The past few years have been a nightmare for the construction industry. The unemployment rate is over 13.5%,companies are going out of business left & right and competition for what little work that is out there has been fierce. What should a construction company owner do? If the answer is to keep the doors open and run the business in the best possible way, the owner should pay attention to the reasons that contractors fail. I define failure, for purposes of this discussion, as going out of business. It is has been my experience that contractor failure can be attributed to many factors. Today I am going to focus on unrealistic growth as a factor in contractor failure.
What is unrealistic growth and why are we discussing growth as a factor for contractor failure in today’s business environment? Unrealistic growth is when a company cannot profitably manage the growth in their company’s revenue. You might ask yourself how a company can have unrealistic growth when there is no work out there to bid on. Growth is all relative. With contractor revenues down the past few years, the baseline for growth is where a company is today.
The following are examples of what contractors are doing to try to grow their business, but if not managed properly, can lead to their failure:
- Changing the type of projects that they perform. Residential contractors are now working on commercial construction projects. Private contractors are now working on public construction projects.
- Expanding into new geographic areas because that is where the work is. Columbus has been a hot bed for out of town contractors coming in to our area in an attempt win work.
- Taking on significantly larger individual size projects than they have experience with or have worked on in the past.
- Rapid or over-expansion. Contractor balance sheets have been significantly weakened over the past few years and when revenue starts to grow, the balance sheet and cash balances are not in a position to support the growth.
A company is three times more likely to go out of business when the business is expanding than in a period of stagnation or even decline. Why? Because the company cannot support the cash flow required for growth. In addition, most contractors do not understand the risks associated with changing the way that they do business.
As Director of Construction Industry Services at GBQ Partners, LLC, I found that prior to construction companies becoming a GBQ client, they thought all CPA’s did was accounting and tax work. I have found through my experience and expertise that helping contractors understand their risks can help them avoid failure. Along with helping contractors understanding risk, it is just as important to help them plan for success and to help them understand the impact of the decisions that are made on their company’s balance sheet and income statement.
Does your Company have adequate cost and project management systems that allow you to be successful? Next month we will explore the importance of construction cost and project management systems and by not having adequate systems can lead to contractor failure.