How can my construction company cut overhead to survive a slow market?

It was like a bomb went off. In March, 2020 dozens of the largest cities and even entire states shut down construction over Covid. Then, supply chain delays sent materials soaring by as much as 80%. And owners started putting projects on the back burner, fearing recession and shifts in commercial real estate demand.

Matthew Campbell is a Liberty Mutual Surety Plus underwriter for small and mid-sized contractors. One of his main messages is that you don’t want to be running after work outside of your area of expertise. Keep the overhead lean and travel light.

So here are six ways you can limit risk, slim down and get through the storm.

The Market Is Lean

No one wants to feel like they’re gambling when they take a risk on a construction project. And for underwriters like Campbell, the best approach is to trim down and be more lean.

Cut Costs

The first thing is to rethink how you pay employees. Anything from wages to healthcare costs can be a big number in a pinch, and a new approach to hiring and pay may just be what you need to get through the slowdown.

Fixed base salaries can be a big cost when business slows down. By lowering the fixed salary amount and implementing a bonus system, you can cut costs, but still reward those who do a good job.

Another cost-saving move is to cut the pay rate across the board. This can be an unpopular move, and you should take a cut as well. You may even discover that you don’t need as many workers as you have, and can trim things even further down.

A second strategy is to actually make the hours you do work more efficient, and there’s a couple of things you can do to try to stretch out every dollar you spend. How long are your employees standing around? How much time do you spend maintaining equipment? Watching a few key performance indicators here and there can save you enough to compensate for the volume drop, and keep things rolling while you wait for business to pick back up.

You can also find a way to make better use of the hours you have with a renewed focus on safety. Yes, that saves lives, but it also improves quality of work and value for each hour you’re paying employees. You can take a hard look at KPIs and see which ones really matter now. Go after the ones that really make the difference for you and make every hour count.

The third approach is to control your waste. Overordering material or losing it to defects in the field can blow a budget in a hurry. Take care to plan exactly how you’ll use materials, so there’s less of it lost to bad work or excess.

Construction is a capital intensive business. If you’re in it you have a lot of assets sitting around, so making the most of what you have is important. Consider things like the cost of your equipment and how you can trim that down to get through a slowdown.

The fourth strategy is to pay down expensive, high-interest debt. Consider refinancing to save in the long term and lower your monthly payments.

Along with refinancing, you can add on some time to loan payments. This makes it easier to plan and can allow for smaller monthly payments and better cash flow while things are tight.

The fifth strategy is to manage inventory. The first thing you can do is balance the amount of backup stock you have with the overhead you need to get through a slump. Managing things better can help you avoid losing time, saving money in the long run.

Where you can, talk to the project owner. Get a better deal on material prices and wait times that can help you and them reduce costs and delays. This can sometimes ease the financial burden for you, as well as save money for the owner.

Avoid Needless Risk

The sixth strategy is to refine the business plan. Construction had just come off one of its most profitable stretches in recent memory, when Covid-19 hit.

Don’t branch out for work. If there’s a slowdown it’s going to hit everybody, and branching out to get work can be dangerous. You know your trade the best. Branching out is a gamble, and leaving that comfort zone can mean a loss for you.

It also makes sense to think about sticking to an area you know. Like the old expression goes, “more contractors die from overeating than from starving.” Work outside your geography or scope means risk.