The real reason construction companies fail

The Small Business Administration identifies a huge failure rate among startup companies.

Roughly 20 percent fail in their first year while about half fail within five years. Two in three fail within a 10-year period.

Construction companies have an even uglier track record. Roughly two-thirds go out of business within five years. The owners of the failed companies tend to point fingers at external factors such as insurance, taxes, politics, an inability to get enough workers, and other factors. But these reasons aren’t really the cause of company failures.

In reality, the real causes of construction company failure are within the control of the company owner. That doesn’t mean these causes are always easy to fix. It takes planning, discipline and hard work, but they are controllable.

There’s a long list of reasons for failures. Here a few of the more consequential reasons:

Seven key reasons

1. Starting the business for the wrong reasons. Many companies don’t start out with a strategic business plan. The owner simply wants to be his or her own boss.

Sometimes a friend says, “Let’s start our own company and make a lot of money.” The problem is that nobody gets rich quick in the construction industry. There are only two entities that are in the business of making money: the Department of Treasury and counterfeiters. Construction companies are in the business of serving customers.

Starting a construction company should be based on a legitimate opportunity. Owners should also have a clear vision for what they want the company to be, along with a roadmap toward profitability. Having a strategic roadmap will also help new companies avoid another common cause of failure: trying to grow and diversify too quickly.

2. Poor company culture. Nobody wants to go to work in a war zone. When that’s the type of culture that exists, people put in the bare minimum.

This culture often leads to higher employee turnover, sloppy work, higher workman’s comp claims and financial losses. The unfortunate truth is that many construction companies do not have a great culture. Leadership must identify what employees want, what the company wants and how to get there. It takes commitment and time, but it can be done.

3. Poor hiring. For long-term success, companies must hire people  with the desire and ability to grow with the company and help lead. Warm bodies aren’t enough.

This can be harder to do when hiring out of a union hall. But even in that circumstance, it’s probably better to pay any show-up costs and ask for a more qualified employee. That’s far less costly than carrying an employee who continues to do substandard work or has a bad attitude.

4. Poor financial systems. This is a big bullet point under the broader topic of capital and financial management. Many construction companies can’t track if they’re making or losing money until the very end of the year. Some companies even fail to bill for all of their work because they are so busy completing projects and doing estimates for new projects.

Good financial systems are a must so these types of things do not happen. Accounting software can help, but it won’t solve everything. A good accountant or in-house financial manager may be advisable – one who will provide detailed accounting at least every few months.

5. Inefficient operations. Inefficiency rarely happens in big, easily identifiable chunks. Inefficiency typically impacts that company in 10- or 20-minute increments. A good example is a seven-person crew standing around on a jobsite waiting for a truck to show up. Over the course of the year, this type of wasted time can add up to the point that all profitability is sacrificed.

6. Poor customer service. Some companies do not listen to their customers very well. Companies just focus on completing the work according to the contract. If they get paid, they assume all is good. But remember, construction companies are in the business of serving customers, and that includes good customer service.

7. Family-run corporations. These businesses have an even higher failure rate than the typical company. Family-run businesses have a unique set of challenges that generally hurt future generations more than the current generation. This is a complex issue with many facets to consider.

Editors’ note: Larry Kokkelenberg, the president at Center for Business Development, will host an education session at ConExpo-Con/Agg titled “Top Ten Reasons Why Construction Businesses Fail.” The session will take place Thursday, March 12 from 1-2:30 p.m.