The Garrison Report #2009-12


The Year 2009 in Review

Listen to the audio version of this report here

This past year has certainly created some challenges for the construction industry, the nation and the world as even vibrant places such as Dubai have been roughed up. In the words of comedian Woody Allen, "More than any time in history, mankind faces a crossroads. One path leads to despair and hopelessness, the other to total extinction. Let us pray that we have the wisdom to choose correctly."

The statistics for the economy and the construction industry weren't what people would have preferred in 2009. Private nonresidential construction was down 21 percent year-over-year, private residential construction was down 24 percent over 12 months, and unemployment in the construction industry has reached 19.4 percent, which is virtually double the national average for unemployment. However, these figures were predictable at the beginning of the year; at least they reflect my predictions for the year.

Despite the fact that virtually everyone would have preferred better financial figures, it doesn't mean we are facing doom and gloom. No one has a crystal ball; it's the leader's responsibility to look forward and prepare for the future. Jim Collins wrote in Good to Great that it's critical to be realistic about the conditions. While construction struggled this year, at almost every convention I attended, some contractor told me that his company was having its best year. In recent conversations with the CEOs of two major contractors, they told me that while their company's volume was down this year, profits were actually up.

These comments reinforce my most important prediction for 2009, namely "Despite the first four [economic] predictions, I don't predict doom and gloom for the entire construction industry, just those that aren't prepared for the changes that are coming. In fact, I predict that companies that know what to do and act on those opportunities will have a relatively good year and be primed for growth when the recession winds down."

The point is the numbers by themselves could be pretty depressing if you let them. However, this year when I spoke with CEOs of some of the leading construction companies, there wasn't a sense of gloom. They were realistic about the challenges their companies face, but they were still optimistic about the future. Being realistic means seeing not only the problems, but also the opportunities. When I asked them what gets them up in the morning, they were excited about the future. This is critical because study after study indicates that in a recession those companies that seek out opportunities and pursue them fair much better than those that attempt to play defense to survive the downturn. Which are you?

Not surprisingly, each of these successful CEOs had a different perspective on the industry, but there were some common themes and recommendations.

Workforce Development

With the lower volume of work, now is the time to invest in our workers and improve operations. Unfortunately, during a recession, too often the first things companies do is cut back on training and personnel development. This is a big mistake. Several CEOs said their boards of directors said that one thing they shouldn't do is cut back workforce development. In the construction business, knowledge is one of the biggest values the contractor brings to the process. We hear management say that their people are their most important asset; well, it's time to act like it is because the payback will be substantial both during the recession and when the industry emerges from it.

Increased Focus on Delivering Greater Value

This issue manifests itself in two ways. The first is sustainability issues and educating clients on life-cycle cost issues, not just the upfront construction numbers. LEED certification is no longer a luxury; it's an essential credential. The second issue is the removal of waste from the construction process. This has resulted in an increased interest in lean construction, which offers significant benefits to both the client and the contractor. One contractor told me they streamlined their process enough so that they can get almost any project they want without sacrificing profit margins. Another said that since its profit margins had to be reduced to compete in its highly competitive bid market, they took the decline in work volume to increase their upfront planning to eliminate waste. The result was they saved enough direct costs that they actually had a higher-than-normal profit margin.

Another benefit of the lean process is that it empowers the workforce. This makes a company more attractive to the best workers in the industry. Attracting the best people definitely creates a competitive advantage. Those companies that don't follow the advice on workforce development might find that their best people are moving to those companies that do create a more attractive environment to work in.

Cash Management

Effective cash management is critical. Monitoring cash receivables is essential. Cash management also includes selecting the right projects. Taking on projects where the client is a slow payer or where the profit margins are squeezed or even become negative will not help cash management.

However, be careful that your cash management strategies don't destroy value. For example, cutting back on training, technology development and equipment maintenance can destroy value faster than the resultant cash savings. Spending money wisely is always smart, but don't be penny wise dollar foolish.

Focus on Delivering Greater Client Value and Reducing Project Risk

Everyone assumes that during a recession clients are going to demand lower prices. Of course, some do. But many respond in just the opposite way; they want to make sure that what they spend money on delivers higher value and reduces their risk of surprise because they have little room for error.

Even though you may lose a few projects because you fail to lower your price, that doesn't mean that isn't the smartest move. Of course, that doesn't mean that you don't pass on the savings from lower steel and concrete prices. Don't lower your profit margins or force subcontractors to lower theirs. In the long run, this only causes more problems. Find ways to be more efficient and eliminate waste to lower costs. One advantage of a severe recession is that many suggestions that were once unthinkable now sound very wise.

Summary

What it all boils down to is the construction industry needs to use the right side of its brain -- in other words, its creative side -- to find new approaches to doing business. The challenge is that many of those in the industry are typically left-brained engineer types, so, as an industry, we tend to focus on the analytic issues and numbers. The numbers may be down, but consider that even in this depressed marketplace, no contractor has even 1 percent of the market. There is plenty of room to grow your business; you simply need to get creative. Those contractors that focus on how to deliver greater value to their clients will prosper, while those that focus on how do things cheaper in order to survive will struggle.

 

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