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Seven Ways Construction Businesses Fail

05/15/24

Everything is changing in the construction business world today. The new reality of too much competition and too little profit has become an ongoing challenge. As you get tossed around in this sea of constant change, the basic business fundamentals never change. Here are seven sure-fire ways to fail in business if you don’t make the right moves now.

1. Stay Busy (“No written plan”)

Trying to stay busy or keep your crews working by bidding too cheap is not a plan for success. Neither is jumping from one strategy to another every time the weather changes. During roller coaster times, moving forward without a written business plan is like building a house without blueprints. What is your plan to grow, make high profit margins, and develop customers who value what you offer over the next three years? What is your plan to develop an accountable and responsible management team who can take your company to the next level? And what is your plan to improve how you do business and install written business systems that produce consistent results?

2. Compete on Price (“Nothing differentiates us”)

Companies that are not focused on specific high margin customers or type of work, or try to win contracts by bidding and doing anything and everything on any project, spread themselves too thin and can’t make enough money. They are in the “YES” business, “Yes, we can do that!” Would you go to any doctor for heart surgery? When you claim to be good at everything and try to do any type of project for any type of customer, you’ll never get the good jobs unless you’re the lowest bidder. An ongoing strategy to win work by being the low bidder won’t improve your margins. As an alternative strategy, some customers will pay more for specialists who are experts in a specific type of difficult work. What is your company known for? Why should customers pay more to hire your company? What are you doing to set your company apart from the competition and attract higher margin customers?

3. Hire Cheap (“We can’t find any good people”)

It is tempting to hire low priced and less experienced people in a tough market. But when you hire less experienced, under qualified, and low paid employees, you’re kidding yourself. Cheap people make more mistakes, require more supervision, and force you to supervise them too many hours in the day. This takes you away from making your business profitable or focusing on high priority activities. When you spend all your time checking and helping untrained or inexperienced people do their jobs, you’re not spending your time where the money is made: with customers, looking for opportunities, inspiring and motivating your crews, improving productivity, and on the bottom-line. Better people with experience and track records cost more, but require little or no supervision, will allow you to do more business, and you will make more money.

4. Do - It -Yourself (No written systems - it’s all in my head)

It’s easier to do everything yourself than to teach employees and managers how to do things the way you want them done. This management style requires you to be everywhere to make sure everything gets done perfectly. This also holds your company and people back from reaching their maximum potential. When your day is maxed out supervising others, watching things get done, checking to make sure things are done right, and answering everyone’s questions, you become inefficient and ineffective. Replace yourself with written checklists and business systems to improve production results so you can focus on your top business priorities.

5. Let Someone Else Manage Your Money (Too busy to mind the store)

Most small business owners and contractors don’t know their numbers or have specific financial targets to aim at. They work really hard and hope their numbers work out at the end of the year. Often, they let someone else worry about the finances, like a bookkeeper or spouse, while they continue to work too hard without knowing if their work is even worth the effort. The purpose of your business is to make a profit, not to do good work and keep everyone working. But, with yourself focused 100% on getting work done, you’ll never focus on making money and what you need to do to improve bottom-line results. Dedicate time to get focused on your sales revenue, overhead, job costs, production rates, accurate estimating, job profits, and company profits.

6. Too Big, Too Fast, with No Cash (Not enough working capital)

The number one reason small companies go broke is that they outgrow their cash reserves. Before you take on more work than you can handle, make sure you have the working capital resources to do the work. You would never even start a donut store without at least $250,000 in the bank. Plan to have plenty of cash on hand for three to six months of overhead, personnel, and equipment required to build and manage projects properly. Assume you will get paid in the normal 30- to 60- or 90-day timeframe, but keep adequate reserves on hand in case payments get delayed. Most contractors need a minimum of 20 percent of their annual volume in working capital to stay afloat.

7. Go with the Flow (No marketing or sales plans)

Companies without specific written business development, marketing, and sales action plans tend to bid or go after whatever opportunity comes in the door. This is a reactive approach and won’t take your company where you want it to go. Successful companies have an ongoing approach to sales whereby they methodically go after the markets and customers they want. Identify your top customer targets, make them a priority, go see them, and do what it takes to get them to want to hire you.

The choice is yours— strive to thrive or fail and bail! Consider these seven factors to chart your future in a changing economy or business climate.

Business - Commercial Construction Industry

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This article contains general information only. Sunflower Bank is not, by means of this article, rendering accounting, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, before making any decisions related to these matters, you should consult a qualified professional advisor.