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Prepare your construction business for the next economic downturn

The effects of the COVID-19 pandemic have been unprecedented and far-reaching. Nearly every industry across the world has been impacted in some ways forcing market slowdowns and, in some cases, complete business closures. It’s an unprecedented economic crisis – more challenging than even 2008 in some ways – and the effects have been far felt in economies worldwide.

For the construction industry, state shutdowns, supply chain disruptions, and mandatory safety measures have presented unique challenges that may not be repeated in future times of economic crisis. But while the effects of the pandemic have been unique, there are lessons that can be learned and applied to prepare your firm for future downturns no matter what sort of crisis the country and construction industry is facing.

Project your cash flow

Staying in the black does not necessarily mean your business has good cash flow. In fact, in times of crisis, you learn just how insignificant money in the bank can seem when challenges and costs rise. The good news is you can gain better control of your cash flow in times of prosperity and times of crisis with an up-to-date and flexible cash flow analysis. A thorough cash flow analysis can help you play out various scenarios, such as the effects of the stay-at-home orders that came with the pandemic, and see where you’d end up with certain adjustments. Start with these steps:

  1. Update your financial statements so everything you are looking at is current.
  2. Reevaluate your fixed and variable expenses to take into account the changes that could be possible in your business should you need to close, find different suppliers, or enact new safety measures, like during the pandemic.
  3. Know your credit options and where you can increase if needed. Understand your terms so you can feel confident in your ability to pay off any debt you accumulate when things start to improve.
  4. Project your cash flow using various changes to your income and expenses depending on different circumstances. Get as micro as two weeks out for a better, more precise look at where your business will stand.

Once you’ve got a handle on your cash flow, you can begin to make adjustments in income and expenses with a more informed mindset.

Get cozy with efficiency

A construction business can almost always be more efficient either through operations, personnel, or office management. Each area of your business can be analyzed for greater efficiency and thus greater cost savings in times of success and crisis. Here are a few areas to consider:

Operations – How do you measure the success of your projects? Do you have set standards that everyone is expected to follow in order to ensure the most efficient project possible? Analyzing your operations includes understanding your KPIs for areas such as project performance, project controls, equipment utilization, and labor management. When you know what you’re looking for, you can communicate that with work teams and build a better culture of efficiency and accountability.

Personnel – Having the right team at the right time can make all the difference in your business’s success during times of crisis. In the construction industry, finding the right personnel can be challenging, but attracting and retaining good talent is always the goal. An objective performance management culture and competitive compensation that takes into account fixed and variable compensation can help achieve talent goals in times of crisis and success.

Additionally, ensuring the right people are in the right seats and are being assigned efficiently is key to right-sizing your staffing budget. Before you consider cutting staff in a crisis, think about how they can be retrained and reassigned to meet the changing needs of the company.

Administration – Getting lean with your administrative expenses is key no matter what state the economy is in. Since these expenses are usually fixed to some degree, you can project out how much reserve cash you’ll need to cover them should a crisis hit. It’s generally a good idea to have enough gross profit to cover you for at least a year.

On the flip side of cutting administrative expenses, getting paid is just as important. Cleaning up your accounts receivable and setting up payment plans and expectations for outstanding invoices, and then actually following up, can go a long way to improving your income month-over-month.

Job health – Are you staying on top of the financial health of each of your projects? Job cost reporting, project updates and change orders, and supply chain issues can all affect the health of your project. It’s not just a challenge in times of crisis, staying on top of financial changes in projects also affects your company’s financial health overall. Regular project management meetings and investing in real-time monitoring of your financial health is key. Your CPA can help manage the financial stability of your company while you get back in the field.

Know your obligations

The pandemic has shed light on many issues in the industry but one that should be highlighted is having a thorough understanding of your legal obligations. Thankfully, force majeure has

protected the construction industry during this pandemic. However, not all crisis will be the same, so consider:

  1. Available bonds when you can’t get paid
  2. Lien rights and protecting yourself – understand notice requirements and filing deadlines in your project’s jurisdiction
  3. Contract terms that protect you if a project is canceled such as termination fees, costs related to demobilization, overhead, and profit
  4. Escalation clauses to help mitigate risks of rising material prices

Projecting cash flow, monitoring efficiency, and staying on top of your obligations are best practices for your business regardless of the state of the economy, but they are especially important when times of crisis hit. With thorough preparation, your business has a better chance of weathering the storm of the next economic downturn.