5 Reasons Contractors go out of Business

bankruptcy contractors going broke Jun 21, 2020

Having spent over 15 years in the construction industry, I have seen many contractors come and go over the years. Some appeared out of nowhere to grow some impressive businesses. Others again made an impressive splash and then literally disappeared overnight leaving very few traces
I have been trying to distil the key reasons why contractors go out of business. These are the key reasons that I have identified

1) They don’t know their numbers
Contractors may be very good at their craft and putting together complex projects but they severely lack good book-keeping skills. They forget to track ever single expense to understand if they actually made a profit on their project. Even worse many contractors forget to calculate overheads when pricing projects.
If you want to build any sort of serious contracting business you will have significant overheads. Whether this is the administrative staff required to operate the business and man the phones, or the upkeep of your vehicles and your equipment. Overheads have a tendency to creep up and keep on increasing without you noticing. Contractors need to know the minimum amount of money required just to keep the lights running every month.

But since we are talking about numbers, it never ceases to amaze me when I see contractors not being able to understand the difference between cashflow and profits.
For example in my contracting business I tend to be cash flow positive in the summer months. This means that I have collected lots of advances and payments for projects completed but I may still owe my suppliers money for materials that I sourced.
In the first two months of the year I tend to have the opposite effect. Cash collections are down, but I still need to keep the business running during these low work months until work picks up again in the spring.
I have seen too many contractors mistake being cash flow positive for being profitable. They assume that the money will continue flowing for 12 months non-stop. They go out and splurge on a new sports car, only to realise 3 months later that that money should have been used for paying the rent

2) They don’t get paid for the projects they complete
There are many different reasons why a contractor might not get paid but I have noticed that the contractors who are always complaining about not being able to collect money have several traits in common.
For starters they go into projects without asking for a significant advance to cover their expenses. As the project proceeds and the customer starts asking for extras, they overlook the importance of documenting everything and requesting payments throughout the progress of the project. Then when the project is finally finished, the customer is shocked to see to a massive bill and they start haggling over the final bill.
When working in a long drawn-out project. remember to ask for  payments as you go throughout the project, so that the customer has some skin in the game. Nobody likes being served a massive unexpected bill at the end.

3) They don’t get referrals. Referrals are the easiest and cheapest way to get new business. And even though I teach contractors how to improve their marketing, I hate to admit that the number 1 cheapest way to grow your business is to have happy customers. Happy customers want to show off to their friends how great their remodelled kitchen looks. Happy customers will gladly post a 5 star review for your company. Happy customers will enthusiastically share any new content that you have posted on social media. If you have a steady stream of happy customers you will no longer need to advertise. And by the way referral customers tend to be better value customers and tend to haggle less for price
How do you get more referrals? Do awesome work and bill the customer honestly. Cut out the excuses and the bullshit. And don't forget to flat out request referrals from your customers.

4) They don’t invest in equipment
Not investing in equipment is the silent killer of contracting businesses. Coming back to my point about contractors buying flashy cars when they can't afford them: I find it shocking how many contractors don’t invest in new equipment or even properly maintain their existing equipment. If your business depends on having power drills, and your only power drill breaks down every 4 days, well then its time that you get a new power drill (or actually get more than one!)
I remember back in 2012-13 I desperately needed a new floor grinder. However my country was going through a devastating financial crisis at the time and I kept on putting off the expense as my business was struggling.
As a result my work was suffering and so was my company’s productivity. I was becoming ever more dependent on renting equipment (that was often of dubious quality), my operational costs were up and my productivity was down.
When I finally took the leap and invested in new floor grinders and dust collectors I saw improvements across the board. My completed work was better, my staff was happier, my operating costs were down and my referrals were up as my customers were impressed by my equipment. I was able to go after new projects that I had previously avoided as I did not believe that I had the right equipment.
If you keep on procrastinating on investing in new equipment, your competitors will overtake you, they will be able to put in better bids. They will be completing projects faster at a lower cost. And you wont even realize it.

5. They dont have a Steady Marketing System for generating leads

Contractors often fall into a trap when work is booming. They assume that work will always be this busy. As a result they stop advertising, they stop chasing new leads, they stop following up on proposals as they assume that the work will come to them.

And then all of a sudden, work slows down. But there are no jobs in the pipeline as they havent been chasing leads. The scrambling for new work begins and this tends to last until the next big job appears. The vicious cycle repeats itself. When work is busy, the business owner has no time to chase future work, and when work is down, there are no warm leads ready to start work. This is why I always stress the importance of having a steady system of capturing leads. Don't just advertise when times are tough, you should be present all the time. You need to be aware of how much you are spending to acquire a lead, and how much you are spending to acquire a customer. All these priciples are covered in our flagship course Marketing Mystery

Now that I have listed my top 5 reasons, I want to hear from you. Are there any other reasons why contractors go out of business? Leave a comment below!