Best Ways to React to a Downturn
Written By Tyler Jones
The past few years have been a roller coaster of anxiety between the pandemic and economic uncertainty.  While many financial indicators show long-term growth on the horizon, the nation continues to hit potholes in its recovery, both physically and fiscally.  The current construction market is showing signs of growth--new housing starts have been increasing steadily for more than a decade and commercial and multi-family construction saw a healthy jump last year. They provide a good opportunity to start developing the skills and resources needed to foresee potential downturns in the market and act proactively to protect your interests.

Plenty of sources exist for large-scale economic data such as industry trade groups, federal and state governments, and media analysts.  They provide data used by economic prognosticators around the world to identify trends in spending, which themselves are indicators for growth or decline:  people and companies spend more when they have a healthy economic outlook and pull back on spending if they fear a slowdown.  

Within your own company, you have barometers for signaling potential issues that you can tap more easily and with a more direct relationship to your business’s well-being.  Recognizing these signs should prompt you to review your internal operations to prepare for the coming situation.

Signs of the future

Two departments in your company will signal to you what the future holds:  sales and accounting.  Your sales team are the people who connect with clients and prospects, hearing their goals for their next construction project and the hurdles they face to get there.  You always want your team’s sales funnel to be full because that is the best way to get new business. In other words, what your sales team learns from clients and prospects directly impacts your future business.  

Are your customers:
  • seeking lower cost options?
  • requesting more generous payment terms?
  • inundated with bids from new competitors who hadn’t reached into this market segment?
  • postponing projects that they had scheduled?
  • choosing to renovate rather than undertake new construction?
These are signs that your client is holding on to cash as much as possible to solidify their financial standing in the future.  This can manifest in your sales team seeing a lower close rate for business as new competition creeps into your space and as prospects opt for less lucrative proposals--or cancel planned projects altogether.  

As the ones seeing the flow of money in and out of your business, your accounting staff oversees the fiscal health of your company.  They handle the calls when clients are having trouble paying, and they make sure your company has enough cash to make payroll and cover the bills.  

They’ll see the signs of an impending downturn as:
  • typically reliable clients having trouble paying, lengthening the average time to pay.
  • prices of materials fluctuate when demand decreases or as suppliers cut back on production.
  • credit lines tighten.
  • profit margins on projects shrink.
  • your subcontractors start to demand faster payment.
All these are indicators of a shrinking market and a push to keep or obtain the cash needed to run businesses.  It should signal to you that the market is tightening, pushing you to take measures to prepare for unsettled times.

12 best ways to react to a downturn

If you see persistent signs that your clients, vendors and contractors are all belt-tightening, it’s time for you to do the same thing.  Hopefully, you have a full pipeline of jobs scheduled to hold you over through the initial downturn:  construction tends to be a “lagging indicator” when it comes to economic trends--both heading into a downturn and recovering from one.  Let’s examine three key elements of your operation that can offer ways to help you tackle a downturn.

In the sales arena

As one of the early harbingers of economic conditions, your sales team can have the biggest impact on how your company weathers the downturn.  Unfortunately, many companies’ reaction to a softening market is to let go members of their sales teams; the rationale being, there’s not a lot of business for them to get, so we can’t continue to employ them.  But you won’t get much new business unless your sales team redoubles their efforts, not cuts them.  Instead:
  • Expand your bid radius:  As soon as you see signs of a potential downturn, expand the areas your company works in, both geographically and client industry.  If you’re set on staying within a specific type of construction project--residential, industrial, health care, for example--widen your geographic reach.  If you must stay within a certain region, expand the types of clients you’re prospecting.  
  • Seek reliable customers:  In a down market, prospective clients will likely face the same issues with credit and cash availability as you.  Shift your prospecting to clients who traditionally have been bedrocks during financial stress:  federal and state governments, hospitals, and educational institutions can pay when others cannot.  Be careful of businesses that get immediately impacted when money gets tight:  big ticket retailers, entertainment and luxury product/experience providers are usually the first things taken off consumers’ lists, so those businesses will experience their own cash flow problems.
  • Be creative with proposals:  Yes, you need to cover all the specs in the RFP, but add some low-cost (or no-cost) benefits to your proposals.  In tough economic times, clients want to have certainty that their projects are moving along on schedule, so include more updates in schedules than you would during busier times, for example.  

Tracking the numbers

As the people in your company who handle your money, your accounting and finance team see the flow of cash in and out of your company, and they can be the most effective in identifying ways to solidify your financial standing in difficult times.  They can:
  • Confirm a client’s ability to pay:  During tight financial times, it’s important that you run more than a standard credit check on your clients, particularly new ones.  Contact their creditors and their banks to ensure they have arrangements that will provide them with the funds needed to pay you when you expect payment.  Don’t be afraid to turn down a job from a client with a poor financial history:  it’s better that you don’t take a job that you won’t get paid for rather than invest your company’s resources and never recoup the cost.  
  • Request up-front payments:  This will be a tough sell, but a valuable one.  If you can get cash to partially cover your proposal at the beginning of a project--whether it’s a kitchen renovation or a full-scale construction of a skyscraper--you’ve already gotten some stability and a commitment from your client.  If they can’t release the money up front, perhaps set up an escrow account that can be tapped into later.
  • Take advantage of discounted payment terms on accounts payable:  When cash gets tight, businesses will bend over backwards to get paid as soon as possible.  If your vendors offer such discounts (“2% discount if paid in 10 days” or “$50 discount for cash on delivery”) take advantage of it if you have the cash on hand.  You won’t likely make as much money with the money sitting in your bank account as you would save by exercising these terms.  And you may be able to negotiate even more favorable terms.  

Managing materials 

Typically one of the top two expenses on any construction project--the other being manpower--how and when you buy your materials impacts the amount of cash you have on hand as well as the amount you’ll have to spend to maintain your inventories.  
  • Identify required materials early:  Widen the window when materials and equipment can be ordered to give your procurement team the longest possible time to get the goods.  Creating materials schedules based on models early in the project is a great way for your procurement agents to learn what will be needed so they can sign contracts when prices are optimal.  
  • Bundle:  Need steel or copper wiring for three different jobs you’re working on in the next two months?  Bundle your purchases when the price is low if you have the storage space.  Larger orders equate to lower per unit costs, so thinking big saves cash.  
  • Minimize ancillary materials costs:  By tracking the delivery of materials to arrive when needed in the prefab shop or the job site, try to schedule them so they spend the least amount of time laying around before being used or installed.  This cuts down on everything from handling expenses to theft to waste to damage to insurance costs.

Operating optimally

Managing your operations, from tradesmen to office staff, to deal with the changes in business practices during an economic downturn doesn’t necessarily require cutting staff.  Instead, utilize your team to bring the most to the table for your company and your clients by empowering them to work through the cycle. Your company can:

  • Prefab as much as possible:  In your proposals, include prefab components as much as possible.  Prefabbing is not only less expensive than job-site fixes; it also reduces waste and rework in the field when done right.  The controlled environment of a shop provides the opportunity to do quality assurance tests on elements that would be unworkable in the field, reducing expenses and improving operations.
  • Bolster customer service:  When cash gets tight, customers start demanding more for their money.  This also leads to added complaints which need to be addressed in a professional manner.  Make sure your contracts are clear about your responsibilities, duties and deadlines.  The people working with your clients become key buffers for these demands, and they need to know the parameters within which your company can provide additional services on a project.  Exceptional customer service personnel can smooth over these speed bumps to make sure you, your company and your client enjoy a beneficial relationship.  (Also be aware that your customer service team needs your support in dealing with difficult clients.)
  • Increase communications:  Whether it’s your company CFO dealing with your bankers or your department managers, encourage your team members to discuss your company’s business environment with stakeholders, which include your employees. Many problems--stress, anxiety and uncertainty--can be overcome by openly sharing an accurate representation of the conditions the company is operating in, and open communication can uncover previously unknown solutions to issues.
When economic conditions signal a slowdown in growth, it’s important to not shrink away from your business objectives.  Keep your visibility high--as both a leader in the industry and in your community.  Utilize your team's down time between projects to undertake a community service project.  Encourage workers to take part in industry events like educational seminars or conferences.  And you, as the leader, should also be out in front of your company, letting them know an honest assessment of the industry and the company.  

Downturns will happen, but planning for them, anticipating, and dealing with them with a solid plan will alleviate the fiscal and mental stresses they bring. Learn more from an expert.

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