HERE WE GO AGAIN
The Perilous Post Pandemic Construction Market
By Thomas C. Schleifer, PhD
As the world's economy emerges from pandemic slumber, I'm hearing familiar rumblings from the contractors I talk to everyday. Keep in mind that the construction market is not back yet.
- "Material inflation is killing me. The contracts I sign today will end up costing me money tomorrow."
- "I can't find enough competent tradesmen that are willing to work. Most of my new hires are pretty inexperienced and are producing shoddy work. This labor shortage is hurting me. If this keeps up, I'll end up losing money on my existing work and I am worrying about potential disputes."
- "It's still a buyer's market out there, and wouldn't you know it, owners are driving hard bargains. I'm telling my people to watch the pricing but we've got to participate in this post pandemic market even if the margins are slim."
After hearing so many contractors admit that they see the dangers lurking in this post pandemic expansion cycle, I held back the next "Best-In-Class" series construction management blog I was planning and decided to insert this caution instead:
During Growth Cycles, be Cautious not Ambitious.
As I have discussion after discussion with construction professionals familiar with my work on the dangers inherent in growing too fast, I realize that some of them may not see the early subtle internal signals that will warn them if their company is headed for financial trouble. As I have written extensively in the past, this is why so many otherwise well-managed construction companies suddenly go out of business.
When you run out of money, you're out of business. If you wait till the last minute to take corrective action, you have already passed the last minute.
The Symptoms of Financial Disease
In Chapter 7 of our new book coming out this year we take a look at the ten subtle signs of internal erosion that can warn a contractor they are heading for trouble in a cyclical growth market. I have belabored for many years the “risks” of contractor failure during growth periods. In this book, our research defines the early “symptoms” of impending financial failure. If you recognize the “symptoms” early enough, you can cure the disease before it is fatal. If you start to run a fever, you usually take an aspirin. If you notice any of the following signs of internal erosion in your company, like a good physician, take action to prevent a fatal disease.
- Disproportionate increases in overhead - In a low profit margin business, a small increase in overhead in advance of revenue growth can be fatal.
- Increase in turnover in personnel - Unexplained departures of key people “in the know” can be an indicator of distress - It may be a sign that those leaving the company think they are on a “sinking ship”.
- Late accounting information - When the accounting information does not come out on time, it may be because the numbers are not adding up and too much "massaging" is taking place.
- Late project financial information - If the delay is later than usual, it is worth further investigation. And when the information is received for an active project, any major swings in job profit, whether positive or negative, demand immediate explanation.
- Unexpected borrowing - Whether for working capital, equipment, or expansion, all borrowing activity should be foreseeable and planned for. Unexpected borrowing is a sure sign of cash flow problems.
- Increase in internal disputes - Under-performance breeds discontentment. Under-performance unaddressed is fatal.
- Decrease in the quality of the work - During financial stress, the dedication of employees to quality work suffers.
- Too many excuses - If more things are going wrong and fewer people can provide the reasons, financial performance is probably slipping too.
- Departures in accounting staff - Of the hundreds of companies in jeopardy studied by the authors, more than 40% experienced the CFO or senior staff in the accounting department leaving within one to three years prior to failure.
- Inadequate time to perform key functions well - If there is limited time dedicated to cover baseline activities due to more time spent with attorneys, outside accountants, or consultants, it is usually a indicator of trouble.
These are symptoms, not causes. Take your company’s temperature sooner rather than later.