Talk of a looming recession has only intensified over the past few months and varying industries have begun to take action to prepare for the impact. Since the start of the COVID-19 pandemic, change has been the only constant for the construction industry and the economy at large.
Even with these shifting narratives, enduring a recession is a dark cloud that will rain down hard for some. When we hear recession we think of layoffs, downsizing, shrinking profit margins, steeper competition, and bankruptcies. These things are inevitable, and it’d be overly optimistic to say there’s a lot of silver lining when it comes to economic downturns but there’s one thing they do reveal: poor business decisions.
The flip side to this is that, over time, good business fundamentals win. There may be slower growth, and recessions will still have their effect, but good businesses survive and build a reputation of trust with their clients.
For the construction industry, changes in the landscape have been the rule for the past decade, and a recession is just another brush stroke in an already complex painting.
We’ve seen project delivery go from a Design-Bid-Build to a Design-Build model, with DB expecting to make up 47% of all construction spending in the US by 2025. In 2021, the Federal Government passed the Infrastructure Investment and Jobs Act (IIJA) to help revitalize infrastructure throughout the United States. This bill will change the type of work many contractors focus on because the $550 billion in new spending can provide opportunities and security for construction firms in the coming decade. There’s been an influx of energy and money going towards sustainable buildings, and massive technological change, both in the office and on the job site.
At the moment, construction is juggling a seemingly contradictory set of variables. The pervasive skilled labor shortage is still around even though overall employment in the industry is rising and demand for construction services is still hot. Material and energy costs are still high, cutting into profits. Workers are bargaining for higher wages and since unemployment is down it means that costs will be higher. The result of this could be that Federal Reserve policymakers tighten interest rates further to curb inflation.
Overall, the economic forecast for construction is stable because project backlogs are steady and contractors are anticipating rising sales and employment.
Of course, all of this can change, especially in an industry that has to react so aggressively to the whims of the global economy. As it stands, contractors have a great opportunity to put themselves in a strong position whether or not the economy recovers or continues staggering.
Recession-proofing starts with people
One of the first instincts to arise during an economic downturn is to cut down costs. The largest expense for a construction company is its people, but this is a double-edged sword because its people are also at the heart of its project delivery.
Shedding workers is a massive risk at this time because there’s already a lack of labor. If the soft recession forecast is correct, then trying to rehire quickly when the economy improves will prove to be exceptionally difficult.
It seems counterintuitive but it’s not a bad idea to keep hiring. Having a surplus of labor is an extra cost as things slow down, but when they pick up you’ll be a lot more prepared to win projects and deliver them effectively because it’ll be easier to assemble teams of people you already have rather than trying to scramble and hire people that may not be the best fit for the work you do.
The problem isn’t the cost of labor, but rather the cost of ineffective management of labor.
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Play Where You Win
The cost of ineffective management happens most often when contractors are taking risks on projects they aren’t experienced in or are ill-equipped for. A key way to recession-proof your company is to bid on projects you have a higher chance of winning and completing successfully.
A few things happen when you do this. Firstly, you build trust with your clients. They know they can count on your company to complete projects successfully, therefore they come back for repeat business.
Secondly, your bid-hit ratio improves, meaning you’re not necessarily winning more projects, but you’re bidding on less to win. Whether a bid is won or lost, there’s an overhead cost for putting it together. These expenses include marketing, sales, pre-construction services, public relations and the costs of employing estimators. Improving this ratio will mitigate the cost of lost bids and target your resources toward bids that have a higher probability of success.
Thirdly, it puts you in a strategic mindset. Every action and decision you make has to have a defined goal with clear tactics laid out for achieving it. To pull this off you need to be strategic about your most important resource, your people. You build this strategy by having long-term visibility of your labor capacity and by having quality data so your team can collaborate effectively.
Break Down Data and Communication Silos
One of the most insidious aspects of economic pessimism is the pressure that persistently amplifies itself through companies. It causes teams to isolate themselves and work in a vacuum. The irony is this behavior has an extremely detrimental effect on morale and company performance. In construction, this is especially relevant because silos are already prevalent due to tools like spreadsheets which don’t lend themselves to quality data and collaboration, as well as the generally complex nature of the projects that contractors are attempting to deliver.
In order to recession-proof your business, these silos need to be broken down as soon as possible so collaboration is made easy through cross-functional teams.
Embracing innovative technology designed to help you achieve this level of collaboration is the first step in achieving this as an organization. For example, using construction workforce management software can help operations, sales/marketing, and HR collaborate around all the variables around labor.
Imagine giving your business development teams the ability to see when people with certain project experience are coming off a job 6 months from now. It’s going to make a huge difference in their ability to procure everything needed for a bid if they know your company will have the capacity to complete the job on time.
This collaborative effort goes the other way too. If your operations team knows certain projects are being pursued by business development, they can take those into account and run scenarios showing whether or not you have the labor capacity to take those jobs on. If not, then you can proactively reach out to HR so they can recruit with enough leeway to pick the best candidates for the job. With today’s skilled labor shortage, any time HR gets to proactively set up a recruitment strategy will be cherished.
The way to recession-proof a construction company isn’t to find sneaky ways to stay afloat, instead it’s about centering your company around making better business decisions. There’s no guarantee that better business decisions will make you a construction behemoth, but every construction company that emerges stronger from this economic downturn will have figured out how to empower their people to collaborate so they can win at a greater rate. When the dust settles they’ll be ready to take advantage of the boom.