Construction projects are high risk presenting unusual logistical challenges for companies constructing new office buildings, plants or production facilities. Underestimating risk can lead to poor procurement strategy or the lack of skilled resources to actively manage the risk of project implementation may lead to poor decision-making.
Relationships with sub-contractors
Construction contractors are under constant pressure to improve margins, reduce costs and improve predictability. Developing long-term relationships with key strategic suppliers is a key part of delivering this strategy. This involves construction companies motivating their contractors to be pro-active, develop new approaches, solutions and work with them to reduce risk.
PPP projects are an important source of construction and investment income for many of the largest construction companies, however, they can also be high risk. There is a time-lag between bidding for a project and receiving earnings. Project over-runs are common and can present a significant risk.
Absence of barriers
Due to the ease of entry into the construction industry, there is a proliferation of small firms with little management expertise in the industry. There are just too many contractors at unsustainable prices. This leads to the tendering of projects by small contractors who are not capable of doing the job. They become insolvent when they cannot manage the job.
Cash flow problems
Nearly all companies that fail do so because of cash flow problems. Cash flow is more of a problem in the construction industry than in any other industries due to the fact that when tied to a fixed price contract, normal market forces are immobilized. Too often, people concentrate on whether they are making a profit. However this profit is tied up in debtors, work in progress or retentions.
Poor financial control
Successful contractors do well in cash control and management. They employ highly sophisticated techniques of cash flow forecasting and monitoring. A well managed contractor maintains detailed financial, cost and management accounts which allocate cost in as much details as possible to specific contracts and to individual elements within them.
The 'knock-on' effect
The majority of contractors in the industry are small firms with just a few employees. Small firms often fail because of the financial failure of another company which is further up in the supply chain. This is known as the "knock-on" effect.