Why Construction Businesses Go Under

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Keeping a construction business operational is a challenge. Not only do you have to win new business continually, but you also have to ensure that your cash flow remains healthy. If you receive a large order, you often have to live off cash reserved for weeks, if not months, before your client pays you. What’s more, you might not have the resources in-house to abide by the SLA, forcing you to incur penalties along the way. 

Here are some of the reasons why construction businesses go under and what you can do about it. 

A Lack Of Cash To Pay Suppliers

Construction companies often find themselves between a rock and a hard place financially. The perennial problem is usually something like this: the client orders a large amount of costly work, but expects you to finance it immediately. You then have to take on risk, paying employees and buying in materials yourself. Later, only after a few weeks or months does the client actually pay you. It can be a nightmare. 

What’s the solution? As a rule of thumb, you want about six months cash on hand to cover all of your expenses, including labour hire. You need to make sure that you have enough money in the bank to continue your operations, even if your client is slow or late in paying you. Furthermore, you want to make sure that you’re not dependent on one client paying you to allow you to carry out work for another.

Not Hiring Enough Workers

Construction is a labour-intensive industry that requires dozens and sometimes hundreds of people to work on a single project. It’s the nature of the operation. Some construction companies, however, can find themselves in trouble if they don’t hire enough labour. 

One of the most common issues is falling behind on a project. Management might believe that they have sufficient workers to get the job done in time for the client. But often they find that they don’t have enough workers to make it happen. Then they end up hiring lots of additional people at the last minute, hoping that they can catch up. It rarely works out that way. 

Top construction companies consult with hiring experts in advance to figure out just how many people they need to complete a particular project. Knowing ahead of time the labour input required for each stage makes a big difference in how long it takes to complete work and the reputation of the firm. 

Buying Plant And Equipment Instead Of Renting It

One of the reasons construction companies often lack cash is that they buy plant and equipment upfront instead of renting it.

The benefits of renting are many. The first is that it allows you to build up a cash pile more rapidly. You don’t have to finance large expenditures upfront. 

Second, by renting you only pay for what you use. There’s no point spending money on large cranes if they’re going to sit in a warehouse unused for large portions of the year. Try where possible to get daily rates on the machinery you use to keep costs down.