The construction industry must adapt to survive in an era of economic instability

Carl Oliveri is construction practice leader and partner at Grassi

The construction industry entered 2024 with a sense of cautious optimism. After weathering the devastating impacts of the COVID-19 pandemic and dealing with supply chain issues, ongoing labour changes and high interest rates, many construction executives believed the worst was behind them.

Buoyed by the soft promise of lower interest rates and billions in planned infrastructure projects, construction executives were bullish. At the start of this year, 56% of the industry’s executives expected 2024 revenues to increase.

The reality, however, was far less promising. Inflation continued to rise, and the job market did not perform as well as the Federal Reserve had hoped. Anticipated cost reductions never materialised, burdening firms with high labour, equipment, and benefits expenses.

While the Federal Reserve gathering in Jackson Hole seemed to bring news of impending rate cuts, the overall economic path forward remains cloudy. Construction firms should buckle in financially for the long haul, but doing so will require many to shift away from the project-by-project mindset that traditionally dominates the industry.

Financial Discipline: A Key Differentiator

Let’s be clear: in construction, cash flow is everything.

In uncertain economic times like the ones we’re now in, the difference between a successful construction firm and one that struggles can often come down to a single project. Construction companies, especially smaller firms, are used to floating costs on everything from mobilisation to labour and associated fringes, as lags in payment often scuttle schedules.

Cash is moved around as needed, but there is little collective understanding or certainty of when payments can be expected and bank accounts replenished.

But that’s a precarious way of doing business, particularly given the uncertainty we currently face. With a presidential election looming that could change the kinds of infrastructure projects that get built (and not), having no cash cushion can create vulnerabilities that can be fatal in a downturn.

Given how the two candidates see the world differently, conditions that may look favourable at one moment could crater tomorrow when projects are halted or pulled from the planning agenda.  It can be very hard to retain people - let alone think and act strategically — when your firm doesn’t know where its next cash infusion is coming from.

The difference between smart operators and those that continue to struggle is long-term vision and planning. The most resilient firms leverage financial tools and change their companies’ culture to adopt a disciplined approach to financial management.

Rather than evaluating their business project by project, these companies are looking at the entire year (and the years beyond) and situation planning for every outcome. They know when they will be paid, when to pay out, and what they can do if certain funds are delayed or withheld.

It’s a change of pace for many construction firms, who are often accustomed to using simple spreadsheets to track everything from payroll to bank account balances. By utilising construction financial management software, these companies can engage in proactive financial and cash flow forecasting, allowing them to anticipate and plan for various scenarios—including the possibility of project cancellations.

Having a robust financial and cash flow forecast enables contractors to understand cash peaks and valleys, providing insights into managing surpluses and deficits. When cash is plentiful, firms can decide whether to invest in new opportunities, save for future uncertainties, or purchase bonds and other securities. Conversely, when cash is scarce, they must assess whether they have sufficient funds available through bank lines or other financial instruments to bid for and take on additional work.

Preparing for the Worst

Certainly, a comprehensive financial forecast helps companies prepare for the worst.

When unexpected events occur — such as the COVID-19 pandemic or the Canadian rail strikes — companies that clearly understand their liquidity sources will find themselves on much stronger footing than those that fail to plan.

A good example: During the pandemic, many contractors scrambled to access their lines of credit. Too many firms didn’t understand the full terms of their lines and found they were limited by the pandemic’s extraordinary conditions.

Having this kind of financial bird’s eye view also helps companies identify potential problem areas, especially those related to personnel, project management, or broader company-wide cash flow issues.

Building a Culture of Financial Vigilance

The necessary level of financial preparedness requires more than advanced tools. It demands a culture shift within the organisation, as the construction company’s finance team can’t be seen as “the bean counters”. From the C-suite to project managers, everyone must understand that finance and cash flow are the lifeblood of the business, and that without them, the firm and all the people it provides with a livelihood are in danger.

This financial cultural shift, if made correctly, opens up lines of communication and ensures that potential financial issues are identified and addressed early on. And this shift isn’t something companies should wait on. Moving to financial vigilance can begin immediately by documenting planned projects, determining the likely timing of their cash flows, evaluating events that could derail the projects, and understanding the effects of each on the company’s financial position.

The construction industry must adapt to survive in an era of economic instability. By embracing financial discipline and fostering a culture of vigilance, smart operators can protect themselves from the worst of what the economy might throw at them.

• Carl Oliveri is construction practice leader and partner at Grassi

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