3 Common Causes of Construction Company Failure

The economy is picking up, the long, great recession is slowly losing its grip on the economy and those construction companies still standing are looking at a brighter future.  That sad, I have been slinging performance bonds for a living for close to thirty years.  I have been through a few economic cycles during my tenure and a good construction economy can be as damaging as a bad one. Below are some of the more common reasons contractors fail.

• Growing too Fast:  This has not been a concern for the last few years, but as the economy picks up, the potential is there now. Chances are a construction company has had to cut its overhead to the bone to survive, now there there is the potential to not have the infrastructure to support the rapid growth.  By growing too fast the company will spread its project managers too thin, promote inexperienced employees, or be forced to hastily hire additional inexperienced project managers.  If the controls are not adequate the company may experience problems with delayed/inaccurate billing, inaccurate and/or untimely financial  information, poor project estimation, and cash flow problems. Controlled growth is a much better .
• Obtaining Work in a New Geographic Region:  Maybe following a large client, maybe looking for greener pastures, regardless, performing a contract in New Jersey is different than a contract in Texas. Logistically it is harder to manage a contract thousands of  miles away than one in your backyard. Also, labor supply, subcontractor quality, suppliers, codes, lien laws, permits, labor laws, tax rates, weather and soil conditions can be dramatically  different and, accordingly, may result in unforeseen costs and problems.
• Dramatic Increase in Single Job Size: A contractor who continually builds $1,000,000 commercial buildings will find new and different challenges building a $15,000,000 building.  A $15mm building is not just a $1mm building, 15 times.

Construction is risky business. Improve the odds of success by avoiding these pitfalls.  Incrementally take on more work, and bigger work.  Geographic expansion, stick a toe in the water first, don’t bet the farm in a new geographic area.  If a company does bonded work, there is a good chance the surety company and/or a competent surety agent is well versed in these and other high risk factors of the construction trade.