By: Kendall Jones on September 16th, 2022
6 Reasons Why Construction Companies Fail
Running a successful construction company isn’t easy. The industry is full of risks and challenges that can lead to failure. According to data from the Bureau of Labor Statistics, of the 69,296 private construction firms that started operation in 2001, 56% were still around three years later, 26.6% made it to year 10, and only 17.2% were still in operation 20 years later. That’s a failure rate of nearly 82.8%. Let that sink in for a bit.
There are literally hundreds of reasons why construction companies fail and have to close up shop. When construction companies fail, it’s typically not caused by a single issue. In most cases, there are a number of contributing factors and missteps that led to their failure. While outside factors can play a role, just look at the Great Recession, most companies fail from within.
Here’s a look at some of the common root causes that lead to construction companies going out of business.
Capital & Cash Flow
Construction companies are capital intensive businesses, large amounts of capital are invested in fixed assets like tools, heavy equipment, and vehicles. Not maintaining an adequate level of capital has led to the failure of many a construction company. Not having enough capital to get your company through lean times or to overcome unexpected surprises is a huge risk.
Overleveraging, tying up working capital and cash in ongoing projects, and overinvesting in fixed assets that are underutilized are some common reasons firms will dip into their rainy day reserves and deplete all available capital. Without that buffer, construction companies face failure when an unexpected need for capital surprises them.
Cash flow management is another major area of concern that can lead to failure for a construction company. Cash flow, the amount of cash coming in and going out, needs to be properly managed to ensure your business’s success. This means making sure you are billing for projects and getting paid in a timely manner, keeping your accounts payable and receivable in check, and properly managing project budgets.
Maintaining a positive cash flow allows you to pay debts and expenses, reinvest in your business, and maintain a buffer for emergencies. When cash flow slows to a trickle or if you have more money going out than coming in it can quickly lead to failure.
A single bad project doesn’t typically sound the death knell for a construction company, but it has been known to happen. String together a handful of bad projects that lose money and your business could be in serious trouble.
Ensuring you deliver profitable projects starts long before signing contracts and commencing construction. Picking projects that are the right fit for your business and going through a bid/no-bid decision-making process should be your first step. Doing your due diligence when estimating and job costing can help you avoid taking on work that won’t be profitable.
Once you selected a project that is manageable and profitable for your business, it’s time to plan out the work to successfully complete the project on time and within budget. This means having the right leadership, workforce, and equipment available to perform the work. Failure to properly manage and deliver projects can result in losses or razor-thin margins—not exactly a sustainable business model.
Failure to Plan
A strategic business plan is key to running a successful construction business. A good business plan means developing specific goals and objectives that are attainable and manageable. Your business plan should include defining leadership roles, growth strategies, succession planning, and defining a company culture.
Define your company’s core competencies and stick to them. This doesn’t mean you shouldn’t grow or expand your business, but it should be carefully mapped out, so you don’t get overextended or veer too far off the path of what makes your company successful.
Be sure to communicate your goals and objectives to your entire staff. If your workforce doesn’t know where you plan to be in the next year, or the next five years, they won’t be able to help you get there.
Growing Too Fast
It may seem crazy to think that trying to grow your construction business can lead to going out of business. Problems arise when a company tries to grow too fast without having the resources, manpower, and know-how to execute that growth successfully.
Taking on too much work, trying to tackle larger projects, expanding into new geographic areas or new building types are all ways you can grow your business. Complications arise when you don’t properly research and plan ahead and instead rush headlong and willy-nilly into unfamiliar territory.
Be strategic and methodical in your plans for expansion. If you want to take on larger projects, do it incrementally. Don’t try to jump from doing $100,000 projects to $10,000,000 overnight. If you want to expand into new geographic regions or new building types, start with one or two and then, once you’ve successfully completed those, start building your backlog from there.
The Wrong People
A successful construction company is only as good as its people. From your executive leadership team down, you should make sure you have the right people on board to ensure your company’s success. If your employees aren’t engaged and valued, they aren’t going to feel motivated to give you their best effort.
Turnover in the construction industry is high, so it’s important that you recruit and retain the best workforce you can. This means becoming an employer of choice by offering competitive salaries and benefits, providing on-the-job training for all employees, promoting your best workers from within your organization, and building a company culture that is focused on keeping employees happy and engaged.
Failure to Innovate
Failing to innovate and adapt to technological changes have been the downfall of many successful businesses over the years. Blockbuster, Eastman Kodak, General Motors, Compaq, Toys “R” Us, Blackberry, and most recently, Sears are all companies that went bankrupt or ceased operations in part because they failed to innovate and adapt quickly enough to survive.
The construction industry is in the midst of a digital transformation that will inevitably lead to the demise of construction companies that refuse to adapt. Technology from drones and robots to Building Information Modeling (BIM) and big data are rapidly changing how the construction designs and builds structures.
The latest ConTech Report from JBKnowledge, Inc. shows that only 43.2% of construction companies surveyed have a dedicated research and development budget and that 46% of companies spend less than 1% of their annual sales volume on IT. Continuing to underinvest in technology and refusing to innovate is going to be detrimental to construction companies moving forward.
As the complexity of construction projects increases, companies that are innovating and incorporating these new technologies and digital tools into their businesses are setting themselves up for continued success in the future. Those that refuse to innovate and continue to operate the same way the always have are going to struggle to keep pace with those that embracing this technological transformation.
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About Kendall Jones
Kendall Jones is the Editor in Chief at ConstructConnect. He has been writing about the construction industry for years, covering a wide range of topics from safety and technology to industry news and operating insights.