Some construction companies have pulled in their horns for the rest of 2008 and are planning for revenue and profit reductions in 2009. Many have already conceded that 2008 was a bad year. You could swear that a hurricane was heading directly to their doorstep. In fact, there were some construction companies that started to plan for a downturn over two years ago despite economic signals in their geographic region indicating otherwise.
Self-Fulfilling Prophecy Can Be Negative
The companies that have pulled back have either been told the markets are bad or they feel the markets are bad. These companies may fit the classic definition of a self-fulfilling prophecy…you end up exactly where you believe you should be.
Use Real Market Data to Make Decisions
Apparently owners who have made these decisions never stopped to research the real market data and they also never thought about the repercussions of their actions. Some recent national market data reflects 2008 growth as compared to 2007 in the following market segments:
PrivatePublicThe key is to discover where market segment growth is located if your city and/or state is not currently thriving. Projects are available if a company is willing to pursue them.
Repercussions to Employees & Customers
Not only are many owners making serious errors in judgment by planning for reduced revenues, they are also jeopardizing their relationships with customers and employees. Many employees leave companies that provide fewer project opportunities and these same construction companies are then not prepared to serve customers when opportunities do come across their doorstep.
Do construction industry owners think that employees and customers will wait for their companies to get back on the growth track? Construction projects will march forward, whether or not construction companies are ready to participate in the process of building them. Employees will continue to seek employment with construction companies that have more realistic and optimistic growth plans.
Market Impacts Can Be Overcome
Construction Industry owners can be defensive when explaining their decisions to batten down the hatches. They tend to defend their companies in the following ways:
- There is more competition and they can’t get work at the prices they want
- Competitors are buying work because competitors fear a downturn
- Some customers have cancelled and postponed contracts
- Residential competitors have slid into the non-residential sectors
- Rising material prices have made it difficult to estimate costs and to create contractual protections
- Companies have experienced growth spurts the past few years and they think it’s time to pause.
All of these explanations make sense for why any company would want to decide to slash their growth plans, but what doesn’t make sense is why these same successful companies won’t research true construction market indicators/data and why they won’t adapt to overcome the challenges.
Basic Reasons for Growth
Most construction firms do no have to be too inventive to look for reasons to grow their companies. The reasons for growth are very elementary, but the reasons pack a wallop. Companies seek to grow because:
- Block Competition: They want to prevent existing competitors from grabbing market share and they want to stop new competitive start-up companies from entering the marketplace. If a construction company cuts back their revenue projections for 2009, they are inviting other companies to grab available opportunities.
- Retain & Grow Employees: They want to encourage employee skill growth and development. Without growth, companies are compromised in exposing their personnel to other areas of the business. Many employees leave stagnant companies because they want to continue to make progress on a career path.
- Earn Strong ROI Percentages: To continue to earn a strong Return on Investment (ROI) percentage, construction companies must continue to grow. If revenues and profits slide downward enough, some situations call for owners to withdraw idle working capital or equity. For example, if a company earned $1M in net profits before tax (NPBT) on $4M in equity, their ROI is 25 percent. If that same company only earned $200K NPBT on $4M in equity, the ROI is 5 percent. Owners would need to ask themselves if there were alternative investments for their money. In every business venture, owners seek to maximize their ROI.
Achieve Your 2009 Goals
When your company prepares its strategy for 2009, don’t be one of the construction firms that decides its growth and profit plan based upon some selected, narrow market occurrences and information. Look at the big picture to understand the overall construction market and the individual market segment trends. Then target how much of the market you want your company to acquire and build.
To make your 2009 revenue and profit goals happen, every construction company needs a solid work acquisition team and system in place to identify project opportunities deep in the pipeline. You will know when you have enough project opportunities available, because when you lose out on one project, there is always another one available. And secondly, your company still maintains a healthy mark-up because there are other project options. That’s how you grow your company during uncertain economic periods. It’s all based upon developing and knowing the full extent of project opportunities within the construction industry.
Don’t let a few project disappointments and some rumors about the construction economy influence your decisions to plan ahead, especially when the work is there for the taking.
(Terry Kramer, president of Kramer Consulting, has been consulting within the construction industry for over 20 years. Aaron Kramer, senior consultant, focuses on the profitable strategic management of construction companies. They can be reached at 480-314-0711, or via e-mail at [email protected] and [email protected].)
