Vipul Patel was running what, by all measures, was a successful small construction firm, primarily specialising in interior fit-outs. As the business expanded, buoyed by a thriving economy, so too did his firm’s bank balance, along with the acquisition of new equipment, tools, vehicles, and even staff.
Three years into the business, however, Vipul began to experience difficulties in contract execution. This issue was not a result of an economic downturn; in fact, the economy continued to flourish. He found himself constantly needing to request extensions, which began to damage his reputation. Moreover, the company’s bank balance started to dwindle, forcing him to rely on bank overdrafts and plead with suppliers for extended credit terms. By the fourth year, Vipul had no choice but to surrender and declare bankruptcy.
Vipul’s predicament could have stemmed from various factors.
The Cashflow Trap
In standard business practice, if your income exceeds your expenses, you are in a strong position. However, in Kenya, a contractor may appear to be making a profit on paper while facing dire circumstances. Construction businesses typically incur substantial upfront costs—such as purchasing materials, leasing equipment, and paying employees—before payments begin to flow from clients. By the time work commences on a project, the business is often already in a financial hole. Even after completing a job, payments can be delayed by as long as 90 days, or even years, depending on whether the employer is public or private and the presence of disputes.
In a recent interview with an established contractor, this troubling situation was brought to light. Mr Narani Hirani, who has been in the industry for decades, told Construction Kenya Showcase: “A contractor is required to deploy to the site and begin work for at least 28 days, but it may take another 28 days before the first payment is received. This means that the contractor must somehow find their own funds to work during that period.” Such conditions severely impact the contractor’s cash flow.
Unrealistic Bids
Another significant challenge facing some contractors is the temptation to submit unrealistic bids. To ensure their bids stand out, they may deliberately underquote, hoping to compensate for this through labour and materials manipulation. The harsh reality is that creating an accurate estimate is crucial to ensuring that your company can complete the project successfully and meet the cash requirements as it progresses. Shortcuts are counterproductive, and this is often realised shortly after the work begins.
Biting Off More Than You Can Chew
This may sound contradictory, but securing multiple contracts can indeed spell disaster for a contractor. The more contracts you have, the better? Not necessarily. Unless you possess the capacity to manage several projects simultaneously, taking on too many jobs can be problematic, especially for small and medium-sized contractors. You may simply lack the adequate resources to deliver on multiple fronts. Attempting to juggle numerous projects often stretches two critical resources—labour and cash—too thin, resulting in delays and poor workmanship due to inadequate supervision. This inevitably leads to issues with clients, and your name may soon be associated with unreliability.
As a small contractor, it is essential to recognise these common pitfalls and develop strategies to avoid them.
