Five Challenges For Construction Companies | Business Risk | Rea CPA

There Are Risks In Growth

Top Five Challenges Construction Companies Face Today

Recently, I gave a presentation to a large group of bankers about how to identify risks in their portfolio of construction clients, and the importance of doing so. Much of their concern stemmed from their ability to determine whether their construction clients’ could withstand some type of recession. In response to their questions and concerns, I told them that, over the course of my career, I’ve noticed (and studies support) that construction companies are more likely to run into trouble during periods of extraordinary growth than during an economic slowdown.

As you can imagine, my answer appeared to surprise more than a few in the room.

But here’s the thing, we can see this happening. Right now, we are realizing a period of extraordinary growth, which is, of course, a great thing. However, extraordinary growth brings its share of extraordinary challenges.

Here are my top five challenges facing the construction industry today. I’ll start with a few relatively basic challenges and how they impact business during times of growth, and conclude with the most major concerns. Let’s get started!

Listen to episode 195, “Risky Business,” on Rea’s award-winning podcast, unsuitable on Rea Radio, featuring Joe Urquhart, vice president of Overmyer Hall Associates, to learn four faux pas that are opening businesses up to risk.

#5: Failure To React Quickly To A Problem Job

When companies are stretched for manpower they are more unlikely to react quickly to problems. To overcome this challenge, you must continue to monitor job performance weekly. If, in doing so, you see margin fade of more than a couple percent, go into crisis management mode.

While you might be tempted to simply throw more manpower at the job, I can assure you that such a stance will fail to yield sustainable (or even desirable) results. Instead, be transparent internally and put your best problem solvers on the case right away.

Pulling some of your best employees from another job might result in you losing a few percentage points there, but preventing an unmitigated disaster at the job site that’s causing you problems is worth a heckuva lot more.

#4: Getting Caught In The Daily Grind

When experiencing periods of growth, it’s easy to lose focus on some of the basic “blocking and tackling,” in the interest of moving a job along a little quicker or freeing your team up to take on more work. Don’t let yourself get sucked into this trap. It’s important to stay on top of essential responsibilities like following proper documentation procedures for change order requests, staying on top of notices of commencement, furnishing, etc., and following review procedures on estimates and contracts. Oftentimes, a lack of attention to these ‘details’ can trip up an otherwise risk-averse company.

#3: Short- And Long-Term Efficiency Issues

As your company takes on more volume, you’ll ultimately stretch the capabilities of your existing management team and project managers. When this happens, it’s time to look for opportunities to elevate high-performing employees within your organization. While this objective will help your team manage the growing workload more efficiently, moving your team members into new or expanded roles can initially reduce your company’s margin and efficiency on jobs. Just be sure to be strategic in your staffing efforts and plan accordingly.

#2: Not Enough Cash On Hand To Fuel Growth

A growing company needs more cash flow to function. Therefore, it’s incredibly important to make sure that you have enough cash and access to liquidity. Preparing a weekly, rolling cash budget can help you plan for the increased costs of material and manpower. Be conservative when projecting the timing of cash collections, too. The cash budget will help you immensely in understanding the timing and need for liquidity.

#1: Taking On More Than ONE New Thing

This seems to be a constant struggle in any economy. Talk to any surety about the losses they’ve had to cover over the years and, in almost all cases, they can be traced back to a contractor who decided to stretch their company’s capabilities a little too far – particularly with regard to geography, scope/type of work and job size.

It’s within reason to take on a job that stretches your company in any one of these areas. However, when you try to move your company beyond your historical norms in two or more of these areas … well, let’s just say that you’d better have a ‘fortress’ balance sheet in order to take on that level of risk.

I can recite dozens of stories in which I’ve witnessed an operator leave their comfort zone in an effort to stretch their business into what they thought was “closely related work” on an already sizable job, only to wind up with a disaster on their hands. For example, it might be OK to follow a project owner, general contractor or developer to a job a couple of hours away from your established marketplace, but if the job is also more sizable than what you’re used to, you may be setting yourself up for more risk than you (and your company) can handle. And this can be difficult to wrap your mind around, because it’s usually the larger-size job that makes you think that the whole endeavor will be worthwhile. In reality, the larger job only amplifies the risk. Instead, here’s a tip. When it comes to job size, remember that 10 percent of the largest single contract should equal no more than 25 percent of equity.

Is Your Company At Risk?

If you’d like to have a more in-depth dialog about the ‘why’ with regard to any of these top five risk indicators, give me a call at 614.314.5937 to discuss.

By Doug Houser, CPA, MBA, CEPA, principal and director of construction & real estate services

Looking for more tips and insight to help fuel your construction company? Check out these resources:

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