Small construction companies are a pillar of the U.S. economy.
According to the most recent data from the U.S. Small Business Administration, construction companies represent more than 1 in 10 of the small businesses in the United States. This includes general contractors and subcontractors, commercial and non-commercial.
There were more than 3.7 million such companies in the United States at the start of 2023, according to researchers at IBISWorld. That figure tends to grow at a rate of about 2.5 percent per year.
When combing through all that data, we noticed a fascinating trend: Small, early-stage construction businesses thrive at a higher rate than they used to.
In decades past, two in three construction businesses would fold before Year 5. Not so anymore. More and more businesses are surviving to Year 5 and beyond.
And we think better construction business software helps explain why.
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The Early Fail Rate for Construction Businesses Is Falling
The Bureau of Labor Statistics has statistics on the rates of business survival across various sectors stretching back to businesses founded in 1993–1994.
We used that data to see what the first five years of an average American construction company looks like today versus what that journey looked like 20 years ago.
That comparison revealed three interesting trends:
- Overall, the sector was bigger 20 years ago. There were more than 70,000 construction companies founded in 1996–1997, and those businesses employed more than 317,000 people. For 2016–2017, those figures were approximately 53,000 construction companies founded and approximately 207,000 employees
- Startup construction companies are getting smaller. In the 1990s, construction companies had on average 4.5 founding employees. That number has been steadily dropping. In this decade, construction companies have around 3.5 founding employees.
- Many more companies are making it to Year 5 today. Among the construction companies founded in 1996–1997, less than half (46.2 percent) stayed in business through Year 5. For those founded in 2016–2017, almost 6 in 10 (59.3 percent) made it to Year 5. That suggests the average construction company is almost 30 percent more likely to celebrate five years in business than it was two decades ago.
Year 5 is more than a celebratory anniversary. Somewhere around Year 5 is when successful construction businesses tend to find their stability. According to those BLS numbers, construction companies that make it to Year 5 tend to see survival rates of around 94 percent going forward. So, the vast majority of construction companies that make it to Year 6 make it to Year 7, and so on.
3 Reasons We Could Be Seeing the Fail Rate Drop
Why are new construction businesses thriving at a higher rate than their predecessors?
Our theory is these businesses are better at solving the biggest internal hurdles to company survival: overextension, insolvency and operational inefficiency.
Fewer Subcontractors Are Getting Overextended
Tim Holicky, a construction surety underwriter at The Hartford, says construction companies have a tendency to take on more work than they can handle.
On the face of it, too much work sounds like a good problem. But companies that don’t know when to say “no” get stretched too thin, Holicky says. They start to miss construction project deadlines, operations fray and financial problems appear.
This is something construction project management software solves. When executives have access to robust, up-to-date construction project data, they have a much better idea of their teams’ capacities. They know whether they can take on one more project, and they can weigh their capacity accurately against the opportunities new projects offer.
They Have Better Control Over Their Finances
Cash flow problems are one of the biggest reasons construction businesses fail. When construction companies don’t have enough cash to cover their liabilities, they face the possibility of bankruptcy — even if the business is profitable.
Cash flow is often a visibility problem. “Many construction companies can’t track if they’re making or losing money until the very end of the year,” management consultant Larry Kokkelenberg writes at Pit & Quarry. “Some companies even fail to bill for all of their work because they are so busy completing projects and doing estimates for new projects.”
This is something accounting software and project management can catch when those tools are integrated. When executives can see how much money is coming in and how much is going out on a project-by-project basis, they don’t have to wait until the end of the year to learn their cash positions.
They’re Vigilant About Scope Creep
Scope creep is the bane of any project-based business.
In the construction trades, scope creep sometimes happens when someone feels pressure to close a deal and over-promises services to a client, writes Evan McLaughlin, CEO and president of the Toronto-based contracting company Column & Joist. Some of those promises might not make it into the final contract, effectively creating non-billable work.
To avoid scope creep, McLaughlin recommends:
- Having project managers review sales contracts before they’re signed.
- Having all pre-construction project documents reviewed for feasibility and scope.
- Ensuring any changes in the project scope get documented properly, and that those changes get passed along to the relevant stakeholders.
These are all things cloud-based construction project document management software can streamline. When all project stakeholders have easy access to a construction project’s documents and can see in real time what’s changed from the original scope, they can collaborate to ensure no teams are doing free work.
These Businesses Are Still Vulnerable to External Pressures
There’s no economy in which long-term business survival will rise to 100 percent. Software can help businesses anticipate challenges that emerge internally, but external factors will always play a part in any construction business’ survival.
Around the world right now, inflation, materials costs and labor shortages are squeezing construction companies’ profit margins, UK advisory firm PKF Smith Cooper writes.
Further, economic downturns hit this sector especially hard. You can see this in the BLS data. Roughly 1 in 3 new construction businesses founded in 2007 and 2008 — the run-up to the last recession — failed to make it to Year 2.
Construction businesses have little control over these factors, but they can take steps to fortify themselves ahead of tough economic times. Those steps include managing spending, doubling down on reliable revenue-generating work and creating operational efficiencies like the ones listed above.
Takeaways For Construction Trade Contractors – Construction Business Software is Key
If our theory is correct that construction business software is helping create more successful construction businesses, then these are the tools executives should invest in:
- Accounting software that gives you visibility into revenue and cash positions.
- Project management software that gives you visibility into your team’s maximum capacity.
- Project document management software that supports a policy of getting everything in writing so you’re never on the hook for unpaid work.
We built eSUB Cloud to be the tech backbone of any trade subcontracting business. eSUB’s platform helps these companies organize their documents, helps keep construction projects on track and integrates with most accounting tools. To learn more, schedule a demo.
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