The construction industry has faced six years of economic downturn. While some firms are thriving, the vast majority of companies have experienced declining revenues, margin pressure, challenging projects and balance sheet deterioration.
Now, construction company owners and senior leaders are focused on managing profitable growth after the recession. The key to any successful business is developing a written business plan and communicating it to the entire organization. The plan needs to be proactive and forward thinking, with a focus on market trends and future opportunities. The senior leadership team needs to be aligned with its strategic business and financial partners—including sureties, bankers, attorneys and CPAs—which collectively can share best practices and add tremendous value to contractors looking to grow.
Many firms experience the age-old issue of growing too fast. Controlled growth is the key to long-term success. Contractors should avoid having too many new areas of focus in their business plans, such as taking on a new type of work within a new geographic territory and adding new, untested people.
Diversification is another key to managing growth. The construction market remains very fragmented, with some markets growing and others declining. Successful contractors quickly identify emerging markets and take a very methodical approach to market entrance. They also spend ample time researching new markets and construction disciplines. Contractors should pursue smaller jobs before jumping into new areas with both feet. As businesses expand their geographic footprint, managing projects and labor from a distance becomes more difficult. Diversification allows contractors to put more cushion in their bids, with the goal of increased margin realization.
When entering a new territory, successful contractors find a local joint venture partner. This allows them to spread risk and gain access to additional talent, subcontractors and balance sheet resources. The “all eggs in one basket” approach often does not pan out in today’s zero-tolerance environment. Diversification in backlog allows the inevitable bad job to be isolated, ideally minimizing the impact on the balance sheet.
Adequate capital is another fundamental concept for managing growth. Successful contractors have built up a balance sheet over the years with resources that give financial partners the flexibility to support the growing business. In many situations, the work program and desires outpace the balance sheet for a period of time. It is critical for the contractor to communicate the roadmap to its financial partners so they can quickly develop a new strategy if the plan goes off course.
Job selection is critical to running any business and managing growth. Successful contractors fully review contract terms and conditions and work closely with surety partners in a collaborative effort to negotiate unacceptable risk out of their contracts.
Knowing where the fundamental risk lies and how much risk a firm can tolerate is half the battle. A great deal of time always has been spent on building the project within the specifications, but it is becoming increasingly more common in today’s environment to ask if the project can be built within the terms and conditions of the contract.
In the ever-changing world of technology, cost and accounting systems are essential in managing growth. Information is power, and the more information project managers and senior management have at their fingertips, the better their decisions will be. The systems available today continue to improve, and contractors should select the applications that fit both their immediate and future needs. Sureties and CPAs can be great resources for recommending what systems might be a good fit for managing growing organizations.
Talent management always has been, and will remain, a critical driver in managing a company’s growth. The construction industry is experiencing a rapidly aging workforce and, like other industries, is struggling to attract new talent. The firms with established training and mentoring programs will not only grow, but will grow profitably.
Despite the economic headwinds, signs of optimism exist as margins begin to tick up in certain markets and pipeline reports are growing for a number of construction firms. Historically, construction failures and surety losses increased after a longer-term construction recession, as balance sheets eroded with increased debt to service while businesses did not pare back overhead fast enough. A successful contractor manages overhead during difficult times by maintaining only its best workers and trimming expenses.
If a contractor stays focused on its business plan and can execute it while adhering to the aforementioned guidelines, it will be in a position to manage growth successfully.