The construction industry is one of the sectors that were hit the hardest by the ongoing public health crisis. Construction projects were forced to close down, supply chains were disrupted, and many businesses were pushed to make adjustments and confront the economic onslaught brought by the COVID-19 pandemic.
The economy has fortunately started to open up in recent months. Many states have begun allowing the resumption and reopening of construction projects, and new construction opportunities are on the horizon.
But even though the economic outlook is looking a little better, contractors and business owners are still encouraged to plan ahead and strategize. Having a robust strategy in the wake of a crisis will go a long way, and here are six key steps that you need to keep in mind through these critical times.
1. Assess your current financial status and plan ahead
Businesses are often caught off-guard when a global crisis strikes, but this does not mean that there is no way to keep moving forward. To ensure that you are able to weather the storm, one key step is to thoroughly assess your current financial situation.
Note that the assessment must be comprehensive. Open your books and calculate the money that you have on hand, examine your project timelines and track the deadlines, and carefully study your cash inflow and outflow.
You should also consider how your supply chain is affected by the crisis. For instance, ask yourself if you have any suppliers that are based in heavy-hit areas. Early on, you must start listing alternative suppliers that you can utilize in case resources get depleted or delivery schedules get delayed.
Leave no stone unturned when doing your assessment; being as detailed as possible will help you build a solid, well-informed business strategy. Be aware that you must come up with a plan for different situations. Do not just prepare for the best- and worst-case scenarios, but also consider the gray areas that could affect the successful completion of your deliverables as well as the stability of your cash flow.
2. Examine and adjust your variable costs
In order to survive a crisis, you will definitely have to make adjustments in how you spend your money. Carefully examine your variable costs and identify the items that you can modify, if not completely cut.
Some variable costs can be easily adjusted. Discretionary expenses on entertainment and social committees may be temporarily cut, and you may also start implementing remote work set-ups instead of spending on travel costs. You should definitely take advantage of technology to conduct remote meetings. Keep in mind that working remotely could consequently reduce your spending on electricity and other utility costs.
If possible, try to avoid the scenario of employee lay-offs. You may take advantage of government payroll programs and maximize the productivity of your existing labor force instead of outsourcing contract labor. Redistribute tasks if necessary. Also, encourage your employees to take a leave of absence so you can preserve capital.
3. Look for business opportunities to raise revenue
When you review your expenses, you should also look into your fixed costs and identify opportunities that can help you raise more money and keep your cash flow going. You can evaluate your existing assets, for example, and determine if any of them can be maximized for higher cash inflow.
Ask yourself if you can afford to rent out any of your equipment for extra income. Also, consider selling your assets and leasing them back—doing so can alleviate your immediate need for cash flow. You may also want to look into expanding your business for third-party warehousing or contract manufacturing.
The key is to keep the core of your company operations while remaining flexible for expansion and other changes. Be conscientious when modifying and converting your fixed costs, and also think of the long-term consequences of your decisions.
4. Consider alternative financing options
It is very important to understand that your existing financing models may not work as effectively during a crisis. You might have to make adjustments to ensure that you continue to maintain a steady cash flow when a crisis strikes.
To do so, you have to consider employing other funding methods. The US Small Business Administration (SBA) offers financial resources, including disaster loans and microloans, for small-sized businesses. Watch out too for government stimulus programs that can help you maintain revenue and protect your finances.
Furthermore, you should look into the different financing options offered by private lenders. Invoice factoring, for example, is one way to sell your invoices for immediate cash. There is also asset-based lending, where you can use your existing assets as leverage, as well as traditional bank loans, where you can get access to capital at relatively low interest rates.
By being open to alternative funding methods, you put yourself in a better position to maintain a steady revenue during a crisis.
5. Continue to monitor policy changes and economic projections
One of the most daunting aspects of a crisis is the uncertainty it brings—you are never sure when the economy will pick back up again.
During a crisis, you must continue to stay updated about current events. You should be knowledgeable about new government aid programs, new federal policies, and, of course, new market projections from economic experts.
Arming yourself with information is an effective way to help you plan and strategize for the future. Focus on learning the updates not only in your specific area, but also where your clients and suppliers are. See if there are markets that you can exploit, and be ready to switch suppliers if needed. Read this article for more information about how resource management can be a game changer when the construction backlog drops.
Being involved in your community can also help you plan ahead. By engaging with local and state governments, you are more likely to learn about important updates (e.g. orders for business closures). A crisis is not the time to hole up—you should definitely reach out and communicate with relevant stakeholders so you can make better, more informed decisions.
6. Study your contracts and know your rights
In order to protect your revenue, you should not forget the best practices that you used before the crisis hit. You still have to be very careful when taking on new projects, and pay extra attention to relevant clauses and provisions in your contracts.
Understand your contract deliverables and the possible financial consequences if delays ensue. Scenario planning is very important: consider the possibility of delivery delays and other disruptions in your supply chain. Make sure that the contract protects you if these unfortunate situations arise.
Moreover, you should proactively protect your payment rights. Your clients are likely going through the same financial difficulties, and they might delay releasing your payment so they can preserve their capital.
Revenue protection means ensuring that your expected cash inflow arrives, so you should know that construction professionals are entitled by law to receive their due payment. If payment delays come up, be ready to exercise your lien rights.
Filing a mechanics lien to recover your payment from a non-paying client is one of the most effective ways to make sure that you get paid. Note, however, that filing a mechanics lien requires you to preserve your lien rights by submitting the appropriate preliminary notices. Different states have different forms and rules–for example, the Notice to Owner for Washington and Florida, and 20-Day Preliminary Notice for California and Arizona.
In times of crisis, it is all the more important to familiarize yourself with your payment rights so your hard work gets compensated accordingly.
Patrick is the CEO of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.