Causes of Subcontractor Business Failure and Strategies to Prevent Failure

Abstract

Construction is a risky business, and subcontractors often find themselves in financial difficulty, which results in business failure. This paper reports the results of a study undertaken to investigate the primary causes of subcontractor business failure and to identify strategies for preventing failure. Construction industry bankers, bonding professionals, construction accountants, and specialty construction firm owners were interviewed to collect information regarding the primary causes of business failure, to determine if the primary causes varied based on the size of the construction firm, and to identify strategies that company leaders could adopt to prevent these problems and reduce the risk of business failure. There were some external economic factors identified that influence the profitability of a firm, but most of the causes identified relate to the business practices of the company and the lack of an effective business plan. The primary causes of business failure identified were insufficient capital/excessive debt, lack of managerial maturity, lack of early warning measures, increase in project scope, poor billing procedures, failure to evaluate project profitability, unfamiliarity with new geographical areas, and poor use of accounting systems. Based on the results of this analysis, risk management strategies were developed for small, mid-size and large firms.