I had dinner last night with a wicked smart friend who advises lots of construction companies. I mentioned my surprise that more firms haven’t gone bankrupt in this recession. His response seems worth sharing:

1. A few years ago, many privately held firms had the principals no longer guaranteeing their loans with their personal assets. The banks have gotten more aggressive and now most principals have their homes and personal savings on the line. So banks know that company owners have all their skin in the game.
2. Banks have a limited number of “work-out specialists” and started with the worst problems first. Lots of construction companies were down on the list, in default of loan provisions but blaming the economy.  Banks are working through their lists of problem loans and getting to more construction companies. The excuse of a bad economy holds less weight as each year passes.
3. Many construction firms had a dismal 2009, but thought 2010 would be much better. It often wasn’t. Then the hopes were thrown to 2011, which has been better for some but certainly not a big recovery year. Many banks will look at the upcoming down winter cycle and a 2012 that may not be much different than 2011, they will often conclude that the firm should close in the Fall of 2011.
4. Site work companies and other firms with substantial construction equipment assets may follow a different logic. Since the asset value remains so low for the construction equipment, the banks may encourage those firms to continue operating if they can avoid going much further in debt. It’s likely that the construction equipment will be worth considerably more a few years in the future.

So, if you are subcontracting work, be especially vigilant this fall. Construction firms that close are like people drowning. They will grab anyone nearby and try to push themselves to the surface. Don’t expect integrity, even if you experienced it with the same folks previously. Think desperate times and unethical measures.

If you’re thinking of starting your own construction related business, pay particular attention to what’s happening with competing firms in your local area. The death of one firm becomes an opportunity for another. It’s just basic ecology.

Finally, remember to be thankful that we live in exciting times. In a boom economy, anyone can make money. Now you get a real chance to prove yourself. How’s that for half-full thinking? Maybe half-fool thinking? You decide.

Give me some comments here.