(New Information Added 10/23/2014)
There’s no widely available statistical evidence that construction contractor businesses fail more than other types of companies. There is however, a lot of reporting to that effect, but writers arrive at their conclusions by misinterpreting data or using data of questionable value.
A primary source of business information in the US is the Census Bureau, and people regularly use its data to draw the conclusion that construction has a high business failure rate. However, the Census Bureau makes it perfectly clear that it doesn’t have data on business failures. Writers assume the bureau’s references to “deaths” of businesses means the businesses failed. But businesses also simply close for many reasons, and the bureau’s use of death doesn’t distinguish between closings and failures.
Old References Too
People also use old information when researching and reporting on the topic. For example, a 2013 paper on business failure used 1991 and 1992 sources to justify the conclusions that construction bankruptcy rates were increasing in recent years, and that construction has the highest percentage of company failures each year. Other sources will refer to things like “the percentage not operating” after 1, 2, 3 or more years. “Not operating” can be for many reasons that have nothing to do with failing.
The Census Bureau’s, Business Dynamics Statistics tracks the openings and closings of businesses in all industries. It shows construction having a fairly stable rate of business closings from 1977 to 2011, the latest year data are available. Except for 1980, 1981 and 2009, construction typically had about 10% of its businesses close every year for many reasons, not just because they failed.
Reasons Construction Contractor Businesses Fail
During the past few years it’s been excusable to look at failed contracting businesses and assume the cause was the economy. To a small degree that may be true since the construction expansion that took place before the recession would have fueled growth in the number of contractors – more work, more contractors. As business waned, some had to go. Still, the reasons cited for construction contractor business failures haven’t changed much.
References I found from 2002 to late 2011 all cited the same factor as the number one reason – unrealistic growth. The kinds of activities construction companies were engaged in before they went belly up included expanding into unfamiliar territories, taking on larger and larger projects, and taking on projects where they had little experience. Some firms simply bit off more than they could chew by getting on fast track expansions for reasons they would later admit were based more on hunches than on careful study.
Performance & Leadership
Before the great recession, the second reason cited for construction contractor business failures ranged from taking work in new geographic areas to having “volume obsessions.” One source even found that people who go into contracting often have ego-based time bombs waiting to explode at the most inopportune times. But today, the second most-cited reason that construction contractors fail is performance problems. These manifest when contractors themselves or their people don’t have the experience needed for new types of work, or work that has a wider scope. Not having enough people also leads to performance problems.
The third reason that construction contractor businesses fail is because of changes in leadership. An owner retiring, dying or becoming disabled creates major challenges for everyone involved. This is especially devastating when there are no plans for continuity so an orderly and well-thought-out transition can happen. Changes in leadership also occur when a business is sold or when business owners shift the focus of the company. Anytime the leadership in construction businesses changes it makes them more vulnerable to failing. Even if the new leadership is more experienced, more disciplined and more focused, the potential changes they bring to the company culture coupled with how employees respond to that change, will have a significant impact on the company’s success.