While most experts are optimistic about the future of the construction industry, new economic data on year-end 2020 results and predictions for 2021 are beginning to paint a different picture. Contractors in sectors that are showing a significant decline may want to start thinking about a plan to pivot their businesses.
Economic Data
According to an Associated Builders and Contractors (ABC) analysis of data published on Feb. 1, 2021, by the U.S. Census Bureau, national nonresidential construction spending declined 0.8% in December 2020. On a seasonally adjusted annualized basis, nonresidential spending totaled $790.2 billion for the month, 4.8% lower than in December 2019 but 3.8% higher than in December 2018.
Private nonresidential spending was down 1.7%, while public nonresidential construction spending was up 0.5% in December. Annualized, private nonresidential spending was down (-9.8%) and public nonresidential was up 2.5%.
ABC’s press release indicated that spending fell on an annualized basis in 10 of the 16 nonresidential subcategories.
Declining sectors in 2020 were:
The sectors that grew were:
The religious sector had 0% growth.
While the data is inconclusive on what will really happen in 2021, it is somewhat concerning. Contractors might consider looking for alternative ways to stay in business. Several ideas on what contractors can do were presented in a recent Construction Executive article, Uncertainty Brings More Opportunities for Private Contractors. These include retrofitting buildings to make them safer while reducing the structure’s carbon footprint, focusing on sustainability and green building, or repurposing buildings that are no longer in demand like shopping centers and office buildings.
Due diligence should be conducted any time a business is entering a new sector or service offering. This is the only way to know if what is under consideration will work. Here are some recommendations.
Run the numbers
Work on financial projections with an accountant. They are trained to develop forecasts and what-if scenarios. Accountants also know the key performance indicators that are important to analyze against benchmarking data on similar businesses in a geographic area.
Associations, companies and government-related data sources such as the U.S. Census Bureau have a wealth of information on the economic health of industry sectors. Review data from several vetted sources for an accurate assessment. Keep up on news releases issued by the ABC and other organizations to keep updated on new developments. Look at month-over-month and year-over-year numbers to determine trends and the long-term viability of the change. Research trade associations and join organizations that will provide information and contacts.
Become known by attending networking events, Zoom meetings and webinars. Read the organizations’ publications to gather important insights.
Contractors can collect market intelligence by reading books, newspapers and trade publications, as well as by talking to subject matter experts, people already established in the sector, customers, suppliers, distributors and other stakeholders. Contractors should also speak to their accountant, lawyer, banker and surety agent to determine how clients in the same line of business are doing.
Determine the market leaders and about other major players. Conduct a SWOT analysis to determine strengths and weaknesses compared to each competitor, as well as the competitor’s weaknesses and how the competitor is a threat.
The political and legal environment consists of laws, government agencies, and pressure groups that influence organizations and individuals. New opportunities can happen because of the political-legal environment, as well as uncertainty and challenges.
Learn what technology will be needed to invest in to operate efficiently. Technology can be used as a differentiator.
Look at the potential market or consumers who have a sufficient level of interest, available market or consumers who have interest, income and access to a particular offer; target market or the qualified available market that the company decides to pursue, and penetrated market or the set of consumers who a buying the company’s product.
Prepare a macroeconomic forecast, industry forecast and company sales forecast. The macroeconomic forecast projects inflation, unemployment, interest rates, consumer spending, business investment, government expenditures, net exports, and other variables. The gross domestic product and other economic indicators are used to forecast industry sales. The sales forecast is derived from the percentage of market share that the contractor expects to win.
Include developing internal processes, purchasing materials, supplies and other resources; fitting the business to do the work, and hiring skilled workers. Also include developing promotional pieces, updating the website and social media channels, issuing press releases, etc. There can be barriers to entering a new market. By analyzing all the above areas, contractors will be prepared to make better decisions.
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