How to Recession-Proof Your Construction Business

Watch the business economy long enough, and you’ll see that it’s always cyclical: there are good times and there are lean times. And often the secret to long-term survival and success lies in how well you plan for the lean times. This is especially true for the construction business, which can be particularly vulnerable to the volatility of the larger economy. The housing and labor markets, as well as the supply chain and cost of materials, will repeatedly test the foundation of your business.

Recessions are like buses—there’s always another one coming along. On average they happen every three to four years. That means there’s no reason not to build recession-proof strategies into your business planning, so you’re not caught off guard—the same way you’d want to flood-proof a house that’s located close to water.

With that in mind, here are some tips on how to help shelter your business from the storms that inevitably lie ahead.

1. Stress Test Your Business

If you haven’t already done it, conducting a financial stress test is a great way to figure out how vulnerable your business may be to a downturn, so you can take the right action. It involves taking a close look at your financials and envisioning adverse scenarios, so you can gauge how you’ll fare with your cash flow, labor and other resources if things get dicey. How long can you survive?

The term stress testing sounds like it might be an expensive and maybe even anxiety-producing process, but it can be as easy as setting up a three-column spreadsheet. More sophisticated approaches involve running computer simulations. A modern ERP such as Dynamics 365 Business Central makes it easier to see and analyze the data you have from across the business, in one place, in addition to exporting and importing from Excel, if needed.

You can use the results to determine whether there are areas that aren’t adding value for your business, and where you can pare down.

2. Plan Ahead for the Lean Times

Based on what you learn from your stress test, you can figure how much cushion you’ll need to get through a downturn.

A key principle is to make sure that you leverage the good years to help get you through the lean ones. Assume that sooner or later you’re going to hit a rough patch and need some reserves to get you through. Making sure that you have adequate cash reserves and cashflow to get you through a recession takes intentional financial planning and skillful management.

A cloud-based modern ERP can also provide the structure that can lead to more predictability in cash flow. For example, Business Central can help companies better understand the order-to-cash cycle of their organizations. The visibility in Business Central also allows accounting to be more proactive with past-due invoices, providing dashboards and filtered views that help the team prioritize their follow-up.

3. Stay in the Flow

Beyond saving for a rainy day, you can look at ways to keep the cash coming in. New tools can come to your aid here. For example, machine learning and predictive analytics can analyze customer payment patterns and identify which customers are most likely to have difficulty making payments on time. To respond proactively, you might decide to use some extra communication to help keep the riskiest customers aware of deadlines well ahead of time.

Business Central provides the visibility you need to better manage and even automate these kinds of communications. Business Central’s Late Payment Prediction feature keeps track of how quickly a customer pays and leverages Azure Machine Learning to predict behavior.

4. Focus on New Business

It’s important not to rely on backlogs, because when a recession hits, those backlogs can evaporate quickly as projects get put on hold or canceled outright because financing is no longer available.

So, think ahead about how you’ll keep business coming in when times get more competitive. Make sure you’ve got strong marketing and advertising strategies in place, and the resources to implement them.

5. Keep Your Customers Happy

In this business, reputation is everything. And a reputation for keeping your promises—meeting timetables, coming in at or under budget, and exceeding expectations—is golden.

For that reason, it’s important to prioritize following through on the promises you make to your customers, and communicate if timelines change—as they inevitably will. Business Central and ProjectPro allows project managers to proactively communicate when they see delays coming. Getting ahead of a delay, and communicating the potential impact on the project, is critical to keeping customers happy.

The same is true for staying in budget. Consider change orders; you should avoid eating cost overruns that you didn’t cause. An effective Construction ERP allows the people managing the project in the field to track actual costs versus budget based on real time site conditions and request appropriate change orders as needed. This can also help you estimate future jobs better by looking at past jobs with similar needs and baking in some room for unexpected things that come up.

6. Keep Your Team Happy

It’s a basic economic truth: retaining talented team members is easier and more cost-effective than hiring new ones, especially in a low-unemployment labor market.

As The Hartford notes, a skilled labor shortage is making it difficult for construction firms to stay within project timelines. Even before the pandemic, there were more workers leaving the field than entering it.

The ripple effects of the shortage include not just productivity and profitability, but worker safety. And that’s causing many businesses to reevaluate how they operate. Having fewer employees may mean that you can’t take on as many new projects at the same time as you’d otherwise be able to.

Due to all these reasons, it’s important not just to get creative about bringing new hires on board, but to make sure you properly value the workers you’ve already got.

Employees drive your business forward. They help keep costs down, solve problems more quickly, reduce your liability, and boost customer satisfaction by delivering higher-quality work. It’s critical you provide them with the modern tools they expect, as well, so they can do their jobs better. Field and project managers expect modern and mobile job cost and construction management applications.

7. Diversify

Your business will be less vulnerable to downturns if it’s got more than one leg to stand on. If you’re only operating in one market or sector, when it slows down, you’re stuck.

That’s why diversification should be on your list of goals. If you’re only building or supporting one kind of project, it’s time to explore whether you can dip your toes in other markets.

It also helps to zero in on the most recession-proof sectors of your business. According to Construction Dive:

• “Publicly funded or subsidized construction projects will remain the safest bet for contractors in a downturn,” said Brian Turmail, vice president of public affairs and strategic initiatives at the Associated General Contractors of America.
• “Public buildings like schools and healthcare facilities should also be insulated from a downturn,” said Richard Branch, chief economist for Dodge Data & Analytics.

Expansion into other markets such as remodeling or modular construction is easier with a solid back-office foundation. That’s where a modern ERP can come into play.

8. Spend Smarter

When belts get tighter, it’s a natural impulse to start cutting costs. But cost-cutting by itself is reactive and inadequate. And too much cost-cutting can be counterproductive. For example, if you start laying off workers, you might find yourself caught short and unable to ramp up quickly enough when business rebounds. The same goes for offloading facilities, equipment or other assets.

What you need is a thoughtful spend management strategy, which can help protect your business by helping you spend more strategically. The essential goal of spend management is to consistently improve an organization’s spending through better data and planning. It means mitigating financial risk while taking into account your business’s broader priorities.

The ability to forecast spend accurately is key to making smart spending decisions, and fortunately, modern business analytics software is getting better at that task all the time.

Instead of throwing more human power into understanding project profitability, modern ERP solutions allow you accomplish more with less resources. Many times, we see Construction companies hiring more project accountants to keep track of costs, billings, and WIP, by tracking data in Excel and modeling it. Spending smarter would involve investing in the right ERP so that your systems can give you the report you need without an army of people working in Excel to deliver it. While this change does compel you to push the tracking of job costs to the project and field managers, where it belongs, it’s more efficient and less costly in the long run.

And that leads us to our final piece, which is leveraging the right technology.

9. Invest in the Right Technology

When you’re facing a potential slowdown, investing in technology may be the last thing on your mind. But it’s hard to overstate the real and tangible benefits of selecting tech that can automate your processes and give you greater visibility into costs, while also helping you keep closer tabs on materials, suppliers, and even customer payments.

All business is data-driven these days, and better data means better business decisions. A modern, cloud-based ERP system will help you organize and centralize your data so you can get more value out of it, by recognizing patterns, identifying issues that need to be addressed, and helping you see the road ahead more clearly. What’s more, a cloud-based ERP limits your spend on internal technology infrastructure, a costly, depreciating asset that requires people and services to care and feed.

Microsoft Dynamics 365 Business Central

One ERP solution that deserves a closer look from constructions firms is Microsoft’s Business Central, part of its Dynamics 365 offerings. Business Central operates within Microsoft’s larger cloud-based ecosystem, alongside offerings like Office, Teams, PowerApps, Power BI, and more. It offers reliability, flexibility, and scalability.

Here are some of its other potential benefits, all of which can help make your business more agile and resilient.

• Analytics and Forecasting. Business Central gives you real-time performance metrics and reporting and can help you better understand that data you have to improve your forecasting and decision-making.
• Sales and Customer Service. Business Central offers job-quoting capabilities as well as customer service features that are key for construction companies.
• Inventory and Supply Chain Management. For construction companies that have or are moving into prefab work in a factory, Business Central can help you deliver on time and adapt to changing business models with visibility across purchasing, manufacturing, inventory, and warehouses.
• Subcontractor Management. Business Central can make managing the subcontractors on your job sites simpler. For example, Business Central connects systems in your office to devices on-site, giving you real-time visibility into project progress and timelines. Valuable features include subcontract issuance, managing insurance certificates, and processes related to lien releases. Field managers onsite can also have access to subcontractor information to better understand cost, timelines, and more.
• Scheduling. When you’re managing multiple job sites and dozens of subcontractors, scheduling is everything. Business Central lets you connect Outlook and Microsoft Teams to update your calendar automatically. You can also create Job Teams sites for collaboration, checklists and document sharing—all connected to Business Central. Plus, Business Central’s scheduling tools help you visualize subcontractor progress, to keep things moving ahead smoothly.
• Accounting. Business Central gives you a more powerful way to manage accounting, and loan obligations. It improves reporting and automates a substantial amount of data entry that would otherwise be manual—making it easier to keep track of your finances.

Interested in finding out more about how Sikich can help you recession-proof your construction business? Contact us and we’ll help you get the ball rolling.