It is without a question that the construction industry is a very risky business. According to recent statistics, 3.1% of the sector – 2026 companies – are facing “high to severe” financial risk, with nearly half, 931, in the $1 million -$10 million turnover bracket.
From lack of strategic planning to poor delegation and overexpansion, construction companies die for different reasons. Read on as we reveal in this infographic the 10 of the major causes construction business fail.
1. Running Out of Capital
Many failed construction businesses cite insufficient operating funds as the top reason for their failure. Aside from not having enough money to keep their operations sustainable, these companies also set an unrealistic expectation of incoming revenues from their sales.
In order to avoid undercapitalisation, it is imperative that you conduct a thorough business planning so you can identify not only the cost of starting a construction company but also the cost of staying in business. In general, you will need to prepare enough fund to cover for all the costs you will incur for the first two years of your business until your sales can eventually pay for those costs.
2. Lack of Strategic Planning
Even companies that survive the first 3-5 years of operations cease to operate due to lack of strategic planning. If you have a little idea of where your business is headed from that point forward, it will operate aimlessly without priorities, and with your employees confused about the purpose of their jobs.
Regardless of how small or big your construction business, having a strategic plan is imperative for you to reach success. When developed effectively, it should help you provide direction to your company, foster collaboration between your employees, and execute the right actions that support your long-term business goals.
3. Poor Management
Another common reason construction companies fail involves poor business management skills by the management team or business owner. In many small construction firms, a business owner is the only senior level personnel within the organisation. However, while they may have the vision or the skill to start a business, they often lack the qualities of a strong business manager and the business acumen on other business aspects they lack knowledge with.
To address this problem, you should take the initiative of taking business management courses. In doing so, you will be able to educate themselves on the skills you lack and at the same time gain outside perspectives from your business peers.
4. Bad Cash Flow Management
Cash flow management is one of the banes of many Australian business owners. In fact, recent The Invoice Market’s research shows that a whopping $76 billion worth of outstanding invoices and two million businesses are drowning in a sea of unpaid bills.
There are numerous strategies you can employ to prevent cash flow problems, such as forecasting your sales and outgoing cash accurately and preparing more than one cash flow projection. It is also wise to spread out required payments for materials and supplies so that you will have more cash on hand to sustain your operations.
5. Lack of Competitive Advantage
Many construction companies are on the brink of collapse because they lack the Unique Selling Proposition (USP) which they could have exploited to obtain a strong footing on their own market niche. If the price is the only distinguishing factor to set your construction business apart from its competitors, it will be left at the mercy of any construction company that can provide a better quality service at a lower cost than you can offer.
6. Bad Marketing
Regardless of how unique your business model is or how efficient your people in the field are, your business will fail to succeed if your target market does not have any idea on what you can provide to them. In today’s multichannel world, it is imperative that you take advantage of the most effective marketing channels available to engage your target clients and promote your business in the most competitive way possible.
7. Poor Delegation
Far too many Australian business owners have poor delegation skills which lead them to suffer from the syndrome called “Lonely At the Top.”
In the very demanding construction industry, having that feeling of isolation will not hinder your productivity, but it could also negatively impact the overall performance of your company due to poor concentration and lack of focus.
Being able to delegate some of your time-consuming tasks to a reliable employee is vitally important for you to concentrate on more strategic aspects that is critical both for the short- and long-term success of your business.
Uncontrolled rapid growth is also one of the major killers of a potentially successful construction business. If your business grows too quickly or expands too much, you could face financial, legal, staffing, resource, and supplier issues.
While you can capitalise on your business growth to become a leader in your market, not having a strategic plan, the right systems, and enough people in place to support such growth will make your success “short-lived” the long run.
9. Mediocre Workforce
No matter how detailed your strategic plans are or how advanced the equipment and business software you are using, it all becomes futile if your employees are not efficient at doing their jobs. Poor performance caused by inexperienced, untrained and unmotivated employees can limit your business growth.
This is why it is imperative that you streamline hiring processes, provide proper compensation and benefits, and ensure that everyone is clear about what they are doing and why it matters to the overall success of the company.
No construction project is safe from delays; however, this does not mean that you cannot plan for it. Factors such as poor weather, budget and resource shortages, overbooked crews, unreliable subcontractors, and unexpected request from clients all cause construction delay, which if you fail to mitigate can reduce your revenue and even result to loss of potential clients.
Although these causes can be challenging to address, there are strategies and tools that you can use to plan for them. Always make sure to manage your clients’ expectations through clear and open communication.
Also, ensure that your workers are well-trained for their jobs. Ultimately, use a construction project management software to monitor the important metrics that help you adjust your resources when you fall behind schedule.