The construction industry often attracts new businesses due to the relatively low barriers to entry. But starting a construction business isn’t the real challenge; the harder part of owning a construction business is keeping that business going long-term. According to the U.S. Bureau of Labor Statistics, only about 75% of construction businesses survive their first 2 years in business. At 5 years out, the failure rate is over 40%.
Compare that to franchise businesses, which have a much higher chance of success. According to a five-year study performed by the franchise consulting firm FranNet, they reported that 92% of their franchise placements were still in business after two years and 85% after five years. In our recent post on “Home Services Franchise Opportunities Guide” we talked about the advantages of franchise business ownership, which explains why the failure rate for franchise businesses is so much lower than startups.
While less rare, failure does happen. And there are dozens of reasons why construction franchises fail. But most of the time, failure isn’t the result of one single issue. Rather, there are usually several mistakes and contributing factors that lead to the failure of a construction business. While some of these factors may include outside forces (a recession, for example), more often, construction businesses fail due to issues from within.
In this article, we’ll take a closer look at common reasons a construction franchise might fail, and ways to avoid making these fatal mistakes.
Insufficient Cash Flow
A big reason why construction companies fail is problems with cash flow. Cash flow problems may seem simple on the surface, but are more often the result of other issues with business operations or systems. For example, insufficient cash flow may be caused by any or all of the following problems:
Charging too Little
One reason a company may not have positive cash flow is because the owner may not know how to correctly bid each project. Job costing is a skill that any construction business owner must develop to keep their business going. If you are not charging enough for your products and services, obviously this is going to eat away at your profits and, over time, cause you to lose money.
Lack of Agreed Upon Payment Schedules
Another aspect of cash flow is timing. Construction franchise businesses need to be paid for the work completed in a timely manner, or serious cash flow problems can result. This is a very common problem for struggling construction businesses, who probably lack an agreement about payment schedules with their client(s). If you don’t know when (or if) you will get paid, that can wreak havoc on every aspect of a construction business.
Insufficient Number of Profitable Sales
Closely related to bidding projects correctly is the need to ensure each sale is actually profitable. Construction businesses, especially individual start-ups, are notoriously bad at tracking the profitability of their sales. These business owners have no idea whether they are actually making money on completed projects or not, and rely on working as hard and as fast as they can to stay afloat. But working harder won’t be enough to keep the doors open, not if the business isn’t completing enough profitable projects to keep cash flows in the black. To stay on top of income and expenses, a business owner needs a good accountant to track project numbers and produce quality financial reports.
Insufficient Cash Flow
Cash flow problems are a common reason why construction companies fail. Not having a positive cash flow can cause a business owner to start to make hasty decisions and take on unprofitable jobs, just to stay busy. The problem is that this strategy actually makes cash flow problems worse. And because most construction businesses are also small businesses, even temporary cash flow problems can be a disaster. But cash flow problems are not inevitable. A better solution is to choose a roofing franchise business that can train you how to bid correctly, track sales data, and use that data to keep the cash flows flowing in the right direction.
Lack of Organization, Processes, & Data
Next to cash flow problems, a lack of organization, processes, and data often leads to the downfall of a construction franchise business. In other words, construction businesses that don’t offer contracts, document change orders, or have a way to measure job performance often find themselves struggling not only to find new business, but to keep the doors open at all.
Lack of Legal Contracts
It’s a common practice of many general contractors to rely on verbal agreements or a hastily scribbled document, if anything at all, to start a project. This approach has disadvantages not only for the client, but for the business owner as well. If a disagreement arises, there is usually little documentation to rely on to ensure that both you and the client get what you are expecting out of the project. Without a legal contract, it can be nearly impossible to recover full payment from a recalcitrant client.
Lack of Change Orders
Another common reason that construction franchise businesses can fail is not carefully documenting change orders. It may seem like a time-saver to simply do the work the client asks for, with many construction business owners assuming that they can settle up with them later. But in the midst of a project, it is easy to become disorganized and to lose track of changes, especially if the client makes several requests along the way. Not only can this result in an unhappy client – adding on extra charges without a change order has made many a client angry! – but can make collecting your fee much more difficult.
But perhaps one of the biggest problems that can cause a construction franchise business to fail is poor project performance. One of the realities of a construction business is that a client’s perception of quality starts from their very first interaction with the business. This is often when they first contact the business for a bid. After that, they will typically base their opinion of the work not only on whether the work gets done, but how well it gets done. For example, things that clients typically cite as a reason for their poor experience with a construction company include:
- Poor/insufficient communication
- Inability to meet deadlines
- Inability to adhere to a schedule
- Low quality work
- No clean-up after the job is done
Each of these elements becomes part of the client’s experience and, ultimately, will influence their opinion of the business. In today’s world of online reviews and social media, few construction companies can survive a lot of bad customer reviews. But if a construction franchise business doesn’t have a strategy and system in place to not only track project performance but customer reviews, as well, chances are that this oversight will lead to business failure.
Failure to Plan
Perhaps you’ve noticed that some construction franchise businesses see early success, but then seem to struggle as time goes on. Starting a business can take focus and dedication, but what too often happens is that so much of the owner’s energy is spent on getting their business up and running that they fail to create a strategic business plan. Long-term success depends on knowing how to run a successful construction business, and that takes both planning and know-how. Partnering with the right construction franchise company can ensure that you have both.
Excess Overhead and Employees
A common mistake that construction franchise businesses often make is spending too much money on overhead or employees that they don’t actually need. Now, that’s not to say that a successful construction business doesn’t need to plan for overhead and employees, but the key here is to know how much you actually need at each stage of the company’s growth. Too many overhead expenses can lead to cash flow problems, as can a payroll that is out of proportion with the business’s income. Lean business models like those of Storm Guard roofing franchises tend to be more profitable, since the projects are completed by subcontractors. As the business owner, there would be no need for warehousing materials or hiring lots of employees, keeping costs low.
Hiring the Wrong People
Business owners are directly responsible for the quality of work they provide. For this reason, anyone working on behalf of a construction franchise business is, by extension, a representation of the business owner and the brand itself. To stay successful, a construction franchise business must know how to vet and hire people who will perform quality work as promised. This process can take time, but it’s an extremely important part of any business’s success.
Growing Too Fast
Too often, construction franchise business owners think that when it comes to growth, more is always better. But growing too fast has caused many businesses to fail. Taking on too many projects, trying to expand into new project areas without the right know-how or manpower, or trying to take on work outside of the business’s scope can all lead to disaster. Rather than rush into unfamiliar territory or overload the business, construction franchise business owners need to plan ahead and make sure that expansion, when it comes, is part of their overall business strategy. Developing a growth strategy is a valuable part of being a Storm Guard franchisee!
Failure to Innovate
In today’s technology-enhanced world, the old ways of doing business simply won’t work anymore. But too many construction franchise businesses are stuck in the past, trying to keep their businesses afloat while relying on outdated technologies and practices. To own a successful construction business today, it’s important to innovate. Successful construction franchise business owners need efficient, high-tech tools to stay in contact with service providers and clients, not to mention to help track project performance and keep things organized. When choosing a construction franchise company, it’s important to choose one that offers the tools today’s business owners need to keep up with evolving business practices.
Failure to Follow a Code of Values
When asked, few people will say that they look forward to hiring general contractors. It’s an unfortunate commentary on the construction industry as a whole, since so many construction business owners choose to engage in unethical or even illegal practices. By failing to follow a code of values, many business owners are unknowingly contributing to their own downfall.
Engaging in Dishonest Practices
One unethical but all-too-common practice of construction businesses is to give potential clients a very low bid on a project in order to win their business. Then, once work has begun, the business owner will “discover” a need to increase costs by adding on necessary work that was deliberately left out of the original bid. Not only will such practices leave clients dissatisfied, it can also lead to lawsuits and other legal headaches. No business can survive too many of those for long.
Having a code of values is an important part of building a reputation and a respected brand name. This is particularly true in the roofing industry, where dishonest practices abound. In fact, Storm Guard is one of the top construction franchises, in part, because of our company-wide code of values.
Not Guaranteeing Work
It’s rare to find a construction company that will guarantee their work. But this practice can actually be detrimental to the survival of the business. Too often, people hire a construction company for a project – even one with a recognized brand – only to realize too late that the company will not take responsibility for their own work. Few people will rehire or recommend a company that refuses to come back and fix minor issues once a project is done, which could result in a short life span for that business.
Lack of Professionalism
People today value professionalism in the service providers they hire. For this reason, having an unprofessional image or personal conduct can result in lost business. This lack of professionalism can also show up in the quality of communication a business provides, how organized each step of the process is, and in the conduct and appearance of each employee and subcontractor. Professionalism is a big part of earning the client’s trust, and so also essential to growing a successful business. This is part of why partnering with a known and trusted brand like Storm Guard is such a valuable asset for any construction franchise business.