Checking up on backlog: the industry’s and yours
Owners of successful construction companies can usually predict the future. It’s not because they have magical powers. No, strongly performing businesses typically have a healthy backlog of projects in the pipeline, with contracts signed and schedules laid out.
By the same token, the construction industry as a whole can forecast where economic trends are heading by, among other things, tracking how strong or weak backlog is nationwide. As of this writing, for instance, commercial contractors are cautiously optimistic about sales, profit margins and staffing levels over the coming months — in part because of encouraging backlog numbers.
It all adds up to one simple truth: By checking up on backlog, both the industry’s and yours, you’ll be able to better adjust your financial management practices to the opportunities and challenges that lie ahead.
According to the industry trade association Associated Builders and Contractors (ABC), nonresidential contractor confidence has been ticking upward as backlogs have stabilized. These construction business owners have expressed this confidence while also recognizing that the U.S. Federal Reserve may continue to increase interest rates to combat inflation.
In September 2022, for example, the ABC’s Construction Backlog Indicator reported that the backlog of work won but not yet started had grown to 9.0 months from 8.7 months in August. That figure was higher than at any point from February 2020 to March 2022. ABC found that many nonresidential contractors were operating at capacity, with few signs of faltering demand.
Of course, promising industry numbers are subject to change and no guarantee that your business will have a healthy backlog. If yours is dwindling or nonexistent, it might indicate that competition is increasing in your market and/or your reputation is suffering.
A large backlog is generally considered healthy, but there’s a breaking point. Maintaining too big of a backlog might signal a future decline in client satisfaction because completion deadlines will get pushed further and further out. It also could be a sign that you’re underbidding.
5 tactics to consider
Backlog management is all about finding the proper balance between growing your book of business, keeping current clients satisfied, and maintaining or widening your profit margins. Here are five tactics to consider:
1. Adjust your approach to bidding. Resist the temptation to bid for every project that comes along simply to build your backlog. Bid only on jobs that you’re suited for, are likely to win and hold promise of solid profits.
Biting off more than you can chew can undermine cash flow and leave you without the funds needed to pay bills and service debt. You could end up damaging both your reputation and credit standing.
2. Tailor your workforce to backlog. It’s vital to match your staffing level to realistic expectations regarding upcoming projects. Maintaining too high of a payroll when jobs will likely become scarce will tie up substantial funds in idle workers.
On the other hand, overextending a minimal workforce can lead to injuries, workers’ comp claims, delays, poor employee retention and trouble hiring quality workers. Find the right balance based on your backlog and strategic objectives.
3. Maintain strong client communications. Be upfront with clients about scheduling based on an honest assessment of your backlog. Misleading them will only create frustration, disappointment and bad word of mouth.
That said, your backlog is your business — literally and figuratively. You don’t have to go into too many details. Rather, reassure clients by sharing and reiterating plans and timelines for their respective projects.
4. Nurture relationships with everyone. As you communicate with clients, strive to build lasting relationships. And use this same approach with everyone else involved in your jobs — including developers, engineers and inspectors. Having friendly, collaborative relationships can buy you valuable time when dealing with problems and give you helpful leads on future projects.
5. Monitor conditions. Keep tabs on the national, state and local economies; the industry in general (such as ABC’s backlog data); and your local construction market. Staying on top of trends and developing stories can help you seize opportunities and prepare for downturns.
Backlog … to the future
It’s a funny word, “backlog.” One might think it refers to the past, but your backlog is really an intended path into the future. It’s also vital to ensuring consistent cash flow and continuing profitability. Your CPA can help you integrate managing your backlog with cash-flow and tax planning.
Leverage data to better manage backlog
Over the years, a wide range of industries have come to see the value of intensive data analysis. However, many construction businesses — especially smaller, closely held ones — have yet to fully get onboard. Backlog management is one of the many areas where analytics can prove particularly valuable.
Odds are, you’re already sitting on a mountain of information that you can use to better track and manage backlog and potentially increase profit margins. The easiest approach is to identify key performance indicators (KPIs), such as annual revenue, annual gross profit percentage and monthly return on scarce resources. By calculating such KPIs for past projects, you can better target the types of jobs most likely to be profitable.
The KPIs could, for example, show that certain contract-value segments or project types have given your bottom line the biggest boost. Conversely, they can highlight the kinds of jobs that generally haven’t paid high premiums or perhaps have even cost you money. Obviously, you should avoid these going forward.
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