Study Assesses Causes of Large Contractor Failures

Encompass Services Group, Guy F. Atkinson, J.A. Jones and Dillingham Construction. These are just a few of the large and historically successful contractors that experienced catastrophic financial trouble in recent history. These and dozens of other companies were reviewed as part of a new study from FMI Corp., which sought to achieve a better understanding of the reasons for large contractor failures.

Encompass Services Group, Guy F. Atkinson, J.A. Jones and Dillingham Construction. These are just a few of the large and historically successful contractors that experienced catastrophic financial trouble in recent history. These and dozens of other companies were reviewed as part of a new study from FMI Corp., which sought to achieve a better understanding of the reasons for large contractor failures.

Hugh Rice, FMI chairman and co-author of the report, noted: “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.”

FMI, spurred on by interest from the Construction Industry Round Table, set out to determine what set the failed companies apart from their more successful peers.

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 internal 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 mentality of contractors who are driven to grow, fear layoffs and have excessive egos.

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.

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