This article was originally written for and published in the GVCA Journal (Jan-Feb 2023 – Issue 1).

After weathering years of uncertainty due to the pandemic and related measures, the economic forecast is showing signs of continued uncertainty for the next few years. Rising interest rates, employee-related costs, and material costs are colliding with an economic slowdown, making forecasting more important than ever.

As uncertainty increases, the spread in the sensitivity analysis of a forecast often grows. But only from completing that exercise can you truly see where immediate attention is needed to weather the next few years.

Interest rates

Prime interest rates have risen from 2.45% in late February 2022 to 5.95% in late October 2022 after years of minimal movement in those rates. The 3.5-percentage point increase in an eight month period has quickly bumped up the cost of new borrowings as well as the cost of any current variable debt. Companies that were able to lock in fixed rates before the interest rates began to climb, will have the advantage of low, predictable debt costs. Meanwhile companies with variable debt will need to factor the potential of continued rising rates into their forecast’s sensitivity analysis.

Labour market

The construction industry is continuing to be hit on all sides of the labour market battle. Not only is the industry facing labour shortages with fewer people entering the industry, but there are also pressures to fill the gaps as a large portion of skilled labour is nearing retirement age. Combined with the current employees’ market, all these factors add up to rising costs to attract and retain construction labour at all levels from labourers to site supervisors and beyond. These additional costs need to be included in the company’s forecast and plans set in place to get more out of your staff and information technology to help close the gap.

Build a pipeline

Having a pipeline of secured work provides some certainty to the revenue portion of your forecast while reducing the stress on key employees to keep everyone busy. Focusing on building a pipeline will help to ensure you have profitable work lined up in advance rather than taking on low or no margin work when jobs dry up just to keep your staff on payroll.

Tying it all together

As you pull all the variables together in your forecast to factor in as much of the uncertainty as possible, where does that leave your company in a worst-case scenario? If it leaves things a little too tight for comfort, you can consider some of the following:

• Do you have capital elsewhere in your organizational structure that can be used to pay down third-party debt to reduce interest costs? Of course, you must weigh the cost of lost income potential on that capital in say, your holding company, against the benefit that the operating company will get with reduced interest costs.
• How much of the additional costs in borrowing and labour can you pass on to your customers? Are you building in enough room in your tenders to still obtain work while covering potential further cost increases?
• What will you do to retain your key staff, without compromising the business, if work slows?
• Can you automate some of your more manual processes to use your scarce people resources for their highest and best use?
• Can you reach out to customers who provide you with regular work and formalize as much profitable work as possible to lengthen your pipeline?
• Can you diversify your pipeline to capture some work that might be impacted differently by an economic slowdown?

Seeing the best- and worst-case scenarios in times of uncertainty will allow you to identify areas that require your immediate and near-term focus. Then update the forecast regularly as factors become known to avoid as many surprises as possible. Putting some time and energy into modelling your company’s forecast can easily mean the difference between profits and losses.