Handling Losses and Leveraging Failure in Your Construction Business

Including a list of crucial warning signs

Nearly every construction business is going to experience losses. You can have a great quarter and then – bam! – the next quarter you’re in the red. Every construction company will face failures. A client may sue you, you’ll fail to complete a project, or you’ll not make anywhere near the profit you projected. Successful construction companies learn how to handle losses and leverage failure. Let’s talk about ways you too can ride out the tough times.

Causes for Failure

In the first article in our series, Why Do Businesses Fail in the Construction Industry?, we told you the many reasons why a construction business may fail. Often there are signs of trouble well before a company need close its doors. Let’s talk about some of those warning signs. But first – a review of the Top 10 reasons a construction business will fail:

  1. Not working hard enough.
  2. Not enough capital.
  3. Trying to do it all.
  4. Bad hiring decisions.
  5. Poor planning.
  6. Not having agreements in writing.
  7. Poor estimating or underbidding.
  8. Underestimating the competition.
  9. Not understanding the market.
  10. Poor project management.



Failure is an Option

It sounds very heroic to say things like, “Failure is not an option.” You picture yourself with sweat on your brow, fists clenched, shouting this to your team. But it’s more practical to believe that failure is an option. This fact alone should motivate you to do the planning necessary to reduce the risk that you will fail.

Warning Signs

In an ideal world, you will have created a risk mitigation plan before you started your business. In the real world, you may already be facing the warning signs of a business in trouble. Let us know if any of this sounds familiar:

  • You have not won a bid in quite some time.
  • You’re cutting your price to get jobs.
  • You lost money on the last job – or the last two or three or four jobs.
  • You don’t have the time to follow up on unpaid invoices.
  • You’re not sure how much your spending.
  • You’re not sure how much money you made last month.
  • Your best workers have quit.
  • Your worst workers are still hanging around.
  • You’re coming into the office late – or not at all.
  • You’re exhausted all the time.
  • You’re receiving second and third notices to pay one or more bills.
  • You stopped paying yourself a salary.
  • New jobs are paying overdue bills.
  • You’re only making minimum payments on your credit cards.
  • You just bounced your first check.
  • You have little repeat business.
  • You’re being sued by a client or subcontractor.

Nearly all of these warning signs fall into one of three categories: managerial, operational, or financial.

Managerial Warning Signs

  • You don’t have the time to follow up on unpaid invoices.
  • You’re not sure how much your spending.
  • You’re not sure how much money you made last month.
  • Your best workers have quit.
  • Your worst workers are still hanging around.
  • You’re coming into the office late – or not at all.
  • You’re exhausted all the time.

A good manager of people and projects has systems in place to always know how much money is coming in and how much money is going out. (This is your construction company’s cashflow.) They recognize good workers and do what they can to keep them happy. They give bad workers a chance to improve but know when to cut their losses. In other words, will fire workers when needed – even if it’s your cousin or brother. Finally, a good manager knows how to manage themselves.

Operational Warning Signs

  • You have not won a bid in quite some time.
  • You’re cutting your price to get jobs.
  • You lost money on the last job – or the last two or three or four jobs.
  • You have little repeat business.
  • You’re being sued by a client or subcontractor.

A well run construction business operation has solid processes in place to properly cost and bid on projects. They may cut their price to get a job – but they are clear on when and why it makes sense. They have and execute a marketing plan. A good marketing plan includes how to keep and leverage existing clients. They always – and we mean always – have written contracts for their jobs. They work with their insurance agent to have the right type of insurance policies. So if they are sued, they have solid contracts in place and insurance that will protect them.


Financial Warning Signs

  • You’re receiving second and third notices to pay one or more bills.
  • You stopped paying yourself a salary.
  • New jobs are paying overdue bills.
  • You’re only making minimum payments on your credit cards.
  • You just bounced your first check.

Managerial and operational warning signs are often the “canary in the coal mine” warning of financial problems to come. In some cases, the financial warning signs have gotten your attention too late, and it may be time to consider closing shop. But before you pack it in, let’s talk about how you can handle your construction company’s losses and leverage your failures.

Handling Losses

If you’re attempting to operate in the red by doing things like not paying yourself or making minimum payments on your credit cards, the first thing you need to do is admit it. To yourself, to your investors, and to key employees. Then meet with your team to discuss your options and develop a plan. Options for handling losses may include:

  • Renegotiating loans and credit card debt.
  • Developing and implementing a marketing strategy.
  • Implementing job costing and bidding software.
  • Reviewing overhead costs and cutting expenses.
  • Implementing a process for following up on unpaid invoices.
  • Closing locations.
  • Putting expansion plans on hold.
  • Reducing (but don’t eliminating) your salary.
  • Asking workers to temporarily cut hours and / or pay.
  • Reviewing insurance coverage. (But not just canceling policies.)

The key to handling losses is to cut the fat, not the bone. You want to cut out anything that is not helping your business succeed. You want to judiciously spend money on things that will reduce costs, increase cashflow, and increase sales and profits. Run your plan past your accountant, lawyer, and insurance agent.

Leveraging Failure

Successful construction business owners admit to their failures and analyze what went wrong and how they can improve. There are many ways to leverage failure. Here are few examples:

People Management

We’re not going to go as far as to say there are no bad employees only bad managers. There are bad employees. But good managers have a process for dealing with bad employees. They:

Look to themselves to see where they can improve their leadership. Are they telling their employees to do one thing, but showing them something different? Don’t tell your workers to show up on time and then walk in late on a regular basis.

Provide a framework for success. Give your employees clear instructions and then step back. Whenever possible, give them deliverables but don’t micromanage how they do the work. Provide feedback regularly so they know what they are doing well and where (and how) they can improve. Praise them in public but dress them down in private.

Provide written improvement plans. If you have a “problem” employee, sit down with them and review what their doing well and where they need to improve. Create a written plan with specific actions and goals. Then meet regularly to see if they are improving their performance. If not, give them a warning. If they still are not improving, let them go. The key is that everything is in writing. If the employee sues you for wrongful dismissal, you’ve got the receipts.


Operational Improvements

You can leverage operational failures by identifying problems and developing a plan to correct them.

Reviewing past projects. The first thing you want to look at is estimates versus actuals for both time and money. Did the project cost more than you had estimated? Why? Were there changes that you did not charge to the client? Were there mistakes made by subcontractors that you corrected at your cost? You should review and document each project at completion. There are always adjustments than can be made to improve the next project.

Marketing. Marketing, like insurance, is often the first thing to get the axe when reviewing overhead costs. But – like insurance – marketing can save your business. Take the time to develop a marketing plan. There are solid marketing companies that can help you develop and implement a marketing strategy. We’ll be talking more about marketing your construction business in future articles.

Financial Improvements

Automation. There are many software programs available now to automate bidding, project management, accounting, equipment and materials tracking, and more. You don’t have to automate every aspect of your business at once. If job costing and bidding are your biggest problem areas, then start with those functions.

Simple improvements. Some financial improvements, like accounts receivables, can be improved by just having someone in the office follow up with clients each week. Another way to increase cashflow is to make it easier for clients to pay. Embrace online services such as PayPal, Zelle, and Venmo. You don’t have to wait until new software is implemented to improve some of your processes.

Risk Mitigation

Once you have identified the areas that need improvement and develop a plan, you’ll want to start creating risk mitigation plans. You and your team brainstorm all of the risks you may face. If there is an economic downturn, what will you do? There are less dramatic risks that can impact your construction business – like losing a materials vendor or a reliable subcontractor. In risk mitigation analysis, you develop a list of potential risks and then rate them on their likelihood of occurring and their impact to the business. You create a mitigation plan for those risks that rate high on both scales.


Quitting is an Option

If things have gotten so bad that you’re bouncing checks, perhaps it’s time to put the shovel down and stop digging that hole. It takes guts to admit that maybe this construction business is not for you. Perhaps it’s best to do the work you love – for someone else. Put in a hard day’s work, get your paycheck, and head home for a nice meal and a beer. No shame in that.

Bankruptcy

Sometimes you do want to continue your construction business but need some breathing room. Bankruptcy may be an option. Be sure to talk to a bankruptcy attorney. It’s a specialized area of law and the types of bankruptcy available to you can vary from state to state. Learn from your mistakes and develop a solid business plan to move forward. Bankruptcy is not a failure – it’s a business decision. You can choose to feel ashamed, or you can choose to feel motivated to succeed. Your choice.

Conclusion

When you start a construction company it’s critical to remember that failure is an option. Do everything possible to mitigate the risks you will surely encounter. However, even the best laid plans can still result in losses and failure. That’s okay. It’s just another opportunity to learn and grow. You may decide to work for someone else or do what you can to save your construction business. If you take responsibility, take stock, and move forward, you will survive.