Why do Building Companies go Bust?

 

Almost weekly another building company goes into liquidation and hits the news. And these are only the larger companies, generally owing millions to creditors and sub-contractors. What about all the smaller builders and various trades business we don’t hear about?

 

So why do builders go bust?

 

Unfortunately, there isn’t one particular reason or answer. However there are several common problems.

 

Here are my nine top reasons why building companies go bust and this applies to all other trades.

 

  1. Lack of business/management training

 

Business or management training isn’t usually included as part of your trade training. It makes sense. The most important thing to teach an apprentice is how to build a house properly, right.

 

Of course, it’s easy to migrate from being an employee to going out on your own. All you need is a bag of tools and a van. Anyone can do it  – and many often do. But, just because you’re great at building houses doesn’t mean you will make a great business owner.

 

As your business gets bigger and you employ more staff your focus needs to shift from building houses to running a business. You need to learn a whole new skill set.

 

Payroll, tax, ACC, employment issues, debtors, creditors, business development, marketing, project management and sales are just a few of the things that you need to know as a business manager.

 

Some can be learned “on the job” and for others, you can hire specific people. But as the business owner, you need to be responsible for everything that goes on. You don’t need a business degree but taking time to learn some of these skills will benefit your business.

 

Where can you go to learn these new skills?

 

Most Polytechnics offer small business management courses. New Zealand Institute of Management and Icehouse are others.

 

  1. Incorrectly costing jobs/failing to back cost

 

Pricing jobs correctly is one of the hardest parts of running a construction business. Get this part wrong and it’s all downhill.

 

Most building supply merchants happily price up the materials you need. But if you can’t read the quotes properly to see what they have missed, and invariably they do, any mistake is on you.

 

Spreadsheets are great, but they rely on you to make sure you include everything and you have your quantities and formulas right.

 

Using a quantity surveyor is even better but they can be expensive. Money well spent, I suggest.

 

This is just the first part of the job. When the project is complete you need to go back over the costs and make sure what you said you could build it for is what you spent.

 

This may sound obvious, but in my experience, it’s not done often enough.

 

  1. Failing to keep track of time and costs

 

Once you have priced a job, the next most common mistake is not sticking to the schedule or budget.

 

Perhaps the most common mistake is labour – either underestimating the time required or not keeping track of the time spent.

 

There is no point in getting to the end and finding you are 20% over on materials or time on the job. However, if you do a summary after the end of each major component of the build (ground work, foundations, framing etc), then if you find you are over early on in the job, then you have a chance to pull it back as the build continues.

 

As suggested, back costing every job ensures you accurately know what you spent, how long it took, how much your subbies charged, which variations you charged for. This information is invaluable when you price up your next job, so any mistakes aren’t repeated.

 

  1. Fixed priced contracts and failing to allow for price increases by suppliers

 

Fixed price contracts are now the norm for residential construction. Everyone wants to know exactly how much the build is going to cost up front. The problem is, unless you are getting guaranteed rates from your suppliers, if prices for materials or from your subbies go up, you have to wear the cost increases.

 

The key is to get a quote and formally accept the price for as much of your materials and services as you can. Make sure the timeframe on these quotes cover the job (ie. quote valid for 30 days but you won’t place the order for the materials until after this time).

 

Negotiate. Don’t be afraid to go back to your suppliers and ask for a better deal.

 

 

  1. Not charging for variations

 

Rarely is a building built as per the original plans. Sometimes practical alterations are needed to complete the construction – let’s blame the architect. But more often than not the owner requests small and sometimes large changes across the build process.

 

Even something as small as moving a power point takes time. Most builders want to do the best for their client, but if it’s a change that takes time and materials, then it needs to be charged for. The hard part is keeping track of all these changes and invoicing the client.

 

Sometimes variations are agreed as the builder and the client walk around the site. Sometimes it might be something agreed to with the site foreman. There can be arguments as to what was or wasn’t agreed to and the cost of this work.

 

The best way is to agree to any changes in writing. Maybe it’s easier said than done. But if you want to make sure you get paid for the extra work, you have to be able to prove you have done it with the owner’s consent.

 

  1. Pricing a job low to win the contract, then thinking you will make up their margin with variations

 

When a builder knows they are in a competitive bid with others, sometimes they look to submit a low price to win the job. This might be by reducing their labour charge out rate or cutting their margin on materials. Either way, the price submitted is below what would be considered reasonable to make a profit.

 

False thinking is that this initial loss can be made up by charging for variations on the job. This is simply a disaster waiting to happen.

 

Although most jobs have multiple variations and charging 10 to 15% mark-up on materials is acceptable, if this is your strategy for making a profit on a job, then you are in the wrong business.

 

Make sure your initial price is sufficient to both cover the cost of the build and make a profit. Otherwise you are essentially working for free.

 

  1. Managing cashflow

 

One of the big problems with running a construction company is the need to pay for building materials before you get paid. If you have a trade account you get until the 20th of the month following, but payment claims are usually submitted at the end of the month and you usually still have to wait to get paid.

 

On big jobs, the outlay can be tens, if not hundreds of thousands of dollars. You have wages to pay weekly and all other costs and expenses.

 

Managing cashflow is the key to running a successful building company. You need cash in the bank to take on bigger projects and more staff.

 

A bank overdraft is one thing. But at the end of the day having more money coming in than going out is the key.

 

  1. Robbing Peter to pay Paul

 

When cashflow is tight it’s easy to take a deposit or a progress payment from one job and apply it to creditors from another. When this happens it’s usually the beginning of the end. In fact, it’s probably more likely the end of the end. If you are in this situation it’s very hard to successfully recover.

 

Ideally, each job needs to be treated as a separate project financially. Deposits, progress payments, material costs and subbies all need to be costed directly against this one job.

 

It’s all money in the bank, but if you are in a situation where you’re waiting for a payment on one job so you can pay bills on another, you need help.

 

  1. Not asking for help soon enough

 

Make no mistake, its tough to run a successful business. It requires a mix of skills and abilities, and no one person has all of the skills or time to manage everything, especially as the business grows.

 

I have seen it time and time again, builders spending all day on the tools, only to go home and spend most of the evening quoting and invoicing. Sound familiar?

 

Usually the first thing builders do is bring someone on to “do the office work”. This usually involves paying wages, creditors, handling correspondence and other general administration tasks. This allows you more time to spend onsite, quoting or looking for more work.

 

But don’t forget you need to understand what’s going on in the office. You can’t simply leave it to someone else.

 

Sometimes it’s hard to see where things are unravelling. Most builders are blokes, and sometimes it can be a pride or ego thing to “battle on”, thinking that if you work harder or put in more hours you will catch up, or if you can just land that next big job, it will solve your problems.

 

Truth is, if things aren’t going well, especially if you can’t or won’t see it, then it’s unlikely the “building fairy” is going to come along in the middle of the night and sort things out. Maybe it’s time to ask for some help.

 

The first place most builders turn to is their accountant or their bank manager. I don’t want to unfairly bag accountants or bank managers, as I know several who provide an excellent business support programme. However many don’t. From experience your average accountant or bank manager doesn’t really understand the building business. They are more likely to give “financial” advice rather than practical, useable business advice in a language your average builder can understand.

 

So where can you go to get help?

 

Business Mentors NZ

Trades Coaches. There are a number of specialist Building Trades Coaches throughout New Zealand.

Networking Groups

Industry Groups. RMB, NZCB etc

Talk to your mates

 

 

About Mike Blackburn

 

Mike, a management consultant and business mentor, works with building companies and various trades across the construction sector.

 

He has an MBA degree and more than 20 years’ experience in business and senior management. He specialises in management systems and administration, business development, sales and marketing.

 

Mike Blackburn M.B.A

Management Consultant and Business Mentor

021 370 018

www.blackburnmanagement.co.nz

 

Director

Combined Building Supplies Cooperative Limited

 

 

One response to “Why do Building Companies go Bust?

  1. Great information Mike, these are still basic business requirements.
    Often learnt (yes learnt), through trial and error by small business owners.
    Larger businesses seem to fail to employ the right person for Site Management, Project Management and foreperson positions. Often they go for the bully tactic manager and not one that has an understanding of interpersonal skills etc.
    The construction sector seems focused on the end zone, without breaking the process down on how to get there. this is leading to multiple amounts of rework, which either adds to budget blowouts, variations/additions and substantial time delays. We all know the story of the Turtle and the Hare.
    For an industry that has an abundance of checks and balances, it misses the basic understanding of realistic time management, scheduling and communication.

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