New Zealand is experiencing a building boom. Huge housing demands in Auckland and Canterbury should see builders set for at least ten years. Why then are more construction companies going bust and declaring insolvency or facing liquidation?

Over 100 rebuild related firms have gone belly-up in Christchurch since the February 2011 quakes, collectively owing $35 million! Mainzeal, Tribeca, and Valiant homes will be familiar names if you read Auckland liquidation notices.

In both cases, the problems facing the construction industry seem to fall into one of two camps:

1. Companies expanded far too rapidly as they expected a windfall slice of the boom.

After the earthquakes and big housing announcements from the government lots of companies started taking on extra staff and buying up materials in preparation for all the work that was going to come their way.

As the number of competitors grows, so does the price of building materials. This inflates costs across the board and makes quoting for jobs very difficult. Companies are constantly aware that they have to charge enough to cover costs but be cheap enough to win the tender. A few poor calls can lead to an early demise.

A few misquoted jobs, or paying staff while waiting for red tape to clear caused some overinflated construction companies to close their doors. In the case of Waikato building company Stanley Construction, a system error on a single project caused their financial downfall. Thanks to quick action Stanley Construction avoided liquidation by reaching a company compromise with creditors.

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2. Mismanagement and bad financial decisions

Many tradesmen saw the potential in the housing boom and decided to leap from wage earner to company director. Being an excellent tradesperson does not make you good at cashflow, GST, PAYE and all the other factors that face business owners. Not keeping up to date with tax returns and invoicing will cause a business to collapse, no matter which industry you are in.

With building booms come the rise of cowboys – tradespeople who ride in, do a slapdash job and try to leave before people are any wiser.

Not spending enough time, using cheap materials, and generally cutting corners on construction projects can save you money in the short term. But, as any good tradesperson will know, you don’t make money if you have to return to the job and do it again.

With the rise of social media, cowboys will be named and shamed fairly quickly, effectively ensuring they don’t pick up any more work.

How can you avoid failure in the construction industry? Work with your accountant to make accurate financial plans. Don’t take on more workers, vehicles, tools and materials because you “hope” more work will come your way, use their advice to grow within your means.

Have a business plan, and make sure staff, suppliers, contractors and creditors are paid on time. Your accountant should also be able to help with this, or recommend a bookkeeper who can do it for you.

Finally, do excellent work on-site. Happy customers mean good referrals, and you save money by not returning to the job for a do-over.

For more valuable information, download our guide Options for Companies in Financial Difficulty.