts payable to overhead to incidental costs and other expenses you pay out each month. The goal is to identify where the money is going and how much of it is leaving.
The time to find and plug the holes is when business is good. Being proactive now about any unnecessary spending or expenses ensures that the company can save money and also survive reduced cash flow for longer. Waiting until there isn’t enough money to make payroll is simply too late.
Build Cash Stores
It might not seem like rocket science, but there’s actually a lot of value to unpack from this tip.
Building up your cash stores is one of the best ways to prepare for an economic downturn. Companies with a healthy stockpile will be able to weather situations better than those relying on credit and loans to get through. Cash is almost always a safer bet than the expensive interest rate-bearing loans available in recessions.
But cash isn’t just for keeping the lights on and funding projects. Recessions can also present incredible investment opportunities. Whether it’s purchasing another company, buying equipment at a reduced rate, or even providing short-term funding to other contractors, cash can make it happen.
The trick about building cash stores, however, is being proactive about cash flow. Contractors need to stay on top of their accounts receivable, minimize frivolous spending, and set a goal to save each month. It’s important to have a proactive but realistic plan for saving.
Diversify Your Customer Base
Construction companies that put too many eggs in too few customer baskets rarely do well during a recession. Even companies with a finely-tuned recession game plan will lose customers during a downturn. Whether it’s because of financing drying up or because companies are simply going out of business, some will fail.
The key to ensuring that losing one customer doesn’t crush business is having a portfolio of other customers to work with. Increase your outreach and marketing efforts, and encourage salespeople with additional incentives for landing a certain amount of new clients each month. This allows you to continue serving your current customers while still expanding your reach.
Focus on a Backlog, But Don’t Bank On It
A company’s backlog can be a sign of its health during strong times, but it can be a false sense of security during downturns. Backlogs can quickly dry up, with projects being canceled or put on pause until money is cheaper. For this reason, it’s important to focus on your backlog, but don’t take it for granted.
Try to keep your sales funnel as full as possible. This is easier said than done, but starting new outreach campaigns, expanding your service area, and offering new services can help attract more clients, keeping the sales funnel and backlog brimming. Don’t rest on your laurels, though. Concerted sales efforts are still critical to keeping the backlog full enough.
Add Recurring Revenue Models
Recurring revenue is all the rage now, and it could be a key component to making it through a recession. Construction companies that start repair or service arms with subscription-based fees that keep the money rolling in each month will have an easier time maintaining positive cash flow when things get difficult.
Some business models to consider include:
- Repair services: Clients pay monthly for access to a repair team whenever they need them.
- Emergency services: Businesses pay each month to have a trusted team on call for emergencies.
- Property maintenance services: Monthly subscription payments entitle the property owner to a set amount of days for clean-up.
Companies will receive small payments from these customers each month in exchange for a service. The recurring revenue increases the company’s valuation, builds customer relationships, improves cash flow, and allows companies to retain workers they might otherwise consider letting go during tough times. Plus, upselling additional services to existing subscription customers is relatively straightforward and doesn’t require a robust sales team.
Rely on Data
Every decision made during a recession is more critical than those made in boon times. Companies need to make better decisions with more certainty because more is on the line, and recovering from a stumble is a lot harder in a recession. The best way to make great decisions is by relying on real, up-to-date data.
Companies that utilize modern project management software can make the most of the available data. These programs provide customers with overviews of project statuses, available resources, budgets, timelines, and more. Most are cloud-based, so when changes are made, the entire system reflects the change across as many line items or contracts as necessary.
These programs can also generate valuable reports instantly. When big decisions are on the table and teams need real-time data, they’ll have instant access to the latest information, allowing them to make the best decision possible.
Choose the Right Projects
If there’s one area where companies can improve their chances of growth and success ahead of a recession, it’s project selection. Choosing the right projects with the best clients and the safest funding stabilizes the backlog and allows companies to breathe, even when others are closing their doors.
First, go where the money is. Today, that would mean focusing on projects like data centers, chip manufacturing plants, EV battery and manufacturing plants, and similar projects funded by the CHIPS Act and Inflation Reduction Act. Also, infrastructure projects funded by the Infrastructure Investment and Jobs Act should also be considered safer than private projects. The government has earmarked billions of dollars to fund these programs, making them a better bet in the long run.
Also, be selective about your clients. Reviewing data regarding payment and credit history allows companies to determine how risky a potential partnership could be. If a customer has a history of defaulting, canceling projects, or not paying its contractors, they’re worth avoiding in good times, let alone when things are getting difficult.
Start Your Recession-Proofing Before You Need It
It’s not a matter of if a recession happens, but when. These challenging times are cyclical and we’re never more than a few years removed or away from one. Construction companies need to make hay while the sun shines rather than taking positive cash flow and lengthy backlogs for granted. The tips mentioned above will help companies narrow their focus to surviving these challenging times so they can grow at a time when others are struggling to survive. Get started recession-proofing your business today.
Posted By
