The Subcontracting Business Life Cycle: Keys to Construction Company Longevity
In April, we wrote that construction companies founded today have significantly lower fail rates than they used to.
Most construction executives know that this industry sees some of the highest fail rates of any businesses in America. But according to data from the Bureau of Labor Statistics, the five-year success rate for construction businesses is higher than the U.S. average across all sectors.
The team at Lending Tree also crunched the BLS numbers and found that the five-year fail rate for all businesses was 48.4 percent, more than 8 percentage points higher than construction’s (40.1 percent).
In this post, we’ll take a closer look at what’s happening among American construction companies, why those businesses have begun to enjoy such long-term viability and the keys to construction company longevity.
Table of Contents
Starting Point: Billd’s Latest Subcontractor Report
The 2023 National Subcontractor Market Report from Billd is what inspired this research.
There’s a stat that’s easy to miss among the more headline-worthy numbers in that report, but it’s important to this discussion. Among the 876 people surveyed in the Billd report, 97 percent of respondents worked for trade contracting businesses that were at least five years old.
These are the companies that understand what it takes to make a construction business successful in the long-term. It’s useful to see what those companies are doing from a tech and operations perspective, because these are the areas we think construction companies have made the biggest strides in the last couple of decades.
Here are some figures about those companies that are worth noting:
- 79 percent of respondents had annual revenues of $15 million or less in 2022.
- 62 percent used estimating / takeoff software.
- 57 percent used accounting software.
- 41 percent used project management software.
2 Things Successful Construction Companies Do Well
The Billd and BLS data corroborate two things we’ve seen in our own work with trade contractors:
- Successful construction businesses don’t try to grow too quickly.
- Successful construction businesses invest in tools that help them manage finances and operations.
Let’s take these one by one.
Steady Growth
“It may seem crazy to think that trying to grow your construction business can lead to going out of business,” ConstructConnect Editor-in-Chief Kendall Jones writes. “Problems arise when a company tries to grow too fast without having the resources, manpower, and know-how to execute that growth successfully.”
Notice that the vast majority of respondents to the Billd survey saw annual revenues below $15 million. Trades businesses don’t scale up the way online retailers or Silicon Valley startups do. They take years to build their reputations and develop the capacity to take on $50,000 projects, then $100,000 projects, then $500,000 projects.
Likewise, they don’t go from doing two construction projects at a time to 10. Construction projects are wildly complicated undertakings, and doubling the number of projects adds much more than double the amount of work.
Many companies have had to learn this the hard way.
Tim Treadgold, a business reporter in Western Australia, has covered the collapses of several big companies in heavy industries. In 2018, he wrote about one business, RCR Tomlinson, that overextended itself by adding solar farm construction to the company’s already large portfolio of construction projects. A combination of ambition, disadvantageous payment terms and poor recruitment efforts brought down the 140-year-old company.
“How it could go so horribly wrong in a business building something as simple as a solar farm is perhaps the most remarkable aspect of RCR’s failure, because a solar farm is nothing more than an overgrown meccano set with parts bought off the shelf and then bolted together in a sunny location — or at least that’s the way RCR approached the job,” Treadgold wrote.
Instead of making these kinds of mistakes, construction companies should follow the example of Perez Construction in San Francisco. Perez Construction offers high-end residential remodeling, and the company is clear that it never overextends its teams.
“We cap ourselves at five projects at a time,” the team writes. “We are vigilant in ensuring that we are not overextending ourselves and are able to deliver (and overdeliver) on our commitments.”
Investment in the Right Digital Tools
In an article for Pit & Quarry, management consultant Larry Kokkelenberg writes that two major reasons construction businesses fail are poor financial systems and inefficient operations.
“Many construction companies can’t track if they’re making or losing money until the very end of the year,” he writes. “Some companies even fail to bill for all of their work because they are so busy completing projects and doing estimates for new projects.”
Now, go back to the Billd data: 62 percent of respondents used estimating and takeoff software, and 57 percent used accounting software. It’s not a coincidence that successful companies have found ways to digitize their financial management.
This dovetails somewhat with operations because efficiencies have such a profound effect on bottom lines. “Inefficiency rarely happens in big, easily identifiable chunks,” Kokkelenberg says. “Inefficiency typically impacts that company in 10- or 20-minute increments.”
About four in 10 Billd respondents said their companies used project management software, and this is precisely the tool trade construction companies need for fixing those 10- and 20-minute incremental setbacks.
How Trade Construction Businesses Can Improve Further
Despite the rising success rates in this industry, construction businesses have plenty of room for improvement. Here are two things these businesses can begin to focus on to further extend their life cycles:
Make Worksites Safer
According to the Center for Construction Research and Training, the rate of non-fatal injuries in construction has fallen steadily since the early 1990s. Mining, manufacturing and agriculture have followed similar trendlines.
But much work remains. According to the BLS, fatal injuries among construction workers hit a five-year high in 2020.
Nationwide, the costs of workplace injuries, fatal and non-fatal, added up to $167 billion in 2021, according to the National Safety Council. Safer worksites will translate to more viable construction businesses.
Digitize Project Documents and Construction Project Management
Now, for the last figure we highlighted in the Billd report. Only four in 10 respondents said their companies used digital construction project management software.
That means six in 10 respondents were leaving opportunities on the table. Those opportunities include:
- Having all project documentation and data in a single, cloud-based location where anyone who needs to retrieve information can do so. This saves hours of work each week.
- Closer collaboration between field and office teams.
- More accurate, consistent reporting.
To learn more about eSUB and how it can bolster your operations, schedule a demo today.
Images used under license from Shutterstock.com.
