4 Changes Construction Firms Should Make During Recessions

Recessions are difficult for everyone. They cause unemployment rates to rise, incomes to fall, and economic activity to slow in general. The construction industry is particularly vulnerable during recessions because of its reliance on entrepreneurship and economic development for work.

Now, that all sounds scary, but while the damage and emotional turmoil they cause is undeniable, recessions are a normal occurrence in any economy. There have been six in the United States since 1970.

This fact doesn’t make recessions any more pleasant, but it does indicate two things: (1) that economic recovery is very likely, and (2) that we can expect these kinds of downturns to continue to occur in the future (albeit, unpredictably).

Luckily, we’re here to help you weather the inevitable. Keep reading to learn about how the right preparation (and technology) can keep your construction business afloat throughout a recession.

Use these 4 strategies to recession-proof your construction business

Development may slow during an economic downturn, but your business can stay afloat with the right plan in place.

1. Pursue projects that effectively use available manpower and equipment

Making the most out of your available resources is a good way to keep profit margins high on projects, which is exactly what you need when the flow of jobs slows down.

If your construction firm decides to move forward with a job that is too large, it could lead to equipment and crew shortages. On the other hand, a project that is too small wouldn’t be an efficient use of the same resources, leading to lower profit margins.

One way to determine the most effective use of your resources is to analyze jobs you’ve completed over the past few years and take note of the ones that were the most successful. Pay close attention to their scope, timeframe, and budget, then use this criteria to define (and pursue) ideal projects for your business.

During a recession, focus on attracting jobs that align with this “ideal project” criteria. These are the projects that will maximize potential profits.

2. Look for opportunities to diversify services

Consumer demand changes during a recession, and one way to respond to those shifts is to focus on services or projects there is actually a need for. For example, consumers are more likely to repair than replace during a recession, which means opportunities for maintenance will be more prevalent than those for new builds.

Justin Edwards of Contractor Advisolry told us about how expanding his service offerings helped his pool construction business endure the Great Recession.

Edwards went on to say that this new offering later became a monthly pool service that accounts for 40% of his revenue today.

While maintenance may not be the most natural next step for your particular line of work, the takeaway here is to identify and pursue customer needs that your business is capable of fulfilling.

3. Identify areas to cut costs

Lowering expenses is a quick way to ensure that incoming cash goes even further for your business. We spoke to Keith Melanson of RenosGroup about ways construction firms can save money during a recession.

Renegotiate with your suppliers. Suppliers are vulnerable during recessions due to lower demand for building materials. Because of this, they are likely willing to offer discounts or other incentives in return for a steady stream of business.

Melanson says: “Always buy in bulk when possible, price check regularly, and save and reuse your materials.”

Minimize rework. Rework is one of the most common reasons construction companies lose revenue during a project. Not only does it extend the project schedule and risk late delivery, it also impacts your company’s reputation, which, in turn, impacts the number of bids you secure. Using building information modeling (BIM) and involving an experienced contractor and project manager during the planning phase can help minimize the amount of rework done near the end of a project.

Automate processes with technology. The right software can help your company work efficiently and stay competitive. From payroll to scheduling to project management, there is a wide range of construction software out there that can help your business save money in the long run.

Melanson says: “For starters, use customer relationship management (CRM) software that contains automated functions. Instead of hiring staff to enter client data, use a system to book appointments, and send follow-up emails and texts.”

4. Protect your lien rights

Funding for projects can disappear quickly during a recession. Oftentimes, large or expensive construction projects are put on hold until the economy recovers. Protecting your payment rights is especially important during a recession, because it minimizes your risk of going unpaid.

The worst case scenario is that your customer goes bankrupt and fails to pay you for work that’s already been completed. If this happens and you failed to protect your lien rights, you’re out of luck. That’s why it’s important to always send a preliminary notice, even if it’s not required by your state’s laws and you don’t foresee payment problems.

Preliminary notices let property owners and general contractors know who is working on a project, exactly when the work starts, and how much the work is going to cost them. They help construction firms get paid quickly, and in many states are necessary in order to file a mechanic’s lien.

When it comes to settling payment problems in the construction industry, there is nothing more effective than the mechanic’s lien process. These liens work for many reasons; they get the construction lender and property owners involved, they can cause a contract breach, and they’re extremely difficult to challenge. Many times, filing a notice of intent to lien is enough action to prompt payment.

Take action today to make your construction company more resilient during a recession

With the right plan in place, there’s a good chance your business will be able to make it through an economic dip. These four strategies will keep you focused on playing to your strengths, staying lean, and protecting your cash flow.