Recently, FMI Corporation, a consulting, investment banking and research firm to the E&C industry, analyzed the operating profit margins of nonresidential construction firms, showing growth at 17.3 percent CAGR between 2013 and 2017. FMI continues to report, “This breaks down to 24.7% for general contractors, 5.9% for specialty trade contractors, and 15.3% for heavy/civil contractors.”
During this time of strong economic growth, companies in the Engineering and Construction industry are hiring, getting bigger jobs, growing revenues, and gaining greater profits. Things look really good right now. But what if something happens that can disrupt this peaceful time? Could you lose everything if your business is not prepared for when the economy takes a downturn – and it will, eventually.
What can you do to prepare your business for a potential downturn? Let’s look at these four areas:
- Operations – If margins begin to fade, contractors need to be concerned. But before any losses occur, contractors need to know the true cost of a project to see if there are any areas for improvement. What visibility do you have into the true cost of scheduling, labor, productivity, equipment use, etc.?
- Risk Management – It is reported that more contractors go bankrupt during good economic times because of overaggressive growth and poor money management. Contractors need to ask themselves whether they have maintained a healthy balance sheet, managed cash flow properly, and staffed projects with the right assets.
- People – There is a shortage of skilled labor in the construction industry, but hiring people with little experience is often not a great idea unless you have an effective training program. When hiring inexperienced people, give them a set of goals to meet and work with them on how to meet them, such as additional training or extra time to meet goals.
- Incentives – In today’s job market, people move around to different companies more than they used to. To keep employees, you will need to offer competitive wages and exceptional bonuses. These can increase overhead. You need to ask yourself if your compensation programs mitigate or aggravate profitability in a downturn year?
It is better to be prepared now than have to scramble later. First, automate your business processes and use a collaborative network so you can better conduct business with your supply chain trading partners. Next, utilize the data generated from the transactions across the network to search for patterns and identify trends. You gain visibility across all your partners and your organization. You’ll be able to identify bottlenecks, uncover challenges, and find discrepancies to mitigate risk. Once you find these issues, you can fine tune the areas and continue to improve your operations so you’ll be ready if there is an economic downturn.