I originally wrote this blog article back on Dec 11th of 2005. To the best of my recollection I was reading the Construction Contractors’ Survival Guide by Thomas C. Schleifer and chapter 2 was entitled Elements of Contractor Failure and was inspired to do more digging after reading the list of eleven chapter sections there:
- Capitalizing on Experience
- Increase in Project Size
- Unfamiliarity with New Geographic Areas
- Moving into New Types of Construction
- Changes in Key Personnel
- Lack of Managerial Maturity in Expanding Organizations
- Poor Use of Accounting Systems
- Failure to Evaluate Project Profitability
- Lack of Equipment Cost Control
- Poor Billing Procedures
- Transition to or Problems with Computerized Accounting
My expanded list from 2005 follows below….
1. Lack of Skills and Experience
Listed perhaps in an increasing level of importance:
- Basic Business Acumen & Financial Control Many small contractor business operation fail because managers do not integrate accounting and accounting practices to any kind of reasonable level in their business. By failing to do so, they suffer from the lack of financial control and consequently cash flow problems force the business to fail.
- Project Management Many small contractors think because they execute small projects or have the trade skill to build a house they should just naturally be able to manage the project of building a house and that just not true. Project management is a unique set of skills unto itself.
- Sales Skills. Contractors need to have the basic customer relationship skills to understand what their clients want and how to respond to those needs. And of the basic sales skills contractors need to understand and learn how to close the sale.
- Trade Skills This is pretty obvious to most contractors but perhaps because it is so obvious it is incredibly over emphasized with is just as dangerous as having no trade skills at all. Often contractors will think this area is the most important or the only thing that is important. Thinking that is often a huge fatal mistake.
2. Insufficient Capital (Money)
And that can mean anything from insufficient capital to market the business enough to get it rolling to not having the capital for a operational reserve (an OCRA account) to get you through a bad stretch or cash flow crisis. How many contractors even know how much money to even keep in an OCRA account (Operating Capital Reserve Account also sometimes referred to as a CYA account).
3. Poor Location
Meaning your working the wrong business in the wrong market area. This doesn’t at all mean to survive and thrive you need to work in Beverly Hills or Greenwich CT but it does mean you need to tailor your product offering for the region you plan to work in.
4. Poor Inventory Management
This means a couple of different things. In the management schools of Lean Thinking, Six Sigma, and the Theory of Constraints work-in-progress is considered inventory so having too much work in progress. That’s where you’ve paid for the materials and have put in you time or paid for your labor’s time but the client has yet to pay for it. People might say well that’s just a matter of keeping your Accounts Receivable to a minimum but it goes beyond that in that Accounts Receivable only represents the work that is completed and ready for payment and not the incomplete work that is in the pipeline.
5 Over-investment in Fixed Assets
Renting shop space, buying an Altendorf table saw, Festool saws and drills and the brand spanking new truck while not having the profitable cash flow to support those purchases or leases
6. Poor Credit Arrangements
Or no credit.
7. Personal Use of Business Funds
Spending the businesses money on that boat you want so that you can go fishing. Real bad idea.
8. Unexpected growth or the Inability to Manage Growth
Getting too big too fast and not having the infrastructure in place to support the growth
Well there is not really too much competition in the building and remodeling market we been in for the past few years but who knows how long these flush times will last and even then you could always be blind sided by a good skilled contractor who has devised a better way to produce the same out you are only cheaper and faster or you could be blind sided by a gray or black market contractor underbidding you.
10. Mistaking A Business for a Hobby
Woodworkers and and good cooks (restaurants are # 2 for having the highest business failure rate right behind contractors) may in fact be the most prone to this. We love our trades and would do them even if we were in another career field.
11. Asking Friends & Relatives for Advice
They will more often than not tell you what you want to hear rather than what you really need to hear.
12. Asking Friends & Relatives for Money
When things get tough the pressure they can put on you for their money can double the stress.
13. Mismanaging Money
Paying too much or paying for things at the wrong time.
14. Poor Marketing
Gets you caught between a rock and a hard place when your word of mouth leads dwindle or dry up in a tightening market.
15. No Business Plan
Dwight D. Eisenhower once said: “In preparing for battle I have always found that plans are useless, but planning is indispensable.”
16. No Understanding of Pricing Boy this is a big one in my estimation. This means understanding both the concepts of markup and overhead recovery and how to estimate at least semi-accuratly.
17, Inability to Plan for Transitional Periods
What to do during the peaks and valleys when the work you do is seasonal or the peaks and valley of an economic cycle
18. Lack of Commitment
Not realizing that running a business is a full time relationship that needs to be worked on to succeed.
19. Failure to Set and Revise Goals
Out of the start gate you need a goal to head for but you have to be able change as the opportunities in the market change.
20. Inability to Develop and Monitor Financial Statements
Not understanding what the bottom line you have to achieve can be deadly. I think every contractor has to understand and know precisely what their break even point is.
21. Inability to Balance Business & Family
As the stress and needs of a business build up they compete for what is a finite resource. The waking hours you have available in a day so the two can very easily end up in competition to each other rather than complementing each other.
22. Underestimation of the Time Requirements
This applies both to in the area of understanding and planning for the time a business owner needs to spend on the business house keeping, administration, and marketing as well as the understanding of the time requirements of the actual trade work.
23. Poor Internal Communications
Poor internal communications between project sites and the home office plague many construction companies. Consequently, there may be little warning of project execution problems or financial difficulties. This can be anything from not having an actual phone connection from the sit cellular of land line to a company culture problem such as “shooting the messenger” where employees don’t want to tell their bosses the bad news because they’ll be punished for it. In most cases, it only takes one or two disastrous projects to bring down a company. Early warning is essential if corrective action is to be taken in time.
24. Poor External Communications
Not talking to the customer. Or talking at the customer instead of listening.
25. Inaccurate estimates
Many contractors do not make a detailed estimate of their projects before they bid and some of them simply rely on past experience. They do not get the job because their bid for a project is too high and if ever they win one because they gave the lowest price, they also end up losing money because the price that they were paid for can never deliver the service that they promised. Having a detailed and accurate estimate for any construction job brings more confidence and increases the probability of getting a construction job.
26. Poor purchasing
Good material sourcing is a critical success factor in the construction business. Good purchasing is not just getting the lowest price but also involves quality and delivery. Looking at alternative materials and suppliers is a good strategy in trying to bring down costs.
27. Poor pricing decisions
Even with an accurate estimate, some contractors still would want to shave off their bid price just to ensure that they are the lowest bidder and would eventually win the job. Although dropping prices is a pricing strategy, it is most of the time not sustainable and should be looked at as a short-term strategy.
28. Poor quality control
A lack of quality procedures and control would only lead to poor workmanship. If this happens, the customer will not accept the job and will only result in rework and additional costs for the builder. Many builders have closed shop due to poor quality.
29. Unsafe construction site
An unsafe work site is an unproductive work site. Accidents at the work site affect costs, image and the overall morale of the workers. A responsible builder is one who makes sure that the work site is safe for the employees, customers and its surrounding environment.
30. Contract management failure
A construction contract is a legal contract in which the owner agrees to use the services of the contractor and the contractor also agrees to provide the required services based on the agreed price and specifications. A legal failure is caused by poor contract management. It is the responsibility of the contractor to build to specifications but it is also the responsibility of the owner to pay the builder on time. The construction contract should detail all of the requirements on the project and both parties — the owner and builder — should fully understand these. When in doubt about contract interpretation, builders should always seek the advice of a legal counsel.