Eight Ways to Avoid Construction Business Failure 1

Monday, April 28th, 2014
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For a long time, the construction industry in Australia has suffered excessive rates of business failure and insolvency, with entities of all sizes operating across all sectors being affected.

Moreover, despite policy maker efforts over recent decades in areas such as arbitration, security for payment legislation and domestic builder legislation, survival rates among builders, property developers and subcontractors remain too low. In the December quarter of 2013 alone, figures from the Australian Securities and Investments Commission suggest no fewer than 463 construction businesses entered external administration. This at a time when building conditions were turning upward.

Here are eight key themes I have observed throughout almost three decades of industry involvement that can help companies avoid this fate:

1) Foster a culture of professionalism

In my experience, companies that survive the varying stages of the business cycle are incredibly astute and promote a culture of professionalism and a commitment to quality.

Those who have this gain a reputation which allows them greater choice with regard to the contracts for which they bid. Companies who do not share this reputation are forced to scramble for less lucrative work.

2) Surround yourself with the right people

Firms which prosper in the long term tend to develop the right base of reputable clients with good payment records and engage only suitably qualified service people such as accountants and lawyers.

This requires constant diligence as clients with a sound financial base and payment record today may not be that way in a number of years’ time.

3) Get the team right

A leading developer in Melbourne recently told me that whilst large projects will always entail challenges, those who take the time to get the right team in place have a much higher success rate than those who do not.

This is exactly right. As structures built upon solid foundations generally last in tough conditions, so too do property development firms who develop the right team, engage capable architects and quantity surveyors and maintain positive relationships with financiers.

4) Don’t buy work

Underquoting is a major cause of insolvency and the days of being able to win work on low quotes and vary your way out of trouble are long gone.

Instead, develop a reputation for excellence and bid only for work with regard to which you are able to make a satisfactory financial return.

5) Get the Contract Right

Many times over the years I have acted for clients who have become locked into unfair and unreasonable contracts with regard to which they have had little chance of escaping.

‘Home grown’ contracts are particularly problematic, as are ‘take it or leave it’ ones where terms are non-negotiable and the other party says you can simply take the deal or leave the deal. Such contracts are heartless and oppressive – a blight on the industry. Moreover, large contracts can have nasty provisions hidden in the detail.

All this underscores the need to engage a good construction lawyer and ensure you fully understand the contract and agree only to terms which are reasonable and fair.

6) Keep on top of your paper work

Know the contract well and follow it to the letter, always claiming appropriately for variations and delays and getting all variations documented in writing.

Above all, if the contract provides that variations have to be agreed upon, scoped and costed along with time impacts, do not start work on the matter to which the variation relates until this has been done.

7) Beware the drip feed

Drip feeding occurs where progress payments are only partly paid rather than being paid in full – a situation that will often leave you out of pocket at the end of the project with some clients being subject to trumped up counterclaims to delay payment and missing out altogether where company assets have been sold leaving insufficient money for them to be paid.

Be wary when this situation occurs. Do not be prepared to let it go on.

8) Don’t throw good money after bad

Many times I have seen contractors spending fortunes in the pursuit of money owed that was never going to be recovered.

Don’t fall into this trap. Instead, make an objective assessment regarding your chances of success and continue to pursue the matter only when these justify the costs involved.

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  1. Paul Symonds

    I like the point about under-quoting of work.

    You are not working for nothing. If you can't make a fair and reasonable financial return on your work, why do it?