The E&C industry has endured seismic shifts during the past decade and is still going strong in 2019.
Rumblings about a recession on the horizon are starting to make company leaders a bit nervous, but many are just too busy keeping up with current work to start thinking about contingency planning. In fact, the constrained labor situation, coupled with material increases, compressed project schedules and ongoing margin compression, are all creating more risk for E&C firms today—and right when we find ourselves at the top of the market. As we like to say, “Contractors don’t starve to death; they die from gluttony. They get too much work, too fast, with inadequate resources, and then they get into financial trouble and run out of cash.”
Now is the time to get proactive with conversations and planning around lessons learned from the last down- turn and “recession-proof” your company. While the last recession was historic in scale and duration, the next downturn will likely look very different. Still, through good preparation, companies can take the lessons they (or their predecessors) learned from the last recession and use them to avoid repeating any costly mistakes. Following are seven key lessons from FMI’s senior consultants and directors that all E&C firms can learn from:
1. Don’t wait too long to make any hard decisions you have been deferring. This might be a marginal performer you’ve been keeping, an underperforming office or division that has been limping along, or anything else you’ve been unwilling to pull the trigger on. During the last recession, these types of issues plagued E&C companies for far too long. Leadership that is slow to react and respond can make or break a company.
2. Find your own sweet spot and don’t just follow the herd. Be picky and don’t chase every project or every owner. Know what your core competencies are and with whom you like to work. Also, don’t just be a market follower, especially if you are trailing behind others in markets where your company has little or no expertise. If you’re following the crowd, you’re going to be a year behind the latest movements.
3. Work on the new, envisioned future and set the strategy for post-recession success. Be clear on organizational purpose and values during this exercise; they will be tested. Many of today’s leaders are in constant firefighting mode and not focusing on the big picture. Living in a reactive mode and not being proactive and taking charge of shaping your own destiny and future can become your biggest detriments.
4. Get a grasp on “incremental economics” like revenue, margin and overhead. A good business doesn’t turn on its head in a bad market. A competitive landscape has transformed standard estimating procedures into a game of marksmanship. Understanding the total costs for each project and how these costs break down is the first step in knowing where and how you can improve profit margins. Too many E&C firms lack true knowledge of what it costs them to both do and pursue work. In a recession, the ability to produce as inexpensively as possible is the key differentiator. If you know your costs for any specific scope of work (i.e., historical costs), you can proactively reduce or raise your prices according to market conditions.
5. Maintain a healthy balance sheet (i.e., cash and working capital) in the context of growth plans.
Conduct a risk analysis on all existing projects slated to complete more than six months out. Identify high-risk projects and how each will be staffed to take to project completion. Leverage and utilize a multiskilled workforce: In-house, self-perform capabilities can mean a difference on margins, time and manpower, while all-around adaptability can make a firm indispensable to satisfied clients.
6. Get positioned in your market (and in the heads of your clients)—early. The game of selling work and interacting with clients has changed quite a bit for many E&C companies. These days, early plans allow for the most flexibility. Look particularly close at segments that are likely to do well in a recession. Are you winning the size and type of work that will allow you to quickly expand in the event of a market change? Do you truly understand your clients’ mindsets? Do you get their way of thinking and what’s important to them? While client relationships won’t guarantee you work, they do still matter and are critical when the market slows down.
7. Get more feet on the street. It’s time to give sellers/doers the skills they need to be confident calling on customers. Have them build a list of contacts that they want to keep in touch with. Then, create a training program to educate your people on “how to behave in a recession”—estimators with project selection, field managers with scope management, PMs with cash management, etc. Client interaction across all company levels will increase your presence with clients, give you an inside track and improve collaboration among future leaders.
Back in the Great Recession, contractors had large backlogs in the fall of 2008, and many thought they would weather the storm. In reality, almost all that backlog disappeared relatively quickly. First, it was deferred, then it was postponed, and then poof—it was gone. It may not happen that way next time, but history could repeat itself. Much work today is being delayed, with schedules constantly being slowed—perhaps this is a precursor to the next slowdown. This is a red flag to keep a close eye on as we move further into 2019.
Back to the Basics
Instead of grasping for straws once the downturn hits, FMI tells companies to go back to the basics and focus on building the best organization possible now. Make sure you have:
- Great disciplines around communication, feedback and planning.
- Great people who can embrace the organization, negotiate well and
understand what the owners want.
- The right support structures and systems.
- The right financial mechanisms in place.
- The right technology to support your company’s vision and strategies.
As the industry continues to climb toward the market peak, this is also the time to unabashedly build out your equity base. That way, when you transition into the next downturn, you’ll have the cash resources to do whatever it takes to sur- vive (even if that’s “no work” because the money’s not there). Skip this step and you’ll wind up overextended going into the slowdown; that’s where companies historically run into trouble.
Here are six more “back to the basics” strategies that E&C companies can use to offset the negative impacts of the next recession:
- Extrapolate clarity of purpose in your values and the goals/milestones that are in front of you.
- Use data analysis to evaluate these goals against the current context of what’s going on in your business.
- Be an agile and flexible leader.
- Explore the market itself, your peers and other benchmark industries and business builders that you feel that you can learn from.
- Be intellectually curious and use your mental flexibility and intuition to come up with new, creative business ideas.
- Have a plan in place for your key talent. What people do you need to have on your team 10 years from now in order to sustain the business for the next 30 years?
Right now, the market is still relatively good; you still have options. All E&C firms should be picking opportunities that allow them to succeed, or to at least know that they have a trail of work in place as they head for the next downturn. The market leaders will be the ones who really understand the markets and who know where construction is headed, while the chase group that doesn’t understand and/ or care may get crushed.