During the past few decades, there have been dozens of large contractors that, after many years of growth and apparent prosperity, experienced notable financial disasters, resulting in bankruptcy or a reincarnation of the business in a much different form. A new study from FMI Corporation, "Why Contractors Fail: A Causal Analysis of Large Contractor Bankruptcies," seeks to understand what set the failed companies apart from their more successful peers.
"Many people from failed companies point to issues outside the control of their companies as the causes of their demise. Yet, in any market, at any time, you can find examples of companies that succeeded despite the same external force being present when another company suffered a catastrophic financial event," notes Hugh Rice, chair and co-author of the study.
While FMI researchers agreed that external economic conditions and the nature of the construction industry were significant factors in a company's demise, they also found other internal root causes were typically present in failed companies. These causes were categorized as either "Culture and Systems of an Organization" or "The Mind of the Contractor" and included issues ranging from a lack of financial discipline to the mindset of the contractor.
From the research, FMI created a "Failure Chain Reaction Model: Critical Root Causes" to show the interplay of these critical root causes with external causes that lead to financial disaster. The firm is developing diagnostic tools based on this model to provide new ways for firms to assess their level of risk for failure.
"Why Contractors Fail: A Causal Analysis of Large Contractor Bankruptcies," a summary of the research study, appeared in "FMI Quarterly," Issue 2, 2007, the construction industry's premiere resource for business management solutions. For a copy of the article, write to mprendergast@fminet.com.