The exact number of construction companies that have failed is difficult to quantify, and it’s even more difficult to know the reasons behind their failure.
A general consensus is that roughly one half of all construction businesses fail to survive more than five years, which isn’t unlike other businesses. Once they reach the five-year anniversary, however, chances for continued success are higher.
Failures generally fall into several categories. Among the most prevalent causes for business failures (listed in order of occurrence) are:
Why Construction Companies Fail
Very rapid growth not accompanied by a similar increase in resources
If a business expands too quickly, it often cannot keep up with demand. Quality of work suffers because inexperienced or unskilled workers are hired and put to work with little or no training.
Shortages of equipment also plague companies that grow too fast; when several work crews must share one piece of equipment, productivity and efficiency suffer, along with chances for profit.
Improper budgeting and estimating, lack of cost controls, poor cash flow, and inadequate project management spell doom for many new businesses. Contractors must have more than creativity and technical skills to succeed in the competitive contracting environment.
When key staffers leave the company, they are often replaced by personnel who are either incapable of doing the work or are poorly trained. When the general economy is doing very well, the pool of skilled laborers shrinks, placing more strain on newer businesses.
Other factors beyond the control of the owner
Economic downturns, high inflation, shortages of materials, or the dreaded “client from hell” can cause serious damage even when a construction business seems to be running smoothly.
On the other hand, successful contractors share many similar characteristics. While there’s no single formula for success, good contractors combine most of the following assets to establish an environment where success is expected, and usually achieved:
- Good training for new employees
- Good relationships with subcontractors
- Competitive wages and benefits with excellent incentives
- Low employee turnover
- Excellent management of financial resources and cash flow
- Cost controls
- Accurate job estimating
- Happy customers, employees and/or subcontractors
- Excellent communications with customers, employees, and subcontractors
- Hands-on project management
- Manageable debt
- Ability of owners and managers to identify potential problems before they get out of hand
- A cohesive and reasonable business plan
- Staying on top of changes in the industry from new rules and regulations to the latest in tools and technology.
How to handle client complaints
Problem resolution must be the highest priority for a construction company. Clients appreciate it when a contractor works with them instead of against them to resolve a dispute or misunderstanding. The following guidelines will help resolve complaints:
- Be courteous, and listen carefully to what the client has to say.
- Don’t argue with the client.
- Don’t make excuses.
- Resolve problems quickly.
- Remember the importance of good client relationships.
- Be reasonable even when the problem may not be your fault.
- Make written notes of discussions.
The ultimate goal should be to resolve disputes quickly and to the satisfaction of both parties. Contractors who stand behind their work even when they’re not at fault reap huge rewards over the long term. Reputations are made by happy clients, and additional profits are made from their recommendations of your business.
This isn’t to say that a contractor should comply with the client’s demand on each and every issue, but if the cost of resolving a problem is less than the expected long-term benefit, it makes good sense to spend the time or money to satisfy the client.
The best-run businesses can be severely hurt by unreliable suppliers or subcontractors. An efficient operation can easily become derailed if the materials needed to complete projects aren’t available when promised. The same is true when working with subcontractors: They must be reliable and complete their portion of the project both on time and within budget.
The best way to avoid problems with suppliers and subcontractors is to have an excellent communication system in place. While email can facilitate the ordering process, new business owners should personally meet with their suppliers’ representatives. By getting to know your salesperson, you’ll be able to shortcut problems or bottlenecks and avoid unnecessary delays in implementing your projects.
The old adage “You get what you pay for” is often very true when considering which supplier to use or which subcontractor to hire. While your own work force might be top notch, your image will likely suffer if the materials or subcontractors you use are below average. You need to research suppliers in your area.
Networking with other contractors, sometimes through associations, can be beneficial when gathering information about suppliers. Even as competitors, you can both benefit either by ordering in greater quantity, which will be a bigger order for the supplier and may also result in better rates from the supplier as a means of saying thank you for the referral.
While there are many benefits to hiring a specialist to complete a portion of a property development project, caution is necessary. If the subcontractor is unqualified, the problems obviously offset the benefits.
When hiring several subcontractors, the general contractor must have the ability to coordinate the work of these various individuals. The general contractor who hires the subcontractors must understand the responsibilities of each sub and how each fits into the overall construction sequence.
Most importantly, always hire subcontractors that are extremely reliable and able to meet the schedule established for the project. The best subcontractors are usually in great demand. Therefore, a general contractor cannot risk losing the services of one sub because of the inefficiency of another.
In addition, subcontractors must be able to meet the quality standards of the project set by the client, architect, and general contractor. While high-quality work is always expected of subcontractors, high-end projects with large budgets demand more skill and detail than low-budget projects. Subcontractors must understand what is expected of them and set their schedules accordingly.