I experienced this firsthand when my company was sent in by sureties to complete projects interrupted by a contractor’s unexpected failure. The Contractors were always shocked that they did not see it coming. The question is why didn’t anyone see it coming? It happens too often.
428 Years in Business (Construction News, UK, 03 JUL 2019)
“The UK’s oldest contractor collapsed after 428 continuous years in business… “Durtnell & Sons is preparing to put a debt repayment proposal to its creditors to allow it to carry on trading… (It failed and they bankrupt.)
“The company, founded in 1591, had been working on the refurbishment of Brighton Dome Corn Exchange and Studio Theatre. Yesterday Brighton Council said the company…had suddenly ceased trading. “We had to take back the site and make it secure”, a council statement said…
“Current boss Alex Durtnell is the 13th generation of the family to head up the firm. He blamed “very challenging” economic conditions for the collapse…
“One of Durtnell & Sons earliest projects was the Poundsbridge Manor in Kent, which was built in 1593 and still stands today.”
Surprise?
The failure of the oldest continuously operating contracting firm in the world at that time is a dramatic example of how vulnerable even long-running legacy firms are to collapse. This was not the first contractor that ran out of cash to pay current bills and was forced to close their doors. I have been conducting research for years trying to determine why sudden collapse happens so frequently in the contracting business, and why the company’s principals are always caught completely off guard.
Flaws in the Business Model
More than a decade of completing failed projects for the surety industry provided me with data on hundreds of up-close and personal contractor failure cases to study. Here’s the secret my research uncovered:
Sudden contractor failure and the surprise and anger that often accompany these events are caused by flaws that have seeped unnoticed into the construction industry’s business model over the past 75 years.
By ‘flaws in the business model’ I mean common everyday business practices that contractors simply accept as the way we do business. After years of what was considered standard practices, no one questioned how we were doing business. It was simply the nature of the construction business.
Common Counterproductive Practices
These are the top ten counterproductive everyday business practices my research uncovered that have become part of the contracting business model. These slowly eroded profit margins to the surprise and indignation of otherwise completely competent contractors who thought they were successful until they suddenly weren’t.
Low-bid acquisition
Fixed contract pricing
Commodity pricing
Providing interest-free financing of the client’s work-in-progress.
Emphasizing top line growth over bottom line profit.
Not understanding that firms have capacity limits.
Little or no access to public equity capital.
Disregard for accounting disciplines.
Believing that cash flow trumps profit.
Haphazard organizational development.
Beliefs
If contractors believed they were doing the wrong thing they wouldn’t do it. Over the years contractors have unfortunately come to believe that the above common business practices are appropriate and the very nature of the contracting business.
For the next ten weeks we will be taking a closer look at these ten counterproductive business practices that have become standard operating procedure in the construction industry. If you share any of the beliefs below, you might want to stay with us for the next ten weeks. Your future success may be in the balance.
“If you want to stay in business you have to aggressively bid for the available work in a highly competitive market.”
“You have to finance the work in progress before you can expect the project owner to pay for it.”
“I, or family own this business. We don’t want to sell any of it to others or to Wall Street pirates.”
“We need to go out and get the next job in order to finance current work-in-progress that we haven’t been paid for yet because we need the cash flow.”
“Our accountants are not construction people. They don’t really know the business. They just keep score after we’ve played the game.”
For more information on profitable business practices, read more at: PROFIT
For a broader view of financial management, read more at: MANAGEMENT
To receive the free weekly Construction Messages, ask questions, or make comments contact me at research@simplarfoundation.org.
Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.
