Construction Company Failure and Financial Management

Construction company failure rate

The construction industry has been experiencing an above-average failure rate since 1988, compared to the failure rate of other companies. The number of construction companies operating in the U.S. comes down from 709,590 in 2000 to 698,898 in 2001, resulting in a net decrease of 10,692 companies or 1.5% for the year. This statistic does not exemplify the real number of companies that went out of business over the year because the actual number of construction companies that went out of business is counterbalance by the number of new construction companies that were started over the year, but it may give a rough idea of how many construction companies go out of business

Two of Japan’s largest construction companies—Sato Kogy Company and Nissan Construction—filed for insolvency, in 2002. In the same year, Germany’s second-largest construction company, Philipp Holzmann AG, that had been in business for longer than 150 years, filed for insolvency too.

By 2006, nearly one in four contractors (23.6%) out of the 850,029 construction contractors working at the beginning of 2004 had stopped working.

Unique nature of the construction industry

The construction company is a risky adventure. Every year, many construction companies go out of business. Operating a successful construction company needs a specialized set of financial management skills, due to the unique nature of the construction industry. Counter to other industries, the construction industry faces a number of challenges:

•     Continuous construction of unique projects.
•     Building a project in a different location every time.
•     Dealing with retention and progress payments.
•     Significant reliance on the use of subcontractors to complete projects

Main causes of business failure in construction

Large and small construction companies, old and new, local and foreign are among the statistics of failed construction companies around the world. The Surety InformationOffice has identified six obvious warning signs that a construction company is in disturbance.

•         The Financial management systems for construction companies are ineffective and ineffective. Financial strategies are not designed and implemented correctly.
•         Excessive use of bank loans. The company has borrowed the loan from a bank touching the credit limits.
•         Ineffective estimate and poor and ineffective business cost reports. Means that the information provided related to estimates and cost of labor reports does not rise to the level of satisfaction.
•         The project management techniques used by construction companies are weak and imperfect. Projects are not managed according to requirements; the policies applied in them are weak and ineffective.
•         Construction companies do not rely on comprehensive business plans. Thus, pre-work thinking is absent in their work practices. Working without proper planning often leads to failure.
•         The correct communication line is absent in the construction company which is the main sign of its failure. The smooth and free flow of information is important to the progress and success of any business.

Four of these six sources of failure are directly related to the company's financial management.

What is financial management?

Financial management is the use of the company's financial resources. This includes the use of cash and other assets - such as equipment. Many of the daily decisions affect the financial future of the company. For instance, if the manager decides to assign employees to perform work on the project, the project will require more financial resources than if the company hired subcontractors to do the work and may leave the company with insufficient resources to purchase additional equipment, leaving equipment rental as the only option.

Who is responsible for financial management?

Often the person eventually responsible for the financial management of the construction company is the owner. Many tasks are delegated to assessors, supervisors, or project managers - especially those specific to the project.

Nothing will put the employee on the fast track to achieving success within the company faster than increasing the profitability of the company through sound constructive financial management. In general term financial manager is used to designate Supervisors, project managers, estimators, or owners who are responsible for all or part of the construction company's financial management.

Financial manager responsibilities

The financial manager is responsible for ensuring that the company uses its financial resources wisely. The financial manager responsibilities can be divided into four broad areas covering:

•         Accounting for Financial Resources
•         Managing Costs and Profits
•         Managing Cash Flows
•         Choosing among Financial Alternatives