The peak construction season is upon us, and it appears a fairly good year is ahead. While there is a lot of optimism out there, it could translate to a higher than normal business risk if you are not properly analyzing your territory and the amount of work that will actually take place this year.
Up to this point, construction equipment dealers have, as a whole, been very optimistic about their ability to sell equipment in 2017. Both dealers and bankers I know specializing in the construction market tell me they have not seen this level of optimism for many, many years. I take this to mean that contractors have been conveying to dealers their intention to buy more equipment.
On the other hand, I have also been reading that equipment rental companies have not loaded up on equipment as they did before the last crash in 2009. Used equipment prices are on the rise, and lead times for some types of construction equipment are out to six months because inventory levels are lower than in the past. So I have to say that the rental industry, as well as OEMs, are taking a conservative approach to 2017 so far.
Use Caution if Planning for Growth
A few months ago, I would have sided with the equipment dealers. However, I’m slowly coming around to taking a more conservative approach due to:
- All of the infrastructure work we have been hearing about will probably not take place until 2018-2019 and into 2020.
- The tax bill that would have lowered your tax rate as well as allowed a 100% write-off of capital expenditures is probably not going to apply until 2018.
- Getting a better handle on healthcare costs also looks like it is not going to happen anytime soon.
- Interest rates remain low, which is both a good thing and a bad thing. Low rates encourage equipment purchases. But they also create additional monthly debt service requirements that will need to be funded by higher demand for your services — which may not be as imminent as you believe.
- Any number of global issues could disrupt our economy or banking industry and slow down the process of expanding GDP growth.
All in all, I believe there is enough smoke on the horizon to indicate a fire is close behind. In short, you need to have your “risk finders” working overtime to avoid putting yourself into a financial bind, or a non-profitable year. I am a “Cash is King” guy who believes that your balance sheet governs your final performance for a year. If you maintain your cash balance, your operation is probably in good shape.
I guess what I’m doing is cautioning you not to run out and plan for a banner year before you see the work unfolding before you. If you’ve already taken steps to grow your business, take a hard look at any remaining commitments you have and evaluate if you should go ahead with these transactions or not. I know you have to run your business and plan well in advance to line up personnel and equipment you may need to get the work done. But if anticipated demand for your services turns out weaker than you planned, the sooner you adjust your game plan, the better off you are.
Tips to Manage Operating Results
What can you do to get a better handle on operating results for this year? Here are some tips to consider:
- Review last year’s results to see where you need to improve and make sure you address those issues.
- Ensure that your operating system is up to date and provides efficiencies in terms of reporting and jobsite management — especially in terms of your ability to bill for services rendered as soon as possible.
- Do you really need to buy new equipment? Consider used units or units coming out of a dealer’s rental fleet. All are cheaper options with lower monthly obligations.
- Take advantage of telematics services being offered by the OEMs and various vendors. These services can make you more efficient and more profitable.
- If equipment needs are a problem, you can work out deals for rental units that will reduce your equipment cost on a job. (You only pay for when you use it.) I also assume you have equipment rates for your owned units.
All this being said, the work in the Midwest where I’m located appears to be strong for the balance of the year. Because of that, I will go back and review my equipment needs, and review the market for used equipment that fits those needs. If the market moves against me, I will sell off equipment with poor utilization (time or dollars) and shore up my cash reserves.
In your business, you always need an “out.” Do your planning with that in mind.