Dr. Tom Schleifer has worked as a carpenter, a construction contractor, and, for 13 years, as a surety consultant for bonding companies. He retired from business and earned his Ph.D. in construction economics, researching the cause of construction firm failures during previous economic downturns. Since then he has conducted extensive research on the 2008-2012 Great Recession while it was happening.
Schleifer has drawn a number of conclusions from this career, and he believes these lessons are important for contractors and bond producers during our current virus-induced economic crisis.
First on his list? In order to survive an economic downturn, construction contractors must cut overhead to bring costs in line with reduced revenues as reflected by national construction trends. Schleifer stresses the national economic cycle, because he says small and mid-size contractors often focus too narrowly on local conditions.
“During construction market downturns, competition becomes stronger and prices come down, and the construction contractor has to lower prices to get more work. All ships move down and up with the tide,” Schleifer said.
As construction work becomes scarce, contractors may begin chasing contracts that can jeopardize their businesses. One risk is to move out of the accustomed geographical area – the next county or state over depending on the size and scope of the contractor. This can mean limited knowledge of local conditions and loss of management control as the chain of command is extended. Another common cause of failure is changing the scale of work: taking on larger jobs than usual as other projects disappear. And contractors can destabilize their businesses by lowering project bids, which in turn lowers margins.
His advice for construction companies is to match their overhead with the falling tide of the current business cycle. Schleifer notes that firms are able to function in a growing economy because they have the correct overhead to match their income. “If we can make a profit going up, why can’t we make a profit going down,” Shleifer asks. Contractors should ask themselves: “’My market’s down 20%; what do I need to do?’ I say go back to when you were that size and go back to that overhead number, period.’’
Schleifer admits this requires difficult decisions, because, in construction, cutting overhead means cutting employees. He notes that contractors are understandably hesitant to take this step because they have personal relationships with their workers. “At times like this the fun goes out of being the boss,” he wrote in one of his blog posts detailing responses to the downturn.
But Schleifer said in an interview that keeping the payroll at a level the firm’s cash flow can’t justify could sink the whole operation. He has seen it happen as he administered liquidation of more than 1,000 insolvent companies during 13 years as a surety consultant.
“If I take the position (as a construction contractor) I’ve got to hold onto all of my people and keep my overhead up by refusing to lay off one, two, or three or whatever, then I have to maintain my overhead. I then risk the whole company.”
Schleifer sees ominous echoes of the Great Recession in contractors’ early response or lack of response to this virus-induced downturn.
“In 2008-2012 no one did it (layoffs) for at least a year, and most waited for two years. My point is that, if people waited two years to cut overhead, they are going to wish they did it earlier,” he says. “I’m a little frustrated that contractors are not reacting as quickly as I thought they would because the 2008-2012 recession is not that long ago.”
Construction contractors, he says, should realize that their industry suffers high rates of enterprise failures. “Construction is the second most risky business in the United States – second only to restaurants – so the risk is very real, and it’s hugely magnified in a declining market,” Schleifer said. “It’s almost fair to say that almost any contractor can do well in a growing market.”
But when economic activity shifts into reverse, so do the fortunes of construction contractors. “Very few do well in a declining market.” Read Dr. Schleifer's series of Crisis-era Messages to Contractors during the pandemic.
Thomas C. Schleifer, Ph.D. is a “turn around” expert in rescuing companies from financial distress. With more than 45 years of contracting and consulting experience, he advises contractors on organization, structure, and strategic planning. He was Founder and President of the largest international consultancy firm serving the contract surety industry. He was a project manager and vice president of a construction company. He is author of Managing the Profitable Construction Business, Construction Contractor’s Survival Guide, and Glossary of Suretyship and Related Terms. He has a B.S. and M.S. degree in construction management (CM) from East Carolina University, and a Ph.D. also in CM from Herlot-Watt University, Scotland. He was the first Eminent Scholar of the Del E. Webb School of Construction, Arizona State University in 1993. He can be reached at tom@schleifer.com.