Construction contracting businesses have the highest failure rate of any business according to the US Department of Commerce. Up to 96% of construction and contracting related companies fail before reaching 10 years in business.
If you own or operate a construction company, you know exactly what I’m talking about. Building a successful construction business is beyond difficult. It’s far easier to fail. I’m speaking from experiencing having owned multiple construction companies. It took several years of iteration and learning before I figured it out.
In this article I’ll let you in on the primary reasons for construction company failure. Don’t make the same mistakes that most of us make early on. Implement the outlined principles below to ensure that your company thrives in the top 4% of businesses in the construction industry.
Construction companies, general contractors, and specialty contractors universally face the same eight problems. Here’s why construction companies fail.
1 – Insufficient Cash Flow
Cash flow is king. Without constant positive cash flow, construction companies and specialty contractors quickly find themselves struggling to pay for materials, payroll, advertising, taxes, and hundreds of other requisites for keeping their company doors open for business.
When cash flow is negative, companies often make hasty decisions and take jobs that almost always result in further profit loss and more significant cash flow problems down the road. But, how do you maintain positive cash flow? Keep reading…
2 – Charging too Little
Most if not all struggling construction companies and specialty contractors do not charge enough for their services. Many companies don’t realize that they are charging too little because they don’t fully understand their overhead and operating expenses.
To build a successful construction or contracting business, the billing price of each job must cover job costs, its share of overhead costs, plus a reasonable profit. To build a sustainable construction company I recommend a minimum of 8% profit. Failure to charge enough on each job will soon lead to problem number one, insufficient cash flow.
3 – Lack of Agreed Upon Payment Schedules
A construction company or specialty contractor that is on the road to success will outline a cash flow protective payment schedule on estimates and customer contracts. Payment schedules that require a construction company to finance parts of the job will consume cash flow and ultimately limit success. Instead, ensure that payment schedules cover at minimum, job expenses and associated overhead.
In my experience, a 40% down payment on approved estimates and change orders followed by a weekly or biweekly progress payment that gets the customer current in payments with the percentage of completed work as outlined on the estimate, works best. Customers rarely have a problem with well documented and communicated payment schedules. Communication and managing customer expectations is the key to success here.
4 – Insufficient Number of Profitable Sales
Many construction companies and contractors fail simply because they lack consistent profitable jobs. For almost all businesses, advertising and one or more sales people are required to maintain a flow of consistent sales.
In addition, a good website, search engine optimization (SEO), and a number of good online reviews will dramatically increase the flow of organic job leads. It’s extremely common for construction companies to purchase job leads from companies like HomeAdvisor, Porch, houzz, Angies list, etc. Proper management of job leads and customer data will dramatically improve your ability to convert leads to sales.
For this you’ll need a construction Customer Relationship Management (CRM) software solution. For obvious reasons, I recommend Projul. But in all honesty, it really is by far the best construction CRM and construction management system on the market for construction and specialty contractor businesses that want to make success easy.
5 – Lack of Change Orders
Cha, cha, cha, changes… Unforeseen issues, customer scope creep, and upselling are just a few examples of why real time changes orders are needed on most construction and specialty contractor jobs. Waiting until the end of the job to tack on additional costs to the bill can be problematic. It will often result in customer sticker shock, bad reviews, and customer resistance to pay, leading to more cash flow problems.
When a job change requirement occurs, the construction company should submit a change order to the customer for approval and even request a deposit on change orders that are over a couple thousand dollars. Often customers get excited about the work that is being done until the final bill comes and find themselves over extended and unable to pay.
Having a signed change order and deposit before the work has begun ensures that company and customer are on the same page and ultimately improves cash flow and profitability. I highly recommend leaving very little money left on the table for the end the job. Fat payments due at the end of the project are often hard to collect.
Take away – Make consistent job progress, communicate progress and manage expectations with the customer, and pull progress payments to match. By the time the job is finished the customer should owe you a relatively small amount.
6 – Lack of Legal Contracts
A detailed estimate and contract, signed by the customer, are essential for ensuring common ground and strong communications between construction company and customer.
There are as many bad customers out there as there are bad contractors. Some of those customers simply want to get the work done for free and will argue about things that, they claim, were promised. A signed contract and detailed estimate will usually prevent this type of customer from trying to rip off the construction company.
7 – Excess Overhead and Employees
Don’t get too excited to add employees. Company growth is what you want, but add each employee only when absolutely necessary and after ensuring that the company can afford to do it. Employee payroll is one of a company’s biggest expenses. Often construction companies or contractors hire before they do the math to ensure that adding an employee will help the bottom line rather than consume it’s cash flow.
When you do hire an employee, hire slow and fire fast. A great empowered employee often has the productivity of three or more bad employees. A bad employee can quickly poison your small to mid-size construction company and demotivate an entire team. Unfortunately, I learned that the hard way many times. It’s unprofitable to be in the business of fixing bad employees.
8 – Lack of Organization, Processes & Decision Making Data
It’s not possible to grow and scale a sustainable construction business when the bulk of the business is operating out of one person’s head. To grow your company you’ll need more data transparency, processes, and organization so that projects and issues can be efficiently managed by the people that you hire to help you.
For larger companies that are still using sticky notes and boxes full of file folders you essentially have the same problem on a bigger scale. Job leads and customer management, project details, task management, communications, schedules, progress tracking, equipment management, the list goes on and on.
Analyzing lead, advertising, sales, schedule, and project data from file folders and spreadsheets to make good business decisions is daunting, extremely time consuming, error prone, and can negatively affect profitability and cash flow.
Summary: Get Help
The best construction companies and contractors are using construction management software to grow, increase profits, and to help manage all of these. Now that you have a clear understanding why construction companies fail, it’s time to make some course corrections.
There are a few decent construction management software products on the market that will make your construction life easier and more productive. If you’re operating a small to mid-size construction company of 4 to 50 employees then of course I highly recommend Projul construction management software.
Get started with a trial and see how Projul can work for you.
It will change your life, organize your business, simplify your scheduling, provide you with amazing reporting insights, and increase your profit. If construction management software is not in your future, then I recommend diligently daily usage of spreadsheets to manage at minimum, leads and projects.
We make no warranty of accuracy, timeliness, and completeness of the information presented on this website. Posts are subject to change without notice and cannot be considered financial advice.