External and Internal Factors Influencing 2020 Construction Business Expectations

How to adjust 2020 planning to deal with both the external and internal factors that can impact your construction business.

Time to polish up the crystal ball and guess how 2020 will impact your business operations and financial situation. It could be bad, not so bad, same as last year, better than last year, extremely better than last year - it could be any one of these choices. But the “real” outcome will be a result of both external and internal factors.

So, let’s take look at both the external and internal factors affecting your business and how you should adjust your 2020 planning to deal with them.

External Factor #1: Economy

We all hear the news and read industry-related publications that spell out what to expect in 2020. There is a lot of speculation about the amount of debt being incurred worldwide that simply cannot be repaid in any reasonable amount of time, which will in time generate a credit crisis that in turn will result in a recession. While I agree that a crisis is coming, it probably won’t be in 2020.

I read a lot of financial journals and while they pretty much cover the credit situation, a number of them believe that a recession is created when business slows down to a point where debt payback cannot be covered, or where a major credit crisis (such as in 2009) causes a related recession. Because our economy is doing quite nicely at this time and is expected to do so through at least 2020, we will probably avoid a recession this year unless a major credit crisis appears. This is unlikely because business is producing adequate cash flow to cover debt service.

So, on a scale of 1 to 10 - with 1 a disaster and 10 a home run - my outlook falls between 6 to 7, since we can still generate local recessions for other than financial reasons.

So, with this assumption, you can plan out 2020 assuming like results compared to 2019.

External Factor #2: Interest Rates

Interest can represent a material expense on your income statement and at the same time eat up a significant portion of your cash flow. The good news is that they are low compared to historical rates and there is not much reason to expect them to change much at all in 2020. Even it they did, a quarter percent change on 3% is not going to break the bank.

If anything, you should be reviewing all your notes to see if you can consolidate at a lower rate or just shop around to see if you can get a lower rate. Many current loans were executed with banks and borrowers believing rates would increase when they did not. That being the case, maybe you are paying too much. Check it out.

External Factor #3: Inflation

This is another area that seems to be under control unless you deal in materials and commodities that could swing because of supply and demand. Other than that, if inflation has not increased because of current economic conditions, it probably will remain under control through 2020.

Some expense categories will increase irrespective of inflation. Those would be union rates, increases for new equipment as well as those demand and supply categories noted above.

External Factor #4: Employment

This is the fly in the ointment because most of you express a need for more qualified workers. That being the case, this is a time when you step out of the comfort zone to find new ways to attract and keep qualified workers. Either find new workers or find ways to use technology to make yourself more efficient using fewer people.

Find out what other contractors are doing to fill this void. Talk to your accountants, your bankers or any other service providers that specialize in the construction trades. Do this now.

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All in all, 2020 looks like a repeat of 2019 unless an unexpected financial crisis appears that could turn into a recession. Consequently, your normal customer base should be moving ahead as usual, with your company ready to serve them.

That said, I always suggest a Plan B, which would cover the “not so bad” scenario outlining potential adjustments to expenses, Cap X purchases, reduced cash flow and impact on financial covenants.

Internal Factor #1: Planning

When it comes to planning, ask yourself the following:

  • Are your books closed for 2019?
  • Do you know where you need improvement based on 2019 results?
  • Do you understand your cash flow from the operation number?
  • Has your overhead number been updated?
  • Have you reviewed the “owned” equipment list to see where it may be more profitable to rent vs. own?

Put a projection together and determine what cash flow you will produce. Then use some sensitivity analysis to account for sales 20% less than expected and 20% more than expected.

Internal Factor #2: Revenue

Let’s assume it’s business as usual compared to 2019. Is the sales funnel full? Do you know where your work will be coming from in 2020? What are you expecting in terms of the competitive environment? You can expect a more competitive market resulting from technology.

Can you use more rental to lower fixed costs so that you can be more competitive? Best get out in the field to find out what to expect.

Internal Factor #3: Material Costs

No matter what, vendors will ask for increases. It’s up to you to figure out what is reasonable. You may also want to search for sources that can deliver more efficiently and thus lower your cost. Supply and demand will be your issue with material costs.

Internal Factor #4: Labor

As noted earlier, finding and keeping qualified employees is probably your main operating problem. You have to do what is necessary to sign up workers and find ways to keep them on the team.

What can you do?

  • Pay referral fees to employees for bringing in job candidates that get signed up.
  • Kick in more money to retirement plans.
  • Provide a bonus program if a job they work on meets budget.
  • Provide training for higher paying jobs.
  • Follow a team approach to keep them interested in your company.

The bottom line here is money talks!

Internal Factor #5: Overhead

The tax scenario is getting nuts, especially regarding state and local taxes. If you work in more than one state, this is now an area that needs review. Falling out of compliance can be expensive.

Insurance markets are tightening up. Expect increases for your coverage.

Technology is getting pushed down to smaller and smaller companies. If you do not adapt, you could lose your competitive edge. You would be amazed what you can do with your payroll system along these lines. Find out what other folks are doing and see if there is a fit.

Equipment rental continues to grow. Use it where you can.

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The way we do business changes every day and, in these times, every hour. You owe it to yourself to keep abreast of your markets and business practices. Benchmark your operation and find where you have gaps compared to competitors and explore ways to close them.

While the comments here are directed at 2020, the potential for a major credit crisis is still out there. My plan would be to run lean by reducing fixed costs and switching out labor for technology. I would also embark on a marketing program to keep you in the minds of potential customers. 

Garry Bartecki is the managing member of GB Financial Services LLP and a consultant to the Associated Equipment Distributors. He can be reached at (708) 347-9109 or gbartecki@comcast.net.