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Blog/May 9, 2017

Plan for Contingencies, Execute Based on the Facts

The election was a big point of uncertainty and contention. With that behind us, many of our clients are cautiously optimistic—if not even bullish—on the U.S. engineering and construction industry going into 2017. Favorable general economic conditions, a high level of consumer confidence and the potential for tax reform and increased federal spending all promise to keep the industry on track for yet another positive year.

Of course, with this optimism comes a dose of pragmatism, including uncertainty about what these new policies and regulations will look like and whether Congress will have the ability (or the will) to enact legislation that’s favorable to the E&C industry. Given that we are in an era of sustained deficit spending and escalating national debt, significant levels of conflict could lead to a political stalemate. This scenario could impact tax and health care reform, infrastructure spending bills and other key initiatives in which all stakeholders are at odds, and, consequently, everything comes to a standstill.

For companies in engineering and construction, infrastructure and the built environment, the question becomes: Are you going to push forward with capital projects that are on the drawing board right now, or are you going to wait and see what happens? To the extent that this indecision drags on for a substantial amount of time, the result could be fewer construction starts and more project delays. That’s the hidden risk behind all of this optimism that we’re observing in the marketplace right now.

Here are several key recommendations on how to navigate the coming year:

  1. Don’t spend ahead of the marketplace realities. In today’s VUCA world, an environment characterized by volatility, uncertainty, complexity and ambiguity, our advice to clients is: Plan for contingencies, expand your scenarios to the upside and always execute based on facts. Put simply, don’t let your optimism and bullish outlook go unbridled in an environment where unknowns and challenges are lurking around the next corner. To avoid any unpleasant surprises as 2017 progresses, focus on what’s real rather than spending ahead of marketplace realities and your firm’s ability to perform.
  1. Don’t chase the next big thing. If there’s one thing we all learned from the last recession, it’s that abandoning core and incumbent markets to chase the next best thing is not a sustainable growth strategy. Instead, preserve your core business and take advantage of any market opportunities that open up when your competitors get distracted by chasing the next big thing. Keep your core markets, core services and core capabilities very strong, and stay loyal to your key clients. It’s what you execute best on. Sustaining and expanding work with existing customers in known markets often leads to more stable business and better profits over time—regardless of external market dynamics.
  1. Think twice before you introduce more risk variables. As we like to say, “Contractors don’t starve to death; they die from gluttony.” In other words, contractors don’t fail for want of work or because times are tough. They fail because they get too much work, too fast, with inadequate resources, and then they get into financial trouble and run out of cash. In light of today’s severe labor shortages, this problem becomes particularly acute in an environment where demand is expected to accelerate in one or more sectors of the economy (i.e., a focus on infrastructure). According to AGC’s recent economic forecast, “contractors say they expect more work in every category in 2017 than in 2016. “All this to say: Think twice before you introduce more risk variables by abandoning your core markets.
  1. Look at new alliances and partnerships. Consider the fact that more than 30 sizable E&C firms from Asia, South America, Europe and the Middle East are currently showing a strong interest in the North American infrastructure market. Some of these firms are looking to diversify beyond their dormant, declining economies, while others have grown too large for their current markets and must expand internationally in order to utilize their acquired resources. Seeking design-build partnerships and firms of scale, these international companies often have self-perform capabilities and can position themselves as part of the proposed infrastructure spend. This could present significant opportunity for U.S. and Canadian firms that can partner with, form joint ventures with or even be acquired by these larger players that want to gain a foothold in the North American market.
  1. Keep an eye on the future. Today’s political and economic environment leaves many unanswered questions, but there are some key trends that will continue to shape our industry well into the future. For example, consider the evolution of smart buildings and smart infrastructure: a web of interconnected systems and devices with lights, smoke alarms, HVAC systems, security, water, appliances and other systems managed through a central interface. In the past, these systems—while perhaps sophisticated in their own right—existed independently and did not communicate with one another. Today, manufacturers are rushing to find ways to connect and integrate their products with all components of the building and related monitoring services, and then linking the information back to the building owner. Exactly which companies will control the interface is still an open question, but the stakes are obviously high. Firms that anticipate and adapt to changing circumstances will not only survive the changes impacting the E&C industry, but also thrive on future shifts.

Looking ahead in 2017, there is cause for continued optimism for the North American E&C industry. However, beyond a sound economy and other traditional demand drivers, there is growing hype for a boom market in infrastructure spending, which to date is nothing more than speculation based on the new presidential administration. Our caution to clients is similar to the old Wall Street bromide, “buy the rumor and sell the news.” Only in this case, we should all prepare for the possibility, but invest behind the facts.

Download U.S. Markets Construction Overview 2017

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