Commentary: How to Avoid the Common Causes of Contractor Failure
Construction firms are failing faster than in recent memory, and the majority of contractor failures result not just from market forces but also from decisions made by contractors themselves—internal decisions that deviate from sound business practices. These mistakes place additional strains on a company’s staff, systems and financial capacity. As deviations from sound business thinking grow, the resulting risks increase exponentially.
Construction is always an extremely competitive business. That fact is not limited to territory or project type. With limited local opportunities available to some contractors, expanding beyond their territory or normal scope of work becomes tempting, but that injects additional risks into the equation.
A new territory can bring with it new owners, architects, subtrades, labor, weather, site conditions and different legal and regulatory issues. Risks increase with stretched supervision, and the new scenarios put more pressure on internal systems, especially estimating, even before bidding begins. Think twice before you go after that project two states away.
Cash flow is the lifeblood of any business, but its importance for a contractor can never be understated. One’s ability to get paid in a timely fashion for completed work is critical. While there may be some comfort level when working for public owners, that should not be taken for granted. Understanding the timing of payments remains important, and conservative cash flow management is critical.
Additional diligence is necessary when working in the private sector. Do your homework and ask questions. Confirm financing and learn about the owner and his history in regards to building, payments and conflicts with past work—and do the same for the architect, in certain cases.
Our industry is such that the success of a company typically requires management to provide a single focus. Whether it is another business interest or personal activities that tug at this focus, the potential cost to the organization can be significant. Principals and their leadership drive the success of an organization.
Organizations develop and change, but the need for solid leadership does not. While leadership lapses may be evident when looking at financial statements, the company’s personnel also feel them. Success is more likely when everyone understands the direction of the company and its course corrections, and this happens when management continuously leads in that direction and clearly communicates its goals.