7 reasons why most of the construction projects and contractors fail
Construction is a critical industry that is essential for building and maintaining infrastructure. However, it is also an industry that is plagued by a high rate of failure. According to research, approximately 20% of construction companies fail within their first year of operation, and around 60% of construction companies fail within their first five years of operation. So why do so many construction companies fail? This article explores the various factors that contribute to the high failure rate of construction companies.
Intense competition and low margin
First of all, the construction industry does have one of the lowest margins. During the tender stage margins can be up to 15 – 20%, but in the end when the project is finished in the best case it comes down to 10%. And the average margin for the construction industry is 2-5%.
Imagine how low that is. These margins are low because there is a lot of competition; everyone is always fighting for the lowest price.
According to a report by IBISWorld, the top four companies in the construction industry account for less than 10% of the market, leaving the remaining market to be divided among numerous smaller companies.
No cash, no business; cash is king. It depends on the scope of the contractor, but sometimes the set up costs for a new project can be up to 60% of the total price. So for those contractors who need to inject a lot of cash to start the project, it can be hard to maintain cash flow. Very often, general contractors can hold payments, and in such times, the schedule and whole planning will be jeopardized. Also, once the project starts to go out of the project and starts to squeeze the whole cash flow things go bad very quickly. Besides, don’t forget that the average margin is only 2–5%.
Shortage of skilled labor
There are so many jobs that can be done on site: foundations, concrete works, roofing, facades, plumbing, electrical works, tiles, painting, and so on. Each one of those tasks can ask for many different skills. You might be good at installing drywall but fail with plastering. So most companies, especially specialty contractors, have to train their own workers. A lack of skilled workers very often doesn’t allow companies to expand as quickly as they would like to. Hence, when a contractor gets too many projects, he can start to face a shortage of skilled workers. Which then results in delays and contract penalties.
Lack of planning
One of the main reasons why construction projects fail is a lack of planning. Proper planning is essential for the success of any construction project, as it helps to ensure that the project is completed on time, within budget, and to the required standards. However, many construction companies fail to invest enough time and resources into the planning phase of their projects. This can lead to a range of problems, such as unexpected delays, cost overruns, and safety issues. Without proper planning, construction projects can quickly become chaotic and disorganized, making it difficult for the team to work efficiently and effectively.
To survive, you need a constant flow of projects to generate cash flow. In a best case scenario, contractors would like to finish one project and then move on to another. In reality, projects overlap, and very often there is a gap before the next one or there are no new projects.
So why does this happen?
The contractor sales team must work together with the site team; they have to know when the work will be finished, look for alternative projects, and pay more attention to those clients who will fill these gaps first. Also, very often, sales teams are not trained well; they don’t know how to do outreach for new projects or how to do cold emailing. And of course, basically none of the contractors are doing SEO.
Too often, change orders are not managed well. They quickly became a major problem for the project and contractor. Unmanaged change orders can cause delays, cost overruns, and conflicts between the contractor and owner. When they are not properly documented, tracked, and approved, it can lead to misunderstandings and disputes over payment and responsibility. Contractors may also be tempted to cut corners or rush through work to complete the project on time, resulting in poor quality work that can harm their reputation. Therefore, it is essential to have a proper change order management system in place to ensure that all changes to the project scope are documented, tracked, and approved in a timely and transparent manner.
Lack of use of new technology
It is so strange that contractors are not using the latest technologies. They spend so much money on the latest Hilti, Milwaukee, and other tools, but they are spending nothing on the latest software technologies. Research says that around 9 out of 10 projects are having cost overruns, so basically every project is having problems. Imagine that the same thing would be happening in production, that with every 9 out of 10 products there would be some problem. One of the biggest and oldest construction softwares is Procore and eSub; together, they may have around 16 000 clients. And they have been on the market for more than 20 years. They are like Coke and Pepsi in the soft drink industry. Of course not all of the softwares are useful and you need to do research. Using construction software that is aiming to increase productivity, forecasting, or document management will increase contractors overall performance. Construction software companies are investing a lot of cash in ways to improve the overall construction industry, yet they face a lack of interest from clients.
In conclusion, the construction industry is a critical sector that is essential for building and maintaining infrastructure. However, the industry is plagued by a high failure rate, with approximately 20% of construction companies failing within their first year of operation and around 60% failing within their first five years.
This is due to several factors, including intense competition, low margins, cash flow issues, a shortage of skilled labor, poor planning, change management, and a lack of use of new technology. Around 90% of projects are facing cost and schedule overruns, while maybe 10% of contractors are using the latest construction software and advancements. Those who do use software like PlanUpPro are always aware of their schedule and budget. The software is calculating and rescheduling itself for you.
Author – Emil Berzins. Follow me on