INDUSTRY INSIGHTS | FALL 2011 EFFECTRebuilding Your Construction Company After the Recession
by David EnglishRemember the days when there was a shortage of qualified workers on the project management and engineering sides of the construction industry? Firms were paying large salaries for project managers and engineers, even when the job backlog wasn’t there. Construction companies were tapping foreign talent to design and manage projects, and some union laborers were being retained once a project was complete, so companies wouldn’t have to go back to the union hall to obtain unfamiliar workers for the next project.
But as we approached the end of the last decade, everything changed. The construction industry was one of the hardest hit by the credit crisis and recession. According to the Home Performance Resource Center, 2.1 million jobs were lost from the industry peak in 2006 to January 2011. And as a result, construction entities have virtually abandoned earlier employment methods in order to cut costs and keep their businesses afloat.
Construct a stronger team
Unfortunately, survival mode means that many companies shed overhead so fast that they are now dealing with succession issues, especially since a large percentage of those laid off were younger professionals who didn’t have tenure. During today’s period of smaller backlogs and tighter profit margins, management must identify ways to reward and retain their key employees.
John Raiche, CFO of Divane Bros. Electric Co., believes his team has developed such a plan. The company has a policy of hiring new, young employees each year to ensure fresh talent and ideas are integrated into their organization. Then after being with Divane for a certain amount of time, they are evaluated for potential ownership opportunities, based on a formal plan that includes a structured approach to purchase shares. This plan has proven successful, and Raiche believes it benefits the company in multiple ways. First, it motivates the employee to provide excellent customer service and quality work. Second, it helps attract, develop, and retain workers, because they see a future for themselves in the company. Finally, the plan, as defined, helps the company maintain a reasonable capital structure.
Other companies have explored deferred compensation plans to help retain employees. This is particularly critical in the current economic environment, since cash flow at most entities is tight. If structured correctly, deferred compensation plans will allow the employee to earn significant equity, or rights to cash, with the payment coming a few years out, hopefully when money is more readily available. This process provides incentives for the key employees to remain with the company, as well as budgeting flexibility for the near future.
Diversify to keep the work coming
In light of recent instability, executives now must carefully balance their budget with their backlog. Because of their financial conditions, state and local municipalities have delayed many planned infrastructure projects. And we’re just starting to see retailers begin to spend money on capital projects. It could take awhile for the work to come back.
Companies that have identified specialized practice areas are more likely to ensure a queue of jobs and remain profitable through these tough times.
Companies that have identified specialized practice areas are more likely to ensure a queue of jobs and remain profitable.
One industry niche that has seen growth is “green” construction. According to 2010 report by McGraw-Hill Construction, the number of new non-residential green projects increased 50 percent from 2008 to 2010, and that number is only expected to grow.
There are many opportunities to enter the green construction environment, including an increase in civil projects. Mike Forest of R B Construction in Villa Park, Illinois, says he is seeing many new municipal and school district projects that require LEED certification, a rating system that guides and distinguishes high-performance buildings as “environmentally friendly.” In order to receive certification, significant paperwork and processing are required, in addition to the specialized building materials and products installed. As you can imagine, individuals experienced with LEED certification will be in high demand as construction companies explore taking on these types of projects.
For companies that endure, the future of the industry is bright. According to the Bureau of Labor Statistics, construction employment is expected to grow by 19 percent from 2008 to 2018. Changes in technology and the need to rapidly improve our aged infrastructure mean there will be big profits for those that can look and last into the future.