4 Strategies for Construction Companies Navigating Economic Slowdown & Labor Shortages

Anthony Lewis

Sep 17, 2024

Construction workers on site during sunset

Construction can be a challenging enterprise. Even when economic conditions are favorable, construction business owners need more than cookie-cutter financial strategies to stay on track. In a market still suffering the disruption of trends like remote working, fluctuating material costs, and climbing interest rates, having a real-time picture into your profitability is critical.

Although activity has been ramping up since a record decline in 2021, many construction businesses continue to struggle with difficulties that include slow payment, a shortage of skilled labor, and a soft market for commercial construction starts. It’s an environment in which long-term strategic thinking can feel like an expense of time and effort you don’t have.

Even so, as you think about how to manage your construction business during uncertain economic conditions, don’t overlook the benefits of an approach that goes beyond short-term concerns. Here are four strategies that can pay off in any market but are especially valuable when margins are tight.

1. Take Your Cash Flow Management Processes Up a Notch

Effective cash flow management is survival for small and mid-sized construction businesses, where the constant calibrating of draws and deposits against the expense of labor and material costs can have little room for error.

Effective estimating and change order management processes are critical to protecting your profit margins. Without good processes, your cash flow can erode and projects can come to a halt. Don’t get left personally financing operations and material purchases because a customer draw was untimely or underbilled.

A more diligent approach to cash flow management can aid in structuring a schedule so that customer draws are available for the purchase of materials and maintain a balanced cash flow throughout the life of a project.

Best practices include:

Managing cash flow at the project level
Maintaining a draw schedule built on pre-determined dates or milestones
Conducting over/under billing analysis to maintain positive cash flow, plan for increases in material costs, taxes and labor, and stick to a timeline that keeps you on budget.

We recommend that you track project performance. Noting the difference between estimated and actual final project costs will help you determine if your estimating process needs improvement or if client change orders are leading to cash flow issues. It’s a bit of extra work but can greatly improve the accuracy of your budgeting to cover overhead and ensure profitability.

2. Improve Quoting & Change Order Processing with Better Financial Visibility

Effective estimating and change order management are critical to ensuring that your profit margins are protected against unexpected increases in material costs and uncompensated job changes.

While bidding is often more of an art than a science, implementing solid monthly accounting practices provides you with a foundation of real time data about the health and profitability of your business. Analyzing the data by project, season, client, or any other way you want to slice it, offers a level of visibility you can leverage for more accurate forecasting, pricing, equipment and material purchasing, and strategic decision-making. When your financials are up to date and properly accrued, you have the financial visibility you need at your fingertips to analyze job profitability and identify gaps in your estimating and change orders process.

3. Invest in Your Workforce

With some industry estimates showing construction businesses are more than 500,000 workers short of current needs, investing in your workforce has become more crucial than ever.

While recruiting efforts are important, don’t forget to invest in the team you already have. Consider establishing an internal training program to retain promising employees and grow your next generation of leaders. This approach not only serves as a recruiting incentive but also offers potential federal tax benefits, as companies can generally deduct costs of job-related courses, seminars, supplies and travel costs.

Beyond training, focus on retaining your skilled workers by providing comprehensive healthcare and pay-related benefits, and communicating opportunities for advancement. These strategies not only address immediate labor challenges but also build a strong, loyal workforce for the long term. By investing in your team’s growth and satisfaction, you’re not just filling positions – you’re cultivating a skilled, committed workforce that will drive your construction business forward.

4. Find a Reliable CPA Firm with Construction Experience

Don’t make the mistake of trusting your accounting needs to a firm that only dabbles in the construction industry. From change orders, to bidding, to fixed contract budgeting, construction industry accounting and financial strategies are not like other businesses, so you need an accounting partner with construction accounting experience.

Along with deep construction industry expertise, Kirsch CPA Group provides a holistic and forward-looking approach to your accounting needs to ensure you have the financial processes and information to make better decisions, take advantage of opportunities for growth, and weather difficult economic conditions.

Kirsch CPA Group also provides the strategic business advisory and tax planning services growth-minded construction business owners need to meet short and long-term financial and business goals.

What could your construction business do with solid financial information and strategic proactive advice? Let us show you.

Learn more about construction accounting services