Have You Got an Economic Plan?
Mark L. Johnson
November 2009Wall and ceiling contractors handle economic planning in various ways.
Some firms take a formal approach: "We gather data and put it in an Excel spreadsheet,” says Ron Lauer, controller at Denver Drywall Company, Englewood, Colo.
Others focus on the bottom line: "With the economy as it is there’s not much you can do but bid and try to acquire jobs,” says Kim DeBacco, office manager at E & K of Phoenix, Phoenix, Ariz. "Our plan is to sell, sell, sell.”
Since no one can accurately predict the direction of the economy, why should wall and ceiling contractors bother to try? Answer: They’re not trying to predict anything, but are trying to be prepared.
"Companies caught without a plan are of the mindset that if they can just get through this period of weakness, all will be fine,” says Bill Conerly, an economist at Conerly Consulting, Lake Oswego, Ore. "But things could get much worse. Even if things get better, people still need a plan.”
What’s an Economic Plan?
The words economic and plan suggest a formal report. Someone in a cubicle pours over construction activity, credit data, labor trends and supply issues—and then crunches numbers. Out comes a paper with charts, bullet points and a plastic report cover. It seems too cerebral to be useful to anyone running day-to-day operations.
But, a good economic plan goes beyond just data. It’s not a forecast so much as it is a plan of attack. The goal is to answer one important and compelling question: What exactly will we do if growth prospects suddenly change?
Think about it. The number of projects out for bid might further plummet, as it has in many areas, just when your firm is saddled with too much overhead. Or later on, when sales resume, you may be eager to add work but lack the cash reserves and manpower to ramp up effectively. If you faced either scenario, what would you do?
To be ready, some companies gather their top executives and revise their budgets regularly. "We take our top managers, sit down, work it up and tweak from there,” Lauer says.
Other firms include their project managers in the process. For them, economic planning amounts to goal-setting, in addition to crisis preparedness. "It’s a measuring stick throughout the year,” says Joe McPherson, executive vice president, Central Ceilings, Inc. in South Easton, Mass. "Everybody on my team has what we call a Balance Score Card. I say what we should be able to do, and they say how they are going to contribute.”
Some contractors have been known to scribble their top expense line items on an envelope. When business conditions change, they use the list as a ranking system for making cutbacks.
"I don’t think there are any real guidelines on economic planning,” Lauer says. "If you could predict what the economy will do, then you could start doing things realistically. You can only guess at the best case.”
At any rate, economic planning helps contractors to avoid being blindsided. "The minute we stop winning contracts, or we have to reduce our margins on contracts, we start making cuts,” Lauer says.
Now consider this question: What steps will you take when the economy comes thundering back? Admittedly, few contractors see that course transpiring soon. "Everybody is talking about a ‘V’ return, where growth is going to skyrocket to a different plateau. I just don’t see it,” McPherson says. "I don’t expect heavy growth until 2013, which is three years away.”
But suppose that forecast holds true. Then now would be an optimal time to plan for re-staffing. The construction industry lost 682,000 jobs in 2008, second only to manufacturing’s 875,000 loss that year, reports the U.S. Small Business Administration Office of Advocacy’s 2009 edition of The Small Business Economy: A Report to the President. Bringing layoffs and recruits into the fold could prove difficult. "The industry has downsized significantly both in terms of entry-level labor and management personnel,” Conerly says. "When business turns up, they’re going to scramble to find people to do the work.”
In steady economic times, contractors can hire workers one or two at a time and easily integrate them into their operations. In a strong recovery, however, companies must add heaps of workers all at once, and that can be challenging. "Your existing work force will have been together through a downturn, and you’ll be mixing in new puppies,” Conerly says. "It won’t be easy to get them all working as a team.”
One problem this time around may be the current outmigration of labor. The recession in the United States has hit immigrants hard, so much so that the number of foreign-born residents of the United States declined for the first time since 1970, according to the Census Bureau’s annual American Community survey. The Wall Street Journal reported that "a decline in construction jobs lured fewer immigrants from their home countries, especially those from Mexico.”
"These workers may find it harder to come across the border than when they first came,” Conerly says. And that means the labor force may no longer be able to flex and respond like it used to. Contractors should at least think about their top talent.
"You definitely have to be strategic in how you go about reducing your work force,” McPherson says. "Some of our guys are retiring, but on the other hand we’re making sure that we train our future leaders.”
Another economic upturn issue involves vendor performance. If a contractor is dependent on one or two critical suppliers, then that firm may face problems. "A vendor may not be able to deliver because it downsized its own staff or doesn’t have the financial means to ramp up,” Conerly says. A good economic plan prompts contractors to review how their suppliers are working out. Why not ask about the steps your suppliers have taken with their employees? Inquire about their inventory levels. Find out what they’re planning to do once construction activity resumes. You just may sidestep many problems.
The Hidden Cash Crunch
Contractors who suddenly get projects may lay out significant amounts of cash before getting paid. A firm’s cash outflows can grow faster than the cash coming in. While contractors want to be flooded with winning bids, they have to be ready to handle all the work.
That’s where some cash-flow planning comes into play. A contractor can ask these questions: How much growth do my current cash levels accommodate? At what point will I have to go to my bank to ask for a larger credit limit?
"Banks are used to contingency planning on the downside. They’re used to talking ‘what ifs’ related to sales declines and problems related to the contractor getting paid,” Conerly says. "It’s unusual for somebody to walk into the bank with a contingency plan for the upside.”
But upside planning is a good idea, Conerly says. For starters, obtaining extra financing may be a problem after April 15, 2010. That’s because most banks assess their lending to small businesses by evaluating prior tax returns. They will usually going back two years. And next year, the years 2008 and 2009 will be under review, just when many firms’ tax filings may not look so credit worthy to a bank.
A plan can make the difference, since it would outline the steps a contractor plans to take to purchase materials, pay crews and keep operations running smoothly. Even if a bank refuses to grant a higher credit limit, the contractor can think it over before bidding on more projects.
"In an upturn, we’ll come up with three different best-case budgets,” Lauer says. "It helps us to decide how much growth we want to take on.”
A Case History
Richard Huntley, president at WeKanDo Construction, San Juan, Puerto Rico, has a plan for getting aggressive in his market.
"We looked at all of our overhead costs using an Excel spreadsheet,” he says. "We went back to 2004, our start-up year, and compared it to last year. Like a lot of people, we had a good year. We had contracts and a backlog, but now that’s hitting a wall.”
Huntley is watching his cash. "We don’t want a month where we’re sitting ducks,” he says. "We’ve looked at our fixed costs and at how to shave those variables. We’ve been aggressive on jobs, trying to pick them better to make sure we get decent profit.”
WeKanDo Construction recently moved into a new, 45,000-square-foot warehouse and office. Because the firm still holds the old property, its overhead is higher than usual at the moment. But, the new facility allows the firm to operate more efficiently, with greater visibility in the marketplace and with more responsive service to customers.
WeKanDo’s plan includes controlling expenditures and renegotiating payment terms with suppliers. The plan even calls for making some marketing moves, including starting a quarterly newsletter to trumpet its services to architects and general contractors, some of whom only know the firm for its work in a few areas.
Bottom line: WeKanDo’s plan serves as a basis for optimism and fiscal focus. "It helps us to set our break-even points, so that we know where we can hit our numbers,” Huntley says.
It’s About Vision
In the second quarter of 2009, gross domestic product fell for the fourth consecutive time. The unemployment rate rose to 9.5 percent by summer, and construction employment continued its decline month by month, according to the SBA Office of Advocacy’s Quarterly Indicators.
What do contractors have to say about it?
"Next year doesn’t look like a growth year in Boston,” McPherson says. "Schools are a big part of construction in the northeast, and endowments are way off. Until they stabilize and start growing again, we’re going to see a very conservative approach in spending.”
"I don’t see an end to the downturn in contracts until mid next year,” Lauer says. "I don’t see money freeing up, and I don’t see owners having buildings built until then. Nobody is speculating like they normally do.”
Yes, economic predictions for the construction industry are currently dire. But economic planning can help a contractor to stand tall. The planning process calls for strategic thinking—how to substantiate your business vision, develop your team, confront change and capitalize on opportunities.
"As your vision becomes more focused, your ideas will appear stronger and more credible,” states the Small Business Planner: Forecast page on the SBA Web site. "Not only will it be easier to convince others that your idea is a good one, but it will also be easier to maintain your own conviction and motivation when you reach any pitfalls or obstacles in the road.”
Mark L. Johnson is an industry writer and marketing communications consultant.