Whether you believe we’re having a recession, might have one or are just coming out of one, there are ways to make such downtimes less painful.
Analyze your field labor force. How many full-time journeymen and apprentices are making you money? Your annual labor capacity is that number, multiplied by an average of 2,000 hours per year. Now, chart your customers by profitability and allocate that labor toward those who make your highest profits. During tough times, you can’t afford to use untried or inefficient craftspeople, and you can’t afford customers who won’t pay on time or use too many overhead hours.
“Breaking up” with customers can be fascinating. You not only find out how much they are willing to change their business practices to keep you, but you have the opportunity to play matchmaker between the worst ones and your least favorite competitors. You’re the winner, because you’ve provided the client with a new subcontractor, your competitor has “beaten you” and they both deserve each other.
Continuing the same line of reasoning, during tough times, allocate resources only toward those purposes that match your long-term strategy. Do not enter a new niche now; learning curves are expensive. It’s not the time to expand either; untried customers and unfamiliar employees are more risky. The good news is that tough times also affect material, equipment and vehicle suppliers, so your opportunity to get a better deal is your incentive to reanalyze your supply lines and your purchasing methods.
If you’ve already improved your use of technology, it will pay off now in terms of efficiency. If you’re still working with old computers, cumbersome accounting and estimating systems and a building that leaks like a sieve, you’ll suffer for the failure to plan and invest when you had the extra funds.
Darwin was right. The strong survive the tough times. If you have built your cash reserves and managed growth sensibly when the work was there, then you’ll survive the price wars during recessions. If you are a prime to owner clients, especially in low-voltage residential or public work, you’ll still have work when commercial and industrial projects become scarce.
Traditional pricing theory still applies. Let the other competitors club each other to death with low prices. Keep yours where they should be. At some point, your prices will look like a good deal in the marketplace. Inevitably, others will hit capacity, which should drive prices up. The key is to be able to wait a few months for the right deal, control your greed and refuse to panic because you “need the work.”
Have you invested in relationships with design professionals by offering them pre-bid consultations and value engineering ideas? If so, you’ll get first look and a potential advantage when they put those projects out for bid (especially if you do negotiated work).
Have you become a full-service, turnkey supplier? If so, you’re simplifying your clients’ purchasing by taking responsibility for more of the project. That breeds loyalty and dependency, because you know their needs.
Both of these investments will pay off during the downtimes, if you’ve built the relationship side of your business.
Can you insure for all risks? Insurance industry consolidation has resulted in some of the largest carriers re-evaluating their participation in the construction markets. If you haven’t been reading and negotiating your contracts, tough times will force you to accept more risks than you can reasonably control.
Also, employees and suppliers may resort to white collar crime, so make sure that security is tight and you are tracking your data, costs and cash flow, and that everyone in your company and supply line knows you’re being alert.
The banking industry is also consolidating, and contractor loans are a “policy exception” for lenders, not a preferred market. If you’ve got loans or lines of credit sitting untapped, it might be advisable to draw them down and put the money in the corporate mattress before your bank changes the deal. It’s happening virtually overnight: contractors with long-term banking relationships have suddenly found their lending lines evaporating.
Some electrical contractors prosper during a recession, because they have not grown too fast, have built cash reserves, have carefully cultivated profitable customer relationships and have maintained a loyal, productive field and office workforce. If you haven’t done these things, and you are lucky enough to make it through this recession, think about preparing more carefully to take the pain out of the next one. EC
NORBERG is a management instructor with the NECA Management Education Institute, a former subcontractor, and past president of two national construction associations. She can be e-mailed at firstname.lastname@example.org.