We didn’t need a pandemic to expose the construction industry’s potential vulnerabilities. Long before the pandemic, the industry was in the depths of a variety of ongoing challenges, felt most by small construction businesses. Odds are against anyone starting a small construction business and still being in business after 5 years.
According to the Small Business Administration (SBA), the average small business failure rate is:
- 20 percent fail in the first year
- 50 percent fail within five years
- 67 percent fail within 10 years
While these numbers are astonishing, the failure rate is worse for construction companies, as 63.5 percent fail in the first five years. And according to a 2017 Fintech Report, of all industries, Construction has the lowest success rate for small businesses.
1. Not hiring the right people
At the core of every business are people. Steve Jobs, Co-Founder and former CEO of Apple said it best - "It does not make sense to hire smart people and then tell them what to do, we hire smart people so that they can tell us what to do". This is why the pre-hire screening process is crucial, particularly in interviews. The best advice is to ask the candidate open-ended questions, and make them prove to you that they are a fit for the job given their experience. These questions should be task/project-oriented, as well as questions focused on their personality, work ethic, and problem-solving skills.
In addition to the typical interview, it's becoming increasingly popular that the candidate meets with a supervisor they'd be reporting to as well as the crew they'd be a part of. How candidates connect with the people they may be spending 40+ hours a week with can be very telling and help differentiate who is the right vs. wrong fit for the position.
2. Starting the business for the wrong reason
Money should never be the main reason for starting a business. The idea behind each business' creation is a purpose. Why are you in the asphalt business? "To make money" is not a legitimate answer to this question. Behind every successful small business is a purpose, or passion. Is your small paving business' purpose to make money, or to improve the roads and well-being of the people in the community that use them?
To help instill these ideals into the company workforce, build a strong mission statement for the business, and display it clearly for all to see. Then, each decision made for the business going forward should always accurately reflect this mission statement.
3. Financial mismanagement
Many construction companies can’t track if they’re making or losing money until the very end of the fiscal year. I’ve even seen companies that fail to bill for all or their work because they are so busy completing projects and doing estimates for new projects. Good financial systems are an absolute must so those types of things do not happen. This includes an accountant, financial manager, or even digital accounting software. Tracking expenses and revenues can help reduce the number of surprises on the books including:
- Chasing what is owed
- Lack of reserve capital/being underfunded
- Intermittent revenue stream
- Capital equipment costs
4. Poor leadership/Management
We've all heard the saying, "Good workers don't quit companies, they quit managers". This adage continues to be true and consistently relates to the success and failure of small businesses. The leadership/management style has a profound effect on people and the organization's culture. When appointing leaders to manage a section of the business, it's important to know their leadership styles.
- Are they more task or people-oriented?
- Are they more authoritarian or democratic when making decisions?
- How do they like to delegate tasks?
- How do they motivate team members?
If you want to create a great place to work, focus on the people.
5. Inefficient operations
One of the biggest reasons why a small construction business may fail is that the team's time isn't being used efficiently. Inefficiency rarely happens in obvious, large instances. Most of the time, Inefficiency impacts the business in 10- or 20-minute increments. Take improper scheduling as an example. Let's say a ten-person crew is standing around on a jobsite waiting for a truck to show up with materials to continue the project. Over the course of the year, this type of wasted time can add up to the point that all profitability is greatly affected.
6. Lack of effective marketing
Marketing is all about what makes the business stand out. How is your business different than other construction businesses in the area? Why should someone choose your business over the competitors? Answering these questions comes down to having a value proposition.
This statement is what lets consumers know the value they can expect to be delivered from your business. Below are two examples of value propositions.
- "Your total source for asphalt paving and maintenance."
- "Voted "Best of the Best" 2 Years in a Row from the Saginaw News."
This statement helps consumers understand the priorities of the business. Is the priority material quality? Customer service? Variety of services offered? Let consumers know right away with a strong value proposition.
7. Lack of customer service
Consumers want to be treated like people, not as sources of income. If they aren't treated as such, expect them to move on to another competitor. According to Bain & Company, a customer is four times more likely to defect to a competitor if they encounter an issue that is customer service-related versus price- or product-related.
8. Growing too quick
While growing a construction business quickly is exciting, businesses need to look out for red flags that signal an unsustainable trajectory. When a business is growing too rapidly, it increases the demands on every employee, and the team as a whole. This can easily lead to stressed-out employees and result in low morale. It is important not to overpromise, especially in the beginning.
9. Equipment costs
It may be tempting to invest in a large fleet of construction vehicles and equipment right away, equipment costs are one of the biggest expenses for new construction businesses. In addition, many business owners do not consider the added costs of maintenance and equipment downtime. In accordance with the previous 'Growing too quick' advice, try to start small and focus the business on a few popular or high-profit areas of construction to help reduce the amount of equipment and machines needed and increase profitability.
10. Lack of planning
No business should be founded in the absence of a well-throughout, comprehensive business plan. This plan should account for the opportunities within the local market as well as take into account the competition. You should be very familiar with what the competitors are doing well and what they do not do well, and how your business will take advantage of this opportunity.
It is unlikely that a new business can compete with a well-established competitor in the same market, which is why it is crucial to pre-plan and understand how your business will be profitable despite the competition.
About the Expert
Larry Kokklenberg, PHD is a principal in Organizational Trainers & Consultants, a dynamic consultancy serving both the public and private sectors. This article is based on the presentation Larry gave at World of Asphalt 2022. For more information on education sessions, see here.
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