Survivor

How to stay on top when the economy's heading down

By Chris Thompson
Editor at large

The construction economy is balanced on the tip of a needle, just waiting for a downdraft to send it spiraling into the abyss or a strong breeze to carry it to the nosebleed heights of the last several years.

"Right now, it seems to be like a moving target, where one week it looks like everything is going to fall apart and the next week it's the exact opposite," said Jim Lange, president of C&C Erecting and Mega Construction in Waukesha. "It's extremely volatile."

The current economy and its forecast might be foggy at best, but Lange said there's no doubt the last several months spelled a downturn for construction.

"Originally, most people thought it would recover in July, and most people I talk to are still optimistic," he said. "In the construction business, the niche we're in is extremely slow, and we're having to really scratch to find stuff."

Lange's company focuses on nonresidential construction, and he said keeping an ear to the ground and an eye in local and national business publications are the best ways to predict which way the economic winds are blowing.

"We get information from our key suppliers, and we get data on our main product shipments into the area," he said. "We talk to the vice president of a large metal building manufacturing company, and their business, as an industry, was down 21 percent at the end of the first quarter of 2001 -- and they track it by state and county."

Lange's not alone in his apprehension. Jeff Walters, certified public accountant and partner at Virchow Krause and Company LLP, an accounting firm in Appleton, said it's not yet time to run screaming for the exits, but there's also no cause for celebration.

"The general climate right now is OK," he said. "It's not gloom and doom, and there still seems to be a fair amount of work. It's not as steady as most construction companies grew accustomed to for several years, and there are periodic pockets of layoffs. There was a line of growth going straight up, and now it's tapered off."

Where that line goes, Walters said, is the question on everyone's mind.

"The curve is not straight up, and it's starting to flatten, but it depends on how it goes over the next year to determine if there will be a sharp turn up or down," he said. "The private sector is where you would see it flattening out. Three to five months ago, the financial markets were ugly, and that impact goes right down to the individual. It's loosening up now, and maybe we'll see some pent-up demand start to bust out, but that's still probably six to eight months out."

Predictions as to whether the construction economy is expanding, retracting or holding steady depend on who's talking and where they are, said Mike Benes, CPA and industry consultant with Milwaukee-based Benes and Krueger SP, an accounting firm specializing in the construction industry.

"I think the economy is a big question mark," he said. "We do work across the country, and there are pockets where it's tightening up. But most of our clients in the Midwest are doing reasonably well."

Predicting the future

The economy's crystal ball is open to anyone's gaze, but it won't do much good if they don't know what to look for or how to interpret what they find. Tim Robertson, president of Marketlink, a construction-related marketing firm based in Kimberly, said there are clear indicators when the economy is set to take a dive.

"There is a general lack of action in terms of bids that are available, or relationships are not as fruitful as they were in the past," he said. "In construction, it becomes more apparent because you can start to see regular clients tighten their belts or stretch their timetables. Prospective clients look more seriously at bidding than design/build or negotiated work."

Walters said spotting a downtrend in the economy is sometimes as simple as company owners looking at their bullpen of projects.

"There's not a lot of backlog, and it's going to get tough for companies that do a lot of bid work," he said. "People are looking for work in that market, and the bidding mentality can get down and dirty. They will need to work to advertise and build a better customer base."

Economic ups and downs are typical in the construction industry, and Benes said handling the tough times is sometimes just a matter of proper organization.

"In good times, general overheads expand, but they're things that may not have been needed all along," he said. "Then you get a two-by-four across the head called a downturn in economic conditions, and it forces people to review things. Where can we reduce our overhead without hurting operations?"

Weathering the storm

"Right now, it seems to be like a moving target, where one week it looks like everything is going to fall apart and the next week it’s the exact opposite." Jim Lange President of C&C Erecting and Mega Construction

Depending on the perspective, there are several ways to handle an economic downswing. Lange, for instance, said his company dived headfirst into the market, gobbling up as much work as possible.

"When we found out last year that it wasn't going to be hot at the end of last year and this year, we added a salesperson," he said.

"Our feeling was that if the volume of work was going to go down significantly, the only way to get our fair part was to have someone knocking on doors and getting business."

The company also spread its wings, going well beyond its normal work neighborhood to tackle jobs throughout Wisconsin as well as in Iowa, Minnesota and Illinois. Lange said C&C and Mega Construction have four projects in Madison, two in St. Paul, Minn., and one in central Minnesota, all areas well outside the companies' normal stomping grounds.

"If you asked a typical contractor what they would do, they would say they only go an hour away for work," he said. "We just say that's kind of stupid because if there's not enough work in your area, it doesn't make sense to just die. You have to expand the area where you work."

Aggression during the tough times, Lange said, can mean the difference between survival and failure.

"We have the mindset that distance doesn't bother us," he said. "The easy thing to say is there is no business, so I'll just play cards."

Geographical expansion is one thing, but Lange said a company might also consider spreading into new types of work.

"You might have to change and expand your niche to get enough volume," he said. "Each contractor gets into a niche that they specialize in, and if that niche slows, they need to diversify or get left behind."

Keeping the books

Expansion can offset a slow economy, but it won't do much good if a contractor doesn't keep a close eye on internal operations. Sometimes it's a simple matter of cutting frivolous expenses, but it can get complicated when things get really tight.

Walters said as the economy constricts, competitive environments get stronger and weed out companies that are not financially strong. Those companies with equity will be fine, he said, but startups could have trouble.

"If the backlogs start to dry up, they'll need to look at their core operations and overhead structures," Walters said. "What's going to bring them to the even point so they can survive? They'll need to budget and shave here and there. A lot of companies -- maybe they weren't fat and sassy, but maybe they've done things they normally wouldn't. Companies that get lean and mean will survive. It can be done, but it's a tough competitive environment right now."

Lange said budgeting and fiscal responsibility are core values for his company when things get tight.

"We look closely at our costs and take a hard line to make sure we control our expenses, and we instill that thought process in all our employees," he said. "The biggest things are to watch your expenses, be right on top of your receivables and make sure you closely monitor your cash flow."

Survival, Walters said, is based on how well a company does its job and how solvent it is. Keeping in touch with accountants and understanding what they're saying is key.

"You have to pay attention to the numbers, and you better pay attention to what your accountants are telling you," Walters said. "Why did we lose money this month? What jobs did we make money on? What kind of rates do we need to break even? You'd be surprised at how eye opening it is. You have to understand what it takes to keep your trucks on the road and keep people in the office. You have to understand the overall structure and break-even analysis."

And don't wait until the last minute to figure it all out, Benes said.

"We recommend that people have austerity programs on the shelf so if things turn down and you need to make cuts, you know where to do it," he said. "There are a variety of levels. It could 10 percent or 25 percent, and you look at what you need to do if there's a downswing in market conditions."

Accountants are only part of the equation. Benes said people in the industry should look at the entire process of getting work done to figure out who they need to talk to.

"Before a downswing, you need to continue meeting with your bonding company to keep aware of their programs," he said. "With a downswing, there is a tightening in the surety industry, and that will impact your ability to bond work. You need to communicate with them and make sure you're in bed with them, and they understand what you want to do."

When the backlog dries up and the economy's grip gets tighter, contractors might need to cut people. But layoffs require a level of sophistication, tact and awareness, Robertson said.

Layoffs, if handled poorly, could cause irreparable harm to a company, he said. Robertson pointed to a company that laid off 100 people, but it failed to report that in the previous year it had hired 300.

"When a company does tighten its belt, it's being watched so it's very, very important to communicate," he said. "People are looking at them from a new perspective in that any potential sign of a downturn in a company's business can be amplified or misconstrued in that kind of economy. Tightening your belt can be misconstrued as going down. Companies just have to be very careful about what they say to people because a prospective client could be saying 'Do I want to hire a company that's on the rocks?'"

Name recognition

If a company can establish itself as a trusted, confident and competent face in the industry, swings in the economy might not seem so bad, Robertson said. But, as is the case with bookkeeping, it's important to consider marketing in both good times and bad.

"I think often it's that panic call that comes from companies that neglected to do continual marketing and keep there name in front of the right prospects," he said. "As soon as it gets tight, they start to panic."

Marketing, Robertson said, can't happen overnight. It takes a long time to put a plan in place, so starting in the midst of a downswing could be too late.

"When the economy starts to slow, and they see signs of their business slowing, they're already behind the curve," Robertson said.

"They need to catch up to their competition with a strong message in the marketplace. If you haven't done it already, you better hurry up and get moving. Just have a marketing plan in place and be following it. Don't put it on the credenza and forget about spooling it up."

Marketing, he said, is simply getting a company's name into the marketplace. Meet with people, get on the phone, write newsletters, send out direct mail, advertise or market over the Internet.

"A lot is getting on the ball and doing good salesmanship," Robertson said. "Marketing sets the stage for sales, and if you're not doing marketing, you'll have some cold, hard sales. It should be a daily occurrence, not just when the economy is bad."

He said he strongly suggests that clients figure out what they're best at so when they kick off their marketing campaigns, they know who to talk to. Sometimes, that could mean choosing a narrow niche and staking claim to it.

"More and more companies are saying we build within a certain vertical market -- such as health care, the food industry or schools," Robertson said. "There are not as many old-fashioned general contractors who build anything. Now, vertical markets are the key. You need to figure out what's best for your company."

Global awareness

Understanding and exploiting a niche is important, but Lange said it's equally essential to realize that construction isn't on an island. Seemingly unrelated industries, such as the auto industry, can cause dramatic shifts in construction because if auto sales go down, then vendor sales follow and any planned expansions could get shelved.

"We're globally impacted way more than people want to admit," Lange said. "There are so many things that you can't control.

We're working on a project in the northern suburbs of Chicago, and the company products relate to the meat industry. They're thinking about a 20,000-square-foot expansion, but the company is based in Germany, and they're worried about it because there isn't as much cattle to slaughter because of mad cow disease."

Questions or help? Drop us a line

© 2000, Daily Reporter Publishing Company, All Rights Reserved.