The Haves and Have-Nots
Thomas C Schleifer, Ph.D.
Unlike rampant inflation, supply chain collapse, or a sudden descent into recession; trends creep up without us noticing. We have already discussed the gradual shortage of skilled labor that is now haunting our industry and concluded that the construction labor force will never again look like it did in the 20th century. It has been happening without us noticing like an ocean swell that suddenly becomes a wave and breaks over the beach.
Consolidation Is Not Failure
The next swell hidden behind the shortage of skilled labor wave breaking onto construction’s beach is consolidation. Consolidation simply means that large firms get larger and small and midsize firms struggle to survive or disappear from the scene. For many years I have been referring to this consolidation as associated with the failure rate. Most of my audiences have resisted hearing about construction’s high failure rate and many struggle with my analysis of the causes of construction company failures. Even as many contractors go out of business each year, the construction professionals who remain tend to identify with the successful companies around them and take comfort from the robust nature of the industry itself.
A Robust Industry
Few people envision the vast scope of the construction industry. When we think of the “big” industries in America; big-box retail, automobile manufacturing, defense firms and technology companies come to mind. Most people don’t think of construction as a cohesive “big” industry. Somehow the construction industry feels like a fragmented hoard of small to medium-sized closely held businesses. Rarely is construction mentioned on CNBC or analyzed by financial pundits. Although it is true that the industry is largely a collection of closely held and family-owned businesses, the reality is they add up to America’s oldest and largest industry.
The construction industry is America’s largest industry by a considerable factor and is composed of some of America’s oldest and biggest businesses. There are 3.8million individual construction companies in the U.S. No other industry even comes close. You find a restaurant, for example, on every corner but there are only 1 million of them in the country.
The automobile industry employs more than a million people churning out over $71 billion in annual business. The construction industry employs over 9 million people who produce almost $2.6 trillion in annual turnover. Topping off the pedigree of the construction industry are some of the oldest and largest companies in America.
The Risks Are Enormous
According to data from the Bureau of Labor Statistics, of the thousands of construction firms that started operation in the early two thousands, 56% were still around three years later and only 26% made it to year 10. That’s an entry level failure rate of 73%. Let that sink in for a bit. (The firms that continue, join an industry with the second highest failure rate in the nation.)
Statistics belie those who perceive the construction industry as just a collection of family-owned businesses that suffer from huge risk and a high failure rate. Nothing could be further from the truth when you consider that from the onset of civilization the industry constructed the built environment that the entire world lives in.
Access to Capital Separates the Haves from the Have-nots
The contrast between legacy construction firms and struggling startups is dramatic. It represents the natural portion of consolidation that the construction industry has been experiencing for many years. Some firms make it over the hurdles that mark the various stages of growth while others falter at one or another of the hurdles and suddenly go out of business. The question for all construction professionals is what sets them apart? Why do some companies make it and go on to be remarkable examples of American business ingenuity while others can’t scale the hurdles to success?
As we have so often discussed in the past, there are many causes of construction company failures, but research shows that not maintaining an adequate level of capital is a primary factor in construction’s constant consolidation.
It is apparent that the long-term successful companies that dominate the construction landscape have been successful at managing access to capital every step of the way. Construction companies are capital intensive businesses with large amounts invested in fixed assets like heavy equipment, vehicles, etc. Not having enough capital to get through lean times, to overcome unexpected surprises, or to fuel planned growth is a primary cause of failure.
The “haves” have access to adequate capital at each stage. The “have-nots” – do not. And that has made all the difference.
Next week we’ll discuss how to be a “have”.
For a deeper look into consolidation, read more here: CONSOLIDATION
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