History’s Blueprints: Lessons for Modern Contractors

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They say history repeats itself, and this is definitely true in construction. What can we learn from what happened in the past so it doesn’t repeat itself? Let’s talk about it this week.

Topics we cover in this episode include:

  • What we’ve learned from periods like recession and Covid 19
  • Be aware of economic cycles and how to get through the downturns
  • Prepare for not only the recession, but also the recovery period
  • What we can learn from the supply chain issues during Covid 19 
  • Time and materials contracts and supply bonds

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

TRANSCRIPT

[00:00:00] Wade Carpenter: They say history repeats itself, and this is definitely true in construction. What can we learn from what happened in the past so it doesn’t repeat itself? Come on in, let’s talk about it.

This is the Contractor Success Forum.

I’m Wade Carpenter with Carbon Company CPAs. With me, my co host, Stephen Brown, with McDaniel Whitley, Bonding and Insurance. Stephen, kick us off. What do you think?

[00:00:18] Stephen Brown: I think there’s a lot of economic cycles that contractors need to be aware of. Right now, we’re in a recession, which means inflated prices on everything. Prices are inflated. I took some economics in school, but I’m certainly not an expert on it. Wade, this was your topic. You had some great points. Let’s get started.

[00:00:39] Wade Carpenter: Economics was actually something I minored in in college and always been fascinated with it. And the more I’ve gotten into construction, there’s a lot of things that affect whether contractors are doing well. So I’ve actually been doing some research on some of this stuff lately because of some stuff I’ll probably be announcing soon, but can’t announce right now.

Essentially, we’re at a point where, right now there’s maybe some interest rate issues where it may be affecting some of the markets. We’ve got a presidential election coming up just in general to kick us off. The economy goes in cycles.

We’re doing this on a podcast. If I’m teaching this in person, normally you have a graph where you have ups and downs and sometimes there’s high points and it stays for a long time. And sometimes there’s low points, like the great recession about 10, 15 years ago now.

There are things that we can learn by studying these things. So just wanted to kick around several things today. I think there’s a lot of stuff we can talk about here.

[00:01:40] Stephen Brown: I just think that the different economic cycles that we go through are natural and they can be predictable. You don’t know how long the cycles are going to last, but you know the effect of those cycles. So when economists are starting to tell you we’re heading into a recession or an inflationary period, whatever, there are just certain ways that you ought to act as a contractor to be prepared for that.

How’s that economic cycle going to affect your cash flow? And one thing that I always see is contractors start freaking out about the economy and their sales start dropping, then they fill their plate up with cheap work. It just seems like they’re just going all out because the mindset of a lot of contractors is I’ve got to reach a certain amount of volume to make ends meet.

And my argument would be always that before, when you had a lower volume, did you make profit then? Odds are you did, or you wouldn’t still be in business. What were you doing back then? What adjustments did you do back then to allow you to make that profit? And what adjustments do you have to make right now?

[00:02:47] Wade Carpenter: Yeah, and before we go too much farther in this, I want to really say, we’re not doing this because we see any impending doom and gloom. I still think back to, what, 2008, when Jim Cramer got on NBC and basically told everybody, you need to get out of the market right now and essentially tanked the stock market. What a boneheaded thing to do, if I can say so myself. But–

[00:03:12] Stephen Brown: You think the Contractor Success Forum could sway international economic trends? Just–

[00:03:18] Wade Carpenter: That’s very possible with your good looks. But anyway–

[00:03:21] Stephen Brown: There we go. Okay.

What we’ve learned from periods like recession and Covid 19

[00:03:22] Wade Carpenter: But I don’t know about that, but that’s not what this episode is about. It’s more about what can we learn from the past? And, should we be prepared for something? We are in a cycle where we’re going through another election and we can get into this some, but different parts of construction are affected by things like elections and economic policy and I think we can hit several of these things right now.

My personal experience, especially since COVID, contractors learned that they can actually get on a Zoom call. We’ve got contractors all over the country that we’re working with now. And what’s been interesting to me is that one contractor in one part of the country can be feeling like it’s doom and gloom, and other parts of the country, they can be going gangbusters, and they can’t find their people.

And that seems to happen all throughout my career. I see that certain different types of construction are doing better, sometimes residential versus commercial. So, what are your thoughts on that?

[00:04:22] Stephen Brown: Well, I agree with you. It seems like in the old days, contractors worked in a certain geographic area. They were comfortable working in their space, their territory. And when work was good, they made a lot of money. And when work slowed down, they pulled back the reins a little bit.

And then contractors started coming in from out of the territory and driving their costs down. I think so much of this is what you’re willing to bid your work for.

[00:04:50] Wade Carpenter: Well, that’s definitely some lessons we learned from the Great Recession. And that’s partly why I’m pulling this together is, there are a lot of things we learned from the recession of 2008, 10, 11, 12.

I think the residential markets may have caused some of that. Commercial construction held on for a little longer because they had some projects, but then when they tanked, they were tanking for a little while longer than some of the residential markets. And it depends on the area of the country.

I’m not going to go deep into the statistics right now, but in my research, overall construction contracted about 17%. That’s including residential, commercial, all that stuff during the Great Recession. But certain types of industries– and I noticed particularly that I had a lot of people that, heavy equipment, dirt grading guys that have heavy equipment and lots of debt on these big bulldozer that cost $100,000 plus, they did not survive that. 40 to 50 percent did not survive that period. And so what can we learn from some of those things?

[00:05:51] Stephen Brown: Yeah. What do we learn from the people that did survive that period, Wade?

[00:05:55] Wade Carpenter: Running any business, the failure rate is horrible. Construction is even riskier. And some of these things like seasonality that affect contractors, they don’t plan for it. And if they see these things coming or plan, because they know inevitably they will come back around, then I feel like they’re a lot better positioned to manage through these kind of things.

[00:06:16] Stephen Brown: Okay. So what do contractors need to know generally about the different economic cycles?

Be aware of economic cycles and how to get through the downturns

[00:06:21] Wade Carpenter: The first thing is there are going to be boom times and there are going to be bust times. And one of the points I wanted to make on the fact that when so many people went out of construction, I mean, I know that overall it was 16, 17 percent, but it’s, commercial and some of the residential were 50 percent or more that dropped out during that time period.

 This is where we eventually landed up as I was doing audits and reviews. So many people, the professionals, the administrative staff, got out of construction at that point.

As I’ve said before, construction accounting is not taught in schools. And we lost so much knowledge to having people that knew what they’re doing with construction. And that’s where we built our niche around. Being able to support contractors all over the country like that.

But the point is, what can we do to survive it and thrive in it? I know you’ve made some great points about what people do when things start contracting, and I didn’t know if you wanted to explore that a little more.

Prepare for not only the recession, but also the recovery period

[00:07:22] Stephen Brown: Sure. There’s economic cycles that affect construction universally that we just see over and over again. You have a, for example, a recessionary period and then you come out of that. You have a recovery period. And you’ve got to not only be prepared for the recession, but also the recovery period. And it costs cash. It costs money to recover from a recessionary period.

You have to react to the situations that you can control and you have to manage those so you can be ready for the future. And I would say managing your cash flow, as always, what we preach on the Contractor Success Forum is the key to getting through these tough economic cycles.

But from a more practical standpoint, Wade, what exactly is going on and the contractors need to do?

[00:08:16] Wade Carpenter: There’s a lot of things we can unpack there. Back in 2008, I think a lot of contractors held on longer than they should based on hope, and we understand that. I know I always preach Profit First, and Profit First wasn’t written until 2014, but I’ve said many times, I wish contractors had read that book and implemented that before the recession and maybe they learned some lessons about cash flow and, not just holding on to hope.

But going back to your train of thought on what people do, they start taking work at lower prices. And I have some very vivid examples of people doing the exact wrong thing. A particular grading contractor that I took some work way too cheap. And in a point where people were dumping their equipment, the heavy equipment guys, as well as everybody that was in the residential grading and those kinds of things were trying to do all the commercial work.

So everybody gets in this feeding frenzy of trying to low bid everybody else so that they can keep making payments. And, I know it’s a tough question, but did you see that as well?

[00:09:24] Stephen Brown: Sure, and you see, for example, general contractors doing more work than they used to sub out. So it’s affecting those subs as well.

[00:09:33] Wade Carpenter: That’s true, that’s true. But again it does become a bidding frenzy and you know this particular contractor started taking all his cash flow and buying more equipment because It was cheap on the market.

[00:09:46] Stephen Brown: Sure, that’s what, that’s one benefit of an economic downturn is the equipment prices go down.

[00:09:53] Wade Carpenter: In his case, he thought, well, I’m gonna own this, but he used all his cash flow to run to this particular job when he didn’t have anything behind it. So there’s a lot to talk about there.

What we can learn from the supply chain issues during Covid 19

[00:10:03] Wade Carpenter: If we can, let’s maybe hit some of these other things. What are some lessons we learned from the COVID period and the, supply chain issues?

[00:10:12] Stephen Brown: I can tell you lots of horror stories with customers of mine about getting certain materials that were vital to a project that they just couldn’t get their hands on. Or the job starts and the materials and supplies weren’t ordered quickly enough, the prices weren’t locked in, the quotes from subs and suppliers that used to be open a lot longer were shutting down in a very short period of time. And that’s scary.

[00:10:40] Wade Carpenter: I saw a lot of that too. And contractors that had late penalty clauses because they couldn’t get the supplies. Sometimes the prices went through the roof and they had a fixed price. A lot of them got burned and stuck on some of that stuff.

[00:10:54] Stephen Brown: Yeah, because the owners and the designers always want their project done fast. Especially for a developer, for, for Commercial space. Time is money. When that construction project isn’t ready to produce income for them, they’re losing money in their world.

And so they’ll put high liquidated damages on there that you’re not really worried about. You say, well, I’ve got plenty of time to get that done. And then something happens. Like you can’t get ahold of something that you need that’s integral to the workflow.

[00:11:27] Wade Carpenter: I saw many examples of that too, and people just couldn’t finish out a project in one case because they couldn’t get a particular brand of sprinkler head. And that’s all they needed, and the fire marshal wouldn’t sign off on this huge multifamily thing.

Time and materials contracts and supply bonds

[00:11:41] Wade Carpenter: But the other part of that is, and you actually alluded to it, is that the fact that I saw a lot of people going to time and materials type contracts after that, or cost plus type thing, where if the material prices go up, we have some kind of insurance. I’ve seen lot of people switching away from the fixed price model and into these cost plus or time and materials. You’ve talked about on this podcast a few times about the supply bonds and those kinds of things. Did you see any kind of–

[00:12:12] Stephen Brown: Sure. I was just begging people to get a supply bond. You have a certain pump on a project that’s spec’d out by the engineer and you can’t buy it off the shelf. It’s not readily available. It has to be built for you. Whoever is supplying that could give you a supply bond to guarantee that that pump will be there according to the contract and the timeframe specified and the price quoted. That’s huge.

A lot of manufacturers’ reps, the sales people say, oh, oh, I checked on that. No, we don’t do that. Yes, they do. And it’s very inexpensive. So you’re right. Economic upturns and downturns are all about how you evaluate risk, right?

[00:12:53] Wade Carpenter: Right. Let’s, I know, I think probably all these, we could do an entire episode on just several things that happened, but just trying to do an overview here. What I alluded to earlier with the regional differences and, one area of the country versus another. And sometimes it’s, building booms or sometimes it’s things like seasonality.

And some things that we don’t have to deal with here in the South that people in the North have to deal with is, the weather, as far as colder weather, and you can’t do certain things with concrete or asphalt or whatever.

There’s places where, say, in a commercial roofing or whatever, there’s places in the Midwest, it’s entirely too hot to get on a roof in certain times of the country, in times of the year and other times it’s just too cold or too dangerous to get on a roof.

[00:13:44] Stephen Brown: Well, that’s right. That’s why contractors, as a rule, are generally obsessed with getting their project dried in, which means that they can finish up the rest of it, no matter what the weather’s doing.

[00:13:54] Wade Carpenter: Right. Some of the other things, again, I’m just hitting high notes here, but I did start looking at, there’s an index It’s been around since 2017. It’s called the Commercial Construction Index. And they track quarter by quarter, basically, it’s a measure of, how people are feeling and whether new commercial construction starts and how people are feeling about the economy and, whether they feel like they should be building right now.

And some of that I think has to do with the weather, but I guess the one thing that I look at on the trends was obviously there’s fourth quarter and the first quarter every year, it’s doom and gloom. Because a lot of the people are in trades that have to work outside versus it gets better over time.

And there were some weird dips during COVID. We could come back to COVID, some of my residential guys had the best boom times because people were at home and wanted to do all this stuff on their–

[00:14:55] Stephen Brown: Sure. And construction was classified as a vital industry and allowed to continue.

[00:15:01] Wade Carpenter: Most people in construction did fairly well, even on the commercial side, but there were some areas of commercial that were shut down as well, especially when they’re doing some of the federal projects.

The last thing I really wanted to hit, and maybe we can do with some deeper dives because I think there’s lessons to be learned by every contractor. But it’s the middle of 2024, and we’ve got an presidential election coming up. And I’m not trying to get political at all about this, but there are swings in construction because of who’s in office and, policies out there.

I’ve also heard some people saying, well, I’m holding off on a project because until the election’s over, or maybe I’m trying to accelerate the project because I’m trying to get this done before something else happens. Thoughts on that?

[00:15:48] Stephen Brown: Sure. Presidential elections, as a general rule for federal contractors, you have all these shovel ready projects toward the end of a life cycle of a president that are not funded yet and they need to be done. They have to be done.

So, all the contracting officers and their support folks, architects and engineers, are pushed into getting the project put together for bid, just roughing it out and putting together the plans.

And so as soon as the new president comes in, there’s these shovel ready projects that go out. I see economically a lot of roofing projects come out right after a new president gets elected cause there are the schools, hospital, other important infrastructure to serve us, the citizens of the country.

So it has to be done. A lot of people wait for those cycles to come before they put all that work out to bid.

[00:16:44] Wade Carpenter: Right. Well, I guess my thoughts on it, and I’m trying not to get political inject my personal feelings on some of these things, but some of the most vivid examples in the last several years was when President Biden took office, immediately the Keystone XL pipeline project was shut down.

An entire group of people and, people that were working hard on that got shut down overnight. Building the wall at the southern border, again, not, not trying to get political, but, that sort of stopped immediately, and we go into this trying to build for Climate Infrastructure Act comes into place and the focus becomes more on sustainable energy, some of these things, electric vehicle projects and stuff like that.

So entire industries change because of that. I actually looked at, I think that was passed in 2021, if I’m not mistaken, and, this entire Infrastructure Act that was supposed to be all this money put out there for it, well, only like 0. 6 percent of the money right now has already been spent of the amount that’s been allocated to that.

They’ve got a lot of projects out there, but they’re not turning as many of them as I was hoping. If they’re going to spend the money, you know, I think it should benefit the contractors.

So, I was appalled to see that as of, I think, May or April, I think it was, only 0. 6 percent of the money for the Infrastructure Act has actually been spent so far.

[00:18:16] Stephen Brown: Yeah. And one of the reasons for that, that I’m hearing from the AGC folks up in DC is for federal contracting projects, over 120 engineers, architects and contracting officers retired that had to be replaced. And so it’s not just having the money to spend, it’s having the ability to put the project together properly.

That’s been a huge slowdown to all this money, this priming the pump. for the economy by throwing out a lot of numbers and a lot of budget figures. It takes a while for that to come together.

Presidents want to pump up bad economies by putting some federal work out there. And when they do, it takes a while for that work to get out for bid and to be performed. That’s a cycle in the federal contracting market.

And then when you see tough times, you see certain trades doing work. They don’t normally do to make a buck. And then you have an obsession with your expenses, so you start doing cheap work. And the one thing that I’ve gotten out of this whole conversation, Wade, is that you can’t say for sure what an economic cycle is going to do.

But you can notice the reaction of that economic cycle. You can notice interest rates going up. You can say, well, how’s that going to affect my business? You can see work that’s usually out for bid starting to dry up, and there’s all kind of conjecture. Why is that work drying up? We talk about it all the time on the Contractor Success Forum, our theories.

We don’t always know, you have to know. There’s just certain things that we’ve noticed over many years of being in this business that seem to come and go, and I know that’s what you want our listeners to try to understand: that economics can sound and seem fickle, but there’s tried and true things that you need to do in each economic cycle.

[00:20:15] Wade Carpenter: Right. Well, again, I think we could continue with this conversation for quite a while. There’s a lot, I think a lot of things that we unpacked. We didn’t even touch on things like interest rates and all that stuff. But, again, this is not about doom and gloom or whether you should do, should or shouldn’t do anything right now.

But it, if nothing else, I hope it made you think about it a little bit. And I think we’ll go ahead and put this one to bed. If you have any thoughts or feedback on this episode, we’d love to hear it in the comments. There’s a lot of things to think about, and the hope is that you go back and apply some of this or maybe some of the thinking to your own business.

We’re always happy to help answer questions or hear your thoughts on this, or even topics that you’d like us to talk about in another show. But thank you all for listening to Contractor Success Forum.

Check out the show notes at Contractorsuccessforum. com or the Carpenter CPA’s YouTube channel for more information. / We would appreciate if you consider subscribing, liking the podcast, and follow us every week as we post a new episode. We will look forward to seeing you next time.

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