In the construction business, backlog is generally defined as the total value of all the projects a construction company has signed contracts for but has yet to complete. The construction industry itself also has a running backlog that serves as a leading economic indicator. It’s important for construction business owners and their leadership teams to be mindful of backlog, from both perspectives, as the year goes along.

No guarantees

Among the most widely used source of industry backlog data for nonresidential building is the Construction Backlog Indicator published by industry trade association Associated Builders and Contractors (ABC).

In May 2024, for example, ABC reported that the backlog of work won but not yet started had grown to 8.4 months in April from 8.2 months in March. That was, however, a slight decline from the 8.9 months posted a year earlier in April 2023. Naturally, these numbers are subject to change, but they can help you gauge the strength of the industry based on the amount of work scheduled to be performed.

Of course, a strong industrywide backlog is no guarantee that your construction business will have a healthy backlog. If yours is dwindling or nonexistent, it might indicate that competition is increasing in your market or your reputation is suffering.

A lengthy backlog is generally considered healthy, but there’s a breaking point. Maintaining too long of a backlog might signal a future decline in customer satisfaction because completion deadlines will get pushed further and further out. It also could be a sign that you’re underbidding.

Best practices

Backlog management is all about finding the proper balance among growing your book of business, keeping current clients satisfied, and maintaining or widening your profit margins. Best practices include:

Adjusting your bidding approach. Resist the temptation to bid for every project that comes along simply to build your backlog. Bid only on jobs that you’re suited for, are likely to win and hold promise of solid profits.

Biting off more than you can chew can undermine cash flow and leave you without the funds needed to pay bills and service debt. You could end up damaging both your reputation and credit score.

Rightsizing your workforce. It’s vital to match your staffing level to realistic expectations regarding upcoming projects. Maintaining too high of a payroll when jobs will likely become scarce will tie up substantial funds in idle workers.

On the other hand, overextending a minimal workforce can lead to injuries, workers’ compensation claims, delays, poor employee retention and hiring troubles. Find the right balance based on your backlog and strategic objectives.

Maintaining strong client communications. Be upfront with clients about scheduling based on an honest assessment of your backlog. Misleading them will only create frustration, disappointment and bad word of mouth.

That said, your backlog is your business — literally and figuratively. You don’t have to go into too many details. Rather, reassure clients by sharing and reiterating plans and timelines for their respective projects.

Sustain and maintain

Few construction businesses can turn a profit, or even survive, taking a “one project at a time” approach. Building and carefully managing backlog is critical to sustaining revenue inflows and, thereby, maintaining a strong cash position.

© 2024