Over the last few years, we’ve seen the large number of construction-related businesses fail. Both large and small businesses have gone under. My best estimate is that we have lost somewhere between 35% and 40% of the contractors that were in business in January of 2007.


Why did these companies fail? There are six basic reasons that will cause a majority of business failures. I know we can talk about the economy, but many of these failures would have occurred eventually. The bad economy just hastened it.

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The biggest reason is not charging enough for the work or service provided. When lots of work is coming in the door (which is how things were 6-8 years ago), it’s easy to mask this problem because jobs coming in the door are used to pay for jobs already completed. As long as jobs are coming in, cash is flowing through and everything’s looks okay. Once the cash flow stops, the business is deep in debt and goes under.


Other reasons (I cover each of these in depth in our new book, “Markup and Profit Revisited”):


Failure to use or the improper use of change work orders.


The lack of a written contract, or an incomplete contract. We still see jobs in the six-digit range being done on a handshake. Even handyman or service work needs a written agreement.


Too many employees for the volume of work that is sold, built and collected. In short, the company can’t support all the people employed.


Poor payment schedules on contracts. If you are building jobs out of your own pocket, then hoping your client will pay the bill on time, you are putting your business at risk.


Finally, the lack of profitable sales.


Running a construction company isn’t rocket science, but you can’t do it in your sleep either. No one is born knowing how to run a business profitably, it’s learned. Learn how to make and keep your business profitable. We’ve lost too many businesses in the past five years that might have survived if the owners had educated themselves on the proper way to run a construction-related business.


Michael’s newest book, “Markup & Profit, Revisited” is available now at his website. Sign up for Michael Stone’s free monthly newsletter to get information and tips to strengthen your construction-related business. Michael is a popular industry speaker as well as the author of “Markup & Profit Revisited”, “Markup & Profit; A Contractor’s Guide” and “Profitable Sales, A Contractor’s Guide”. You can visit his website; follow him on Twitter and like his page on Facebook for more great advice and tips.