Why do Businesses Fail in the Construction Industry?

Capital, hiring, planning, estimating, underbidding, and more

Working Hard is Just the Beginning

We know you work hard. We believe that many of you possess the skills, drive, and grit to build a successful construction business. Working hard is a given. No one has succeeded in the construction industry by sitting on their butt or resting on their laurels. So the first reason a construction business will fail is the owner is just not willing to put in the hours and work required.

Not Enough Capital

It takes time to build a business and you need to have enough capital to survive. Some construction businesses require serious operating cash. The second reason a construction company will fail is not having enough capital to last long enough to get the business off the ground.

Trying to Do It All

Many of the people who start construction businesses do so because they like to call all the shots. It tends to be folks with a I-can-do-it-all-by-myself type of personality. And that can work for a while. But not for long. You need help from lawyers, accountants, and insurance agents to keep your business safe. Office managers and marketing companies can help propel your business forward. You can start out as a one-person show but will need to work with others to grow and thrive. The third reason a construction business will fail is trying to do it all by your lonesome self.

Bad Hires

It’s not easy hiring the right people. These days it’s hard to find workers, period. This is a business risk that must be mitigated. It’s particularly a problem for partnerships and family businesses. The “bad hire” could be your spouse, brother-in-law, or best friend. Makes sitting around the Thanksgiving table with Uncle Bill kinda awkward if you recently fired him. A bad hire is someone who is incompetent, lazy, or steals from you. The fourth reason a construction business will fail is hiring (or going into business with) the wrong people.

Poor Planning

Your business plan (and you better have one) is not just a pretty presentation you show to a couple of people in the beginning then just file away. It is a living, breathing document that serves as your guide – and sometimes your savior. Having an unrealistic business plan is as bad as not having one at all. Your business plan is where you really think through what the heck your construction business is all about. What is your business? What makes you qualified to run it? How will you finance it? Who are your customers? How will you attract them? These are just some of the questions you will answer in your business plan. As your construction company evolves, you will revisit your business plan and make any needed adjustments. The fifth reason a construction business will fail is poor planning.

Not Putting it In Writing

Not every construction job contract has to be 100 pages long and written in legalese. A statement of work (SOW) that clearly spells out deliverables, schedule, cost, and payment terms – signed and dated by you and the customer – is sufficient for small jobs. Large construction job contracts should be drawn up by a lawyer. Change orders for any size job should be in writing. You should also have a written contract between you and your partners – even if it’s your spouse. Spoken words disappear into the ether – a written contract – again, signed and dated by all parties – has a far better chance of holding up in court. The sixth reason a construction business will fail is not putting all agreements in writing.

Poor Estimating and Underbidding

Bidding on construction jobs is a delicate balance. You want to get the job, but you need to turn a profit on it. Yes, in the beginning, you may take a job or two with low margins in order to build your portfolio and get some pretty pictures for your website. Choose those jobs very carefully. And make sure you are at least breaking even. Along with underbidding is not properly estimating the cost and schedule. It looks like a winner on paper then you find out labor and materials are far higher than you estimated. Have too many of those and you won’t make it through your first long winter. The seventh reason a construction business will fail is poor estimating and underbidding.

Underestimating the Competition

We know; you’re the best in your business. Do you know why you believe that? No, seriously, what makes you better than your competitors? If you can’t answer that basic business question, we figure you may be in trouble. Researching your competition begins with your business plan. But it shouldn’t end there. You want to know who your competitors are, what they are doing, who their customers are (or at least who they appear to be targeting), whether they are expanding or contracting – in size, services, or product line. Major business decisions are, at least in part, based on your competitors. The eighth reason a construction business will fail is underestimating the competition.

Not Understanding Your Market

You may be the greatest contractor known to humankind. But you must understand your market. Who are your customers? What do they want? How much are they willing to pay? How much have they spent on the types of products and services you plan to offer? Notice we say what you plan to offer. Market research begins with your business plan. It also needs to be research you do regularly. The ninth reason a construction business will fail is not taking the time to truly understand their market.

Poor Project Management

Managing a project is more than just bossing people around. Your project manager must develop and keep to a schedule. They need to hire the right people and keep their eye on them. They need to fight fires every day – sometimes all day long. The project manager is responsible for keeping to the budget. They need to manage the contract. That means understanding and managing the deliverables. And the change orders. Workers quit, materials don’t show up – or they do, and they’re damaged or just plain wrong. Equipment breaks down, weather doesn’t cooperate. A good project manager keeps the work flowing and minds your money. The tenth reason a construction business will fail is poor project management.

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Why do construction businesses fail?

Construction businesses may fail due to reasons such as insufficient capital, attempting to manage all aspects independently, making bad hires, poor planning, failure to document agreements, underestimating competition, and not understanding the market.

How can a construction business prevent failure?

To prevent failure, construction businesses should ensure they have adequate capital, hire qualified professionals, create realistic business plans, document agreements in writing, conduct thorough market research, and implement effective project management strategies.