Why So Many Contractors Fail In The First Year: 5 Common Problems They Have
Every year, tens of thousands of construction businesses open up shop.
Unfortunately, we know that - on average - more than 20% of those new construction businesses are closed down within one year of their opening.
And the business survival rates continue to drop year after year from there.
- So why do so many contractors fail within the first 365 days of opening?
- What are the most common reasons why home service companies close their business?
- And most importantly, what can you do to make sure you don’t become one of those statistics?
The Data On When Construction Businesses Fail
Per the U.S. Bureau of Labor Statistics - over 66,000 construction companies started in 2022.
One year later, 20% of them - that’s 12,886 recently opened construction and home service businesses - would be gone.
Looking at longer-term data - of all the roughly 59,000 construction businesses that opened in 2018 nearly half of them (over 25,000 businesses) shut down within five years.
From the US Small Business Administration - In 2015, the most popular reason why businesses with employees in general closed up shop was because of low sales and cash flow problems.
Construction and home service companies shut down every day - but it doesn’t need to happen to you.
The Common Problems & Pitfalls That Failing Contractor Businesses All Have In Common
Let’s review what you can do to face the challenges of business ownership head-on and avoid the common problems and pitfalls that cause businesses to close.
Lack Of A Clear Business Plan
We’ve seen many contractors start up their businesses because they are passionate about their craft. Many of those folks are excited to run their own business, perhaps because they’ve worked in the industry for a while and want to better provide for themselves and their families by taking things to the next level.
But that passion for quality craft and customer service does not a business make. When you’re doing it right, running a business is more about running a company and less about doing the day’s job.
Having a clear business plan includes knowing how you are going to financially make things work as a company. You have to do things like track sales, know your costs, and understand how much business you need to make your company sustainable while also taking home a fair wage for yourself and your employees.
Having passion for running a business is great, but it requires structure to be successful in the long haul.
A business plan includes short-term and long-term goals for your success. It is a comprehensive plan that should include a financial, legal, operational, and marketing/promotional game plan for your business.
Cashflow Mis-Management
Having an understanding of where money comes in and goes out of your business is key.
Most contractors and home service providers have ebb and flow in their business. Your business will have bills to pay, even in the slow times.
Seasons impact how customers prioritize their spending, and you shouldn’t be surprised by that.
Unless your industry specializes in recurring, year-round services – your monthly income can be a bit dynamic.
Maximize your income during the busy times of the year, so that you can save up and have the cash on hand to keep things running smoothly all year long.
No Customer Retention Or Referrals
Contractors spend a lot of time and effort to get new clients. So why wouldn’t you maximize the value of those customers?
Between repeat business and customer referrals, every contractor and home service company has major opportunities to get more money from customers that you’ve already satisfied.
Whether it is service companies offering maintenance plans, pre-scheduling annual services to lock someone in, or using an incentivized referral program to get your past clients excited to tell their friends about you - find ways to work more with the customers that you know like you.
No Plan For Local Reviews
Successful businesses are not passive about their reviews.
You can’t just sit back and wait for customers to leave you reviews when they are inspired by your superior service.
If you go to a coffee shop and get your drink exactly as you ordered it, you won’t write home about it.
But if you go to that same coffee shop and your coffee is too hot, too cold, too sweet, too bitter - then you’ve got a problem.
The typical person is much more motivated by the emotions that come with a negative review.
If someone is satisfied with a service they receive or a product they buy, that’s not much motivation to say something. It’s what the customer expected to happen.
Businesses that survive have an active review management plan. They complete proactive outreach to ask satisfied customers for reviews and reply to online reviews appropriately. These businesses know that by making customer review communication an integral part of their operations, they are improving their business visibility and customer care.
Neglecting Marketing
The worst offenders here are the folks who do no marketing at all.
Being solely dependent on “word of mouth” without any real marketing effort or other potential lead streams is not a sustainable way to grow your business.
Just beyond that, if you get a website or start with an agency and you decide that you’re now done with contributing to your own marketing efforts - chances are you’re doing it wrong.
Unless you have your own fully fleshed-out marketing department within your business, any marketing company you work with will require collaboration.
So unless you have dedicated staff members to maintain your website, manage your Google Business Profile and local optimization, complete review outreach on your behalf, visit your job sites for ongoing photography and videography, run your referral program, manage your paid advertising campaign, etc. - you still need to contribute to your own success, even if “you already pay for marketing” or “already have a website.”
You need to collaborate to get the most value out of your marketing efforts.
Long-lasting businesses know that hiring a marketing company doesn’t mean you’re done working on your business marketing - it means you’ve only just begun.
Set up your core marketing efforts early to maximize the benefits of time. Continue to assess, reassess, and experiment with your marketing efforts to find the best combinations of marketing and advertising tactics that work to achieve a well-balanced, cost-effective lead flow.
Protecting Your Business From Failure
Protect yourself and your business from downfall. Set goals for your business, plan for the good and bad times, maximize your past customers' value, gain positive reviews, and collaborate on marketing growth.
Resources
Stats from U.S. Bureau of Labor Statistics - https://www.bls.gov/bdm/bdmage.htm#Construction
"Why Do Businesses Close?" - Small Business Facts - PDF from U.S. Small Business Administration - Office Of Advocacy
About Chris Lonergan
Chris Lonergan has over 12 years of contractor marketing experience with Footbridge Media. With a background in web design, print design, content creation, and online marketing, Chris is focused on providing quality marketing and business solutions in the construction and service industries - helping small business owners to more efficiently manage their company and grow their operations.
