Contractor Business Failure
Don't become a statistic
The primary cause of business failure among small business owners can be directly tied to management mistakes. The owners simply did not have the management skills or discipline to make the business successful. While statistics vary widely on the actual percentage of businesses that fail, the consensus among all the studies is the cause.
Over the last 20 years I have worked with thousands of contractors as a business consultant, management coach and trainer. For the most part, I have found that these contractors have invested the time and money to become proficient, if not excellent, at their trade. Unfortunately, when it comes to running a successful business, contractors fare no better – if not worse -- than other small business owners.
The Contractor’s Success Center was established to help Utah contractors build and manage a profitable business. We identify areas where contractors need assistance and develop products and services to match those needs. That analysis has included studying business failures among contractors to learn the causes so that we can help our clients avoid them.
This effort has lead me to a study recently published by the Surety Information Office (SIO), a joint venture of the Surety & Fidelity Association of America and the National Association of Surety Bond Producers. According to that report, 20% of the contractors in business in 2006 had closed their doors by the end of 2008. Those numbers likely increased in 2009 although the numbers are not yet available.
These are certainly alarming numbers. And, because this study only included bonded projects and contractors, the actual percentage may be considerably larger.
While the downturn in the economy is often cited as the cause of the failures, the truth is that all the contractors operated within the same economic climate. The economic environment is an external condition to which the entire population of businesses is exposed. While it is certainly an influence; it is not a cause. Causes are typically internal conditions that prevent a specific business from effectively dealing with an external condition. This is confirmed by the SIO.
According the SIO, the primary reasons for failure among those studied were:
Unrealistic Growth (37%)
• Change in type of work performed
• Expansion into a new geographic area
• Significant increase in the size of individual projects
• Rapid or over-expansion
Performance Issues (36%)
• Inexperience with new scope or types of work
• Personnel do not have adequate training or experience
• Insufficient personnel
Character Issues (29%)
• Contractor retires, dies, sells company, changing leadership or focus
• No ownership or management transition plan to ensure continuity in the event of death or disability
Accounting Issues (29%)
• Inadequate cost and project management systems
• Estimating or procurement problems
• Lack of adequate insurance
• Improper accounting practices (not adhering to the AICPA Audit Guide for Construction Contractors)
Management Issues (29%)
• Key staff leaves company
• Staff inadequately trained on company policy and operations
• Insufficient or incapable personnel at upper management or project level
• Failure to maintain solid accounting and management systems to track costs and billing
According to FMI Corporation’s “What Makes a Good Contractor?” by Stuart M. Deibel, good contractors share these characteristics:
Organization
• Formal and on-the-job training for all levels of employees
• Logical, incentive-based compensation plan
• Tenure for proven field superintendents and internal promotion when possible
• Depth at all levels of the organization
• Succession planning
• Up-to-date, distributed organization chart
• Culture of loyalty, ownership, and urgency
• Visionary, inspirational leadership
• Low turnover
Finance
• Solid management of cash flow and overhead
• Profit-focused company
• Timely payment of bills
• Management of debt and retention
• Reasonable growth without overextending resources
Marketing
• Superior estimating skills and systems to manage costs
• Satisfied customers
• Well-defined market niche and 12-36 month growth plan
• Company culture where everyone is a great salesperson
Project Control
• Closely managed projects with early warning systems to catch potential problems
• Litigation avoidance
• Productive field managers trained to improve processes
Planning
• Disaster preparedness
• Continuity plan with:
• Adequate life insurance coverage
• Shareholders’ agreements detailing buy-sell agreement for multiple shareholders
• Only qualified and interested family members in management
• Detailed business plan
• Strengths, weaknesses, opportunities, and threats
Contractors succeed in their business by doing the same things that make them successful on the job.
• Have and follow a blueprint (business plan)
• Build and follow a solid foundation of systems and processes
Ultimately, contractors must learn and apply the requisite skills of running a successful business. If the recent downturn in the economy has taught us nothing else, it is this: reliance on luck and outside influences for profit is just not a good business practice.
Success will start with a well-conceived business plan and continue with concentrated focus on doing the right things. Just as there is no short cut to building a structurally sound building, there is no short cut to building a financially sound business.