CAN TOO MUCH OF A GOOD THING BE ALL THAT BAD?
Managing growth while staying profitable
Controlled profitable growth is critical to long-term success. However, growing too fast without properly managing growth can contribute to the demise of any construction company. It wasn’t that long ago when construction spending came to a screeching halt. Many contractors were experiencing declining revenues, lower margins and eroding balance sheets. During the great recession, which began officially in December 2007, many contractors closed their doors and unfortunately, not all of them shut down voluntarily. Construction spending started to increase again around 2012. The availability of work had become plentiful which reduced the pressure on margins. The leadership teams of many construction firms are now faced with the challenges of managing a rapid increase in growth. Pitfalls that can exacerbate these challenges include taking on a new type of work, working outside their normal geographic area and hiring people for key positions who don’t fully understand the company’s systems, culture and strategic plan. If a contractor builds a robust strategic business plan that emphasizes growing smarter, they will be in a much better position to ensure the growth is profitable. The following are necessary skills and strategies to help contractors grow profitably:
Make a Plan
Develop a written business plan, communicate it and implement it throughout the entire organization. The plan should focus on market trends and future opportunities. Like many other areas of a contractor’s operation, the strategic planning should be aligned with their trusted advisors including their surety agent and underwriter, banker, Certified Public Accountant (CPA) and attorney. These partners can assist and add tremendous value.
Build the Balance Sheet
Building a strong balance sheet is key, and contractors should plan to add capital prior to rapidly taking on more work. Many contractors coming out of the recession had significant deterioration of their balance sheet. These contractors are running a big risk if they are trying to manage rapid growth without properly capitalizing their business first.
Properly analyze the terms and conditions within all contracts. As the market turned and more and more work was becoming available, the terms and conditions within contracts were becoming more onerous. Successful contractors fully review contract terms and conditions and work closely with their surety partners to negotiate unacceptable risk out of their contracts.
Place emphasis on building talent with good recruiting programs and well-defined retention techniques. The construction industry has a shortage of skilled labor and is challenged to attract new talent. Ken Simonson, chief economist of the Associated General Contractors of America, says finding and retaining qualified workers should be a top concern for contractors going in to 2019.
Invest in Financial Software
The more accurate and timely that financial information is available to managers and senior executives, the better the decisions will be. Sureties, agents and CPAs can be great resources for recommending what cost and accounting systems might be a good fit for managing growing organizations. Working smarter and growing responsibly will lead to long term success without dramatic swings in profitability
BY JOSH PENWELL SR. VICE PRESIDENT, CONTRACT UNDERWRITING