Making Small Construction Business More Resilient: Lessons Learned from Hurricane Harvey

Hurricane season is here again. Is your business prepared for the "unexpected” in order to remain resilient? How can you prepare your business to withstand the impact of severe weather and quickly recover your operation and revenue when disaster strikes? Learn from the experiences of other business who recovered from Hurricane Harvey and gain knowledge of how to help your own. These insights were gained from a survey of 600 small business from 39 Texas counties and 12 interviews with small construction businesses impacted by Harvey. This study was sponsored by the U.S. Economic Development Administration and conducted by Texas Tech University and the University of Houston.

Houston is no stranger to hurricanes and floods. Harvey in 2017 caught particular public attention due to its catastrophic loss, including a hefty price tag of $120 billion. According to FEMA, small businesses are extremely vulnerable to natural disasters. Consider that, historically, about 40-60% of them never reopen their doors after a disaster. Houston businesses actually fared quite well in general against Harvey, with nine out of every ten surveyed firms fully recovering from the storm. Speaking about businesses in construction, they commonly use work volume as the primary measure of whether their business is fully recovered or not. Their mean full-recovery time of seven to nine months is comparable to that from other industry sectors, such as manufacturing and transportation.

Hurricane Harvey experience can be examined through market demand, resource supply, contract administration, and financing perspectives...

Market Demand: Construction work was completely shut down for about one to two weeks after Harvey, mainly due to transportation-related road closure, followed by flooded job sites, material damages, and worker shortage issues. Within weeks after the hurricane, construction experienced a sudden increase in emergency repair demands from homes, buildings, streets, and utilities networks. However, it is a mixed bag for the mid-term (several months out) and the long-term (a year out). On a quarterly basis, more than half (54%) of construction businesses reported higher work volume initially, but later that decreased to about 44% a year after Harvey. Smaller contractors tend to have the capability to adjust quickly and shift toward emergency work to meet the market demands while stabilizing their work volume and cash flow. Meanwhile, larger and more established contractors tend to maintain their work scope with minimal changes, and will only do selective emergency work to help their existing clients.

Resource Supply: The biggest challenge reported was labor shortage as a result of multiple causes, such as workers whose own homes were damaged by the hurricane, road closure, high craft worker turnover due to competitions, and challenges in making new hires in a tight and competitive labor market. Except for a few larger contractors who owned warehouse facilities and inventories, almost all contractors complained about material delivery delay and price spike for about two months after the hurricane. Equipment wise, water pumps were in high demand for de-watering at offices and job sites.

Business and Contract Administration: This covers a wide range of topics related to contractual protection against natural disasters, contractual relief from clients, and progress payment and cash flow issues. It is a common practice in standard construction contracts to include a force-majeure or act-of-God clause to protect contractors against justifiable adverse events, such as time extension of a project. In addition, builder’s risk insurance offers a protection of work-in-progress and on-site materials. The absence of protective clauses in a contract, along with no or inadequate insurance coverage, exposed construction businesses to major risks. Finally, among all business operation challenges, poor cash flow is frequently quoted as the number one cause of construction business failure. Small businesses tend to have limited financial resources and they are particularly vulnerable to disaster impact.

Financing: The survey showed businesses obtained funding from a variety of sources for disaster recovery, including government loan, bank loan, private equity, business owner financing or line of credit. However, they are more likely to use personal fund or line of credit to cover short-term disaster recovery needs before loan or insurance payments arrive, or when such financial resources were not available to them (e.g., did not qualify, were not aware, or applied but got rejected). Many business owners are concerned about their ability to repay loans, thus prefer self-funding rather than relying on loans.

According to the survey, small businesses that prepared ahead of time were more likely to recover. Almost half of the respondents made investment towards disaster resilience prior to Hurricane Harvey. These resilience-investing businesses reported a 92% recovery rate, ten percentage points higher than non-investing firms. Investing in resilience also significantly shorten the recovery time, evidenced by a reduction of the mean recovery time from 10-12 months for resilience investing businesses to 4-6 months for non-investing businesses. The interviewed businesses quoted a wide range of efforts in preparing their business against hurricanes and reviving their operation quickly to the pre-disaster level. Such efforts can be categorized as disaster preparedness and business resilience improvement.

Disaster Preparedness. According to the survey, the most popular mitigation measures adopted by small business were backing up of computer files, use of emergency generators, installing flood barriers, and performing a review of their property. Specific to construction businesses, the interviews found additional preparedness efforts as listed below in no particular order:

• Planning: practices range from a formal written emergency plan for the business (some even have project- and disaster-specific plans) to informal communication protocols
• Communication: stay alert on inclement weather for proactive actions; employee training; maintain good communication with clients
• Leadership and human resources: project superintendent plays a critical role for job specific plan; involve clients in disaster planning; remind and allow time for employees to protect their homes
• Insurance: review property and builder’s insurance coverage (especially flood insurance) and get familiar with claim policy and procedure
• Resources: protect onsite equipment and materials; have necessary dewatering equipment, e.g., water pumps and power tools, on hand to handle flooding and water damage

Business Resilience: This is about strategies to quickly resume business operation and recover work volume by protecting supply, demand, adapting business and organization to changing market conditions, both immediately after a disaster and the longer term thereafter. Similarly, resilience strategies vary significantly from one business to another, reflecting the uniqueness characteristic of their business such as maturity, market positioning, and organization capacity.

• Protecting material and labor supply: balance just-in-time and just-in-case purchasing strategies; identify a list of emergency and key materials and have them in stock (e.g., pumps and moisture meters); job site storage solutions (e.g., box trailer) and surveillance
• Protecting demand/marketing and sales: diversify customer base and project types (e.g., shift focus on emergency work); strengthen business and maximize differentiation through certifications and recognition as minority businesses
• Introducing contractual protections: include a force majeure clause in contracts; keep complete project records for change orders and claims
• Investing in insurance: obtain more comprehensive insurance coverage, especially optional policies, such as flood insurance
• Protecting cash flow: set aside emergency fund; diversify funding sources for disasters and economic hardship; learn about loan and grant programs and how to apply; negotiate for favorable payment terms, e.g., mobilization payment, shorter payment cycle, credit for partial work progress, and reduced retainage; front loading project work; negotiate with vendors/suppliers for payment extension; advise and assist homeowners on obtaining insurance payment for project funding; improve financial forecasting and make sound decision based on historical data
• Adapting organization to changes: decision about whether or not to adjust business scope (e.g. taking on emergency work, or remodeling and maintenance, or making no change); rebalance the portion of subcontracting and self-performed work; expand service geographic locations to reduce business risks and increase revenue; downsize and layoff
• Investing in technology: digitize systems for better record protection and information management; digital tools for efficient communication with clients, e.g., proposals

Among the major lessons learned by the interviewees include:

1. Anticipate the unexpected and take control in reducing disaster related risk.
2. Disaster planning and documentation facilitates a better communication and engagement of stakeholders.
3. Investing in insurance is a smart and worthwhile business decision.
4. Small businesses need to increase awareness and how-to knowledge about various financing options including government grants and loans, and industry organizations and small business agencies can play the training role.
5. Small businesses must adapt to the changing and challenging market during and after a disaster.

This material is based upon work supported by the Economic Development Administration (EDA) under Grant No. 08-79-05280. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the EDA. For any inquiry, please contact Dr. Bradley Ewing at bradley.ewing@ttu.edu or Dr. Lingguang Song at lsong5@uh.edu.