By Larry Michael
The run-up the construction industry experienced throughout the 1990s was actually a 14-year market expansion.
That’s quite a party, and the aftermath will be quite a hangover. Most industry cycles are shorter and less severe, so the payback this time will be significant.
The key is to know and understand at all times where the market is heading, not where it is at. It is the same concept hockey star Wayne Gretzky used to sum up his success when he said you need to skate to where the puck is going to be.
Those of us who make a living in construction can only expect compensation for what the market makes available to us. It is not our boss or company deciding what and how to pay us; it is the construction marketplace and the revenue that is or is not available at any given time.
In a downturn, understand that the value of an hour’s work is not the same as it is in an expanding market. In a downturn, construction companies must reduce all discretionary overhead expenses, including salaries.
Most construction companies are limited-resource family firms. The company cannot be a social-service agency giving paychecks to people who are not producing. If your work as an employee covers the costs associated with your job, you will have a job.
Each job has a value within a range. No matter how well you do your job, its value always is within that range. Should you perform at a high level and produce more value than required, you can expect to be considered for bonus compensation, but only after the fact. But the ingredients for this to happen are found only in an expanding market.
From a construction company’s perspective, capacity must be fluid, rising and falling to match the size of the construction market. Available revenue and capacity to do the work are directly correlated. If a company’s capacity exceeds available work, the contractor loses money, shrinks or goes out of business. If the volume of work exceeds a company’s capacity, the contractor finds good margins and expands.
Salaries are by far the largest overhead items. Reductions start at the top with owners and then affect every other salaried person. Twenty to 25 percent reductions are the most common first step, followed closely by furloughs.
If management and employees resist, the only economic option is to eliminate jobs. In this significant downturn, construction companies will become smaller versions of themselves. Some will go dormant.
Those that have significant debt are facing the toughest decisions. If serious action is not taken to reduce, eliminate or renegotiate debt, creditors will have no choice but to take action.
The name of the game is survival, and the larger message is to successfully structure your company financially to handle an expanding and contracting construction market.
Larry Michael is a surety bond producer for The Brehmer Agency, Butler.