In 2008 I predicted that the recession would be deep and long. I said so in seminars and few people believed it.
In questions from the audience at those seminars, staff from sureties asked, “Where are the failures?” I said that the failures come at the end of the recovery. Now we’re starting to see more failures.
No one liked the recession, but some contractors and sureties are going to hate the recovery, too. Companies will fail at a faster rate than anything we’ve seen since 2008; inflation will rear its ugly head, too.
The construction market recovery is going to be a financial struggle for most contractors because growth eats cash and many have been straining financially during this unprecedented downturn.
Contractors, as a result, may have difficulty financing the growth.
I’ve been studying the construction economy during past downturns over a period of 40 years and what I’ve learned is conclusive. The unprecedented length and depth of the recent market slowdown has produced extremely aggressive pricing, changes in owner attitudes and declining margins.
During much of the recovery margins will remain low because aggressive bidding continues until the appetite of construction organizations has been satisfied.
The research also confirms that the failure rate of construction enterprises is three times worse during recovery than during the downturn.
That bears repeating: three times worse during the recovery than the downturn. Contractors need be warned and understand how to approach the dangerous period ahead.
History Is No Mystery
In a shrinking market the ideal would be for each contractor to accept proportionately less work so that market share of each business is maintained. However, there is a tendency in our industry to resist any reduction in sales, often strenuously, and to fight vigorously for the fewer available projects, driving down prices for everyone.
The tendency persists, perhaps even stronger, through initial and intermediate stages of recovery when every project looks like the last project we may see. Trying to maintain volume in a declining market is, in effect, an attempt to increase market share and any increase in market share is universally “bought” at a cost.