3 Reasons The Construction Industry Has The Highest Business Failure Rate
Written by Shahn Ellis on July 24th 2019
While almost half of all small businesses fail within the first five years, the statistics are much worse for construction companies, with only 36.4 percent ever surviving until their fifth year of business. In fact, of all industries, construction has the lowest success rate, and here's why.

1. CASH FLOW

If you guessed money was part of the problem, you guessed correctly. Steady cash-flow is essential for any small business. Unfortunately, construction companies just don't have it.

In most industries, customers adhere to 30-day payment terms. This typically isn’t the case in construction. The general contractor pays their subs when they get paid, and the money trickles down the line. It's not uncommon to see 90 to 120 days of past-due receivables.

Combine that with another cash management problem: job costs. Not only are you paying overhead while waiting for cash, but also buying materials, paying for labor, and racking up travel expenses while you wait.

Often, cash management problems happen quickly. One day you're doing business, then your suppliers have suddenly cut you off for nonpayment, and you can't finish a job or even worse, you put your personal finances on the back burner to make sure everyone else gets paid. 

2. FAST EXPANSION 

Expansion isn't always a good thing, especially if it happens too soon. Small construction companies often want to bid every job, taking any work that comes their way. Even if the work isn't profitable. This can be a huge mistake. In the beginning, it's much better to focus on jobs that require little expense upfront and solidify your pricing model before scaling and taking on more overhead.

3. LOW PROFIT MARGINS

Low profit margins often go hand-in-hand with fast expansion and cash-flow problems. You want to bid low enough to get the job, but you should always know your bottom number and stick to it. Don't be afraid to lose an opportunity because your bid was too high. Instead, be selective about the work you take on, even if it means skipping some bid opportunities or naming a number that you know won't win. It's much better to have five well paying jobs than 15 that hardly pay the bills.

While growing a construction company is stressful, it can also be very profitable. You can beat the odds if you focus on your cash-flow, avoid taking every job that comes your way, and never settle for low profits.

Shahn Ellis


Shahn Ellis helps Subcontractors lock in big profits, end cash-flow issues, and get their freedom back. He has personally built and managed a successful 7 figure subcontracting business which he recently sold to Consult full-time. If you are a Subcontractor who wants less stress and more income, definitely reach out and request a free strategy session today.
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