Determinants of business failure: the perspective of SMEs Building Contractors in the Ghanaian Construction Industry

Organizations have to be successful in their businesses in order to survive in competitive business environments in the 21st century. However, the construction industry has unique characteristics that distinguish it from other sectors of the economy. It is fragmented, very sensitive to the economic cycles and political environment, and has a significantly high rate of business failure. Business failure, collapse and bankruptcy are common terms in the industry due to the many risks inherent in how the industry operates. Throughout the world, the relative ease of entry gives rise to a large number of contracting firms competing in the market exposing many of them to business failure, Ghana is no exception. The objectives of this paper are to report on a research study which aims at identifying the determinants of business failure of SMEs building contractors in the Ghanaian construction industry and investigating their severity from the contractor's point of view and strategic measures to address this contending issue. The research begins by identifying determinants of business failure of building contractors through critical review of pertinent literature and to develop severity index and also establish strategic measures to address this contending issue in the Ghanaian context. The results obtained from the literature review in the first phase provided the framework and the basis for the development of the survey questionnaire which was used to collect data from the field. Subsequently the data was analysed using descriptive statistics, severity index development of determinants of business failure, rank correlation analysis and one sample t-test. The descriptive statistics and the test of hypotheses largely confirmed the variables which were identified in the literature. The development of the severity indices identified the most severe determinants of business failure as; suspension of projects of previous government, delay in collecting debts from new political heads, financial demands from political heads, non-payment of interest on delayed payments, assigning incompetent project leader at the site, lack of access to capital, undervaluing of work done, change in government policies, low profit margin due to competition, delay in collecting payments, frauds/pilfering, lack of material control systems, poor monitoring and control, poor estimation practices, awarding contracts to incompetent political party members, poor tendering/selection procedure, high and unstable inflation and national slump in the economy. The research also identified that of the five thematic areas of business failure; political factors were most severe, followed by financial, managerial, business environment and business growth in that order. A hypothesis that “D2/K2, D3/K3 and D4/K4 classes of contractors generally agree to the overall severity of rank of failures” was tested and shown to hold true. In the case of strategic measures to address business failure by the contractors themselves and other stakeholders in the construction industry, one sample t-test of the variables also identified and established that; competent site engineer, proper material control systems, easy access to capital, flexible interest rate, ensuring regular and accurate valuation and record keeping system as the most critical factors that would impact on business survival of SMEs contractors in the Ghanaian context. It is anticipated that lessons drawn from the research will serve as early warning signal to SMEs and even large contractors in the running of their businesses and also ensure that proper measures are put in place to address issues which are self imposing. The government and other stakeholders in the industry are also expected to take a cue from the research to ensure that these contractors have the necessary leverage to survive in this risky and competitive industry for them to contribute to the reduction in the infrastructural deficit of the country.

Source: KNUST