THE CONSTRUCTION INDUSTRY
BY: BARRY MCCORD BOWEN MICLETTE & BRITT
Construction Is A Risky Industry
Construction is a tough business by any standard and failure among small construction businesses is common. According to the US Census Bureau’ s Business Dynamics Statistics, construction businesses fail more often than other small businesses such as manufacturing, retail, and services.
Here are some of the reasons for such high failure rates in the construction field:
1. Highly leveraged balance sheets
2. High project risks with relatively low margins
3. Short supply of qualified labor 4. Cyclical nature of the industry 5. Hard-bid mind-set 6. Relatively low barriers to entry
Players in this market need to retain a strict sense of discipline for the greatest chance of success. While the risks in the industry are significant, they also present opportunities for the right type of businesses. To be successful, contractors must evaluate the risks involved, the potential rewards, their ability to control their losses, and their skill in performing in such an unforgiving environment. Here
are the three most important areas for contractors to address:
1. PROJECT SELECTION Contractors should select projects in areas where they have the greatest proficiency, taking pains to enter new geographic markets carefully and only when resourced properly. Be sure to stay away from red flags such as onerous contract terms and conditions, notoriously difficult owners, and the temptation to reduce bid margins in an attempt to gain volume. And finally, it’ s best if you can diversify your customer base to avoid having“ all your eggs in one basket.”
2. FINANCIAL DISCIPLINE There are several ways to manage your business financially to produce better success and profitability. Be sure to plan your growth carefully so as not to stretch resources too thinly, and preserve enough working capital so you can deliver over the long haul. You should have billing procedures in place that are timely and accurate, and be aggressive when it comes to collecting accounts receivable. Understand fully where your money is coming from and going to within a given time period, making sure you track each project carefully and systematically as it unfolds. Any changes or new expenses since the prior evaluation should be fully discussed and understood. Finally, try to identify problem areas early on and preserve resources to combat the unexpected by keeping overhead low.
3. MANAGEMENT OVERSIGHT It is in your own best interest to oversee the most important aspects of the job, such as the selection of major subcontractors, and provide high-quality supervision of workers out in the field. Always surround yourself with trusted advisors, such as your CPA, attorney, and bond agent. Lastly, remember that early succession planning will help minimize disruption during the transition to a new generation of business owners.
Barry McCord, Vice President at Bowen, Miclette & Britt Insurance Agency, has spent his career consulting with contractors regarding their bonding needs.“ Contractors need to be wary of all of the pitfalls out there in a very competitive industry. The right bond agent can help the contractor improve his operation, avoid risks, and help create conditions for success.”
For a personalized consultation with BMB, visit www. bmbinc. com or call 713-880-7119. +
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