Common sense tells us that a recession this broad and deep
doesn’t go out like a lamb. Economist Carmen Reinhart suggests that the economy will need a complete reset – that
debt deleveraging will take at least seven years due to the
scope and magnitude of the financial crisis. 1
If this prediction is accurate, then the good news is that we
are more than halfway to normalcy. Now is the time to begin
a realistic assessment of where your company is currently
positioned. You must ensure that your business strategy
protects your company over the next couple years and be
prepared to capitalize on growth opportunities when they
do eventually arise.
Which Gear Is Your Company in?
Begin by asking yourself: Is your company stuck in Neutral,
trying to rev the engine and going nowhere? Is it still in Park,
or even worse, Reverse?
This may come as a surprise, but I believe that it’s okay to
be stuck in Neutral. In this gear, your company should strive
to exit this recession the same as it entered – sound and solvent, poised and ready. Then, as future opportunities arise,
you will be prepared to shift your company into Drive.
There is a slang term for being stuck in Neutral within the
construction industry: Trading dollars. In the past, trading dollars was seen as temporary because there was always another
market to enter.
Such is not the case with the Great Recession. Alternative
markets are few and far between. The average 2012 budget
shortfall for state governments is 15.9%, 2 hardly an incentive to move from private to public work. AIA’s Architecture
Billings Index (ABI) just barely rose over the expansion
mark at 50. 9 in January 2012.3 And, the American Recovery
and Reinvestment Act of 2009 (ARRA) only affected a few
players within our industry, leaving the majority with a significant reduction in backlog comparable to pre-2008 levels.
What seems to be worse this time around is an oversupply
of contractors and a decreased demand for work, which has
caused serious downward margin pressure on bid day. There
is simply no room for mistakes in today’s environment.
There are some contractors that have put their companies in
Park; in other words, they have tossed in the towel. Most of
the reasons I observed were related to aging owners, inability
to change markets, inflexible management, inadequate capital,
or inability to reinvent the company. Also, many in this category took the earnings from the expansion period of 2004-
2008 and retired.
Ironically, those that shifted into Park strengthened the overall construction industry. After all, the industry needs to reset
from the expansion peak.
Many contractors have been in Reverse since the credit crisis.
Some of them have already shifted down to Park, and I expect
more to close their doors or file bankruptcy through 2012.
One of the predominant issues that leads to Reverse is denial.
Owners are typically optimistic in nature and continue to keep
an organization’s overhead and cost structure at unsustainable levels with the belief that the economy will soon pick up.
RAINY DAY CASH
Another prevalent theme surrounding Reverse is the lack of
“rainy day cash.” Contractors that flourished during 2004-
2008, but didn’t save, were left without a cushion of cash.
Diminished backlogs over the past three years prompted
reorganization, which stretched resources and required balance; contractors had to perfect the when, how, and why to
make cuts in order to protect their cash.
If the timing was off just a little, and without rainy day cash,
the potential to lose money was almost guaranteed. The earnings squeeze caused a domino effect with contractors’ debt
service, creditor relationships, and cash flow.