Business

Deteriorating Backlogs: Responding to a New COVID-19 Reality

With construction jobs scarce and bidding fiercely competitive, it is tempting to jump on any work you can find. But there is a smarter approach to planning for dwindling backlogs.
June 3, 2021
Topics
Business

As 2020 kicked off, the construction industry was flying high, as it had for many years. With a steady flow of work and bidding opportunities, large infrastructure projects on the horizon and sureties offering a seemingly endless supply of bonding, most contractors were hitting all-time-high revenue and profit numbers, with healthy backlogs to keep the momentum going for the foreseeable future.

Then came the COVID-19 pandemic, when public and private jobs came to a screeching halt and were put on hold indefinitely due to government-mandated shutdowns and economic constraints. Bidding opportunities and new jobs were nowhere to be found, payments on jobs slowed or stopped, and bankers and sureties began to sing a more conservative tune.

In certain ways, not much has changed in 2021. Construction operations have adapted to COVID-19 changes and remobilized, but new jobs remain scarce, and bidding is fiercely competitive. Private work is slowed by lifestyle changes, including residential relocations, large amounts of vacant retail space and decreased commercial office space needs.

Public agencies (federal, state, local) remain in financial distress, left with little to no funds to finance new projects or restart those on hold. Many agencies are not back to work yet and need to regroup and restart the process from where they left off a year ago.

Backlogs are being steadily worked down again, but they are deteriorating at a rapid pace as contractors work through them furiously to make up for lost time, meet project deadlines and replace lost revenues. With new construction jobs still limited, backlogs are not being replenished at adequate rates to ensure long-term cash flow and financial sustainability.

Fortunately, 2021 has brought hindsight, vaccinations and the hope of normalcy in the not-too-distant future. Until that day arrives, it is more crucial than ever for contractors to strategically plan for the continued erosion of backlogs.

Smarter Solutions to Deteriorating Backlogs

In this environment, it is tempting to jump on any work you can find, but the opposite approach is more effective in the long run. As backlogs continue to dwindle, follow these recommendations to make smarter moves and come out ahead:

  • Bid smart. SStick to your strengths and do not succumb to peer pressure as you see competitors rush into untried market sectors to grab new work, which could bring increased risk and unknown challenges. Most likely, this work will not yield much, if any, profit if a contractor lacks experience in the new arena and/or underbids to secure work. Taking work simply to get cash in the door is nothing more than robbing Peter to pay Paul.
  • Practice patience. After the vultures descend upon quick opportunities to fill their backlogs and surety programs max out, there will be fewer bidders as alternative jobs materialize, which will increase profits. With President Joe Biden’s American Rescue Plan, there is renewed hope that an influx of funding to states and cities will result in much-needed infrastructure projects and consistent work for years to come.
  • Re-envision the future.If your organization has not revisited its business plans in light of COVID-19, it is essential to reassess and proactively identify ways to strengthen your company. This evaluation should include complete financial and cash flow projections that show the peaks and valleys of projected revenues and what the future may hold. You may determine that accelerating revenue now may not be necessary and that “slow and steady” may serve you better and conserve more cash for the future. With these projections and your financial team’s talent, you can draft a new plan for the company’s future.
  • Identify cost savings. This new plan should include healthy cash flow, which is not only about the revenue you bring in but also the money you keep through cost savings. This includes reducing overhead to be more “lean and mean,” addressing operational inefficiencies and workforce planning.
  • Maximize relief. More than a year after COVID-19 relief was introduced in the CARES Act, these programs continue to evolve. Speak with your CPA and other financial professionals to ensure you secure the maximum relief under the Paycheck Protection Program, employee retention credit, qualified leave credit, Economic Injury Disaster Loans and more.
  • Communicate often. This communication should extend to employees, bankers, sureties, job owners, subcontractors and other stakeholders. Share how your company is doing, your challenges and future plans. Their buy-in, support and collaboration will put your business in a better position to remain strong, healthy and ready for whatever the future holds.

Grassi’s Construction professionals help contractors make the right financial and operational moves in any market condition. Click the button below to learn how.

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