Construction in a Slowing Economy: A Rough Road Ahead

Analysts and academics may disagree about whether or not the economy is in recession, but for the construction industry such discourse may fall on deaf ears. Across the country new home sales plummeted 26% in 2007, and 2008 has already seen the beginnings of a slump in nonresidential construction that is only expected to worsen as the year progresses.

The fate of many small home builders and construction companies may depend not only on how they weather the recession (that is, if we even decide that we are in one), but also in their ability to adapt to the current economic climate. Some home builders, for example, are looking for creative ways to sell their homes.

One notable trend is the recent rise in existing home sales driven by bargain hunters and first-time home owners. This could mean an increase in the demand for remodeling and extensions.

Whatever strategy they use, small home builders and construction companies still have a rough road ahead.

Weathering the Storm: Running Your Construction Company in a Recession

 The state of the economy has dealt a hard blow to the construction industry in recent years- especially for those companies specializing in home building. And small businesses with their limited resources have it even worse. But with the right strategy there is hope. Though the immediate future looks bleak according to most economic indicators, there are many things that small construction companies can do to weather the economic storm and be in a position for success when the economy rebounds.

1. Stay on top of your cash flow.

Focus on the areas where your cash is being held up, such as supplies and equipment purchases. Look for ways to cut costs. You could, for example, cut down on old and obsolete inventory, and save on paper and postage through the direct deposit of payroll. By doing so, you will be in a position to improve your current cash flow and predict a future shortfall of cash.

You should also work to consolidate or restructure your debts. Bring together debt from loans, credit cards, or any other lines of credit, and try to negotiate with creditors for a longer repayment period.

2. Make sure that you are maximizing your tax deductions.

Through careful planning you can maximize your income deductions for the current year. Try increasing your expenses before the year ends through the purchase of any items and supplies your business will require in the immediate future, through the early payment of outstanding bills, and through pushing off repairs and maintenance till the end year . Any income that is expected in December, but can be deferred to January, will also lower your yearly business income. If your income is smaller, then the taxes you will have to pay will be accordingly reduced.

Keep in mind that there has been a significant increase to the Section 179 expensing limits. The Economic Stimulus Act of 2008 has almost doubled the tax deduction allowance, to $250,000, and raised the total allowable cost of new equipment purchases to $800,000.

The ESA also temporarily reinstates a first-year depreciation deduction equal to 50 percent of the cost of equipment purchased after Jan 1 2008, and put into use by Dec. 31, 2008.

3. Focus on project efficiency.

Success in today’s economy depends on finding a balance between implementing cost-cutting techniques and providing customers with a quality product. Real estate owners commonly complain about a project’s timeliness, high costs and substandard performance. In response, many construction companies and builders are embracing the lean project delivery management model inspired by the Toyota Production System (TPS) which focuses on producing value without generating waste through the coordination among all workers to meet customers’ needs within tight time frames. Even if you do not follow this system, your business only stands to benefit from a focus on quality control and efficiency.

4. Stay in touch with your market.

Thus no-brainer is surprisingly often overlooked. In order to make sound business decisions, such as where and how to allocate resources and what markets to focus on, business owners must be in touch with the current market conditions as well as the general trends in the housing, construction, and financing industries.