7 Ways Construction Firms Can Prepare for a Recession
by Matthew Sprague | September 13, 2022
It comes as no surprise that several quarterly construction surveys reflect a growing concern that the industry’s markets and business conditions are heading towards a recession. These recession fears are on top of the construction industry’s continued struggle to attract workers and navigate ongoing supply chain issues.
Some of the questions top of mind include whether construction costs go down in a recession, whether any projects, particularly those in the public sector, will be halted or delayed, or if potential financing sources will dry up.
Are you prepared if a recession hits? Rather than watching and worrying about economic pundits debating the issue, owners can take action now to better weather a recession.
1. Evaluate Project Funding Sources
Before a recession hits, owners in the construction industry should more closely monitor every project’s funding status to understand the stability of each one and what the impact of a recession could have.
Key ingredients in assessing the viability of a project are forecasting and cash flow analysis. With a disciplined forecasting process, you can understand and communicate to architects, subcontractors and others the anticipated cost of the project (and program) with much greater certainty. (Read Evaluating Project Viability During a Recession to learn more about how to do that.)
Cash flow analysis and forecasting can help you determine whether a project continues, is put on hold, or is permanently abandoned.
2. Review Contract Terms
Escalation clauses are increasingly being added to cover fluctuating labor, materials, and transport construction costs to reflect supply chain problems. Reviewing all contracts to understand what is included can help you evaluate risks and understand potential problems.
In some cases, it might be wise to update some contracts. Do you have language that prevents contractors from being held liable for building defaults that may occur from owner-initiated material substitutions, for example?
Are there any allowances for payment of stored and insured materials, or security deposits for preferred schedules for material fabrication? How about incentive payments for suppliers to provide materials in advance or ahead of their delivery windows?
Another area to review would be escalation clauses, which guarantee a change in agreed price if the value of materials goes beyond the original contract terms and authorizes a contractor to claim a higher value.
3. Re-evaluate Construction Materials
Many construction industry insiders are wondering whether construction costs go down in 2023 and how they can better control costs in light of the looming recession. At the moment, the industry is mixed on what may happen given demand is still high for new home construction and there is plenty of government money available for projects in the public sector.
Nonetheless, now is probably a great time to invite your engineers and architects to review materials lists and compare them with current availability to see if any changes might be in order. Doing so could mean the difference between finishing on time and on budget, or not.
4. Anticipate Supply Chain Shortages
If the past two years haven’t already altered your materials buying processes, now is the time to start. Shortages of HVAC equipment, delays of kitchen cabinet hardware, and insulation and a host of other materials have frustrated contractors and delayed projects during the lockdown.
Consider keeping an engineer or architect on retainer in anticipation of material changes so you aren’t waiting on approvals. Make sure to keep detailed records on the agreed upon materials, and records of the substitution. Read this blog post on construction supply chain shortages, to learn how to better manage that paperwork.
If you aren’t already ordering materials as early as possible, now might be the best time to ask your contractors to start. Remember when you do this, you may have to pay to store and insure them, so keep that in mind when reviewing your budget.
5. Have Cash on Hand
Well established construction firms that have weathered recessions previously know that being prepared for a recession includes beefing up cash reserves to get through hard times. Just like personal finance gurus who suggest individuals create a 6-month emergency fund, construction firms and owners should likewise have enough reserves to cover operating expenses and overhead for a few months.
6. Strategize for If Backlogs Disappear
Just because you may have a backlog of projects doesn’t mean you can avoid a downturn. During the last recession, many firms watched backlogs of nine to 12 months disappear overnight when financing evaporated and projects were put on hold or canceled. Create a strategy so you have work coming in if some of your backlog disappears.
7. Retain Your Crew
Surviving a recession requires your best workers. Make sure you are offering competitive wages and incentives so they don’t jump ship for better compensation. Newer workers don’t have the experience or may not have built up the skills of your veteran staff, so make sure they know you value them. Trimble, among other construction leaders, understands that the industry must take proactive steps to recruit, retain and advance diverse talent by embracing DEI or diversity, equity and inclusion.
Rather than wondering what happens to the construction industry during a recession, be proactive and take the steps needed to make sure your firm is one of the survivors and thrives during a recession. Remember, if you are properly prepared, you won’t be easily surprised.
The construction industry has numerous opportunities for growth and improvement,even during a recession. By bringing together your workforce, developing contingencies and leveraging technology, your organization is on its way to a preparedness plan for the future.
Key Topics Covered: Construction Project Management