The conversation around the recession has intensified in recent months and different industries have started taking action to prepare for the impact. Since the beginning of the COVID-19 pandemic (which feels like a lifetime ago now, no?), change has been the only constant for the construction industry and the economy at large.
Enduring a recession is a dark cloud that will rain down hard for some. When we hear recession, we naturally think of downsizing, layoffs, shrinking profit margins, bankruptcies, and steeper competition. These things are often unavoidable, and it’d be perhaps too optimistic to say there’s a silver lining when it comes to economic downturns. But there is one thing a recession does reveal: poor business decisions.
The flip side? Over time, good business fundamentals win. Sure, there may be stunted growth, and recessions will still have their effect, but good businesses will survive and build an even stronger reputation of trust with their customers.
For the last decade in the construction industry, changes in the landscape have been the rule. 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 also passed the Infrastructure Investment and Jobs Act (IIJA) to help revitalize infrastructure throughout the United States. The IIJA will undoubtedly change the type of work many contractors focus on with $550 billion in new spending providing security and opportunities for contractors for the next decade, if not longer. There’s also an influx of energy and money going towards sustainable buildings, and massive technological change, both in the office and on the job site.
Today, the industry is juggling a seemingly contradictory set of variables. The ongoing skilled labor shortage is ever-present even though overall employment in the industry is on the rise and demand for construction services is still high. Material and energy costs are still high, cutting into profits. Workers are able to bargain for higher wages and since unemployment is down it means that costs will be higher. The result? Federal Reserve policymakers might 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.
That can all change, though. Especially in an industry that is often forced to aggressively react to the whims of the global economy. As it stands today, contractors have a great opportunity to put themselves in a strong position whether the economy recovers in the short-term, or not.
One of, if not the first instinct during an economic downturn is to cut costs. The largest expense for any contractor will always be its people, but cutting costs here can quickly become a double-edged sword since people are also at the heart of project delivery.
Laying off workers is an undeniable risk. There’s already a lack of labor and 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 to double down on people and continue hiring, but it’s not a bad idea. Sure, having a labor surplus is an extra cost as work slows down, but once it picks up you’ll be more prepared to win and deliver projects effectively. It’ll be easier to assemble teams of people you already have rather than trying to hire people that may not be the best fit for the company or the work you do.
The problem with continuing to hire isn’t the cost of the labor, but rather the cost of ineffectively managing that labor.
Most often the cost of ineffective management happens when contractors take on projects which they are ill-equipped to deliver or lack specific experience. One important way to recession-proofing your company is to bid on projects you have a higher chance of winning and completing successfully.
A few positive things happen when you play where you know you win. Firstly, you build trust with your clients faster. They know they can count on you to complete projects successfully and come back for repeat business.
Secondly, your bid-hit ratio improves. Sure, you might not be winning more projects, but you’re bidding on less to win. Whether a project bid is won or lost, there’s always a cost for putting it together. These expenses include marketing, pre-construction services, sales, public relations and the cost of your employed estimators. Improving your bid-hit ratio will help to mitigate the cost of lost bids and target your resources toward bids that have a higher probability of success. Do you know your big-hit ratio today?
Lastly, playing where you win puts you in a strategic, competitive mindset. Every decision and subsequent action has to have a defined goal with clear tactics laid out for measuring and achieving it. You need to be more 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.
One of the worst parts of economic pessimism is the relentless pressure that amplifies itself through companies. It causes teams to isolate and work in a vacuum. The irony? This behavior actually has a negative effect on morale and overall company performance. This is especially true in construction because silos are already prevalent. Tools like spreadsheets and whiteboards don’t lend themselves to quality data and collaboration, and generally can’t handle the complex nature of the projects that contractors are attempting to deliver.
In order to recession-proof your business, these information silos should be broken down ASAP so collaboration can be 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 like Bridgit Bench can help operations, sales/marketing, and HR collaborate around all the variables around labor.
Imagine helping your business development team by giving them the ability to see when workers with certain project experience are coming off a job in the near future. It’s going to make a huge difference in their ability to procure everything needed for a bid, especially if they know your company will have the capacity to deliver.
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 actually have the labor capacity. 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 extra time you can give for recruitment efforts will be greatly appreciated.
The way for a contractor to be recession-proof isn’t to find sneaky ways to stay afloat, it’s about 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 and win at a greater rate. When the dust settles they’ll be ready to take advantage of the boom.
Professional Recruiter Associates