Managing Downturns in Construction

The recent economic downturn has had a very negative effect on many industries, and the construction industry has been especially affected. Construction, in many cases, can be seen as a leading indicator of a country’s economic health, and as such it is very sensitive to changes both good and bad. There are numerous factors that have hurt construction in the United States, and some firms have been disproportionately affected.

Small Firms Struggle
Small contractors are impacted much more severely than their larger counterparts. They do not have a large backlog of scheduled work that serves to keep money coming in when new projects are hard to find, while most large, established contractors have significant backlogs. This creates a delicate situation for the small contractor, who must now be extremely diligent when it comes to finding the next project, or face layoffs, cuts or business closure. Larger firms will not see the same issues and even construction claims consultants projects suffer

Price of Materials is Unstable
The US dollar is not as strong as it was during better economic times, and when you combine that with growing economies in other countries it leads to instability in the price of building materials. If the dollar loses or gains some value, or a country such as China has a large order for steel, the price of steel can raise quite a bit overnight. This is another problem that disproportionately hurts smaller contractors who do not have much cushion when it comes to absorbing the increased costs. One or two projects going over budget due to cost increases is much worse for smaller companies.

Projects are Few and Far Between
Another problem that the construction industry as a whole faces is the lack of new construction needs, whether it be for residential housing or municipal projects. The stock of existing, new residential homes is quite high, and buying an older home is cheaper in many cases. This means there are just not a lot of new residential homes being built, a large driver of the construction industry. When you combine this with a lack of projects for government and business the effects can be devastating.

Credit Rules are More Strict
At the beginning of the 2000s credit was extremely easy to come by, too easy according to many sources. This allowed contractors to grow bigger by relying on credit and loans, which is something that simply cannot be relied upon anymore. Tighter credit rules mean that companies without a large surplus of resources will have a hard time bidding on larger projects, as well as a hard time expanding in general. Again, this can disproportionately hurt smaller companies who typically do not have many resources to fall back on.

Payment Defaults and Performance Payments More Common
Less available credit in combination with a more hostile overall business environment simply means contractors need to expect more payment defaults. More customers, whether they are residential or businesses, will face financial hardships during construction projects, and not be able to pay contractors. Performance payments, or those based upon meeting specific goals are also much more common when clients are looking to save money. Performance payments can be good, but if a contractor relies upon them and then fails to meet the performance benchmark, profit can take a significant hit. Small contractors will be most hurt by this, as even a few projects defaulting or missing performance goals can cost smaller contractors a large percentage of their revenue.

All of these factors combine to create quite a few obstacles for the construction industry. Small contractors are impacted more than others, but the industry and country as a whole is negatively effected. There are a few steps that can be taken to mitigate some of these risks, such as more stringent bidding guidelines to account for changing materials pricing or proactive management to ensure performance benchmarks or met, but these are not always possible. Overall, the economic downturn has cause many contractors to go out of business and many tradesmen are now unemployed, but for well managed firms a down economy has created growth opportunities. Less project competition can mean easier to get projects in certain instances, and smaller contractors with fallback resources are well positioned to take advantage of this.