News Headline: US housing starts drop to the lowest level since 2015.
Government restrictions, lockdowns and a slowing economy have added a layer of problems for residential contractors. When work slows, income dries up. Expenses like debt service and overhead continue as if nothing had changed. Too much of that can stress any construction company.
Here’s a checklist to help your company survive long enough to thrive once again when the pandemic is history.
Cherish cash. Money to a construction company is like blood circulating in your veins. When the flow stops, no contractor lasts long.
If you’re using advances and progress payments on the current job to satisfy creditors on prior jobs, you’re transferring debt. That’s like a game of musical chairs. When the music stops, as it has now for many, you’re stuck with bills that can’t be paid. My advice when cash is short: Use the money and credit that’s available to meet expenses on the current job. Keep materials and supplies coming and keep meeting payroll. Creditors owed on prior jobs will have to wait.
Be candid with those you can’t pay. Keep a list of creditors and the amount owed each. Tell creditors, “We’re short on cash right now due to the economy. I keep a list of who’s owed what. You’re on my list. No need to make threats. I promise to pay when cash is available. That’s the best I can do for now.”
That should satisfy some, at least temporarily. Others will threaten suit. Secured creditors will take back their security. Don’t let lawsuits bother you. Getting sued isn’t so bad. It’s the sign of a desperate creditor. Months will pass before anything actually happens. As time passes, most creditors will find a reason to compromise the debt, especially if you agree to make at least token payments. Other creditors may go belly up or simply give up trying to collect. Either way, you get months of breathing room and remain in control. The goal is to stay in business. You’re in survival mode. Keep working. Keep earning advances and progress payments on current jobs.
Focus on profits. When work is scarce, it’s tempting to look for larger jobs that can keep your crews and subs busy long term. Unfortunately, jobs like that are the most competitive and usually carry the slimmest profit margins. Smaller jobs often come with more generous margins. Larger, better-financed contractors can’t be bothered with the distracting trivia that’s common on small jobs. If you’re prepared to deal with picky, indecisive, argumentative owners, and if the profit margins look promising, consider stepping down a notch. Smaller jobs often come with shorter payment schedules and fatter margins.
Be selective. Don’t take on extra work just for the extra cash flow. No contractor loses money on every job and makes it up in volume. Doesn’t happen. More often, extra low-margin work results in extra headaches, especially when finances are tight.
Plan for the recovery. When too many contractors are chasing too little work, put your business in mothballs for a while. Construction contracting will pick up again. It always does. Use the idle time to do strategic planning. Where will the opportunities be when business revives? What skills and equipment do you need to capitalize on that revival? How will you finance growth of your company when the economy rebounds? Get yourself and your team ready to jump back into business. Have a plan. Focus on a particular job or area where success is most likely. Every major change in the economy creates pockets of opportunity. Change is coming. Commit to preparing yourself and your organization for that day.
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