The U.S. commercial (non-residential) construction market outlook for the remainder of 2017 and through 2018 is expected to grow in the 4% range, according to the AIA Consensus Construction Forecast panel. This is slightly below its previous forecasts of 5-7% entering 2017. There are factors that could add tailwind to growth estimates, which include tax reform, financial deregulation, and a trillion-dollar infrastructure program over the coming decade.
The next several years should be a positive environment for construction. The volume and size of projects in the marketplace will lead to growth opportunities. Managing expanding backlogs present some unique challenges, and contractors need to be ever diligent. They must navigate their organizations through the appropriate growth opportunities without suffering the financial and human capital stress of over extension, which can lead to contractor failure. Generally, more contractors fail in good times than in bad times. Contractors primarily fail when they take on too much work, too fast, with inadequate resources, causing them to get into financial difficulty and run out of cash.
Construction growth will require a focus on planning, leadership, discipline on margin, generation of free cash flow, and availability of capable, experienced construction labor teams.
Here are six recommendations to keep in mind as contracting firms manage growth.
Investing in a talented workforce is paramount to profitable growth. (Photo: iStock)
No 6: Construction labor must support growth.
The most significant differentiator for successful contracting firms is having the quality and quantity of a craft labor force (carpenters, electricians, equipment operators, plumbers) and professional talent (project managers, supervisors, estimators). Availability of a qualified construction workforce to successfully support expanding backlogs will be a challenge in most states.
Maintaining strong partnerships with sub-contractors who possess a strong and skilled labor pool is critical to long-term success, as is monitoring the subcontractors to ensure they do not overindulge and take on too much work.
Firms that will continue to grow and succeed in today's environment must create strong incentive plans that encourage profitable results and retention of staff. Employee retention is paramount in this competitive market for talent.
According to the Economic Policy Institute, as of July 2017 there were nearly 2,000,000 fewer construction and manufacturing workers in the U.S. than at the start of the last recession.
Ultimately, a strong and skilled labor force will be the main factor to the extent that the contracting firm will grow.
Most successful construction leaders are adept at business planning, executing on that plan, and delivering sustainable, profitable results. (Photo: iStock)
No. 5: Reward diligent planning and experienced leadership.
A contractor's business plan needs to specify how the organization will manage increased projects and related contract volume. In addition to focusing on labor to perform the work, the plan needs to speak to project management, financial expectation, management systems, equipment productivity, and business continuity with a focus on an operational perspective.
The plan should be developed at a minimum for the current upcoming year and three years out. The plan requires a continuous refinement as opportunities present themselves and business conditions change.
Once the plan has been vetted with ownership, the next step(s) is to be transparent with your key financial partners.
- Banking relationship: A growing firm will require an expansion of the working line of credit. Maintaining appropriate levels of liquidity with an expanding backlog is critical. The cash flow projections outlined in the plan should be a focal point on the need for increased line of credit.
- Surety bonding relationships: There will be a need to visit with your surety agent to outline the plan and develop the potential need to increase your single and aggregate bonding line.
Growth in construction volume will stress existing systems and controls. (Photo: iStock)
No. 4: Effective project management means delivering profit on each project.
This business must maintain the appropriate checks and balances with estimating, scheduling, project review, and related financial and job cost control systems to report on performance. Do not short cut successful business practices as the organization develops into a larger enterprise.
Maintain discipline on requiring appropriate margins on all of your projects. It will be tempting on the larger volume projects to sacrifice margin for volume, but one would be wise to resist that approach at all costs.
Moving into a different line of contracting is not a recommended strategy unless it is a growth initiative through acquisition of another contracting firm that may complement your firm’s long term strategic plan. (Photo: iStock)
No. 3: Expand geographically while diversifying contracts.
Potential growth opportunities will present themselves with expanding into new geographic regions where there is perceived demand for services with a less competitive market. There is no substitute for local market knowledge and expertise. If a new geographic market is attractive, it is best to partner up (joint venture) with a strong local contractor who demonstrates expertise of the local market.
The financial operations will need to be prepared both from a systems and staffing perspective to meet the challenges of a growing contracting firm. (Photo: iStock)
No. 2: Execute thorough financial systems and controls.
The timely collection of receivables and prompt payment of vendors needs to continue to operate effectively. Often contractors do not realize the full potential available within popular construction accounting systems to aid in analyzing their company’s performance, so be sure to fully understand and maximize resources at hand.
Related: When Customers Don't Pay
The financial team will need to be properly staffed and financial systems need to be effective to report timely on the results, cash flow, and projections to monitor the plan and expectations for the future.
There will be an increase in larger public infrastructure construction projects using the public-private partnership (P3s) model. (Photo: iStock)
No. 1: Monitor relevant industry trends.
Partnering and joint ventures might be a strategic move to consider.
International firms will look to participate in the infrastructure build out and may need to partner with reputable local contractors, maintain networking, and build potential relationships for this potential source of business.
Maintain a focus on technology and innovation (drones, evolution of smart buildings) to improve productivity and enhancements in contracting techniques and execution.
These are six key factors to consider for a growth-oriented contracting firm. Once the firm has worked through these areas, the key for success is executing on the plan and creating a winning environment for all of your staff.
Communicating your plan to all of your business partners and employees creates a positive working environment and sets you up for success.
Ed Titus is senior vice president of Surety Division at Philadelphia Insurance Companies. He can be reached by sending email to Edward.Titus@phly.com.