5 Reasons Construction Firms Fail (and How to Avoid Them)

The construction industry is the backbone of our society, shaping our cities, infrastructure, and living spaces. But, behind the towering cranes and bustling projects lies a harsh reality: construction firms face a high risk of financial failure.

In today’s economic climate, with material costs fluctuating and the threat of recession looming, financial stability is more crucial than ever for construction companies. At Bell & Company, we have experienced a marked increase in construction firm directors contacting us due to financial difficulties. While the issues they face differ in each case, there are common themes we have been able to identify.

Here are five common reasons why construction firms fail, and how you can avoid these pitfalls:

1. Inaccurate Budgeting and Cost Control

Construction projects are inherently complex, with numerous variables that can impact the bottom line. Inaccurate estimates, competitive bidding environments, and a lack of contingency funds can all lead to cost overruns and project delays.

For one of our clients, an error during the initial planning phase led to higher costs during the build phase. These additional costs led to budget overruns and forced the company into a position where they had to halt the build or risk compromising on quality. We have had hundreds of clients who have been in these positions; our debt solutions team are always able to provide clarity on expected outcomes, timelines and ramifications; this approach helps our clients plan their projects more efficiently.

2. Debt Management Challenges

Debt can be a powerful tool for growth, allowing firms to take on new projects and expand operations. However, if not managed properly, debt can quickly spiral out of control. Construction firms are particularly susceptible to this due to long project timelines and unpredictable cash flow.

A recent client had submitted a bid with lower profit margins and a plan to rely heavily on debt financing to cover upfront costs. Project delays and cost overruns depleted their cash reserves, forcing them to take on even more debt. Our team conducts thorough due diligence before providing clients with a tailored strategy. This approach ensures we’re able to provide specific and strategic guidance on business operations to assist with cost reductions in other parts of their businesses, including the reduction of overheads to allow for business growth.

3. Cash Flow Issues

Unlike many industries, construction projects have uneven income streams. High upfront costs for materials and labour can strain cash flow early on, while lengthy payment cycles from clients can create a gap between expenses and income.

Despite a client managing their finances well through several large-scale projects, a major client withheld payments for several months, citing minor disputes. This delay disrupted the company’s cash flow, making it difficult to cover payroll and purchase materials for other projects. We negotiate with lenders daily, always taking a commercial and pragmatic view to ensure a favourable outcome can be reached. In these cases, we’re able to negotiate with lenders to implement temporary repayment arrangements to reduce financial obligations and safeguard our clients by mitigating personal exposure.

4. Unforeseen Events and Economic Downturns

The construction industry is no stranger to unforeseen events. Material price fluctuations, labour shortages, and economic downturns can all disrupt projects and wreak havoc on finances.

During the COVID-19 pandemic, the cost of wood increased by 539% between April 2020 and April 2021. This, alongside the current economic downturn, has led many of our clients to face the reality of Liquidation. We have been able to help them through this process, ensuring they are fairly represented and protected from the worst impacts, including when personal guarantees have been called in.

5. Poor Financial Management

A lack of proper financial planning, forecasting, and risk mitigation can leave construction firms blindsided by challenges. Without a clear understanding of their financial health, firms are unable to make informed decisions or adapt to changing circumstances.

One of our clients ran a scaffolding company and, unfortunately, due to poor risk management, had an accident in the workplace that led to an employee being injured. As the client lacked the proper insurance, they were faced with the prospect of closing the business due to a hefty claim against them. We were able to work with them to ensure the directors fulfilled their duty to the injured employee while also taking steps to protect the business.

Building a Strong Foundation: How to Overcome These Challenges

Fortunately, there are steps construction firms can take to build financial resilience and avoid these pitfalls.

That’s why our team at Bell & Company have worked tirelessly to bring you our LATEST Construction Debt Management guide. It provides valuable insights and actionable strategies to help construction firms:

• Develop accurate budgets and cost-control measures.
• Implement effective debt management strategies.
• Optimise cash flow through improved financial planning.
• Mitigate risks associated with unforeseen events.
• Strengthen financial management practices.

Beyond the Guide: Partnering for Success with Bell & Company

We understand the unique challenges faced by construction firms, that’s why we offer a range of services specifically designed to help you navigate the financial complexities of the industry and achieve long-term success.

Download your free guide today and discover how to avoid financial failure and protect what matters most to you. Additionally, consider scheduling a free consultation with Bell & Company to discuss your specific financial needs and explore how our expertise can help you build a stronger, more resilient future for your construction firm.

Don’t let financial difficulties hold your business back. Take control and build a foundation for success.