7 Factors Behind Construction Company Failures (And How I Tackled Them)
If you’re like me and keep up with the news, you’ve probably noticed a troubling trend in the construction industry. Headlines like ‘Another Construction Company Goes Bankrupt’ or ‘Why That Big Construction Firm Failed’ are becoming all too common.
In 2022, an article from ConstructConnect reported a staggering failure rate of 82.8% for construction firms over a 20-year period.
Pretty shocking right?
I sure thought so.
I’ve been in the construction industry for more than a decade - working with GCs, specialty trades, modular manufacturers and real estate developers. Thankfully, none of them failed but having a background in accounting and finance, I made sure to spot the warning signs early and stay ahead of potential risks.
Let me share some of the key reasons why construction companies fail, based on my experience, and what you can do to avoid these pitfalls.
Why Construction Companies Fail: The 2 Big Factors
There are two main types of factors that lead to failure: external and internal (what I call “underlying”).
External factors are things you can’t control, like:
Economic downturns
Industry-wide labour shortages
Increased competition
Government or political changes
Payment delays (this can also be an internal too)
Underlying factors, on the other hand, happen within the company. These are the ones that matter most because they’re in your control.
Since most failures happen due to underlying factors, that’s where I’ll focus on.
Cash Flow Management: Keeping Your Company Afloat
Why It’s a Problem:
Cash flow is one of the most critical aspects of running a construction business. If you don’t have a strong handle on it, things can quickly spiral out of control – especially in such a cash-heavy industry.
Signs Your Cash Flow Needs Work:
Your cash reserves are always low
You struggle to pay off loans
Vendors frequently call to remind you about unpaid invoices
You feel constant stress about cash
What I Did
At several construction firms I’ve worked with, I took specific steps to help manage cash flow:
First, I tracked how long each client took to pay and identified patterns in their payment schedules
I then estimated monthly billings by project and developed a process to estimate project costs using Work in Progress (WIP) reports
We set up a payment schedule for overhead expenses and created a 13-week cash flow forecast to see ahead
Regularly, we compared the forecasts to actual results to make necessary adjustments
The 13-week period isn’t random – it’s a full quarter and gives you enough visibility to plan effectively without overwhelming yourself with too much short-term data.
Pro tip:
If you don’t already have a cash flow forecast in place, try creating one. It can be a game-changer for managing your company’s finances. If you need help getting started, reach out!
Proper Documentation: Avoid Costly Delays
Why It’s a Problem:
Documentation is a key component of any construction project. Contracts, change orders, progress photos, site instructions, drawings – the list goes on. If you can’t find what you need quickly, it can delay the project and lead to costly mistakes.
Signs Your Documentation System Needs Work:
You struggle to locate important documents
Your team relies on emails or individual employees for critical info
Work gets done without written approvals
No one has time to save documents properly
If your team can’t find the information they need quickly, it could hurt the project and ultimately your business.
Accurate Cost Estimation: Know Your Numbers
Why It’s a Problem:
Accurately estimating costs is crucial at every stage – whether you’re bidding on new projects or managing an ongoing one. If your numbers are off, it can lead to cost overruns, strained cash flow and a lot of stress.
Signs You’re Struggling with Cost Estimation:
You’re not sure why you’re losing money (or making it)
There’s no formal process for estimating costs
You don’t regularly review the financial status of your projects
You’re not comparing actual costs to your original bids
You don’t track your costs properly
What I Did
At one firm, I noticed that we didn’t have a clear system for cost estimation. To fix that, I implemented a process where every project was reviewed financially every two months with the project team. We looked at current costs, estimated remaining expenses and tracked commitments. This structured approach allowed us to catch any red flags before they became major issues.
In my experience, reviewing costs every two months strikes the right balance – you don’t let issues simmer for too long, but you also give yourself enough time to gather meaningful data.
Bidding Projects with Razor-Thin Margins: Is Low-Bid Really a Win?
Why It’s a Problem:
Here is a common saying for construction projects: “Low bid wins”. While that might help you land the project, bidding with razor-thin margins can do more harm than good if you’re not making enough profit to cover overhead and generate cash flow.
Signs You’re Bidding Too Low:
You have minimal profit or even losses on projects
Your bid is significantly lower than competitors
You don’t account for overhead costs in your bids
You’re constantly reducing prices to win projects
You always have low cash reserves
For example, if you’re only making a 5% profit on a project, that might not even cover your overhead costs. This can lead to cash flow problems and leave you worse off than before.
Poor Company Culture: An Invisible Threat
Why It’s a Problem:
You might be facing a labour shortage, but is that because of poor company culture? High turnover, overworked employees and lack of leadership can eat away at your business from the inside.
Signs Your Culture Needs Improvement:
High turnover rates
Employees are consistently stressed or burned out
There’s a lack of clear processes and communication
People are stretched too thin, often taking on multiple roles
What I Did
At one firm, we were growing fast, and it became clear that we needed better processes around hiring and company culture. We had no formal HR set up, so I hired an HR Manager and worked with them to create an Employee Handbook, job descriptions, and an interview process. This helped ensure that new hires understood our culture and expectations from day one.
Even if you’re not hiring at the moment, it’s essential to build these processes now so you’re ready when the time comes.
Streamlined Processes: Time to Fix the Gaps
Why It’s a Problem:
Processes keep your business running smoothly. When they’re unclear or inefficient, it costs you time, money and opportunities.
Signs Your Processes Need Improvement:
Team members don’t follow or understand processes
Everything is communicated verbally, with no documentation
There’s confusion between teams or with clients
No one knows what to do if a particular person isn’t there
You see no issues with your processes
What I Did
At every company I’ve worked with, I made sure to sit down with team members and map out the current processes, especially in accounting and finance but also to operations. Once we identified gaps or inefficiencies, I proposed improvements and worked with the team to streamline these processes. By documenting everything and making it easily assessable, we eliminated confusion and saved time.
Sometimes, it was a minor tweak; other times, it required a major overhaul. But the end result was always greater efficiency and fewer headaches.
Investment in Technology: Modernize or Risk Falling Behind
Why It’s a Problem:
The construction industry is notorious for being slow to adopt new technology, but in today’s world, that’s a huge disadvantage.
Signs You need to Embrace Technology:
Processes are not documented or followed
Documentation is still paper-based or unorganized
Communication is scattered and inefficient
You have no plan (or resources) for adopting technology
You’re too focused on the actual construction
What I Did
At one firm, we began by identifying the strategic goals and reviewing current processes. Once we knew what needed improvement, we looked into technology solutions that could help. We carefully considered the pros and cons of each option, then implemented the best one. Ongoing monitoring ensured the tech met our needs.
Technology was never the first step. Automating a bad process is still a bad process – so we made sure everything was running smoothly before bringing in new tools.
Recap
We’ve covered seven key underlying factors that could lead to failure:
Cash Flow Management
Proper Documentation
Accurate Cost Estimation
Bidding Projects with Razor-Thin Margins
Poor Company Culture
Streamlined Processes
Investment in Technology
If you recognize any of these issues in your business, that’s a positive first step – you’re already ahead of the curve.
I hope sharing my experiences has provided practical insights that can help you address these challenges and keep your company on the path to success.
Let me know down in the comments if there are specific topics that you’d like me to cover next.
See you soon!
Hey there. I’m Jeff.
I started an online, modern accounting firm called JTL CPA. My goal is to help Architects, Engineers and Contractors in Ontario streamline their finances, enhance clarity and grow their business.
With more than a decade of experience working with various General Contractors and Specialty Trades, firms in the AEC industry want to work with me because I:
Help simplify their financial management to save time and reduce stress
Help gain clear, real-time insights into their financial status to make informed decisions
Help them leverage expert advice and support to drive the growth of their business
Follow me on LinkedIn or find out more at my website.
Need personalized help? Contact us today!
