7 ways builders can survive and thrive in the coming downturn.

The construction sector has been running hot for the past two years, with activity levels and consents at record highs. But that is unlikely to last, with operating and borrowing costs already up sharply, and house prices down.

In boom times, builders are often so busy working in their business that they don’t spend any time working on their businesses. They get away with it when work is plentiful, but once demand dries up, they’re scrambling to survive. And demand always dries up: residential building activity is notoriously cyclical, massively overshooting when the economy is on the up and undershooting when things turn sour.

Since the early 1990s, there have been five big upturns and four downturns, so if you want to survive in this industry you need to be prepared for both.

With another downturn on the horizon, what can Kiwi building companies do right now to help them survive and thrive in the years ahead?

1. Protect your margins.

To achieve better profitability and cashflow it’s vital to understand your costs and revenues. You should know exactly what your outgoings and incomings are and monitor them closely.

In any downturn, it’s critical to preserve your profit margins. That sometimes means making tough decisions when it comes to cost-cutting. Laying off staff in leaner times is common in the industry, and you might also consider:

selling underutilised equipment
plugging profit leaks (such as underquoting on jobs)
shutting down poorly performing lines of business
looking for quick efficiency gains, like using inexpensive tablets for onsite management.

To boost revenue, ideally you should focus on the jobs with the largest profit margins. Embrace the move to variable price contracts, rather than fixed pricing. And make use of sunset clauses so your business is protected against losses on new builds.

2. Diversify.

Some projects are less affected by an economic downturn. Think about renovations, government or council work, or retirement village projects. Can you diversify into downturn resistant projects?

Can you go after some of the abundant work that’s on offer from agencies like Kainga Ora? You might also think about offering complementary services. For example, can you offer plumbing and drainage services to support your construction project clients?

3. Keep the cash flowing.

Lack of cash is perhaps the number one reason why New Zealand construction firms fail. Anecdotally, we’ve been told that 50% of builders with five employees or fewer face ongoing cashflow difficulties at any point in time – and it hits the big players, too.

Maintain a solid cash fund so you can always meet your outgoings, and keep a very close eye on cashflow.

4. Change your thinking to weed out inefficiencies.

Inefficiency is baked into the construction sector – we have weak productivity growth and too much waste. Projects regularly run over time and over budget.

To tackle inefficiency within your building firm, you may need to let go of ‘that’s the way we’ve always done it’ and move to new systems.

Here are a few examples of inefficiencies you may need to weed out:

Adversarial project relationships and poor coordination on a project
Poor communication, leading to misunderstandings and unrealistic customer expectations on timeframes, budgets, and finished designs
Short supply on materials and labour.

Problems like these are very difficult to address, but if you can improve them, your firm will be more competitive and more profitable.

5. Learn to manage high customer expectations.

You and every member of your team needs to understand how to manage customers’ increasingly high expectations. Homeowners want more than ever: complex, connected homes that are energy efficient and have low maintenance costs. All that, plus low waste and low carbon emissions please – and could we have that at a great price too?

Industry sources tell us that the desire to have it all quickly evaporates when faced with the actual costs. Delivering realistic price information, sensitively and early, can help you prevent miscommunication and have happier end customers who are happy to refer business to your firm.

6. Upskill on digital technology.

It’s not necessary to spend a fortune on digital technology yet, but you need to know what’s coming and how it works. Although home-building in Aotearoa is a low-tech sector that lags behind in innovation and adoption, some companies are using digital technologies.

Use quiet times to learn more: how drones can improve surveying? How does 5D BIM improve design-phase planning and costing? How could industrialisation transform the industry?

Be ready for the future so your firm is not left behind – and remember that there will be first mover advantage for those who invest early.

7. Plan for constant change.

Some businesses thrive in a downturn. The leaders of these firms active plan and allow for constant change. They go beyond just managing for survival and instead take fast, bold, and strategic action to ensure their prosperity.

They respond quickly to changes in their operating environment. They target projects that leverage off their core strengths and deliver maximum profitability. They have a sharpened focus on cutting costs and paying down debt, while making sure they have ongoing access to credit. They work toward long-term success, setting a deliberate course toward value creation, higher performance, and sustainable growth.

Whatever part of the market cycle you’re in, set your firm up to thrive by being financially fit, structurally prepared, and focusing on your strengths. You’ll not only ride out the downturn, but you’ll stand ready to maximise your gains when the market rebounds.