THREE REASONS WHY YOUR CONTRACTING BUSINESS IS FAILING

Running a business is difficult at best. Add in the complexity and expenses of construction and the job just gets harder. It doesn’t seem to matter whether the contractor is big or small, is new to the business or has been around awhile, contracting companies go under all the time. They aren’t even too big to fail.

Something to remember is that contractors do not have the insurance coverage to buffer them if they go out of business like there is for their subcontractors or for owners. Plus, oddly enough, these businesses often fail during an economic recovery rather than during a recession.

There are many reasons for contracting companies to fail. They can be split into three controllable areas, and it isn't unusual for more than one issue to be involved in the failure.

LACK OF EXPERIENCE
Lack of experience affects more than new contractors because it isn’t necessarily the lack of financial or business experience that causes a problem.

Unrealistic growth expectations
It’s easy to get obsessed with the volume of business in the pipeline. You feel as though you must have several projects on your schedule and if everything went according to plan all the time, scheduling multiple jobs wouldn’t be a problem.

Unfortunately, between the weather, material availability, and endless other details, aconstruction job's timeline rarely runs as you think it should. You wind up making unrealistic promises and signing poorly written contracts and then finding it impossible to meet the terms.

Another issue arises when a contractor decides to take on a project that is two to three times bigger than the company has ever attempted. In fact, this is one of the most common causes of contractor business failure. Lack of experience in logistics can cause the project to go over schedule and over budget.

Taking on a project in a new geographic area can land a contractor in the same hot water. Different states and municipalities each have their own regulations and requirements that may differ from the area where you have worked in the past. Methods and practices, as well as labor conditions, can vary drastically.

Did you know how specialized contractors actually are? Many in the business don’t realize how much difference there can be from project to project, especially when a new type of construction is required. The learning curve can cause loss of profits through delays, rework and change orders.

Contractors who are used to bidding on public contracts often bid too low on a private contract. Once the project is started, the change orders begin to proliferate. An already low bid turns into a huge loss of profit.

Going from private to public contracting causes the opposite issue; the bid is typically too high, leading to lost work. The company just isn’t competitive. If the contractor does win the bid, the company may use more expensive materials or spend too much time on the job and lose out that way. (There is a reason the saying, “Good enough for government work,” got started.)

POOR MANAGEMENT
Performing a job and managing someone else doing a job are two different skill sets. Not only that; there is a difference between management and leadership. Lack of understanding and experience of either can cause a company to implode.

Running a contracting business takes more than skill with construction equipment or the ability to read plans. Business acumen must be learned as well. A company needs someone who knows how to manage people, finances, contracts, and possibly IT. It is a whole new world to many who have spent their lives on jobsites instead of the home office.

Lack of management maturity can feed into the problem. Many new managers don't understand the need for delegation; they try to do everything themselves and fail to keep up. They think as long as they are busy, they are productive, another common mistake we have all made. A mature manager knows how to manage and how to lead. He or she can pass leadership to another effectively and efficiently.

Management problems also crop up during changes in key personnel, not just construction workers but in sales and estimating staff, marketing, operations, and administration, the infrastructure holding up the business.

PROBLEMS IN ACCOUNTING AND BILLING
Accounting and billing seem to be two areas where contractors have the most trouble. Unfortunately, if you aren't worrying about cash flow, the cash will stop flowing.

Failure to evaluate the project for profitability
The contractor relies on the project manager to deliver accurate estimates. The company does not learn whether the project was profitable until it is complete and all payments have been rendered, much too late to change anything.

You should be identifying profit and loss throughout the project.

You need an accountant that specializes in construction. Projects are often active through more than one fiscal period, and many accountants are not knowledgeable about verifying account accuracy that does not take place within a single period.

Poor use of accounting systems
Because accounting sounds like a confusing subject, many contractors do not learn to do it. They leave it to the bookkeeper or, possibly, an accountant. Unfortunately, these positions are not considered part of the construction team and do not have a way to provide input into the decision-making process.

Reporting tends to be delayed, making it hard to determine whether a job is losing money. Poor document management results in overpaying taxes for some contractors. Others, up to 22%, are under a sales tax lien due to non-payment, the highest percentage of any industry.

Poor billing procedures round out the accounting troubles. Late payment is considered normal in construction. Contractors get so busy with the next project they don’t expend the time and effort to collect all payments on previous ones.

On top of that, the bigger the job, the slower the payment. Many customers retain payment, which is illegal, but occurs all the same. Either way, the contractor is not getting paid on time, and neither is anybody else.

Poor equipment cost control
Construction equipment is expensive. Contractors should take a good look at utilization before committing the cash to buying a piece of equipment. If utilization is high, then it makes sense to own and maintain it yourself. If it is something you only use on particular projects, renting will be a better deal; the rental agency maintains and repairs the equipment, and stores it when you are finished with it.

Lack of experience, poor management practices, and problems with accounting and billing are three reasons why contracting companies fail. If all you have done is work construction without learning about running a business, you need to learn about these areas before starting your own contracting company. Surround yourself with knowledgeable people to help make your company great.


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