Being a contractor during economic uncertainty: Q&A with Scott Bailey
Even before the pandemic, there was a lot of uncertainty in construction.
“Will we be awarded that job? Can we handle the amount of work in our backlog with this crew? How can we hire a new team in a matter of weeks for that upcoming project? When will we receive payment?” These are just a few of the reasons why contractors worry. Then add a pandemic, and, well, life didn’t get easier. But fret not, because business is picking up and if there’s one thing we know it’s that entrepreneurs — especially contractors — are optimistic by nature.
Having joined UFG Surety in 2019, AVP and Surety Underwriting Manager Scott Bailey has more than 40 years of experience in surety bonding. His consistency and proven partnerships with surety agencies helps him understand contractors and the ins and outs of construction.
We sat down with Scott to discuss what history tells us about being a contractor during economic uncertainty, cash flow tips and what to consider going forward.
What does history tell us about being a contractor during economic uncertainty?
Bailey: The post-COVID economy has seen dramatic changes including material price inflation, labor inflation and lack of labor to meet demand and supply chain interruptions. Each of these challenges, in isolation, can cause unrecoverable project costs, project delays or cancellations, and downward pressure on profit margins. Combine two or more of these factors and you can have a very bad job (or multiple bad jobs) on your hands.
Economic indicators suggest we could be moving closer to a recession or are in one now. Knowing that there’s very likely to be less work available in the coming months, now is the time to be proactive and consider cutting overhead. If you have a lot of debt, it’s time to sell underutilized assets to reduce your debt service that is likely going to increase as interest rates rise. You may also have to make some hard decisions to reduce staff and/or field personnel. Salary adjustments for remaining staff may be necessary, and not just for non-owners.
Cash flow and revenues can be tough to manage – any tips there?
Bailey: Downsizing can help improve cash flow, while growth can eat it. That’s something to be cognizant about going forward. It’s worthy to note that in a recession, results are typically predictable within the construction industry and have occurred in each recovery cycle during the last 70 years. Keep in mind that the construction industry lags a recession by 6-18 months. That’s because contractors often have full backlogs entering a recession and that backlog can take many months to run off. Contractors usually seek to maintain revenues despite a reduced availability of work. This leads to taking work at lower margins, which will compromise earnings. It’s those lower margin projects acquired during the recession that often result in contractor failures many months later, especially for those contractors who don’t manage their overhead to right-size their companies to the available profitable work. Now, for the first time in about 20 years, we’re seeing interest rates increase. The result is that borrowing costs will increase resulting in even further demands on cash flow.If revenues have gone down or you are planning on reducing revenue, don’t view that as a failure. Sometimes that is necessary to continue in an uncertain market. You may be tempted to look at diversifying by traveling farther, looking at bigger or smaller jobs or other types of revenue outside your area of expertise, but each of these options carry significant additional risk.
What should I consider for next steps?
Bailey: As interest rates rise, there will be an increased number of projects, particularly in the private sector, that will be delayed or cancelled. This could even include projects already under contract. You may want to reduce your overhead or at least identify opportunities for overhead reduction that can be quickly implemented if needed. The one common factor in almost every business failure is running out of cash.
One other important piece of advice is to surround yourself with knowledgeable support like construction attorneys, professional surety agents and construction CPAs. The combination of these three professionals could be the reason your company survives or even thrives during economic uncertainty.
