23 May, 2022

The real reason construction companies fail

27 March, 2020

By Larry Kokklenberg, PhD, of Leath Group, LLC.

The Small Business Administration (SBA) identifies a huge failure rate among startup companies. Roughly 20% fail in the first year, around 50% fail within five years and approximately 66% fail within 10 years. Construction companies have an even uglier track record. Roughly twothirds go out of business within five years. The owners of those failed companies tend to point fingers at external factors such as insurance, taxes, politics, an inability to get enough workers, etc. But those factors aren’t really the cause of company failures, which is why the competitors down the street seem to be handling them just fine. In reality, the real causes of construction company failure are within the control of the company owner. That doesn’t mean these causes are always easy to fix. It takes planning, discipline and hard work. But nonetheless, they are controllable. In working with construction companies for many years, I’ve assembled a long list of reasons for failure. Here are a few of the more consequential:

Starting the business for the wrong reasons Many companies don’t start out with a strategic business plan. The owner simply wants to be his or her own boss. Sometimes a friend says, “Let’s start our own company and make a lot of money”. The problem is that nobody gets rich quick in the construction industry. There are only two entities that are in the business of making money: The Department of Treasury and counterfeiters Construction companies are in the business of serving customers. Starting a construction company should be based on a legitimate opportunity, i.e. little competition in a growing market area. The owner should also have a clear vision for what he or she wants to the company to be, along with a roadmap toward profitability. Having a strategic roadmap will also help new companies avoid another common cause of failure: trying to grow and diversify too quickly.

Poor company culture Nobody wants to go to work in a war zone. When that’s the type of culture that exists, people just put in the bare minimum. This culture often leads to higher employee turnover, sloppy work,higher workman’s comp claims, and financial losses. The unfortunate truth is that many construction companies do not have a great culture. Leadership must identify what employees want, what the company wants, and how to get there. It takes commitment and time, but it can be done.

Poor hiring There’s a saying I like: “When you just hire a pair of hands, you never get a head.” For long-term success, companies must hire people with the desire and ability to grow with the company and help lead. Warm bodies aren’t enough. This can be harder to do when hiring out of a union hall. But even in that circumstance, it’s probably better to pay any show-up costs and ask for a more qualified employee. That’s far less costly than carrying an employee who continues to perform substandard work or has a bad attitude.

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