Construction Law

What Causes Construction Industry Bankruptcies?

The concept of going bankrupt strikes fear into the heart of many contractors and construction business owners. Many view bankruptcy as a conceit of failure, an indicator that the person or persons at the head of a company were unable to get the deal done either through poor business decisions or lackluster execution on the project site. Still, the question remains, what exactly causes construction industry bankruptcies?

Several significant bankruptcies rocked the construction industry in 2018, and there’s no guarantee that 2019 will be any different. To get to the root of this significant issue, the Nashville contractor attorneys at Cotney Construction Law will discuss some of the most common causes of bankruptcy in the construction industry.

Poor Financial Planning

Contractors in the construction industry must be incredibly diligent with the way they spend money. Poor financial planning has been the downfall of countless businesses, and contractors, especially at smaller firms, must realize that they’re sitting at the table with high rollers but don’t have the luxury of playing with house money. In other words, many companies can’t afford to go “all-in” on any facet of a project, regardless of how confident they are in the owner financing the project or the abilities of their subcontractors and suppliers.

When an owner overextends themselves financially, a project can go downhill quickly. If they were relying on a single source of income to fund the majority of a project, and that financier pulls out, the contractor may be the one taking the hit, especially if they’ve already contracted out portions of the project to subcontractors and suppliers. Of course, this is avoidable if you partner with a Nashville contractor attorney to advise you through the initial stages of contract negotiation and review.

Late Payments

Many construction businesses go bankrupt as a result of late or delayed payments. Let’s face it, getting paid in the construction industry isn’t always a cakewalk. While you’re undoubtedly familiar with the legal avenues contractors must sometimes take to get paid, playing the waiting game, especially during times of the year where projects are scarce, can prove to be too much for a business to handle. Contractors are often forced to float a substantial portion of the project costs and expenses as they await payment from the owner. When these “out-of-pocket” expenses reach an unmanageable level, some contractors are forced to fold and file for bankruptcy. Cash flow issues plague many business owners and can severely stunt the growth of a company that is trying to handle business with honesty and integrity.

The phrase “growth eats cash” applies to many businesses in the construction industry. It refers to a company in a state of flux where new business is being acquired at a rate so fast that the company runs out of working capital to facilitate this business. When you consider that margins for construction projects can be small, especially for businesses trying to stake their claim in the industry, it’s no wonder that bankruptcy is such a pressing issue in the construction industry.

If you would like to speak with one of our Nashville contractor attorneys, please contact us today.

 

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.