Being a contractor during economic uncertainty: Q&A with Scott Bailey

 July 21, 2021     UFG Insurance    Surety 
Scott Bailey smiling at camera in suit

Even before the pandemic, there was a lot of uncertainty in construction. 

“Will we be awarded that job? Can we handle the amount of work in our backlog with this crew? How can we hire a new team in a matter of weeks for that upcoming project? When will we receive payment?” 

These are just a few of the reasons why contractors worry. Then add a pandemic, and, well, life didn’t get easier. 

But fret not, because business is picking up and if there’s one thing we know it’s that entrepreneurs — especially contractors — are optimistic by nature. Another optimist is UFG Surety’s Scott Bailey.

Having joined UFG Surety in 2019, AVP and Surety Underwriting Manager Scott Bailey has more than 37 years of experience in surety bonding. His consistency and proven partnerships with surety agencies helps him understand contractors and the ins and outs of construction.  

We sat down with Scott to discuss what history tells us about being a contractor during economic uncertainty, cash flow tips and what to consider going forward. 

What does history tell us about being a contractor during economic uncertainty?

Bailey: Typically, construction spending doesn’t fully recover until 12-18 months after an economic downturn, although every market is different. We may just have been hitting that timeframe as the pandemic began in the U.S. around March 2020. I’m sure all contractors are seeing spending come back in different sectors of the construction industry. 

Normally, margins decline in a recession as competition increases while the availability of work declines. That said, it’s not uncommon for contractors to seek an increase in market share rather than look at reducing revenues. But I would be remiss if I didn’t mention that, just like any other business, the rate at which contractors go out of business during economic uncertainty does increase. 

Cash flow and revenues can be tough to manage – any tips there?

Bailey: Downsizing can help improve cash flow, while growth can eat it. That’s something to be cognizant about going forward. It’s also worthy to note that in a recession results are typically predictable within the construction industry and have occurred in each recovery cycle during the last 70 years. Contractors usually seek to maintain revenues despite a reduced availability of work. This leads to taking work at lower margins, which will compromise earnings.  Lower margins negatively impact cash flow.  

If revenues have gone down or you are planning on reducing revenue, don’t view that as a failure. Sometimes that is necessary to continue in an uncertain market. One thing I would recommend against would be trying to grow your business with cheap work during economic recovery — it can be highly problematic. You may be tempted to look at diversifying by traveling farther, looking at bigger or smaller jobs or other types of revenue, but each of these options carry significant additional risk.

What should I consider for next steps?

Bailey: If you’re not already planning for reduced revenues I’d start doing so immediately. There remains much economic uncertainty and there’s no assurance yet that the economy will return to its pre-Covid levels. You may want to reduce your overhead or at least take a closer look at it. Remember, every company is in a different situation. There’s no one-size-fits-all option here. It also goes without saying that cash flow management is crucial and, if possible, it would be a wise idea to reduce debt. As they say, “cash is king.” 

One other important piece of advice is to surround yourself with knowledgeable support like construction attorneys, professional surety agents and construction CPAs. The combination of these three professionals could be the reason your company survives or even thrives during economic uncertainty.

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Any last minute tips?

Bailey: You may want to consider liquidating underutilized assets that you can do without. That’s a great way to free up cash for investments you need to make or simply to have on hand. Another tip is to read your contracts closely and carefully and have your attorney review them. If doing so brings about any questions, ensure those are asked and answered before moving forward. 

AVP and Surety Underwriting Manager Scott Bailey is a veteran of the surety bond industry and here to answer any questions you may have on bonding: sbailey@unitedfiregroup.com. For all other inquiries, please contact your independent insurance agent
 

The information provided is for informational purposes only. Every attempt is made to ensure that the information is accurate; however, it is not intended to replace professional advice. For more information, see Disclaimers & Other Legal Documents.