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Why construction companies go broke

5 Reasons why construction companies go broke. PLUS the tools to avoid it.

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5 Reasons why construction companies go broke. PLUS the tools to avoid it.

Building and construction is a tough game. Simple as that.

Not only do you have to deal with the natural elements; rain, hail, or shine…but anything can go wrong on a building site at any time.

Unfortunately, the construction industry still has a high company failure rate – many construction companies go broke in their first year. In most of these cases, the business owners did not have full visibility over their jobs.

In blank terms, for many businesses, if they had invested in the right technology (a small investment, btw), this problem could have been avoided – with their business alive and well today.

Spending appropriately

A shared experience with a builder is: I need a $5000 concrete saw for this. But I won’t spend that sort of money on software. 

Let me ask you this question; Why would you run a multi-million dollar business on $1,000 worth of software? It’s time to understand why construction companies need to view technology as a critical business investment.

Five reasons why it makes sense to invest in construction software technology

  1. Construction Focussed Accounting Software

Many accounting software packages will tell you if the overall business makes money in real-time. Contrasting this, the accountant will tell you in September that you made or lost $X for the previous 12 months till June. That is three months too late, or even longer in some cases. If you are building and running a construction company, proper Job Costing software helps you avoid this and instead run your business knowing what’s going on in real-time.

Know how well each job is going – not just all jobs together

That means being able to look at a Cost Code inside a job and immediately see if it is on budget or not. Proper job costing also allows you to ensure labour, materials, and machine time are posted against the correct jobs. It is faster, cuts the risk of errors, cuts your costs, and all with fewer keyboard data entry. None of this is difficult.

There are inexpensive systems that do this. But if you have to rekey all of this information into a spreadsheet to get the job information, is it the wrong accounting system? Project Managers need to be using the same software, so you have data validity with the accounting software – the same information.

  • Inaccurate Estimating and slim margins

Estimating can be very difficult. The best estimators will build the job in their minds as they prepare the estimate. You have to be sure you have the correct cost and ensure you make a decent margin. Furthermore, you need to arrive at that cost as quickly as possible.

Here are two examples of this.

  1. A company asked us to run an estimate through our estimating software after signing a contract to build a block of units for $2.2m. We did the calculation and came up with a COST of $2.6m. When we discussed it, the owner told us we did not know what we were talking about and was confident he could build these units for $450/m2. They went broke 12 months later with 63 current jobs running.
  2. Another company advised that they regularly quoted a $100m job with just a 4% margin. Would you put that sort of money on the short term money market and get 4%? What is the risk of cost blow-outs?

There are systems on the market that are purpose-built for estimating. The best have On-Screen Takeoff and rapid estimating features: these save you up to 50% of your time by automating the measuring and calculations.

This extra automation gives your team the time to review the estimate and ensure it looks right.

  • Not Using Commitment Accounting vs. Cash Accounting

Many companies do not use Commitment accounting. Commitment accounting is when I place a purchase order or subcontract against a Cost Code and enter it into the system. Because I have entered my commitment, I know this amount has to be paid at some stage during the job: therefore, I can calculate my Cost to Complete a job – without missing any costs.

You have to enter orders in to the system. If you just enter invoices, you may not know the proper liability you are incurring. The costs won’t be visible until the end of the job, and only then will you know if you have made a profit. 

Will that be too late?

  •  Looking at Cash Flow vs. Profit

Many companies think that money in the bank equates to profit. That is dangerous. Essentially they are running the business on a cash flow basis. We see many construction businesses collapse because they are doing lots of jobs and getting lots of progress claims. But when the jobs dry up, and all the bills come in, they are suddenly in trouble because they used all the money. A construction-focused accounting system gives you smart estimating, helps you watch margins, budgets, and job progress day to day. When done right, there are no nasty surprises.

  • Not Keeping Correspondence

In an age of increased risk of litigation, it is critical to record as much correspondence on a job as you can. Many contracts have strict penalties for not delivering a job on time. Some Subcontracts stipulate total compliance with the terms and conditions. To reduce the risk to your business, documenting RFIs, Notice of delays, Extension of time claims, Site Diaries, and OHS obligations are crucial. Construction companies have been bankrupted due to being unable to defend themselves from unreasonable claims adequately.

COnstruction specific software systems do this for you and help ensure you have a complete record of everything that happened on a job. Day to day, this means documents are stored centrally, not on individual PCs where they may be hard to find. If you need to produce detailed evidence to support a variation or a claim, it is reassuring to know you don’t have to spend days trying to find it.

So how do we get on top of it?

As a business grows – with more jobs and more workers, the systems and methods that worked for a smaller company reach the point where they don’t work anymore. You can’t rely on managing everything in your head. If you do, the risk is high. There are systems specially designed for construction and project management to put you back in charge.

If you have a question about setting up a system that protects your business from unexpected costs, speak to the specialists with years of experience, Thrive. We help identify what you need, your challenges and set up a system that solves them. Thrive provides everything from an entire solution for your construction business to a single piece of software to improve your estimating processes.

Talk to our team of construction industry experts today about how we can help your business become more profitable.