Slow and steady wins the race

While listening to an economic forecast given by Chapman University economist Dr. Esmael Abedi, I was reminded of the story of The Hare and the Tortoise. At first, I thought I was just tuning out more bad news. Then I realized the connection.

Recoveries from the last three major recessions were led by 50 percent to 100 percent increases in residential housing starts. According to Abedi, that won’t be the case this time. He estimates residential housing starts will remain flat over the next year in southern California. The picture for the private non-residential construction market is worse. The commercial sector was over built and vacancy rates are rising as businesses scale back space needs or go out of business. As a result, Abedi is forecasting a decline in non-residential construction of 15 percent for 2010.

What does this mean for you? It means the number of contractors on public works bids is likely to stay high for at least the next year because contractors who once did private residential or commercial work have limited opportunities outside the public works arena. This brings me back to the hare and the tortoise. Since all signs point to a slow recovery, it could take several years, or even as long as a decade, for the economy to return to the boom years we saw five years ago. Many challenges remain, such as California’s budget crises, looming commercial mortgage defaults, high residential foreclosures, 12 percent state unemployment, the ballooning national debt, etc. As a result, we all need to adjust our expectations to make sure we are structured to best meet the challenges and opportunities of the current market.

Like the tortoise, if we prepare for a long, slow race and take it one step at a time, we should be fine. Those who sprint to get ahead – bidding work below cost, not cutting overhead soon enough or maintaining too much debt – could end up losing big just like the hare.

Start your race here.
■ Determine the level of revenue you need to cover overhead. Now that we’ve been in this downturn a while, you should have a better sense of how much work you can get and at what profit margin. Next, estimate the amount of work you need to bid and complete this year by taking your overhead and dividing it by your estimated gross profit margin. For example, if your overhead will be $1 million this year and your estimated gross profit margin is 5 percent, you need to complete $20 million in work to break even. This information will let you know early whether there are additional adjustments or cuts needed.
■ Analyze the structure of your company to see if it fits the current marketplace. I have a client that used to have one person do both estimating and project management. But with the bidding that’s necessary these days just to get one job, my client decided to hire a full-time estimator and let the project manager focus on running work. For some companies with a low backlog, it might make sense to do just the opposite or even to let someone go. In either case, after preparing your projection, look at your business and determine whether you need to make adjustments so your people are spending their time where it makes the most sense.
■ Decide where to make the cuts. Cuts, especially personnel, are never easy; but once you know the structure your business needs to take, it makes things a little easier. If letting an employee or several employees go will hurt your ability to execute your new plan, keep them. If not, let them go. If there aren’t many employees you can cut without affecting your ability to operate, the alternative is to cut expenses across the board by going to four-day work weeks or other things of that nature.
■ Ask for advice. Not one person I’ve talked to has seen a construction market like this, so don’t expect to know how to deal with every situation. We’re all figuring it out as we go, but there is strength in numbers. Talk to other contractors, members of your association or advisors, such as your CPA, surety agent, banker or insurance broker. The bottom line is this – take the time to think about what your business needs to look like to compete effectively today. Then make the necessary adjustments and work hard as you always have. Chances are you’ll end up winning the race.
– By Daniel Huckabay, president, Commercial Surety Bond Agency