The 10 Most Common Reasons Construction Companies Fail
Updated: Sep 13, 2022
A construction company is like most other companies in that it needs good cash flow, motivated and qualified employees, proper marketing, and a good client base in order to flourish. What is different about construction companies, however, is that there are a large number of competing companies on the market. With some much competition on the market, it is more likely that your competitors might win out, causing your company to fail.
Hundreds, if not thousands, of construction companies fail every single year. Most construction companies do not reach past the ten-year mark. Unfortunately, there is so much competition in the market that some companies simply cannot keep up and have to fight for their client base. Read ahead to find out more about why many construction companies fail.
Reasons for Why a Construction Company Might Fail
Most construction companies fail for the same few reasons. While these reasons may also spill over to other sectors and businesses, they are particularly problematic for the construction sector, which is highly competitive and relies greatly on good employees, construction workers, and clients.
How can you ensure that your construction company is able to keep up with the market competition, retain its employees and loyal clients, and not go bankrupt in the near future? You can do this by being aware of the major problems a construction company might face and by taking measures to ensure that your company does not suffer from these problems.
Here are the 10 main reasons we believe are the cause of construction companies failing:
1. Negative or Insufficient Cash Flows
One of the most significant problems faced by almost every construction company is negative or insufficient cash flows. Even if a project is going to be profitable in the long run, if your company is not being paid on time and you don't have enough of a cash flow going, you will be unable to pay your employees, buy supplies or capital, keep up with advertising, meet payment agreements with subcontractors, etc. All of these payments need to be done on time, and without a good cash flow, your company will suffer.
A lot of construction companies end up taking out bank loans when there is not enough cash flow. These loans can cause a number of other problems, such as the inability to pay back the loans on time and eventual bankruptcy.
Another negative to having insufficient cash flow is that companies end up taking up jobs that are not suitable and with clients that are unreliable in order to meet the demand for the cash they need. This can cause further problems in the long run.
In order to keep a positive cash flow, it is very important for a construction company to have detailed contracts in place that ensure suitable payment terms.
2. Not Pricing Projects Correctly
One of the major downsides of working in an industry where the market competition is so high is that most construction companies working in a specific area have to bid for projects. In order to win bids, a company might actually price the project way below what it would actually cost them, leading to long-term losses. Even one large project being priced too low can result in a construction company going bankrupt and failing.
Apart from trying to win project bids, another reason construction companies end up not pricing their projects correctly is because they do not understand that they need to keep overhead costs and operating expenses – in addition to the main project costs – in mind when coming up with their pricing structures.
To run a profitable construction company and keep your company from failing, it is very important that you set up a competitive and suitable pricing structure. Although it is important to keep your prices competitive with other companies, you also need to keep all of your costs in mind and consider your company’s overall financial goals when setting prices.
3. Bad Reviews and a Poor Reputation
With so many construction companies to choose from, it is important that your company does everything it can to bring in new clients. Therefore, if your company ends up with bad reviews and an overall poor reputation, chances are that clients will quickly move on to competing companies. As such, bad reviews are a major cause of construction companies failing.
Building your company's reputation, working on long-lasting relationships with clients, training your employees to represent your company in the best light, and getting good reviews from clients are all very essential for keeping your construction company afloat and preventing it from failing.
4. Unsuitable or Untrained Employees
Construction companies depend highly on their employees. And we're not just talking about higher management. Rather, it is the technicians and actual construction workers that make or break a company. The clients your company works for will only see the actual construction work they end up with and won't care too much about whether or not they liked the company's owner.
If a construction company has unsuitable or untrained construction workers, this will lead to poor quality work, accidents on site, costly mistakes that need to be fixed, delayed project timelines, and an overall bad reputation for the company.
In order to keep a construction company from failing due to its employees’ skills, it is important to train employees properly, keep up regular skills reviews, ensure that the employees know what standard of work is expected from them, and build solid relationships within the company.
5. Lack of Adequate Marketing
With a different construction company to choose from around every corner, it is very easy for some companies to fall through the cracks. When construction companies do not invest in marketing themselves or do a poor job of marketing, there is nothing to set them apart from other companies. If clients do not hear about your company or know that you exist, then the chances of winning projects are very low, which can lead to your company failing.
It is very important to build a name and reputation for your company in order to ensure that it is distinguishable from competing companies. This can be done by developing a marketing strategy that sets your company apart from competitors.
6. Working for the Wrong Clients
Not all clients are the same when it comes to an industry like construction. When construction companies do not have solid legal work and foolproof contracts, one bad client can lead to the whole company failing in the case that the client does not follow through on payments. The wrong client can lead to a construction company running into negative cash flows or bad reviews. If the client does not pay on time, this can lead to trouble with paying employees, project delays, and problems with subcontractors.
In the same way that clients will shop for different construction companies for their projects, it is important that construction companies shop for different clients. When choosing which projects to work on, you should ensure that you are on the same page as your clients, that your visions for the project align, and that you have a solid contract to work off of.
7. Working on Risky Projects
Just like how one project with the wrong client can lead to a company failing and filing for bankruptcy, certain projects can make or break a company too. When companies bid for projects, they face a lot of competition which means that they often end up bidding on risky projects just so that they have something to work on. There are a lot of risks that can be associated with construction projects. Such risks include the possibility of political unrest and instability, land disputes that lead to projects being abandoned or discontinued, a project being undercapitalized, etc.
In order to avoid your construction company failing, it would be wise not to take on such large or risky projects that could affect the entire future of the company were the project to go wrong. Smaller and more reliable projects may seem less glamorous, but they get the job done and help your company stay afloat while building a wide portfolio of clients.
8. Fraud Within the Company
When construction companies begin to grow, the number of employees increases accordingly. Not only are there more construction workers hired, but the number of managers and office employees also increases. Where construction companies fail to keep their employees in check with controls put into place, there is a higher risk of fraud within the company.
Many companies fail because of theft from construction sites which leads to projects going over budget or perhaps an inflated payroll due to certain employees rounding up timesheets. There are many other instances of fraudulent behavior that employees can carry out unbeknownst to the company's owners. Many of these instances can be enough cause for the company to fail.
In order to avoid this, it is important for construction companies to have checks and balances in place, set up controls to keep their employees in check, and build good working relationships with employees that foster honesty and loyalty.
9. Poor Expansion Choices
With a large number of construction companies in the market, one of the most common ways for companies to grow is through mergers and acquisitions. Companies grow in size by buying out other companies and merging them together. While this can lead to high levels of success for some companies, the same cannot be said for others. Making poor expansion choices can actually lead to a company failing entirely.
In order to avoid falling into this trap, it is very important to do thorough research on the company you are looking to buy. There can be a number of problems that go unnoticed on the surface but arise after some time and cause trouble in the long run. Overall, buying another company is not something that can be done without adequate thought and research.
10. Economic Recessions
Economic recessions hit most industries very hard. Construction is no different, and many companies fail during economic recessions. This was very evident during peak Covid times when thousands of construction companies shut down over a very short period. During a recession, construction companies can struggle with cash flows and have a hard time staying afloat as clients pull out of project agreements. The way to keep your company afloat during economic recessions is by having a good handle on capital and cash flows.
Overall, there are a number of reasons why a construction company might fail. While we have gone over the 10 most common reasons, including negative cash flows, unsuitable employees, risky projects and clients, and bad company reputations, there are many other reasons why a construction company might fail as well.
N3 Business Advisors - CONSTRUCTION INDUSTRY MERGERS & ACQUISITION ADVISORS
N3 Business Advisors is a Mergers and Acquisitions advisory services company based in Ontario, Canada, that aims to help small and mid-level construction companies to grow and expand.
If you are a construction company owner looking to grow your company and would like to ensure that your company stays afloat, you can get in touch with us for our help regarding company growth, buying a business, valuing your business, acquiring, merging, and more.
N3 Business Advisors is a company that you can depend on. We have built our team with professionals many of whom have been in the industry for over 30 years. Whether you are in need of lawyers, financial advisors, valuation experts, HR advisors, or other company professionals, our team is ready to help!
For more information, get in touch with us by visiting our website: www.n3business.com or give us a call at 647 967 4222. You can also schedule a confidential consultation with us in order to get started.