PDF As top lines shrink and gross profit margins decline, contractors find themselves challenged not just to make money but simply to survive.
Major uncertainties have almost everyone holding on to cash and reluctant to grow. So how do you stay afloat? Here are some ideas.
Control administrative costs
Construction company owners and managers must control administrative costs. Every line item is in play, and every expense has to be needed, not just wanted. Starting points include eliminating discretionary items such as bonuses, profit sharing contributions, some travel and entertainment, company cars and other perks.
In making cuts, it is important to consider how remaining employees perceive such actions. Would they rather have across-the-board pay cuts and reduced hours, or would cutting the number of staff be preferable? Some staff cuts may mean more work for those who are left.
Employee morale matters even more in lean years. You will be asking the staff you keep to make sacrifices. They need to know that you are acting in their best interest if you are to keep them with you both now and in the future.
One way to help ensure that employees properly perceive such actions is for owners to make sacrifices themselves. While all employees will know that owners’ incomes are down because of decreased work volume, they generally will not know how much.
Communicating to employees that the owners have also cut their take-home pay should help employees view such actions as fair and reasonable.
Some owners have stopped their salaries altogether. However, if their companies are S corporations, they must do this carefully. They could run afoul of IRS requirements for owners to take a W-2 and not just distributions.
Control job costs
Limit equipment acquisitions to only what you absolutely must have or need in an emergency. You do not want any more debt in a poor economy.
Those contractors whose balance sheets have been scrubbed clean of debt typically have an easier time weathering economic storms. Not only do they not have the related principal and interest payments, their very future is not dependent on meeting restrictive debt covenants that banks are much less willing to waive in today’s banking climate.
Banks are putting contractors out of business today by not waiving debt covenant violations.
Effective job cost management means controlling costs to complete and making sure that open jobs do not experience profit fade.
Profitable contractors often have net overbillings at year-end and experience profit gain. Sureties gain a sense of assurance that these contractors know how to run jobs profitably and are more willing to give them the bonding they need.
Contractors who consistently experience profit fade get axed by sureties, especially today. They do not have a good handle on how their jobs are doing, in part, because they do not closely monitor job profit.
Reconciling monthly financial statement income with gross profit from all jobs – completed contracts, contracts in progress and time and material jobs – on an Earnings from Contracts statement is crucial to knowing why you are, or are not, making money.
Look back at ‘the way we were’
Perhaps the best way to gauge how much cutting and what kind of cuts are necessary is to look back to when your company’s volume was about equal to what it is now.
If you made money in 2002 on the same volume of work you are performing now, then you may want to use that year as a guide for how many employees and what kind of overhead you can support.