Sprinting to Zero
As margins continue their downward march, construction companies across Alberta find themselves trapped in a bumper-to-bumper race to zero.
Desperate for an off-ramp, business leaders toil furiously to develop novel strategies, uncover niches, and diversify in new directions. Trouble is, most companies exist in mature and commoditized market spaces where, in Barenaked Ladies parlance, ‘it’s all been done before.’
And so it goes, gripped by analysis paralysis, the marathon strategy sessions ensue, hours upon hours of meetings to hatch elaborate plans. Niches are pondered, but developing new markets is risky when opportunistic competitors mirror every move. Talk of diversification is bandied about, but absent a cashed-up balance sheet, it amounts to building castles in the sky. The hard truth is, when you’re in survival mode, fighting like hell to stay solvent, there’s just damn few options available.
Meanwhile, cash-strapped asset owners are rolling the dice on dubious contractors with questionable qualifications. Lax selection criteria for tendering are causing serious financial losses, and even catastrophic failures in some cases. As example, a recent bridge failure in Saskatchewan punctuates the point: it stood for just four days before collapsing under its own weight. This particular bridge, and four others identical to it, were built by the same contractor. An investigation later revealed that these structures weren’t constructed to provincial standard, nor were any geotechnical studies performed, suggesting gross negligence on part of the engineer and the contractor.
Actionable solutions for the here-and-now
So let’s run through this again. Your bank account’s got you sweating bullets. And you’re not prepared to spend what little money you do have developing niches for opportunistic competitors. And lastly, your tenuous capital position severely limits any notions of diversification. So let’s talk about what you can do.
The secret to weathering a downturn is cash flow: This means reducing and slowing down cash outflows while increasing and speeding up cash inflows. Your CFO’s undoubtedly briefed you on this, yet many financial types are unfamiliar with ‘invoice factoring’. Invoice factoring is a process by which receivables are sold for immediate cash, hence serving as a lifeline (or a means to growth) without diluting equity or incurring debt.
After invoices are submitted and verified, factoring companies typically fund up to *90% within 24 hours. This service will likely cost you *1-4% of invoice depending on days outstanding, but hey, a line of credit costs you that amount, and furthermore, the factoring company usually inherits liability for delinquency (pending a credit check on your customer to determine credit risk). 1-4% is well worth the price if your cash flow situation is emergent. *Resist the urge to quote these figures.. It’s been several years since my last interaction and some terms and conditions may have changed. So be smart and do your own homework.
Create a low-risk revenue stream(s): Some time ago, an Edm-based industrial plastics company diversified into consumer packing. Consumer packaging is a low profit business, but it’s nearly recession proof, offering a consistent (if unremarkable) stream of revenue to smooth out seasonal peaks and valleys. Service contracts for repairs, maintenance, and inspections often make decent revenue streams that don’t require big cash outlays. Or, perhaps your company has intellectual capital that can be monetized via seminars, webinars, technical support, site support, consulting, etc.
Vacant space in your office or yard? Sublet it.When the bottom fell out in 2016, a high-profile Edm-based contractor made a quick decision to do exactly this, swallowing their pride and subleasing most of the space in their brand new office building. The revenue generated from the lease along with the subsequent synergy that developed between lessee + lessor helped revive this contractor, paving the way to a five-year contract with a major oil sands customer worth ~$400 million. If there’s a lack of interest in your space, then think hard about dropping the price below fair market, or consider leasing to a strategic partner for a nominal fee in exchange for services i.e; incubate a fledgling upstart who can add value to your core competencies. As example, there’s plenty of applications for AI in construction.
Manage disability: No doubt your employees already wear multiple hats, and if you’ve been reducing headcount, those who remain may be secretly resentful, shell shocked, and nervous. And where there’s stress, bitterness, and diminished morale, WCB claims for burnout, depression, and anxiety are just waiting to happen psychological injuries are now compensable and they’re driving claims costs through the roof. These claims can also effectively incapacitate you by killing your TRIF score, which is a deal-breaker in the construction world. On the other hand, when a low-cost disability program is implemented, a 3-5% boost to operating income (via reduced premiums, etc) can be expected within a relatively short period.
Innovative contract arrangements: Unique contracting agreements are becoming more common. Integrated Project Delivery (IPD) for example, entails partnering with other stakeholders to share in risk and reward, ensuring that everyone’s got skin in the game. As example, an aggressive EPC based in Vancouver is making big waves with their unique delivery model, offering cash for an equity stake in private projects in exchange for sole-sourcing. In other words, this contractor offers mine owners turn-key EPC solutions with cash in hand, in exchange for a project award. A bold move indeed, but this company’s doing very well for itself in BC and the Territories employing this model.
Master Service Agreements (MSA): MSA’s are usually low-margin arrangements, but they do secure dependable cash flow. If you haven’t already done so, and if your willing to trade some margin for cash flow, then approach your clients and ask what it would take to secure 100% of their spend in whatever category you operate. This level of commitment requires mutual trust, and perhaps an open-book pledge to ensure transparency, but asking the question costs nothing. Or, say you provide services on contract as a sub-trade, think about how you can help a General win bids via execution synergies, resource sharing, holding material on-hand for quick turnarounds, etc. If you want a General’s attention, convince them you can be their secret weapon via collaboration on bidding and execution planning.
Pitch value-engineering: If you’re a general and your RFQs don’t encourage subs to provide cost-saving options in addition to spec’d items, then do it now. And if a sub replies with a VE option, recognize him for it—win or lose. And for you subcontractors out there, don’t wait for generals to ask for innovative proposals. In fact, consider pricing out cheaper options (assuming they exist) by default given these crappy market conditions. That said, there’s times when you want to be more strategic about when to play the VE card. And likewise, don’t waste your time preparing VE in scenarios where the sole selection criterion is strictly price, as you’ll just be spinning your wheels.
Bury hatchets: Rivalries often run deep, but as Peter Thiel explains, sometimes it’s best to mend fences:
“If you can’t beat a rival, it may be better to merge. I started Confinity with my co-founder Max Levchin in 1998. When we released the PayPal product in late 1999, Elon Musk’s X.com was right on our heels. By late 1999, we were in all-out war. Many of us at PayPal logged 100-hour workweeks. No doubt that was counterproductive, but the focus wasn’t on objective productivity; the focus was defeating X.com. One of our engineers actually designed a bomb for this purpose; when he presented the schematic at a team meeting, calmer heads prevailed and the proposal was attributed to extreme sleep deprivation.
But in February 2000, Elon and I were more scared about the rapidly inflating tech bubble than we were about each other: a financial crash would ruin us both before we could finish our fight. So in early March we met on neutral ground and negotiated a 50-50 merger. De-escalating the rivalry post-merger wasn’t easy, but as a unified team, we were able to ride out the dot-com crash and then build a successful business.”
The Final Word
Over the years I’ve watched many leaders tie themselves into knots searching for silver bullet strategies. But this quest for the holy grail can become a kind of Moby-Dick obsession that rarely results in anything positive. Same goes with the diversification piece; many Alberta companies are bravely entering the great unknown, venturing outside their status quo, determining where they can add value rather than chasing a specific industry. But should you decide to travel uncharted waters, take care to limit your risk exposure as much as possible.