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Liberty Mutual > Business Insurance > Insights > Keeping it lean: 6 strategies for contractors to help reduce overhead
It’s been a volatile year in the construction market. In March 2020, dozens of major cities and some entire states put a moratorium on construction to help reduce the spread of Covid-19. Meanwhile, hold-ups in the global supply chain drove up the cost of materials by as much as 80%. Many businesses tabled their construction projects to prepare not only for a possible global recession but also for a fundamental change in the use of commercial real estate.
For many contractors, this market turbulence has led to anxiety – and a temptation to chase business outside their normal territories or areas of expertise. But this is a mistake, according to Matthew Campbell, a Liberty Mutual Surety Plus underwriter specializing in the small to mid-size contractor space. Instead, he advises companies, “if the market does not present itself, keep it lean.”
In this article, we’ll dive into six strategies contractors can use to help get lean, avoid unnecessary risk, and survive an unpredictable market.
6 strategies to “get lean” and reduce overhead
Since March 2020, we’ve seen a steady decline in non-residential construction spending, and current indices suggest that the slowdown of work will continue. Today’s lean market is largely due to a volatile global economy, uncertainty about the future of commercial real estate, and anticipated corporate tax hikes under the Biden administration. And some construction markets have been hit harder than others. Hotels and lodging, for example, have seen a more than 25% decrease in growth in the last year. Many companies stayed afloat by relying on backlogs, but even those are drying up after a year of pandemic.
Rather than diving into risky projects, Campbell and the surety team recommend taking a leaner approach, focused around these six strategies:
Reflect on compensation structure
The cost of labor is a huge expense for many contractors, particularly if they offer employees healthcare and other benefits. It might make sense to take a different approach to your compensation structure during lean times, particularly if your team doesn’t have a lot of work on their plates.
Paying employees a lower fixed or base salary and compensating them with bonuses or incentives is one strategy to reduce labor costs. With this model, you still compensate employees for their hard work, but it costs the company less during slower periods.
If your business is really struggling, doing universal pay cuts across the board is also an option. Although this will be unpopular, it will feel more palatable if managers and leaders are also part of the plan. With slowdowns in the market, savvy contractors should consider what size labor force they really need to get the job done.
