Why Do Construction Companies Fail?

Why Do Construction Companies Fail?

The construction industry has one of the highest business failure rates.
Michael Heidrick
Michael Heidrick, Head of Construction Surety, The Hartford
Tim Holicky
Tim Holicky, Senior Executive Underwriter, Construction Central Bond Team, The Hartford
If a construction company takes on a lot of work, it’s a good thing, right? Not exactly. In fact, overextension is one of the primary reasons why contractors fail. And it’s something that contractors should consider as a priority for their risk management plan.
Of the 43,277 construction businesses that started in March 2011, only 37.6% of companies survived 10 years later.1
“The construction industry has a high rate of failure,” explains Tim Holicky, senior executive underwriter in The Hartford’s construction central bond team. “And more often than not, it’s because of too much work, rather than too little of it. The key to a contractor’s long-term survival is knowing when to say no.”

What Is Overextension?

Holicky says that when a contractor takes on too much work, they’re at risk of overextension. And by doing this, it puts contractors at risk of permanently closing.
When construction companies pick up too many projects, they run the risk of spreading themselves too thin. Projects either get delayed or don’t start on time. Or the workmanship suffers as a contractor tries to move from one project to the next.
When it comes to employees, overextension can cause your employees to rush – increasing their risk of a workplace injury or illness.
Because of how much overextension can impact different areas of a company, Holicky emphasized the importance of being realistic about capacity and only taking on work that’s feasible.

What Are the Signs of Overextension?

There’s no clear way to tell when a construction company overextends itself. But Holicky said there are signs you can look for, like:
  • Brand and Reputation risks – your years of hard work can be ruined overnight by a late delivered project.
  • Poor project site leadership, which can expose the company to delay penalties and potentially default or terminate a contract.
  • Financial - including back charges, delayed receipt of accounts and retainage receivables.
  • Claims loss issues and issues with safety records. With a higher workload, overextended contractors need to hire workers quickly, which results in safety issues and claims. This can include job site injuries, vehicle accidents or even theft losses.
  • System issues that can lead to an increase in theft from employees and others.
  • Failure to keep commitments, which can disqualify a contractor from future opportunities and be refused credit.
  • Administrative problems, such as missing certificates of insurance from subcontractors forgetting to add vehicles or leased equipment to insurance coverage or accounting-related issues.
  • Missed deadlines to get subcontractor bid packages out in a timely manner or failing to buy out a project.
  • Operational problems, such as poor field execution that can delay a project, failing to get necessary equipment on a job site or decreasing work quality.
  • Legal exposure to negligence claims and uninsured losses.
  • Financial company assets tied into accounts receivable and retainage receivable, which leads to a higher level of credit risk.

How Can Businesses Protect Themselves From Construction Overextension?

Businesses can protect themselves from overextension in construction by being aware of how much work they signed up for.
“Know what’s realistic for your construction firm and staff,” Holicky said. “You can lean towards being cautious when a new opportunity for work comes up. There’s a lot of value in being OK with refusing work.”
For companies that have to hire contractors for a construction project, it may be worth getting a surety bond, said Michael Heidrick, head of construction surety at The Hartford. While typically found with government construction jobs, Heidrick said surety bonds are becoming more common with private jobs.
“When there’s a contract between a construction contractor and the owner, we’re the third party that guarantees that transaction,” Heidrick said when explaining The Hartford’s role in selling surety bonds. “The payment bond guarantees that subcontractors and other parties will get paid to see the job through completion if the contractor doesn’t abide by the contract.”
Heidrick added that recent legislation will spur an increase in the amount of construction work available in the U.S., which can lead to overextension if contractors aren’t careful.
“There’s really two ways that contractors go out of business: there’s either not enough work or they pick up too much work,” he explained. “And it takes much longer to go out of business for not getting enough work than it is to get too much work.”
1 U.S. Bureau of Labor Statistics, “Survival of Private Sector Establishments by Opening Year: Construction,” October 2022
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