A Contrarian Investment Approach to Construction

The economy has ended a 6 year bull run. The Fed has raised interest rates and is no longer pumping liquidity into the market. And economic volatility seems to be the new norm. These things directly influence business owners of companies large and small on their decisions whether to expand their business, cut back, or sit tight. In times of uncertainty, the easiest thing to do is to save your capital and wait to see how things play out, but you may be passing up a chance to expand to a new location or renovate your existing facility at a bargain price.

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There are countless adages of investing wisdom recited daily on financial news shows and in magazines and newspapers. Some of them include: “buy low-sell high,” “when making investment decisions, your emotions are often a reverse indicator of what you ought to be doing,” and, “the secret to investing is to figure out the value of something – and then pay a lot less.” It is easy to understand how these sayings apply to the stock market and investing, but many owners may not realize that this wisdom applies to their construction projects as well. And it applies especially well for what we are calling a Contrarian Approach to Construction.

REIT-Investing-Up

In the stock market, the basics of being a contrarian investor are to buy when everyone is selling and to sell when everyone is buying. This approach is easily translated for business owners and their construction projects, and it goes like this: build when no one else is building and be miles ahead of your competitors once they finally break ground – then repeat. While many businesses put off projects for more certain economic times, they are passing up a literal sale on construction. Contrarian Owners will take advantage of this sale, and there is a good reason why.

Low-rise building construction

General contractors experience the same ups and downs of the economy that all businesses do, and when things get slow, the price of new buildings and renovation projects get lower to entice owners to build. This factor is multiplied for an owner by the fact that most projects require a number of trades to complete. That means that the owner can realize a savings from every subcontractor (think plumber, electrician, painter, etc.) that bids on a project. Consider that fact for a project which requires 10-15 different subcontractors, and an owner can gain some very significant savings. These savings could be used for upgraded equipment that competitors don’t have or could be used for marketing in a time when your competitors can’t afford to advertise. This is how Contrarian Owners can get miles ahead of their competition. Once everyone else decides to make facility improvements to catch up to the Contrarian Owner types, the economy will be on the upswing, prices will have increased, and those who waited will be paying a premium for construction. The “waiters” may not be able to afford the cutting edge equipment that the Contrarian Owner was able to buy, or they may not be able to afford any advertising to attract customers to their new facility after paying the construction bill.

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And now the disclaimer: no investment is without risk. Contrarian Owners must be careful to avoid desperate general contractors in a time like this. Some general contractors will take projects at paper thin margins or even zero margin to secure a job. This is not good for the contractor or the owner. When a scenario like this occurs, the owner can expect to battle the contractor over cost for the duration of the project. Because the contractor has little to no profit margin on the job, he will submit frequent and likely inflated change orders at every opportunity to try and gain any margin possible. This makes for a miserable project experience for the owner and very likely will lead to a low quality end product.

There is a way for Contrarian Owners to avoid the scenario described above, and that is to develop a relationship with a quality general contractor (read Perry Contracting, Inc.) that has a good reputation in the community and a long history of delivering quality projects. A general contractor like this values relationships with owners above all else and will go to great lengths to ensure those relationships are preserved. A general contractor like this will have strong ties to quality subcontractors in the community with similar values, and he will use those subs on all projects hence protecting the owner from sub-par work and shoddy installations. A general contractor like this will produce a well built, high quality, and affordable completed project for the Contrarian Owner. So the next time your competitors are ready to bury their head in the sand to wait for a sunnier day re the economy, use this to your advantage. Consider where you could be when others are playing catch up. Build when others are not. Be a Contrarian Owner.

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Written by Luke Perry. For questions about this blog contact Luke at lperry@perrycontractinginc.com

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