In the fast-paced and often unpredictable construction industry, businesses can easily find themselves struggling to stay afloat. Whether it’s cash flow issues, labor shortages, or underbidding, construction companies face unique challenges that can quickly escalate if not addressed. However, a failing construction business is not a lost cause. With the right strategies in place, it’s possible to turn things around and get back on a path to profitability.
As someone who has owned an electrical company and consulted for various construction firms, I’ve seen firsthand the common pitfalls construction businesses encounter. I’ve also developed effective strategies for overcoming them. In this blog, I’ll share five proven methods to help turn around a struggling construction business, putting it back on solid financial ground.
1. Audit Your Cash Flow
One of the most common reasons construction businesses fail is poor cash flow management. In construction, expenses are often high and payments delayed, making it difficult to maintain a healthy cash flow. If you’re running low on cash, the first step is to audit your cash flow thoroughly.
Key Steps for Auditing Your Cash Flow:
Track Every Inflow and Outflow: Start by creating a detailed report of all income sources and expenses. Look at how much money is coming in, when it’s arriving, and how much is going out to suppliers, subcontractors, and overhead.
Identify Late Payments: Late payments from clients can severely impact your cash flow. Identify which clients are consistently behind on payments and consider stricter payment terms or incentivize faster payments with discounts.
Review Payment Terms with Subcontractors and Suppliers: Revisit your payment terms with suppliers and subcontractors. Can you negotiate extended payment terms to align more closely with when you receive payments from clients? Stretching out these terms can give you more breathing room.
Implement a Cash Flow Forecast: Forecasting your cash flow over the next few months will help you anticipate future financial gaps and take action before they occur.
Regularly reviewing your cash flow and making adjustments will ensure that your business stays financially stable. In my own experience, a construction business I worked with was able to increase cash flow by 25% in six months by renegotiating supplier terms and implementing more aggressive collection efforts on receivables.
2. Reassess Your Bidding Process
Bidding on projects is a make-or-break aspect of any construction business. Underbidding leads to tight profit margins, while overbidding can result in losing projects to competitors. A failing construction business can often trace part of its financial troubles to a flawed bidding process.
Key Tips for a More Accurate Bidding Process:
Analyze Past Projects: Look at past projects where you lost money or barely broke even. What were the common factors? Did you underestimate labor costs, material costs, or the project timeline?
Factor in Unforeseen Costs: Always build in a buffer for unforeseen costs, such as price hikes in materials, weather delays, or unexpected regulatory changes. It’s better to include these contingencies upfront than to face unpleasant surprises later.
Include Overhead Costs: Many businesses only focus on direct project costs and forget to account for indirect costs such as administrative expenses, insurance, and equipment maintenance. Ensure these are part of your bid to avoid operating at a loss.
Know Your Break-even Point: Before submitting any bid, know your break-even point for the project. This is the absolute minimum you can bid while still covering costs and making a small profit.
Accurate bidding is an essential skill that can determine the profitability of your construction business. By taking a more strategic approach, you can bid smarter and ensure your projects are profitable from the start.
3. Optimize Your Workforce
Labor costs are one of the highest expenses in construction, and mismanaging your workforce can lead to financial strain. If you’re operating a failing construction business, it’s time to optimize your workforce for maximum productivity and cost efficiency.
Strategies for Workforce Optimization:
Evaluate Productivity: Assess which teams or individuals are performing at their best and which ones are lagging. Implement performance reviews and set clear goals to boost productivity.
Reduce Overtime: Overtime can significantly inflate your labor costs. If you’re frequently relying on overtime, it could indicate that you’re understaffed or misallocating resources. Consider hiring temporary labor for peak periods instead of paying for costly overtime.
Cross-train Employees: Cross-training employees can make your workforce more flexible and allow you to allocate labor where it’s needed most, reducing downtime and increasing efficiency.
Right-size Your Team: Having too many workers on a project can eat into your profits, while having too few can lead to delays and cost overruns. Use past projects as benchmarks to determine the optimal team size for different project types and scopes.
Optimizing your workforce not only helps you cut unnecessary costs but also ensures that your projects are completed on time and to a high standard.
4. Negotiate Better Supplier Terms
Material costs can fluctuate wildly, and poor supplier relationships can exacerbate the financial stress of a failing construction business. Strengthening your relationships with suppliers and negotiating better terms can help reduce costs and improve cash flow.
How to Get Better Supplier Terms:
Leverage Bulk Orders: If you’re able to, order materials in bulk to take advantage of discounts. Even small savings on frequently used materials like concrete, steel, or lumber can add up to significant cost reductions over time.
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Negotiate Longer Payment Terms: Many suppliers offer 30-day payment terms by default, but you can often negotiate 60- or 90-day terms if you’ve maintained a good relationship. This allows you more time to get paid by clients before paying for materials.
Build Strong Relationships: Consistent communication and timely payments build goodwill with suppliers, which can lead to favorable terms when you need them most. I’ve seen construction businesses save thousands by simply building rapport with their suppliers and securing loyalty discounts or payment extensions during tough times.
Explore Alternative Suppliers: If your current suppliers are unwilling to budge on price or terms, don’t hesitate to shop around. There’s a competitive market for construction materials, and switching to a more flexible supplier could significantly improve your bottom line.
In my experience, negotiating supplier terms helped a business I consulted for reduce material costs by 15% and increase cash flow flexibility, which was key to turning around the company.
5. Build an Emergency Fund
Construction is an unpredictable industry, with variables like weather, regulation changes, and material shortages often outside of your control. For long-term survival, it’s critical to build a financial buffer in the form of an emergency fund.
How to Build and Manage Your Emergency Fund:
Set a Savings Target: Aim to set aside at least 3-6 months’ worth of operating expenses. This will cover payroll, materials, and other overhead in the event of delayed payments or project setbacks.
Start Small: If your business is struggling, start by setting aside a small portion of each project’s profits until you reach your target. The key is to be consistent, even if the initial savings feel insignificant.
Keep the Fund Separate: Create a separate bank account for your emergency fund so you’re not tempted to dip into it for non-essential expenses.
Use It Only for True Emergencies: An emergency fund should only be tapped into during genuine crises, like a major project delay or a sudden drop in incoming work. It’s not a buffer for minor cash flow issues or unexpected expenses that can be absorbed by your regular operating budget.
Having an emergency fund in place gives your business the breathing room it needs to weather the inevitable storms that come with the construction industry.
Conclusion
Running a construction business comes with unique financial challenges, but even a failing business can be turned around with the right strategies. By auditing your cash flow, reassessing your bidding process, optimizing your workforce, negotiating better supplier terms, and building an emergency fund, you can stabilize your business and put it back on a path to profitability.
If your construction business is struggling, now is the time to take action. These strategies have helped countless businesses regain their footing, and they can help yours too. For a more personalized approach, reach out for a free consultation, and let’s discuss how to get your business back on track.
By following these proven methods, you’ll not only stop the bleeding but also lay the foundation for long-term success. Don’t wait until it’s too late—start making changes today!
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