Top Reasons Why Construction Companies Fail

Running a construction company regardless of its size is a large undertaking. If you are handling a client’s life saving for a home renovation, a new or existing business build out or building capital projects for major corporations there is always a high degree of stress that comes with the job. You also have to take into consideration your staff, contractors and suppliers needs and wants daily. Lastly you need to completely understand your build and ensure you are keeping everyone and everything on schedule. Most contractors are only contractors not business people that understand the complexities of human behavior or care to understand why people do the things they do. Construction is a people business and you need to have a wheelhouse of knowledge at your figure tips if you wish to be successful in this industry. Building, buildings is a very complex operations there are thousands of elements involved and dozens if not hundreds of peoples desires and wants that need to be met. Many times, your own concerns and dreams are put aside to get the job done. The construction business is a different animal from most other businesses and this complexity results in a high failure rate. This failure rate makes the marketplace uneasy about us and thus results in a lack of trust. I have put together a comprehensive list of why many construction companies fail in the hopes that this may help and or avoid people from falling into the trap that many of us have fallen into. Without further ado here is a bullet point list with a brief description of why and how to avoid these situations. 

·       Inadequate knowledge of general business practices and or construction knowledge - many people believe that building is a simple process and doing a few small projects around your house or office qualifies you to start your own practice. The same holds true for business ownership. There is a plethora of information that is required to start and run a business and a construction business requires another level of skill set that are not required in many other forms of business ownership. It is advisable to take courses in business or work for several companies and even apprentice before you consider opening your own construction company. 

·       Insufficient administration/support staff – all businesses require support staff to help keep it running on a day to day basis. The construction industry requires general administration staff that also have a good knowledge of the construction industry. Without the proper administrative staff behind you, you will run into issues very quickly as most construction companies require the owner to be on site. If you are not on site, then your administrative staff will come in the form of project managers and site supervisors. Hiring the wrong person for these positions will result in a slow and progressive demise of your company. 

·       Scope creep – this item is very detailed; I would advise you to read my article on scope creep to completely understand it. If your business does not have a strong hold on scope and change orders you could bleed money and not understand where the damage is coming from. 

·       Project bleed (using money from one job to finance another) – this is a sore spot for many business owners as many do not see the issue of using money from one project to pay for another as all projects are being completed by the same firm. But this practice will create an accounting nightmare and if one project goes offline it can end up affecting the entire company. 

·       Job Feasibility (daily accounting of how a job is performing financially) – you should know what is happening with every project every day, I would go so far as saying every hour. Construction projects eat up a lot of cash and if you are not aware of where your money is going you can end up building unprofitable projects without knowing it. 

·       Growing too fast (growing to quickly can result in loss of operating capital which will cause the company to start chasing work to pay bills) – growing is not always a good thing especially if you are growing and not understanding what is involved in business growth. Just taking in more business and building more projects is not indicative of success. You will need to expand in all areas of your business and increase profit margins to justify the new growth especially if you plan on growing for long periods of time. 

·       Not calculating for a down period (construction cycles are different geographically and are based on economic condition so these periods can change regularly so keeping on top of current  economic trends is extremely important) –  If you experience growth in good economic times you need to put money away for the inevitable down cycle. Keeping yourself informed as to how the economy is performing is important so you can stay above water. Knowing when to let people go, renting equipment instead of buying and knowing what size building to move into will all be determined by your business/economic cycles. 

·       Un-skilled staff or trades (projects being built incorrectly or admin staff not reporting information correctly or at the wrong time) – when you are running a construction company and you are not on site you can have employees and or trades working at a speed that will not produce a profitable project or business. Also, if their work is below standard you may not be able to collect on your substantial payment benchmark or have several warranty claims to repair. Most importantly bad clients do not refer you and can harm future growth by leaving bad reviews. 

·       Accounting not being done regularly – having all your books done on a weekly or bi-weekly basis will increase you chances of success. Because construction brings in large sums of money all your taxes and labour load will be large as well. Not putting enough away to make these payments will crush your company like a wet paper bag. Staying on top of client payments is an actual problem that can cause serious cashflow issues in your firm. 

·       Job estimating is not accurate (bidding too low or bidding low to get a project) – hire people that are skilled in this or subcontract it out. Never bid low to get a project, if it doesn’t make money then it doesn’t make sense. 

·       Taking on the right projects for your company at the right time – if you have not taking the time to learn the entire building envelope and all its corresponding components then you should not be taking on whatever job comes your way. You should have something you are good at and have years of experience in, stick to that discipline. When you decide to move outside of that take your time and hire people that understand that part of the industry better than you do.  

·       Cash flow management (managing money so cash is always available when needed for payroll, fixed expenses, advertising, marketing and project costs) – understanding your business and the construction process is imperative, without this knowledge it would be difficult to know where to place your money and when. Creating improper benchmarks or ordering materials at the wrong time can severely hurt your cash flow. Although your projects may be profitable, if you do not have the cash to bankroll them then you and the project will be dead in the water. 

·       Project planning (pre-planning and ongoing project planning) – planning a project before it starts increases the chances of its success and having an experienced project manager handle pre-construction is the best-case scenario. If proper pre-planning is done, then a Jr project manager can handle the project otherwise hire a seasoned construction project manager to handle your projects. 

·       Failure to change with the times ( technology and social media ) -this may not affect many companies at this point but in the near future technology will start to affect your bottom line if you are not staying abreast with new technology/machinery, social media sites and artificial intelligence.  

·       Starting for the wrong reason (starting a construction company because you need extra cash or you think it’s a good way to make a lot of money) – like many other things in life you should have a passion for what you are doing. If you have a passion, then you will take the time to learn what needs to be done to run your business efficiently from the start. If you miss some steps, then passion will guide you through the ups and downs when you experience them. The construction industry is not a quick cash in the bank type of business. You need tons of business and construction knowledge to run a successful firm. 

·       Poor management (from the top to the bottom management is crucial and having the right amount of management is vital. 6-9 staff to 1 manager/supervisor) – If you hire the right people you should be doing little managing, if you are baby sitting your staff then you have either hired wrong or not given clear direction. 

·       Failure to advertise and market yourself (review sites are not the way to market your company if they disappear so do you) – word of mouth is still the best marketing tool but as the market expands and the population grows there will be less room for businesses to grow only on word of mouth advertising. Create a plan and execute on a regular basis. This is an expense that will not go away and needs to be added into your margins. 

·       Differentiating yourself from other contractors (specialize in something or have an added service that others do not have) – why should someone hire you as opposed to the other 100 people offering the exact same thing at around the same price. 

·       Unprofitable business model (as an example, having a volume base business in a geographic area that will not support a volume business) – understand your market and what it can handle, make sure your margins are set correctly so you are always incurring a profit.  

·       Underestimating your competition (learn who your competition is and how they operate) – new companies are starting up everyday and current competition is always looking for ways to dominate the industry. If you are not on the look out for what your competition is doing, you can end up a victim to their marketing strategies. 

·       Low profit margins - profit margins are too low to keep your business running or to sustain business growth I suggest you read “Markup and Profit” by Michael C Stone. 

·       Delays in work because of scope creep, weather or client change orders – construction will always have delays and experience well let you know what sort of delays and when you can expect them. Calculating how much money will be needed to get through these delays will take experience so time will be your companion on this. In the meantime, average around 10% for such occurrences. 

·       Creating improper benchmarks (getting paid on time and getting enough money at the right time) – in order to create proper benchmarks, you need to be accurate with your estimates for labour and material. Once these are accurately calculated you can then figure out when you will need money to buy materials, pay trades, pay bills and yourself. 

·       Large project default payment - do not let one client represent more than 50% of your revenue, if they default on payment your company will be in jeopardy. 

·       Poor project management - Project managers have the power to push change orders through and approve payment if these things are done incorrectly either because of lack of knowledge of fraud your company will suffer. 

·       The company does not have a clear vision or direction (example, your company is just another GC blowing in the breeze, you take on whatever comes your way for whatever price) Why are you in business and what motivates you to do what you do? Have valid answers for these questions, they will guide you through your career. 

·       Your company’s geographic coverage is too large (once your travel time extends past 30 minutes your cost will increase so profit margins will need to as well) – this is often overlooked when you are working only to pay bills or your company is highly focused on growth at any cost. 

·       Your company is profit focused and benchmark driven (your business is only focused on making money and not on customer service or quality) – this usually occurs when people get into the construction industry with hopes of becoming rich overnight. This business is far to complex to be in it only for the money. 

·       Employee training and certification - employees need to be trained on a regular basis, they expect this and will leave if not done. Building codes are always changing and building practices are becoming more complex. Lastly technology is becoming more predominant in our industry so training will be needed constantly. 

·       Accountability - having a clear system for accountability is paramount, with no accountability there is no leadership with no leadership everyone is doing what they wish. 

·       No clear leader - all businesses require a clear leader; this usually goes unattended when two or more people get involve in the building of a company. 

·       Using personal money to pay business debt - business is business, when you start using personal money to pay business bills this means 1- you are taking too much out of the company or 2- your business is not financially sound. 

·       Owner and employee burnout (taking on too much work for too long) – often business owners take on far too much because they do not trust their employees or did not hire the correct people to get the job done. This behavior can be passed down to top employees and cause a guaranteed issue when burnout does occur. 

·       Proper systems and procedures (you have no system on how things get done on the field or in the office) – before you start your business you should have completed a detailed procedure manual for how things get done internally and externally in your business. If not done at the beginning create one as soon as possible and have changes implemented as you experience new obstacles.  

·       Not having the right equipment to complete projects efficiently - not having the proper equipment can cause injuries and take staff longer to complete a project than originally anticipated. Internally not having the right hardware or software can add a tremendous amount of time to daily tasks. 

·       Preparing for the unexpected - asbestos, mold, structural, permits, government regulation fees, lead times, weather, sick leave, vacations, death, safety regulation, union regulations, insurance regulations  

·       Having a clear scope of work and contract (what is and is not included in your work order) – a clear scope starts with the sales process and continues through job feasibility, pre-inspection and job hand off. If the scope is looked at and revised through all decision levels, you are less likely to run into issues. 

It is my hope that this has provided some insight into a few of the issues we face in the construction industry. Comments and opinions would be appreciated as I would like to gather as much information as possible so we can repair and rebuild our community to a level that is highly respected. As builders we have a responsibility to ourselves and our clients to produce the best products possible and ensure we stay in business long enough to complete every project. We who build owe it to ourselves to run successful profitable businesses that last a lifetime. It’s time we stop low balling and competing with unprofessional businesses and start educating the public on what is acceptable as far as quality and financial compensation. I love construction and I hope we can start enticing the youth to join this industry knowing they will be respected and well paid. Otherwise we all face a serious dilemma in the coming future.  

 Take Care, Love Life

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