Construction Business Management


A Look at Contractor Failure: Part 1

It's been said that construction is the riskiest business you can get into. What are the reasons?

Anyone who has met all the regulatory requirements can call himself a contractor and attempt any project an owner is willing to give him. The new contractor usually is someone who has achieved some success as project manager, superintendent, or executive in another construction firm and has decided to do it on his own—often before he has acquired sufficient capital and management experience. Being a good project manager or other employee does not directly translate into being successful at running the business of construction.

Some states license general contractors, but a license does little to ensure good business management. Licensing authorities usually require certain financial information, but a contractor's income statement and balance sheet are a snapshot taken at an earlier date and may have changed for the worse. There are some advantages to licensing, and some states' licensing requirements are more effective than others', but licensing is no guarantee of a contractor's viability.

Licensed or not, a hungry contractor may be tempted to take on a project that's outside his realm of competency and financial capability. An astute project owner (through his architect, CPA, or attorney) can do a much better job than any licensing authority is likely to do in determining a contractor's qualifications to build his project, including length of time in business, financial strength, qualifications of key personnel, experience with projects like the owner is awarding, favorable recommendations from the contractor's earlier clients, current workload, and the contractor's experience in the locale of the project under consideration. Softness in one of these areas may or may not be a deal killer but should be considered in light of the project at hand because it can result in problems for both contractor and owner, ranging from minor to catastrophic. But unfortunately for both owners and contractors, contractor background checks are often superficial.

A contractor who starts with too little capitalization, hoping he can generate some profit before he runs out of money, is out on a limb. For instance, the owner can be slow in paying, or the job could turn out to be unprofitable; meanwhile, the contractor's expenses eat up the limited cash he started with.

Please watch this site next week for A Look at Contractor Failure—Part 2.

The author of this article, Nick Ganaway, was a successful general contractor for 25 years. He is a consultant in Atlanta, Georgia for contractors and other small business owners. Nick has described how to set up and manage a construction business that is profitable, enjoyable, and enduring in his book Construction Business Management: What Every Construction Contractor, Builder & Subcontractor Needs to Know.


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