How Contractors Can Navigate a Downturn

Most Atlanta construction contractors are going into the new year with a positive outlook. This is because of the convergence of positive indicators including sales, profits, staffing, and available jobs. In fact, the Construction Backlog Indicator, which highlights the amount of work companies are contracted to complete in the future is quite positive. It is now at the highest level since 2019. Despite this, many are concerned about the current economic situation and what steps to take should a recession hit in the coming months. While it’s unclear what will happen, there are several steps that companies can take now to weather a potential storm. This includes evaluating cash flow, reviewing contracts, and other business management adjustments. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

2023 Construction Outlook

The next year looks optimistic despite known challenges like inflation, material costs, and the threat of a recession. Most are expecting at least marginally higher sales and profits in the next six months.

Material costs are one of the biggest unknowns. Lumber, which skyrocketed during the pandemic, is no longer a volatile commodity and steel mill products are stabilizing. Diesel fuel costs are more than 100 percent higher than this time last year. Depending on which materials a contractor uses the most, that’s either an optimistic or negative forecast for pricing. Regardless, inflation means that costs are generally just higher across the board and hard to predict.

Labor shortages are likely to continue, even as federal spending picks up. This may be one of the top concerns for contractors in 2023 – they can’t bid on jobs if they don’t have people to work.

While a recession seems likely, that’s not what some experts are concerned about. “For many contractors, 2023 does not stand to be the problematic year, it’s more likely to be in 2024 or 2025, if in fact the economy enters a recession in 2023,” said Anirban Basu, Chief Economist of Associated Builders and Contractors (ABC).

Impact of Federal Legislation on Construction

Infrastructure projects are the main reason why mid-term forecasts remain mostly strong. Funds from the Infrastructure Investment and Jobs Act (Jobs Act) are expected to accelerate in 2023. The White House has released various guidebooks in the last year to help stakeholders implement the Jobs Act. In the meantime, federal projects supporting airports, railroads, waterways, and bridges are underway.

Sustainability projects, especially for manufacturing, industrial, automotive, and alternative energy, are also buoying 2023 forecasts. The Inflation Reduction Act (IRA) contained dozens of tax incentives for energy-efficient construction and renewable energy projects.

Especially considering the amount of money that will flow into government-funded and sustainability projects from recent legislation, it’s tempting for contractors who don’t typically do that work to compete. Though these projects have upsides, it can be hard for unfamiliar contractors to find footing. Regardless of the project, it’s wise to stick with the familiar. Efficiency comes from knowledge and experience.  

Tips and Strategies to Survive a Downturn

Despite upcoming funds from federal legislation and a nine-month backlog, contractors would be wise not to rely on future promises. Guarding against future potential downturns comes down to a few key areas: cash flow management, contracts, and strong business practices.

And to the point above about the dangers of pursuing bids for unfamiliar contractors, a recession can be a good time to pursue niche projects. Job cost data will reveal project information to identify the best work to bid on. From there, these companies can maximize efficiencies with established work projects.

Cash Flow Management

Conservative cash flow management can help to preserve working capital. Especially with the decreased value of bonus depreciation starting in 2023, conservative cash flow management may be preferred until conditions normalize. 

Collections are another area where improvements can almost always be made. Proactive accounts receivable policies help to ensure that jobs remain profitable. That extends to accounts payable management. Contractors need to know which vendors and suppliers must get paid immediately or else a business can be disrupted, and which ones can handle later payment terms.

Knowing the cost of doing business is also important. When it comes to regular, fixed costs, like rent, utilities, and payroll, having enough capital to pay operating expenses ensures the lights will stay on, even in lean times.

It’s also a good idea to talk to lenders preemptively about extending or adding a line of credit. Even if it’s not needed, having a backup cash source can be a lifeline later.

Another consideration for contractors is what to do if the project owner doesn’t pay or pays late. While there should be enough cash reserves on hand to weather late payments, that’s not always the case. If a large part of the revenue is tied up in one job, missed or late payments can cause a ripple effect. One way to approach this is to request proof of financing from the owner. This conversation can be had either before work begins or during the project if a payment is missed. If work must stop as a result, the contractor could potentially bill for delays … but only if the terms are agreed upon in the contract first.

Contract Management

The contract stipulates how much and what risk will be shared between parties. Using a customized contract for each job ensures key points won’t get missed.

In addition to addressing payment terms, contract negotiations – especially during and before a recession – need to include language for job delays, pricing fluctuations, labor shortages, and more. Force majeure clauses may need more attention post-COVID to protect against circumstances that aren’t the contractor’s fault. Escalation clauses can mitigate the effects of steep increases in materials costs, especially over a long-term project.

With contracts and other legal notices, industry companies need to pay particular attention to deadlines. If a project goes awry, abiding by agreed-upon deadlines and processes in the contract can entitle the contractor to relief.

Business Management

While clauses for job delays and unforeseen circumstances might be included in the contract, it’s still probably necessary to adjust other areas that affect jobs. These include scheduling and documentation.

Contractors need to factor in labor and material shortages, to the extent possible. Sometimes, this looks like extending the job timeline or adjusting workflow to account for material delays. Detailed, complete records of essential communications and paperwork serve as a backup in case something happens.

Improving operational efficiency is another way contractors can recession-proof their business. There are several ways to lower operational costs, from cutting back on unnecessary spending, and renegotiating terms with suppliers and vendors, to automating processes and more.

Contact Us

Proactive thinking now about how to handle the unexpected will put the business in a position of strength should conditions change. To do this, will require a careful review of various business practices and policies. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.