Many contractors have never experienced a business environment like the one we have today in the United States. The impact on many construction contractors is just now being felt, despite the fact that the country's economic woes began over a year ago. This is due to the time it takes to complete an average-size contract. When the downturn began, contractors had a backlog of average-size contracts. This backlog has taken a year to work itself out and isn't being replaced to the extent it was a year ago. This means that the next year is likely to be very difficult for most contractors in most parts of the country.
The Construction Financial Management Association (CFMA) conducts an annual survey of almost 800 contractors across the country, asking them to respond to many questions about what they are experiencing and what they expect to experience. Respondents also submit financial information about their financial position and results of operations that are averaged and included in the report. The information is kept confidential and tallied by Moss Adams LLP, the largest Certified Public Accounting firm on the West Coast. Contractors responded to the survey questions in the spring of 2008, and results were compiled and released in the fall of 2008-the survey included what contractors said they were experiencing in early 2008, and what they expect to confront during 2009.
At the time of completing the survey, contractors reported that their backlog of work on their books was approximately the same as that of 2007. They expected the volume of work to decline slightly during the rest of 2008 and throughout 2009. Bank and bonding credit had not yet tightened noticeably for them. Profit margins were also approximately the same as the year prior. The approach most respondents were taking was two-fold: continue doing what they were doing, but focus on doing it better, and pursue more aggressive bidding practices. It is interesting to note that in 2008, most contractors were not foreseeing the decline in construction work that has now arrived.
In late 2008 and now in early 2009, market conditions are noticeably tougher. The CFMA has begun a quarterly service called the CONFINDEX, which is a process whereby they measure the overall level of confidence contractors have in the markets in which they work. The base index was established in late summer 2008, and the early winter 2008 index showed an approximate 20% slippage in confidence. Contractors are now expecting 2009 to be much slower than 2008.
One main reason for the significant slowdown is the tightened credit markets, which has meant that project owners are experiencing significantly more difficulty obtaining financing for newer projects. In fact, there are news reports of project financing being terminated during the project, so project owners are directing contractors to cease work in the middle of contracts. This affects contractors in a number of ways:
Less work in most sectors has caused contractors to seek work in new geographic areas and new sectors. More companies are entering into their workspace and they are moving into spaces they haven't previously worked.
More competition means lower profit margins. Contractors have to decrease their bid prices in response to more competition.
Contractors are reducing their workforces in response to less work.
Discretionary spending is being curtailed. As revenues decrease, previously planned spending is deferred or terminated.
The effects of the weakened economy are impacting most contractors. While the news tends to be bleak and disheartening, there are actions that companies can take to weather this storm and emerge strong when better conditions arrive. One impact on tight markets is that many of the weaker companies will not survive. Strong companies will not only survive, but tend to increase their dominance. Your goal should be to become one of the strong if you are not there already.
What can you do? Fortunately, there are many strategies that you can employ: