How to Recognize Your Contractor’s Growth Risk
The construction industry is ever-growing. Not only are businesses pushing for greater development internally, but they are also turning to the construction industry as they expand their efforts. Unfortunately, contractors can get in over their heads if they aren’t too careful.
Construction companies can take on too much too fast, putting their team and projects at risk of failure. When this happens, conditions become unsafe, schedules unmet, and clients unhappy. Of course, it is difficult turning down projects—especially those that promise significant returns. But if contractors hope to maintain a strong reputation and score promising projects down the road, they must find a healthy balance.
Here are a few ways to know when a contractor’s growth risk is too high.
Watch for Symptoms
If you are unsure if your contractor can take on your project, you must look for the symptoms. These may include:
- Unexplained cash flow
- Disproportionate increases in overhead
- High levels of employee turnover
- Increased disputes among staff
- Decreased quality of work
- Accounting mishaps
When it comes down to it, rapidly growing without any means of supporting the growth is by far the most glaring symptom of all.
Rapid growth for construction businesses typically require increases in overhead expenses. As these expenses increase, resources are stretched thin, estimated production costs are missed, and efficiency decreases. Because of the growth, all this is occurring at a time when a business’s trusted staff is diluted by newly hired employees who may not perform as anticipated.
Businesses may borrow against cash receivable, but over time, those accounts will dry up. When this happens, things may go downhill fast. As things start declining, many clients may wonder, “I wish I would have seen this coming.” Sadly, the first sign is often seeing your incoming business take off.
Understand the Numbers
Growth eats up funds, and rapid growth makes all your free-flowing cash part of its buffet. However, despite looking for the symptoms, there are also thresholds to better understand when growth is increasing too quickly. An annual growth rate under 15% has minimal risk.
Growth rates that exceed 15% but doesn’t exceed 25% is also a decently reasonable risk. Growing at a rate of 25% to 50% involves moderate risk, and over 50% is a serious risk.
Keeping your growth around 25% is actually a great sign that your business is growing as it should. Companies should try their best to keep their growth rate steady without exceeding exponentially over 25%. If companies exceed these numbers, they put themselves at high risk of failure and even bankruptcy. Undertake a growth rate over 25% and detailed planning must occur for the work to get accomplished, funded, and successful.
Look at Management
Construction executive management is managing contractor growth risk. As they mitigate risks, managers must determine how much growth the company can handle. Successful businesses have a management team that openly discusses with the entire team, what is working, how far resources can reach and decides what is best. Successful contractors that have been in business for years know how to predict the impact of different growth rates. They also understand when to walk away from a project if it puts their company at too high of a risk.
At Wollam Construction, our team understands when to bid on a project and when to walk away. We regret when we must walk away from projects that are not the right fit or do not have the right timing. We recognize the need for growth, but do not want to put the quality of our client’s projects at risk. That is why when we go after a project, we guarantee that our team has the experience, expertise, and capacity to make it a success. To learn more about how Wollam Construction works, contact us. We would love to discuss your project and let you know if it is the right fit.