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Construction firms face many risks: worksite injuries, skilled labor shortages, cash flow problems, contract disputes, jobsite theft, defects in workmanship and material, weather delays, and supply interruptions, to name just a few.
According to the U.S. Bureau of Labor Statistics, only 56.5% of construction company startups survive after five years. 57.4% close within ten years.
Understanding the obstacles contractors face can help you better appreciate the perils and pitfalls in this field and develop smart risk mitigation strategies.
According to Travelers Construction Surety, there are four leading causes of contractor failures:
One difficult project
Nearly 60% of contractor failures were caused by one catastrophic project. Specifically, these bad projects were often caused by:
- A poor estimate.
- Inexperience. In other words, a contractor’s first project of its type, or in a new sector or location.
- A challenging project owner.
- Weak internal cost controls
Another cause of contractor losses was inadequate internal cost controls or failure to properly use systems that were in place. Some construction companies have difficulty with accurate and timely tracking and reporting of project cost information, especially between the field and main offices. Without timely and accurate information about problems, corrective action wasn’t taken or was too late.
Overextension
When contractors take on more work or larger projects, their backlog of work can extend beyond the capacity of the organization to manage effectively. The contractor’s capacity to properly plan, oversee and execute work gets stretched too thin, leading to mistakes, additional costs and longer than planned schedules.
Cash flow and excessive debt
Cash flow can be one of the most challenging things in managing a construction company. Excessive debt can add to cash flow problems, especially where there has been overextension in the backlog, and the company must absorb unexpected costs.
Warning signs
These are the more consequential risks you’re faced with today, but there are other risks as well. The Surety Information Office has compiled a list of warning signs that your construction firm may be experiencing:
- Ineffective financial management systems
- Bank lines of credit constantly borrowed to the limit
- Poor estimating or job cost reporting
- Poor project management
- Lack of a comprehensive business plan
- Communication problems
- Managing subcontractors
Construction may be risky, but you can take measures to protect your company. High among those is managing the risks your subcontractors bring to a project. These exposures can cause immediate, long-term, and sometimes irreparable harm to your projects. The following precautions will go a long way toward ensuring your project is satisfactorily completed, and your firm is financially strong at the end:
- Vet subcontractors thoroughly before hiring them
- Make sure they are licensed, bonded and insured
- Hold subcontractors to contracts that clearly state job requirements and establish who is liable for what
- Communicate with subcontractors regularly
- Establish a detailed work schedule
- Document job progress
At FIFS, we can provide risk assessments to identify potential gaps in coverage, so your business doesn’t take a hit if something bad happens.
