In 2001 the average number of establishments in the US construction industry was around 770,000. Sixteen years later, after surviving the economic collapse and recession, it has just now started to pass the 770,000 mark and is fighting to grow back up to pre-recession levels. Despite this positive growth, new construction startups have the worst survival rate out of eight different industries clocking in at about 36.4 percent. This leads to the question of why so many contractors are failing to keep their businesses afloat and what can be done to reverse the trend. Here, we will explore five root causes that lead to a business’s collapse that the Fails Management Institute (FMI) identified in a recent analysis of the construction industry.
Cause 1: Poor Strategic Leadership
While it may seem obvious that poor leadership leads to a company’s failure, what’s not obvious is that two major reasons for poor leadership are mismanagement of a company while transferring its ownership and a lack of strong company culture and vision. As many entrepreneurs reading this may know, it takes a strong leader to get past the initial hurdles of creating a startup. However, many new businesses fail to anticipate the loss of their leader when they inevitably retire or move onto new projects. This leads to unqualified people stepping up to the reins and unintentionally leading a business into the ground. Furthermore, even if the founder of a business is in for the long haul, a poor company vision and culture can lead to employees being confused about how to work towards ensuring the company’s sustainability.
Cause 2: Hubris & Complacency
A frequent symptom of the above cause is that business owners who survive the initial obstacles of starting a business can often fall into the trap of thinking they are invincible. In fact, even companies that manage to reach a large national presence can fall to this temptation of thinking they are untouchable and find themselves out of a job before they realize what is going on. One recent example was the bankruptcy of the UK’s second-biggest construction firm Carillion who was overconfident in its bidding, which over the course of seven years lead to an accumulated debt of about $1.35 billion. Despite attempting to expand its presence into a variety of services (including the management of public sector jobs such as providing school lunches) it ignored the warnings of overreaching on contracts and incorrectly believed it was too big to fail.
Cause 3: Overwhelming Changes
Now, initially this may seem a bit confusing as all companies need to change and adapt in order to keep up with the ever-evolving marketplace. However, the caveat is that change is only good when it is done at an appropriate pace. An FMI study of one-on-one interviews with ex-owners revealed that in 90% of cases, a critical issue that led to a company’s collapse was too much change in too short of a time frame. While the circumstances of what changed varied between businesses, what stayed consistent between them were trying to tackle so many things at once that it led to a breakdown in processes and eventually the functioning of the business itself. Gino Wickman, the author of Traction, referred to this distraction from your companies core business as Shiny Object Syndrome and warned that while innovative change can seem attractive they often lead to a lot of time, money, and effort being wasted.
Cause 4: Discipline Breakdown
One of the biggest issues to contractors that enter the beginning phases of growing their company is a breakdown in the discipline as new employees enter their workforce and begin to change the structure of the company. Owners who fail to account for these changes by not implementing clear and concise processes and systems for how the company should manage its services often find themselves bogged down by bureaucracy and a lack of focus. This can quickly lead into employees becoming disconnected and disengaged with their jobs which leads to a vicious spiral of poor customer interactions, poor sales, and eventually an inability to support your payroll.
Cause 5: Lack of Capital
Having cash is essential to operate a business and within some industries, like construction, one job (depending on its size) can determine whether a company will have a successful year or not. In fact, construction projects are unique in that while there is a hard cap on the amount of potential profit that a project can earn, there is no limit to the amount of money you may lose if it is poorly managed. This pitfall of projects going catastrophically over budget is so common that Podio.com has created graphs showcasing some of the biggest examples such as the Hubble Space Telescope going 525% over budget and the Sydney Opera House clocking it at 1357% over budget.
What can be done?
Overall, all of these causes that lead to contractors and small business failing boil down to the owners not taking the steps needed to properly outline and follow through with a plan to make their businesses scalable and flexible enough to adapt to changes in the market. The A Z Advisory Group (AZA) specializes in addressing these problems through the guided implementation of key tools which help you focus on your business core operations and infrastructure. By concentrating on developing key areas of your business, we help to organize your employees into a well-oiled machine that can not only forecast and identify issues before they become full-blown problems, but also effectively take them on through their own initiative. If you would like to learn more about AZA, contact us at any time to see how we can help take your business to the next level.