Article updated October, 2020
Are you seeing your backlog contracting?
The Associated Builders and Contractors (ABC) reported that its Construction Backlog Indicator fell to 7.8 months in July, down from 9 months in July 2019. ABC also reported that when it came to sales, staffing levels and profit margins, confidence among construction industry leaders was down.
At Wipfli, we’ve heard from clients that they’re concerned about their fall 2020 and spring 2021 backlog, but there’s also extra uncertainty because of the COVID-19 pandemic. Schools may close for the fall, allowing construction work to start a lot earlier than it would have normally. Retail spaces may allow construction during the holiday shopping season. At the same time, hospitality continues to struggle.
Alongside backlog, two of construction’s biggest concerns are finding skilled workers and keeping profit margins from decreasing. As ABC reported, confidence is down, and expectations of contraction are rising. Over 47% of contractors expect shrinking profit margins over the next six months.
As we move to the fourth quarter of 2020, we are seeing an increase in the backlog concerns in the construction industry. Many companies are seeing new competition in their traditional markets and are navigating unique price competition as these new competitors try to undercut the market. These challenges will continue as we anticipate continued declines in backlogs in 2021. It will be increasingly important to manage costs, analyze job profitability, focus on scenario planning, and manage risks while keeping your sights on the future. A culture around being profitable will help you continue for the long haul.
So what can you do to battle potential backlog declines, falling profit margins and a lack of skilled workers? As it turns out, a lot …. Here are five big ways:
1. Adapt your business strategy
One of the most critical things you can do right now is assess whether your current strategy can adapt to what’s happening today, tomorrow and next week — and then make changes based on that answer. Because of the uncertainty created by the COVID-19 pandemic, developing strategy around the next 30, 60 and 90 days is essential to being able to adapt quickly to changes. The old three-year plan just won’t work anymore, so focusing on the here and now is critical to success of your business going forward.
Scenario planning is also critical. You need to know what your best-case, worst-case and most-likely-case scenarios are. Then, you can aim toward the most likely case in your strategy, but if you see your organization moving toward that worst case, you can pivot quickly. Planning for each scenario makes your organization nimble, which is a highly valuable quality when you need to react to changes like falling profit margins or contracting backlog.
2. Adapt your people strategy
People are the most important part of any business, from leadership on down. Understandably, there’s a lot that goes into people strategy.
We said above that it’s smart to create short-term, adaptable business strategies. It’s also smart to determine what types of skills you have in your current people and what you may need in the future. You’ll want to make sure you have the right people in key roles who can have a significant positive impact on sourcing new projects and following through to maximize the number of bids won. That includes recruiting people who have those business development skills or by training current employees in those skill areas.
The construction industry is also concerned about hiring and retaining skilled workers. Does your business have a culture that entices new people and encourages them to stay? Perform an assessment to determine what your culture is, what you want it to be and how to bridge that gap. Curate and send out an employee survey to better understand how current employees are being impacted by the pandemic and, then, how you can adjust processes and people practices to better adapt to this impact.
And don’t forget to assess your leaders. Do you have right people in right positions to lead your business through further uncertainty? Are they aligned with and accountable for achieving your strategic visions and outcomes? Are they able to coach their teams to success? Are they good at adapting, or does their stress trickle down through their teams? Think about what leadership traits are critical to leading a strong, successful business into the future and how you can obtain them, whether through development or recruitment.
3. Find ways to reduce waste
There are a few ways to combat falling profit margins.
First, take a hard look at your business processes and determine where there is waste you could eliminate. A lack of efficient processes has likely been costing you in the long run, but by performing a business process review, you can pinpoint places your organization can gain efficiency and productivity. Create standard processes using best practice approaches to increase efficiency throughout teams and departments. Train team members on these new processes and give them the skills they need to be successful in gaining this efficiency.
At the same time, you have to understand what each project truly costs. You can use technology to determine how far you are from the bid price to the true cost, find out why this gap exists and then discover ways to close it.
Finally, don’t sacrifice quality work and service just to be the lowest bid. We’ve seen clients lose out on bids only to have the customer come back because the lower bid came with a significant drop in quality.
4. Assess your technology
Technology has come so far that it’s essential to a thriving business. If you can’t obtain real-time, actionable data quickly, you won’t have the ability to make fast decisions to adapt to changes. Metrics are key, and you want to be able to get them quickly — which means your technology approach is vital.
Business intelligence solutions like Microsoft Power BI visualize your data in easy-to-read dashboards, allowing leadership to access real-time data and actionable insights to make better decisions.
5. Don’t forget business transition planning
Many business owners who would have started considering their future business transition options this year have been understandably distracted by the COVID-19 pandemic.
But it’s in uncertain times like right now that a business transition plan is the most valuable. That’s because this plan isn’t really about your retirement. It’s more about how the business can function and continue on if something were to unexpectedly happen to you tomorrow. This is the part of the plan that’s most important to establish first, and it can actually help you build greater value into your business that will pay off when you do eventually transition it to a buyer, family member or other group for your retirement.
Planning right now can also help you decide what a valuable M&A strategy is for your business right now. You could potentially acquire businesses that haven’t been able to pivot as well during the pandemic’s uncertainty, or you could better position your business to a buyer.
Read more: How to crisis-proof your succession plan
Are you ready to grow your construction backlog?
Uncertainty is the theme of 2020, but our firm is staying on top of trends, updates and other news in the construction industry. It’s important to recognize that every business will move forward amid the uncertainty in a different way, and what works for one may not work for another. Being able to adapt and continue succeeding requires in-depth thinking, planning and dialog with your leadership team. But that’s why Wipfli is here to help.
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