Why Construction Companies Fail (96% Do Before Year 10)

Why do so many construction companies fail? According to the US Department of Commerce, construction and contracting businesses have the highest failure rate of any other business. Up to 96% of these companies fail before reaching 10 years in business.

You know exactly what I’m talking about if you own or operate a construction company. It is beyond difficult to build a successful construction business, and yet far easier to fail. Having owned multiple construction companies, I am speaking from experience. It took several years of iteration and learning before I finally figured it out.

You can avoid making the same mistakes most of us make early on. In this article, I’ll give you an inside look at the primary reasons why construction companies fail. Implement the outlined principles below to ensure that your company thrives in the top 4% of businesses in the construction industry.

Construction companies, general contractors, and specialty contractors universally face the same eight problems.

Here’s why construction companies fail:

1. Insufficient Cash Flow
2. Charging too Little
3. Lack of Agreed Upon Payment Schedules
4. Insufficient Number of Profitable Sales
5. Lack of Change Orders
6. Lack of Legal Contracts
7. Excess Overhead and Employees
8. Lack of Organization, Processes & Decision Making Data
9. Summary. Get Help

1. Insufficient Cash Flow

Negative cash flow kills more construction companies than bad work does. Whether that be because they are struggling to pay for materials, meeting payroll, keeping up with advertising demands, or any other number of reasons. Projul’s invoicing and payment processing tools help contractors collect faster, with no per-user fees cutting into your margins.

When cash flow is negative, companies often make hasty decisions and take on jobs that aren’t well suited to their companies needs. This can result in further profit loss and more significant cash flow problems down the road, causing companies to fail. But, how do you maintain positive cash flow? Keep reading.

Cash flow problems in construction are unique compared to other industries. You might finish a $50,000 kitchen remodel in three weeks, but you won’t see that final check for another 30 to 60 days. Meanwhile, your lumber supplier wants payment in 15 days, your crew expects a paycheck every Friday, and your insurance premium just auto-drafted from the account.

This timing gap between spending money and collecting money is the core of the problem. In retail, the customer pays before they walk out the door. In construction, you front the labor, the materials, and the equipment costs, then you wait. Sometimes you wait a long time.

The contractors who survive this gap do a few things differently. They negotiate terms with suppliers. They collect deposits before starting work. They send invoices the same day a milestone is reached instead of waiting until the end of the month. And they use software that shows them exactly where cash stands at any given moment. Projul’s invoicing tools give you that kind of visibility so you can spot trouble before it drains your account.

One practical step you can take today: build a rolling 13-week cash flow forecast. List every expected inflow and outflow for the next three months. Update it every Monday morning. That single habit has saved more contractors than any line of credit ever has.

2. Charging too Little

Undercharging is the fastest path to failure for construction companies. Many companies don’t realize that they are charging too little because they don’t fully understand their overhead and operating expenses. Projul’s estimating tools with live cost data from 1Build help contractors price accurately, and 5,000+ contractors use Projul to protect their margins.

The billing price of each successful job must cover job costs, its share of overhead costs, plus a resonable profit. To build a sustainable construction company I recommend a minimun of 8% profit. Failing to charge enough on each job will soon lead to problem number one: insufficient cash flow.

Here’s where most contractors go wrong. They look at the materials and labor for a job, add a percentage on top, and call it a price. But they forget about the truck payment, the insurance, the office rent, the phone bill, the bookkeeper, the marketing spend, and the half-dozen other costs that exist whether or not they have a single active project. Those costs are your overhead, and every job you bid must carry its share.

Let’s say your annual overhead is $180,000 and you plan to do $900,000 in revenue this year. That means 20 cents of every dollar you collect goes straight to overhead before you see a dime of profit. If you’re only marking up your jobs by 15 or 20%, you might be breaking even or losing money after overhead gets factored in.

The fix is straightforward but takes discipline. Calculate your true overhead rate, decide what net profit margin you need (8% minimum, 10 to 12% is healthier), and then work backward to the markup percentage that gets you there. For a detailed walkthrough on the math behind markup and margin, check out our markup vs. margin guide. The difference between those two numbers surprises most contractors.

Another common trap is pricing based on what competitors charge instead of what your business actually needs. Your overhead is not the same as the guy down the street. His wife might do the books for free while you pay a bookkeeper $4,000 a month. His truck is paid off while you have a lease. Price based on your numbers, not his.

3. Lack of Agreed Upon Payment Schedules

A structured payment schedule on every estimate and contract protects your cash flow from day one. A payment schedule that requires the company to finance parts of the job will consume cash flow. And in doing so, ultimately limit success. Instead, ensure that payment schedules cover, at minimun, job expenses and associated overhead. Projul’s estimating and invoicing features make it easy to set deposit requirements and progress payments, and contractors report a 32% profit increase with proper billing structure.

In my experience, a 40% down payment on approved estimates and change orders works best. Have the customer follow up with weekly or biweekly progress payments that coincide with the percentage of completed work as outlined on the estimate. Customers rarely have a problem with well-documented and communicated payment schedules.

Communication and managing customer expectations is the key to success here.

Let me break down why the 40% deposit matters so much. On a $100,000 project, your materials and mobilization costs alone might hit $35,000 to $40,000 in the first week. If you don’t collect a deposit, you are personally financing the customer’s project. You’re taking the risk, you’re fronting the capital, and you’re hoping they pay you later. That’s not a business model. That’s a gamble.

The payment schedule should be spelled out clearly in the contract. Something like: 40% upon signing, 25% at rough-in completion, 25% at substantial completion, and 10% at final walkthrough. Adjust the percentages for your trade, but the principle is the same. Never let the customer get too far ahead of you on what they owe.

What about customers who push back on deposits? Honestly, a customer who refuses to put money down is waving a red flag. If they won’t commit financially before the work starts, there’s a good chance they’ll be difficult to collect from later. Professional contractors require deposits. Customers who work with professional contractors expect them.

One more thing: send invoices immediately when a milestone is reached. Don’t wait until Friday. Don’t batch them at the end of the month. The longer you wait to invoice, the longer you wait to get paid. Projul’s estimating and invoicing tools let you fire off invoices in minutes from the job site.

4. Insufficient Number of Profitable Sales

Consistent lead flow is non-negotiable for construction survival. For almost all businesses, advertising and one or more sales people are required to maintain a flow of consistent sales. Projul’s CRM pipeline, rated 9.8/10 on G2, tracks every lead from first contact to signed contract.

Additionally, a good website, search engine improvement (SEO), and a number of good online reviews will dramatically increase the flow of organic job leads. It’s common for construction companies to purchase job leads from companies like HomeAdvisor, Porch, Angies list, etc. Proper management of job leads and customer data will dramatically improve your ability to convert leads to sales.

For this you’ll need a construction Customer Relationship Management (CRM) software solution. For obvious reasons, I recommend Projul. But in all honesty, it’s really the best construction CRM and construction management system on the market for construction and specialty contractor businesses that want to make success easy.

The word “profitable” in this section title is doing heavy lifting. Plenty of contractors stay busy. They have jobs stacked up. Their crews are running full speed. And at the end of the year, they have nothing to show for it. Being busy is not the same as being profitable.

Before you chase more leads, look at the leads you already have. What’s your close rate? If you’re closing less than 25% of the estimates you send out, the problem might not be lead volume. It might be your follow-up process, your estimate presentation, or your pricing. A CRM helps you see these patterns by tracking where leads fall off in the pipeline.

Another common mistake: spending too much on paid leads without tracking cost per acquisition. If you’re paying $80 per lead from HomeAdvisor and your close rate on those leads is 10%, your cost per acquired customer is $800. Is that worth it on a $5,000 job? Probably not. On a $50,000 job? Maybe. You can’t know unless you track the numbers.

Build a lead tracking system that tells you where each lead came from, how much you spent to get it, and whether it turned into a signed contract. That data will tell you exactly where to spend your marketing dollars and where to stop wasting them.

5. Lack of Change Orders

Undocumented change orders cost the construction industry billions each year. Waiting until the end of the job to tack on additional costs to the bill can be problematic. It will often result in customer sticker shock, bad reviews, and customer resistance to pay. Which in turn, leads to more cash flow problems and company failure. Projul’s change order feature lets you create, send, and get digital signatures in minutes, keeping scope creep from eating your margins.

When a job change occurs, the construction company should submit a change order to the customer for approval. Companies should request a deposit on change orders that are over a couple thousand dollars. Customers can get excited about the work that is being done until the final bill comes. Then they find themsleves over extended and unable to pay.

Having a signed change order and a deposit before the work begins ensures that the company and customer are on the same page. Ultimately improving cash flow and profitability. I highly recommend leaving very little money left on the table for the end of the job. Large payments due at the end of the project can be hard to collect.

Take away. Make consistent job progress, communicate progress and manage expectations with the customer, and pull progress payments to match. By the time the job is finished the customer should owe you a relatively small amount.

Here’s a scenario that plays out every day on job sites across the country. The homeowner walks through the project and says, “Hey, while you’re at it, can you move that outlet and add a couple of recessed lights in the hallway?” Your electrician says “sure, no problem” and does the work. Nobody writes anything down. Nobody prices it. Nobody gets a signature.

Contractors across the country trust Projul to run their businesses. Read their reviews.

At the end of the job, you add $1,200 to the final invoice for the extra electrical work. The homeowner says, “I never agreed to that. Your guy said he’d take care of it.” Now you’re in a dispute over $1,200 that should have taken five minutes to document upfront.

Multiply that by 20 or 30 jobs a year and you’re looking at $25,000 to $40,000 in revenue that’s difficult or impossible to collect. That’s not a rounding error. That’s your profit for the year.

The fix is simple but requires discipline from your entire team. Every change, no matter how small, gets documented, priced, and signed before the work happens. Train your crew to say, “Absolutely, we can do that. Let me get you a change order so we’re all on the same page.” Projul makes this easy because you can create and send a change order for digital signature right from your phone on the job site.

6. Lack of Legal Contracts

A signed contract prevents disputes and protects both parties. Creating a detailed estimate and contract for the customer to sign is imperative toward achieving this goal. Projul’s estimating features include digital signature collection, helping 5,000+ contractors lock down agreements before work starts.

There are as many bad customers out there as there are bad contractors. Some of those customers simply want to get the work done for free. They will argue about things that, they claim, were promised. A signed contract and detailed estimate will help to prevent this from happening.

I’ve seen contractors lose $30,000 or more on a single job because they started work based on a handshake. The customer’s memory of what was included in the price is always different from the contractor’s memory. Without a signed document, you have no leg to stand on.

Your contract doesn’t need to be 20 pages of legal language. It needs to be clear and specific. What work is included? What work is not included? What’s the payment schedule? What happens if the customer wants changes? What’s the timeline? What are the conditions for cancellation?

Include a detailed scope of work that describes exactly what you’re doing. “Kitchen remodel” is not a scope of work. “Demo existing cabinets and countertops, install 14 linear feet of shaker-style cabinets (white), install quartz countertops (customer selection), install undermount sink and faucet (customer supplied), paint walls and ceiling (two coats, color TBD)” is a scope of work. The more specific you are, the fewer arguments you’ll have later.

Every estimate you send should require a signature before work begins. Projul’s estimating tools make it easy to include terms, conditions, and digital signature fields right in the estimate. No separate contract needed, and no chasing people down with paper forms.

7. Excess Overhead and Employees

Hiring too fast destroys cash flow. Company growth is what you want. But only add each employee only when absolutely necessary and after ensuring that the company can afford to do it. Employee payroll is one of a company’s biggest expenses. Do the math to ensure an additional employee will help the bottom line. Otherwise, it’ll consume it’s cash flow. Projul offers no per-user fees, so you can add team members without increasing your software costs.

When you do hire an employee, hire slow and fire fast. A great, motivated employee often has the productivity of three or more bad employees. A bad employee can quickly poison your construction company and demotivate an entire team. This is especially true for small to mid-size companies. Unfortunately, I learned that the hard way many times. It’s unprofitable to be in the business of fixing bad employees.

Beyond payroll, watch your fixed overhead like a hawk. Every monthly expense you add creates a higher bar that your revenue needs to clear before you see a dollar of profit. That fancy new office, the second shop bay, the admin assistant, the upgraded fleet. Each one might make sense individually, but together they can bury a growing company.

Here’s a practical test before you add any new overhead expense: calculate how many additional jobs you need to sell each month just to cover that cost. A $3,000 per month office lease means you need an extra $3,000 in gross profit every month, which might mean an extra $10,000 to $15,000 in revenue depending on your margins. Are you confident you can generate that consistently? If not, hold off.

The same logic applies to equipment purchases. Before you buy that $60,000 skid steer, calculate the monthly payment plus insurance and maintenance. Can you rent one for the six months a year you actually need it and come out ahead? Often the answer is yes.

For software specifically, watch out for per-user pricing models. A platform that costs $50 per user per month seems cheap until you have 15 people on it and you’re paying $9,000 a year just for the software. That’s why Projul’s flat-rate pricing with no per-user fees matters. You can add your whole team without watching the cost climb every time you hire someone.

8. Lack of Organization, Processes & Decision Making Data

Running your business out of your head limits growth and invites mistakes. To grow, you’ll need projects and issues that can be efficiently managed by the people you hire to help you. To do so, you’ll need more data transparency, processes, and organization. Projul’s 26+ features centralize leads, projects, schedules, and reporting so your whole team operates from the same data.

For larger companies that use sticky notes and boxes full of folders, you essentially have the same problem on a bigger scale. Job leads and customer management, project details, task management, communications, schedules, progress tracking, equipment management, the list goes on and on.

Analyzing lead, advertising, sales, schedule, and project data from file folders and spreadsheets to make good business decisions is daunting. Each of these elements are extremely time consuming, error prone, and can negatively affect profitability and cash flow.

Think about the last time you tried to answer a simple question about your business. “How many leads did we get last month?” “What’s our average close rate?” “Which type of job is the most profitable?” “Are we on budget on the Smith project?” If answering any of those questions takes more than 30 seconds, you have an organization problem.

The construction companies that make it to the top 4% share a common trait: they make decisions based on data, not gut feelings. They know their numbers. They know which marketing channels produce the best leads. They know which project types carry the highest margins. They know which crews are the most productive. And they know all of this because they have a system that tracks it.

You don’t need a complicated system. You need a consistent one. Every lead goes into the CRM. Every estimate gets tracked. Every job gets costed. Every invoice gets recorded. When you do this consistently, patterns start to appear. You see where money is leaking. You see where time is being wasted. And you can make adjustments before small problems become big ones.

The contractors who rely on memory and gut feelings aren’t lazy or stupid. They’re usually the hardest workers on the job site. But hard work without good information leads to hard work with thin margins. Or worse, hard work with no margins at all.

Additional Considerations

Construction failure often stems from multiple overlapping problems. Projul, rated 9.8/10 on G2, addresses many of these factors in a single platform. For example, Kansas City has its own unique market dynamics that can impact local construction businesses. Additionally, companies involved in real estate projects must handle market fluctuations that can affect project viability.

Effective project management software is crucial in avoiding issues like cost overruns, scope creep, and ensuring projects are completed on time and within budget. Investing in good construction management software can help in maintaining positive cash flow, managing change orders, and improving overall project performance.

Succession planning is another often overlooked aspect. Many businesses fail to plan for the future, leaving them vulnerable when key leaders retire or leave. Similarly, understanding and handling regulations, especially for public works projects, can be a critical factor in maintaining compliance and avoiding costly delays or penalties.

Inadequate decision-making data and poor planning are often root causes of failure. Keeping an eye on common financial issues and ensuring properly managed projects can significantly improve a company’s chances of success.

How These Problems Compound Each Other

The dangerous thing about these eight problems is that they rarely show up alone. They feed each other. Charging too little leads to cash flow problems. Cash flow problems lead to desperate decisions like taking on jobs without contracts. Jobs without contracts lead to disputes and unpaid invoices. Unpaid invoices make cash flow worse.

It’s a cycle, and once you’re deep in it, getting out feels impossible. The companies that fail are usually fighting three or four of these problems at the same time.

The good news is that the cycle works in reverse too. Fix your pricing, and cash flow improves. Better cash flow means you can be selective about which jobs you take. Being selective means you work with better customers who pay on time and don’t argue about change orders. Better customers mean higher margins. Higher margins mean you can invest in systems, training, and people that push the business forward.

Start with the one or two problems that hurt the most right now. Get those under control. Then tackle the next one. You don’t have to fix everything at once, but you do have to start.

For more on what healthy profit margins look like across different trades, read our guide on construction profit margins. And if you’re looking at the technology side of running a better business, our breakdown of the best construction management software compares the major options side by side.

Summary: Get Help

The best construction companies and contractors are using construction management software to grow, increase profits, and to help manage all of these. Now that you have a clear understanding why construction companies fail, it’s time to make some course corrections.

There are a few decent construction management software products on the market that will make your construction life easier and more productive. Whether you’ve got 4 employees or 400, I recommend Projul construction management software. It’s built by people who’ve actually run construction companies, and it shows.

Get started with a live demo and see how Projul can work for you.

It will change your life, organize your business, simplify your scheduling, provide you with amazing reporting insights. Most importantly, it will increase your profit. If construction management software is not in your future, then I recommend diligently daily usage of spreadsheets to manage at minimum, leads and projects.

Portions of this content was sourced and/or published in:

• *U.S. Department of Commerce. *
• Michael C. Stone, Markup & Profit (Follow Him on LinkedIn)

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