Construction Business Management


A Look at Contractor Failure: Part 2

As noted in Part 1 of this article, the contractor’s or builder’s objective must be to keep the company viable during the downturn and ready to spring back quickly when the economy thaws.

The state of the economy is often given as a reason for contractor failure. Despite today’s economy, "bad times" alone do not provide an automatic excuse, because economic downturns are a certainty and good management practice means having a plan to deal with such predictable events even if their timing is unknown. But if the economy tanks early in the life of a contractor who hasn’t had to manage through hard times in the past or who hasn’t built up cash reserves, he is vulnerable. Many contractors fall into this category and some fail.

The contractor's greatest risk is during his first few years in business. Always be aware of your vulnerabilities and be prepared to take the action necessary to save yourself from a non-recoverable situation. For example, you desperately want to keep all of the employees who are so valuable to you, but when times are bad you have to weigh that against your need to survive the current raging storm and be in a position to rebuild when it's over, which means making the very difficult decisions about today’s payroll and other expenses.

Be aware that job costs and overhead expenses will keep coming through the pipe long after the valve is cut off at the source and can eat up the reserves you're counting on to see you through the problem you're faced with. Weigh this lag factor when timing any downsizing.

No one has better described the reasons for contractor failure and how to avoid them than Thomas C. Schleifer in his book, Construction Contractors' Survival Guide. The opening sentence in his preface summarizes his philosophy: "Your management decisions alone determine whether you will succeed or fail in the construction business."

Schleifer knows. As a consultant to the surety (bonding) industry for a decade, his work with contractors in trouble afforded him an internal view of the circumstances that brought on their problems and the management decisions behind them. Before that, he was a general contractor.

I am particularly familiar with Schleifer’s work because it had an important positive impact on my business. In his book, he identifies ten major areas of risk and I used it regularly in employee training. His lessons undoubtedly steered me away from more than one risky decision.

Schleifer does not say the identified areas of risk are to be avoided—only that they must be approached with awareness and proper planning. That advice has a broader application as well: Don’t allow the risk to keep you out of the construction business, just approach it sensibly and responsibly.

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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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