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Managing Key to a Firm’s Emergence From a Recession

Tue June 23, 2009 - West Edition
Giles Lambertson

(Editor’s note: This article is the final installment in a series on the nation’s and world’s current economic conditions. Over the past several weeks, Construction Equipment Guide (CEG) interviewed experts in economics and business, and even psychology, and reported on how the industry veterans are coping, and in some instances, succeeding in this downturn. CEG explored past and present economic downturns in an attempt to provide some clarity on our current situation, while cutting through the hyperbole, often pervasively reported in the national media. And finally in this article, CEG examines what recovery will look like when it inevitably happens and the lessons learned along the way to it.)

With America’s recession nearing a mid-point, construction industry executives are looking around the economic landscape and taking stock.

Are their companies’ paths littered with crumpled and tossed business plans, or just heavily penciled ones? Are their firms leaner and stronger, or only skinnier? Are they keeping pace with peer companies, or eating their dust? Every economic storm winnows weak from strong, but which is which is not always clear until storm clouds lift.

Some weigh the future. Has staffing been strengthened in 2009 so the company can be more competitive in 2010? Is a new generation of leadership coming of age? Are young people being groomed to grow with the company?

Know thyself, say the experts, or fall further behind when gates to profitability swing wide again.

“The really good ones store their acorns,” said certified public accountant Whit Forehand. His simple trope summarizes the ethic of successful executives whose task it is to marshal resources in good and bad times.

Forehand knows all about storing acorns and other survival techniques and is working closely with general contractors plotting their way through a collapsed economy. The 45-year-old is a principal of Davidson, Golden, Lundy & Forehand, a CPA firm that works exclusively with construction industry clients. From offices in Florida and Tennessee, the company advises some 400 long-term industry clients — plus stressed customers who have called since January for fiscal rescue.

“I really don’t have any regular clients who are in trouble, unless they have had a subcontractor fail or something like that,” Forehand said. “The examples of failure that I am seeing now are first-timers who have called in the last six months, including one large company. They didn’t follow the best practices and have gotten into trouble.”

His response in each case, he said, is to “reintroduce discipline” into the decision-making process. “You have to go back and do an overhaul and begin again with improved practices.”

Forehand addressed the issue of economic survival in a February presentation jointly sponsored by the Florida Transportation Builders Association and Florida Department of Transportation. From his seat at the bookkeeper’s table, Forehand offered wide-ranging counsel about the impact of day-to-day business decisions.

His list of 10 best practices ranged from the obvious — control spending, and manage fuel consumption — to the somewhat less obvious — pre-qualify subcontractors and contract owners. Asked if there are one or two suggestions among the 10 that are the most essential in recessionary times, Forehand didn’t hesitate.

“Probably the most important practice, the everyday thing I tell clients, is to maximize your cash flow. It is so important right now. It really has been for the last six months.”

Specifically, Forehand recommended that contractors bill promptly every month and front-end-load payment schedules whenever possible. He believes that giving project managers incentives such as cash-basis job-cost reports can speed the collection process. Negotiating periodic payment of retainage funds will pay dividends, he said, as will keeping an eye on aged accounts.

The third leg of his standard piece of advice — besides prompt billing and collection — is … avoid litigation. “There is more litigation during a recession than at other times. That’s historically true. Contractors need to avoid change orders and conflicts. Stay out of those things. You end up doing the work and then have to squabble over the money.”

Forehand believes some wobbling construction companies in 2009 are victims of their owners’ characteristic optimism. “What I find almost unique to construction is the optimistic outlook of so many people in the business. I think that is just the kind of personality that goes into this business. You have to be a risk-taker kind of person and an optimist.”

The CPA — who himself entered college wanting to become a construction engineer before moving to the bookkeeping side — joked that such personalities add an extra dimension of challenge to his job. “I have a friend who says all contractors are people who are eternally optimistic, risk-taking personalities and, in some cases, maybe even slightly dishonest — and these are the people who prepare the financial statements we have to work with! Consequently, I have had some tough meetings with people who have overextended themselves this year.”

If that is the downside to executive optimism, Forehand said the upside is that “the best contractors in our group already are looking for opportunities. The really good contractors have managed their growth and managed their resources and are using the recession as an opportunity. I have a very successful client who is looking to buy right now. Not looking to make a deal, but to make a steal. He is bargain hunting.

“Three years ago all the resources that contractors have available today were scarce. You couldn’t find qualified people. In fact, three years ago I advised my clients to be cautious about hiring. It was almost as if someone looking for a job then must have had an issue of some kind. Today, there are plenty of qualified people to hire. Equipment was expensive three years ago. It is on sale now.

“The success stories we have,” Forehand summarized, “are from something done by a company during a recession, something that made it stronger when it emerged from the recession. An acquisition, or better-qualified people. More equipment. Something.”

If there are three identifiable stages of executive response to economic downturns —contingency thinking in the slowing months leading up to a recession, steady care-taking of resources during a recession, and anticipated expansion as one ends — at which stage should contractors find themselves at the midpoint? Forehand said it depends on an executive’s skill.

“I think the most successful are always a step ahead,” he said. “They don’t just react, but think a step ahead. At this point in the recession, the successful contractors are already getting ready to run again. Our best clients are all looking for opportunities. They are the ones who reacted most quickly at the onset of the recession.”

“The willingness to change is very important,” the financial adviser added. And he noted that adaptability is not a function of company size. “I wouldn’t say my best run companies are the biggest, nor the worst run the smallest.”

J. Doug Pruitt certainly subscribes to the idea that a recession is a prime staging area for resurgent companies. The chairman and CEO of Tempe, Ariz.-based Sundt Companies — he also is president of Associated General Contractors of America — believes “the chances of making improvements in a company are best during a downturn.

“One of the things I always have said is that when times get tough we don’t want to just hunker down and save money. We need to be prudent, and maybe there are some capital improvements we can back off on a little bit, but we are not cutting training and we are not cutting our technology budget. When we come out we want to be stronger than when we went in.”

Pruitt believes some builders fail to adapt well to changing conditions partly because that is just the character of the industry — an industry dominated by engineer-types, if not actual engineers. “Engineers tend to think on one side of the brain. With them, it is more, ’Roll up your sleeves and get the job done.’ Thinking 10 to 25 years down the road is not what they naturally do.”

But some unresponsiveness to economic change is attributable to the industry being so fragmented, said Pruitt. He noted that construction is not a monolithic economic segment run by a few players, as is true of some other industries.

“We are a very, very large industry if you look at total dollars or percentage of gross domestic product or total number of people employed, but we are not an industry dominated by a half-dozen companies. Only 1 percent of the industry has more than 100 employees. We are a highly fragmented industry of Moms and Pops.”

That is not a negative, he quickly added, but it does preclude many companies from having a lot of extra revenue for research and development and for investment in training. Many small companies simply are along for the ride; when it gets bumpy, they are the first to get bumped out of business.

Sundt is not one of those companies. It is number 55 on the ENR Top 400 largest contractors in the country — and moving up; it was number 62 in 2008. So it does have resources for long-term development of its business plan. One example: the futuristic tool called “Building Information Modeling.”

BIM uses digital models of construction projects — primarily vertical projects (i.e. buildings, as opposed to highways) — that let architects, builders and project owners virtually see a completed structure all the way through its operating phase. The program is designed to create efficiencies in construction and greater functionality in a finished product.

“BIM can make your company more productive. It is a tool that can be used on any work,” Pruitt said of the process. “But you have to invest in it and the question always is, are you going to spend the money?” It follows that most of the Moms and Pops in the industry won’t invest — can’t — and in a future economic downturn are left more vulnerable.

Still, Pruitt believes people, not new technology, will have the most impact on a company as this recession ends. He is openly discouraged about the state of education in the United States and its negative impact on construction’s future workforce.

“We have a serious workforce problem in this country,” the AGC president said. “It is not just construction that has the problem. It is true of all industries that use people with trained skills. I think we have a failed system in this country. Until we look at education differently and have a new appreciation for people who are working with their hands, we’ll continue to have the problem.”

Some colleagues in AGC are joining with Pruitt in a coalition to raise the profile of the issue. “We are going to start getting louder and louder. We have to change the educational system in this country.”

A Wisconsin educator echoed Pruitt’s concern about the industry’s future workforce. At the University of Wisconsin-Stout, Michael Bowman directs a four-year program in which a graduate earns a bachelor of science in construction.

“I guess this sounds kind of negative and I am generalizing, but most of our incoming students seem to want to be told exactly how to do something. It seems to take a lot of effort to think on their own,” Bowman said. “Consequently, it takes a lot more work on our part to get them to handle an assignment. I have noticed it particularly in the last 10 to 12 years. It is not a good trend.”

His response to the concern is to give the students more open-ended projects and less direction on how to accomplish them. “At that point, they have to come up with their own ideas. I tell them this is the perfect setting to try something, to learn by doing. They are not going to lose a job if they get it wrong.”

The school’s four-year program is rooted in construction programming going back 40 years and uses real building projects for which students are given shadow responsibility. The students prepare detailed estimates, work up mock bids and write actual contracts. They also work at least three months with a construction company.

The UW-Stout program’s advisory board represents 42 general contractors and relies upon a construction-experienced faculty. Nearly 80 percent of program instructors are “industry folks” — a higher concentration of non-academic classroom instructors than in any other degree-granting program on the campus of 8,000 students. With 470 men and women enrolled in the program, 60-80 graduate each year. Last year, job placement for graduates was 98.3 percent.

So is this program, and similar ones, producing young people with The Right Stuff to help companies in the immediate future?

“One of the things we pride ourselves in,” said Bowman, who is an engineer and former general contractor, “is developing strong organizational skills, strong people skills in our graduates. Construction is a people business. If you have heart and dedication and a real interest in the business, the technical things come kind of easy.

“We want our students to learn to work with different personalities. Overcoming small differences and leading a project to success is the ultimate goal.”

Alan Laibson is a professional gatekeeper in this “people business” known as construction. Laibson is vice president of Kimmel & Associates, an Asheville, N.C., executive search firm that specializes in placing people in construction industry jobs. He said culling of job candidates differs in boom times and down times and executives tend to do a better job of hiring in the latter.

“From 2002 right on through 2006, construction was crazy,” he recalled. “Companies were almost forced to hire people who, had the companies not been so busy, they might not have hired. The first thing that happened when the recession hit was that employers began to take a hard look at their staff.

“Suddenly it was, you know, Frank has been with us for several years, but every job Frank has been on he used lots of resources, he’s pretty high maintenance, never really reached the full level of profitability that we had hoped for. You know, maybe the company would be no worse off were Frank gone.”

This could be called growing lean, a company staffing principle in which a sum is greater than its individual parts. Old-timers would call it getting rid of dead wood. By whatever name, the process is speeded in a recession — at least when prudent decision-makers are managing the process.

It is during flush times that a Kimmel’s executive placement is more likely to disappoint an employer, Laibson said. Company executives are so busy when work is booming they have no time to either properly interview a candidate or train a new employee. They just hire, for good or ill. Whereas in downturns, there is plenty of time for executive scrutiny and better hires are more likely to result.

In short, now is a good time for executives to be filling key positions.

Laibson, like Bowman, places a premium on people skills. “A good candidate has to have particular skills an employer seeks, of course, but even more important he has to have good interpersonal and communication skills and the right attitude. If people like working with someone, that person will be successful because they want the person to succeed.”

One hiring criterion has changed over the 25 years Kimmel has been working with employers, and that is length of service. Laibson said the old standard was simple: the longer the longevity, the better.

“The new paradigm seems to run something like this: three and 10. Three jobs in 10 years. What factors into that is, if a person has exhibited advancement in each of several organizations, it means the person is amenable to change, is successful at change and, moving forward, will be able to accept new methodology at a new company.”

Kimmel & Associates works with young people through internships and scholarships. Laibson, too, sees attitudinal differences between this next generation and the ones that preceded it — not all them unflattering, incidentally — but he said his larger concern is that the industry won’t have enough jobs for them.

“A lot of the young people coming in now are very bright,” Laibson observed. “One of the challenges is that there are not enough jobs available because of the recession. My concern for them is that they not become discouraged and leave the industry, as has happened in previous recessions. Then as now, young people have to make a living and end up leaving for other industries.

“That’s what has created some of these workforce gaps we are experiencing, these holes in the workforce. A percentage of a generation was lost to the industry because there simply weren’t jobs when they needed them.” CEG

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