Volume 35, Number 6, June 2000

Why Glazing Contractors Fail

New Research from the Surety Association of America Helps Glazing Contractors Learn
from the Past to Build Rock-Solid Business in the Future

by Terry Lukow and Richard Kinnaird

 

One only needs to review Dun and Bradstreet’s statistics regarding construction business failures to conclude that contracting is a high-risk business. According to Dun and Bradstreet, nearly 10,000 construction firms failed in 1998, leaving approximately $1.5 billion in debts, according to preliminary surety industry data. But despite that grim statistic, the Surety Association of America (SAA) tells us to take heart. In its seminar, “Events that can Lead to Contractor Failure,” first presented in February 1999 at AGC’s Surety Bonding Committee meeting on Longboat Key, Fla., the association shows how today’s contractors can learn valuable lessons from the industry’s casualties of the past.

In a review of 86 claim cases of contractor failure submitted by SAA member companies, the association found that contractor failures usually had multiple causes. After examining the details of each case and identifying the primary causes of failure, SAA was able to construct a “road map” of the pitfalls and challenges of the contracting business. In the seminar, contractors learn from these findings to help them avoid their colleagues’ fatal mistakes.

 

Top five causes of contractor failure

The review of contractor failure cases indicated that the top five factors related to contractor failure were:

Indicator                         Percentage of Cases that Include this Indicator 

Unrealistic growth                             37%

Performance issues                             36%

Character/Personal issues                     29%

Accounting issues                             29%

Management issues                             29%

Unrealistic growth refers to an expansion in volume, work type, or work regions that is faster than resources allow. Its prominence among causes of contractor failure illustrates the necessity of a strong “infrastructure” (project management, accounting systems and estimating) as a contractor contemplates expansion of any type. A common sign of unrealistic growth is a sudden increase in the backlog before adequate project management resources are in place. In a typical case of dangerously accelerated growth, a project manager who was responsible for four projects may become responsible for eight. Like-wise, estimators who must address a sudden increase in pending bids sometimes find that lead time to prepare for bids is cut in half.

Performance issues—closely re-lated to unrealistic growth—involve the adverse effects of inexperience that are felt most sharply when a contractor expands too rapidly. Taking on a project of unaccustomed scope, type, or complexity creates a steep learning curve, requiring new subcontractor relationships, project management techniques, or record-keeping systems. As contractors confront the learning curve, they will certainly make mistakes. Wise contractors are prepared to manage those mistakes.

Character issues relate to problems that distract key personnel from the business (e.g. divorce, death in the family, substance abuse or emotional problems). One common issue of this sort involves the lack of an adequate business continuity plan in the event of the owner’s death. Without a continuity plan, the company encounters two challenges. First, if the purchase of the owner’s stock is not properly structured, significant financial resources may have to be diverted from the company in order to purchase the owner’s stock from the estate. Second, with the owner’s death, the company may suddenly lack the management talent to continue operations. Difficulties away from the job site are often the cause of a business failure.

Accounting issues involve the failure to maintain solid accounting and financial management systems that accurately track cost and billing information on a timely basis. Many facets of an operation rely on sound cost data, from profit-and-loss computation to thorough preparation of change-order requests. Indicators of a weak financial management system include tight cash flow, slow accounts receivable turnover, or profit fade. A key component of a strong accounting system is a certified public accountant that specializes in accounting for construction firms.

Management issues relate to insufficient or incapable personnel at the upper management or project level. Indicators of poor management include profit fade, failure to complete projects on time and high claim activity. A successful contracting business ultimately depends on coordination among its multiple departments as well as with its subcontractors, suppliers, and other interested parties in order to achieve a common goal—successful completion of the project.

The wide array of failure factors identified by the study suggests that to succeed, a successful contractor continuously must juggle all the issues mentioned herein, including those of staffing, work volume, project management, accounting systems, continuity planning, owner relationships and coordination with subcontractors and suppliers. Because detail and organization are key to dealing with all these challenges, a sound business plan is vital. It sets forth the organization’s primary goals and objectives, providing guidance for the decisions regarding the day-to-day management of business and addressing contingencies for project delays, a business plan gives the organization direction to face the inevitable challenges of the industry.

Armed with an awareness of the reasons that contractors fail and a comprehensive business plan, a contractor will be able to surmount the daily challenges and excel.

Note: This article was originally written to general contractors to the many reasons their companies fail. The principals, however, are true of most contracting companies including contract glaziers.

Terry Lukow is vice president of Travelers Property and Casualty and Richard Kinnaird serves as division vice president for Westfield Companies.

Reprinted from the February 2000 issue of CONSTRUCTOR magazine. In continuous publication since 1919, CONSTRUCTOR is the national magazine of the Associated General Contractors of America (AGC). For more information, visit AGC on the web at www.agc.org.


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