The contracting industry is always going through Boom and Bust cycles. Business can be great for a couple of years and then completely collapse the next. This explains why Donald Trump made billions from the real estate market before several of his corporations had to file for bankruptcy
Trump’s personal wealth was protected from his corporate bankruptcies, because shareholders aren’t personally liable for debts of pass-through entities. Most contractors don’t have this luxury. They can’t afford to incorporate. Even if they did, they still wouldn’t make enough during good years to weather the inevitable economic downturns that are right around the corner.
How to Build a Contracting Business that Lasts through Good Years and Bad
Plenty of contractors were wiped out during the Great Recession, because they didn’t earn enough money to cushion themselves. The good news is that there are a number of ways that you can create a sustainable contracting business. With that in mind, here are some tips to consider when creating a sustainable contracting business
Don’t Stop Investing in Marketing during a Downturn
The biggest mistake companies in every industry make is cutting back on marketing during recessions. They often do this because they use the percentage of sales method for allocating their marketing budget. Since sales decline during a recession, they end up spending less on their marketing to offset losses.
This is actually the time you should be investing more
in your marketing campaigns. There is still demand for construction even in the dimmest recession. The companies that maintain their marketing can capture most of the business as they have a higher profile.
Practice Better Communication
Poor communication is one of the biggest causes of failure in any industry. Mike Scott writes that it is particularly problematic in the contracting industry
, where companies tend to value technical skills over interpersonal communication.
“For centuries, the building trade has been a hugely fragmented industry, with lots of different companies coming together for a particular building and then moving on to different projects… Typically, a client will commission an architectural team or design team, then engineers will become involved,” explains Graham Watts, chief executive of the Construction Industry Council. “Such fragmentation means that it takes a long time for best practice to filter through, he continues. “A particular project may see some innovation that is a better way of working that could benefit the whole industry, but that team disintegrates at the end of the project and that innovation is lost.”
Boosting communication can go a long way towards building a stronger business that can last through any recession. Good communication is important between clients as much as it is between your employees. Project management tools and contract management software
Don’t Overleverage Yourself During the Good Years
It is easy to hope that good years will last forever. Newer contractors may feel like they are on top of the world during a vibrant economy. Their confidence will quickly be dashed when the market takes a turn for the worse.
It is important to invest in new capital during a good economy, but you don’t want to overextend yourself. It is equally important to build a cash reserve and keep your debt low enough so that you can pay it off during a downturn.
Choose Your Markets Carefully
Finding a market with great opportunities and limited competition is key to building any successful contracting business. You probably won’t be able to build a strong business in major metropolises, because the industry is already very saturated. Your best bet is to look for growing, underdeveloped markets, such as those that foreign speculators are targeting or areas in regions with a major economic boom (such as Midwestern states that recently discovered massive oil reserves).
Every Contracting Business Can Survive a Downturn
Many contractors have difficulty surviving economic downturns. If you want a higher chance of success, then it is important to be realistic about the odds and build a strong cash reserve during the good years.