What Construction Companies Can Do to Prepare for a Possible Recession

Inflation and increasing interest rates have made many people nervous in a wide range of industries. Ongoing struggles that began with the COVID-19 pandemic, such as supply chain issues, only add to the concern. And while the country is not in a recession, many observers seem to believe it is only a matter of time.

The last big recession hit the construction industry (and commercial real estate, for that matter) particularly hard. Thankfully, you can take steps now to prepare for the next possible economic downturn.

Hold on to Your Cash

Recessions can squeeze cash reserves, especially for contractors that must compete against large pools of bidders for new business. A close look at your operating expenses and other costs can help you identify ways to improve your company’s cash flow. Talking to bankers about additional credit could also be helpful.

Maintain Proper Work in Progress (WIP) Reporting

Your WIP reporting tracks your contract value, costs incurred, billings and gross profit. Yet many construction businesses don’t look at it more than once per year. Not only does this make it difficult to see where your revenues are coming from, you could also miss signs a job isn’t performing well. At minimum, look at your WIP quarterly (we recommend monthly) to help catch revenue issues before they worsen.

Avoid Large Expenses

Now’s the time to determine which upcoming major expenditures, if any, are absolutely necessary. Those that aren’t can be deferred to a later date or called off altogether in preparation for a recession. The more expenses your company can avoid in the short term, the more cash it will have on hand in case revenue takes a dip.

Protect Your Workforce

While layoffs are a tempting way to save money before or during a recession, they could cause more harm than good. The post-COVID-19 world has seen changes in the relationships between labor and management. As a result, finding qualified labor is harder than ever. Letting employees go now could lead to situations in which your company cannot hire them back later.

It might also be prudent to maintain your hiring practices during a downturn. If your competitors are shedding workers, it could be an excellent opportunity to build an especially skilled workforce. And once you’ve found the talent you need, make sure your onboarding processes set them up to stay with you and succeed at their work.

Build and Maintain Your Backlog

Real estate and construction companies might see their backlogs shrink if the indicators of an economic downturn continue. This spells trouble when new jobs dry up and you don’t have that backlogged work to sustain you.

Keeping the work you’ve already have scheduled or underway is just as important as bringing in new business. The more work you can line up, the better you’ll be able to weather a possible recession. So stay in close contact with project managers, clients, customers and other stakeholders to build up reserve work. A backlog of at least 12 months should be more than enough.

Stick to What You Know Best

A period of economic uncertainty is not the time for a company to expand its repertoire. While you might think it’s a way to bring in more business, you’ll have little room for error should those new services fail.

Attempting a new trade or venturing into a new market is risky even when the economy is doing well. Don’t make it even more difficult by starting when a potential recession looms. Sticking to work with an established track record minimizes your risk of failure and financial loss.

Look for Federal Contracts

While many types of real estate and construction work might slow down during uncertain economic conditions continue, federal contracts tend to remain more stable. In recent times, laws like the Inflation Reduction Act of 2022 have made billions of dollars available for a wide range of projects involving areas like green energy.

Monitor Change Orders Closely

Changes in the work requested on a project can significantly impact its scope, which in turn impacts your timeline and materials. While this scope creep often brings with it increased costs, it’s not a foregone conclusion that you’re the sole responsible party. Keeping an eye on change orders helps you make sure you’re not absorbing the full burden of paying more than you’d planned.

Stay on Top of Financials

Keeping accurate financial records and statements is never more important than when you’re under the threat of recession. Costs for labor and materials will likely continue increasing because of inflation, affecting overhead expenses and bidding processes. Profit margins may depend on staying up to date on market conditions and project progress.

This requires regular communication among different departments, with subcontractors and with clients to ensure that everything is moving smoothly. The better the communication between key people, the faster the company can respond to and fix problems that may arise. This leads to satisfied customers, which in turn leads to a more profitable business.

Pro forma financial statements can help you anticipate problems and plan for how to respond. Statements that anticipate substantially reduced revenues, for example, may allow you to identify areas where expenses can be reduced and take other actions to protect and preserve your business.

If these steps seem familiar, it’s because they also reflect common-sense business practices in your industry. Following them—and consulting with a construction or real estate CPA—will help you prosper should a recession hit or in any economic climate.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.