BUSINESS SURVIVAL IN THE CONSTRUCTION INDUSTRY IN RELATION

TO OTHER BUSINESSES: A COMPARATIVE ANALYSIS

A Thesis

by

SAURIN ANAND KAKKAD

Submitted to the Office of Graduate and Professional Studies of

Texas A&M University
in partial fulfillment of the requirements for the degree of

MASTER OF SCIENCE

Chair of Committee, Iftekharuddin Mohammed Choudhury

Committee Members, José L. Fernández-Solís
Wei Li

Head of Department, Joseph P. Horlen

May 2017

Major Subject: Construction Management

Copyright 2017 Saurin Anand Kakkad

 ABSTRACT

The construction industry is one of the largest industry in the United States; it

employs close to seven million people and contributes the most to the growth of the

country’s economy. In spite of the huge impact that the industry has on the US economy,

construction businesses have a hard time surviving in the market, with construction

companies having the lowest survival rate among all the industries. Only 36.4% of new

construction companies had survived in the past 5 years since 2012. This study aims at

providing evidence that the construction industry suffers the most as compared to the

other industries in terms of business survival rate. The statistical techniques used are

Chi-Square test for independence and a General Linear Model. Results show a

significant difference between the construction industry and other industries, proving

that the construction industry businesses have the lowest survival rate.

ii
 DEDICATION

To me friends, for supporting me through my journey at Texas A&M University.

To my professors and teachers, who have helped me reach where I am today.

My mother Beena Kakkad

My father Anand Kakkad

To my family, for their undying support & love,

“Family is where Life begins & Love never ends”

iii
 ACKNOWLEDGEMENTS

I would like to convey my gratitude to my committee chair, Dr. Choudhury, and

my committee members, Dr. Fernández-Solís and Dr. Li for their guidance and support

throughout the course of this research.

I would like to thank Dr. Bigelow and Ms. Liz Smith for guiding and assisting

me and making my time here at the Construction Science Department a lot easier.

Thanks to my friends and colleagues, and the department faculty and staff for

making my time at Texas A&M University a great experience.

Finally, thanks to my family for their encouragement and support.

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 CONTRIBUTORS AND FUNDING SOURCES

Contributors

This work was supervised by a dissertation committee consisting of Dr.

Iftekharuddin Mohammed Choudhury and Dr. José Fernández-Solís of the Department

of Construction Science and Dr. Wei Li of Department of Architecture.

All work for the dissertation was completed independently by the student.

Funding Sources

Graduate study had no funding.

v
 TABLE OF CONTENTS

Page

ABSTRACT .............................................................................................................. ii

DEDICATION .......................................................................................................... iii

ACKNOWLEDGEMENTS ...................................................................................... iv

CONTRIBUTORS AND FUNDING SOURCES ..................................................... v

TABLE OF CONTENTS .......................................................................................... vi

LIST OF FIGURES ................................................................................................... viii

LIST OF TABLES .................................................................................................... ix

CHAPTER I INTRODUCTION .......................................................................... 1

Objectives of the Study ................................................................ 2

Research Questions ...................................................................... 3
Scope and Limitations.................................................................. 3

CHAPTER II LITERATURE REVIEW ............................................................... 4

On-Site Worker Injuries ............................................................... 5

Seasonal Slowness of Construction.............................................. 5
Excessive Change Orders ............................................................. 6
Delays in Projects ......................................................................... 6
Labor, Equipment and Material Availability ............................... 7
Labor and Equipment Productivity .............................................. 8
Acts of God .................................................................................. 8
Quality of Work ........................................................................... 9

CHAPTER III METHODOLOGY ......................................................................... 10

Data Collection ............................................................................. 10

Variables and Measurement ......................................................... 11

vi
 Page

CHAPTER IV ANALYSIS AND RESULTS ........................................................ 15

Chi-Square Test for Independence ............................................... 15

Pairwise Comparison using a General Linear Model................... 19

CHAPTER V DISCUSSION AND CONCLUSION ............................................ 21

REFERENCES ........................................................................................................ 24

vii
 LIST OF FIGURES

FIGURE Page

1 Comparison of Business Survival Rates. ................................................... 4

2 Stages of Research .................................................................................... 10

3 Comparison of Survival Rates ................................................................... 17

4 Reasons for Construction Business Failure ................................................ 22

viii
 LIST OF TABLES

TABLE Page

1 Business Survival Rate - I .......................................................................... 12

2 Business Survival Rate - II ........................................................................ 13

3 Business Survival Rate - III ....................................................................... 14

4 Chi-Square Tests ........................................................................................ 16

5 Construction vs Other Industries ................................................................ 19

ix
 CHAPTER I

INTRODUCTION

According to Clusel et al. (2011), failure in business is considered as a state of

insolvency, which is when a company using its assets is unable to meet its liabilities. The

reasons for company failure are causes that are more often than not predictable. Thus the

inability of a company to address these predictable certain risks which in the future turn

into causes are the main reasons for business failure. Frederikslust (1978) defines failure

of a business as the inability of the business to meet its obligations. From an economic

point of view, Altman (1971) defines a business failure when the return on investment

for the business is lower when compared to a similar investment with a high rate of

return. Similarly, Storey (1994) defines business failure as shortage of revenue to meet

the demands of cost or where the return on investment of a business is less as compared

to the company’s cost of capital.

The reasons for business failure often vary from business to business and also the

industry in which the business operates. Some of the common reasons for business

failure as suggested by Frederikslust (1978) are recession, loss of an important client,

management errors and inabilities, inadequate supply or demand, etc. Child (1972)

emphasizes that the failure of businesses is often because of managerial inability and

errors. In another study by Peterson (1983), it was seen that the common reasons for

business failure are lack of managerial expertise, high interest rates, recession,

undercapitalization, taxes, competition, cash flow, regulations and overhead.

1
 The failure of businesses has a significant impact on the country’s economy.

Business failures leads to unemployment and unpaid debts. Business failure in the

construction industry, the highest contributor to the US economy and having seven

million employees, will have significant impact on the economy of the nation.

Objectives of the Study

Failure in business is a concept which is not acknowledged by many businesses.

But, in construction, failure of business is a big possibility. The construction industry is a

dynamic industry, which involves the input of a number of parties’ before, during and

after construction. Further, the construction industry is extremely dependent on the

country’s economy, has huge competitiveness and has a relative ease of entrance for new

firms. All these factors considered, make construction industry a prime candidate for

business failures.

The study aims at proving that businesses in construction have the lowest rate of

survival when compared to businesses in other industries. The study further discusses the

various risks involved in construction that make it the most vulnerable industry. The

study will help inform construction industry professionals about the various risks leading

to business failure and will help them better manage their businesses.

2
Research Questions

Being the leading contributor to the nation’s economy, what makes the

construction industry the most vulnerable amongst all the industries? The construction

industry is an amalgam of contractors, subcontractors, owners, clients, labors and so on.

High number of parties, large investments, environment, make construction an extremely

risky business. This study aims at answering questions related to construction

businesses, such as, is the business survival rate of businesses in the construction

industry the lowest? What makes the construction industry different as compared to

other industries? What risks are peculiar to construction?

Scope and Limitations

The study covers business survival rates of industries within the United States

only. The data used for the study is confined to only agriculture, mining, construction,

manufacturing, transportation, communication and utilities (TCU), wholesale, retail,

finance, insurance and real estate (FIRE) and services industries and does not consider

data for any industry other than the ones mentioned above. The data used is limited from

the years 1977 to 2014. The trend followed in these years may have since then changed

and conclusions may vary accordingly.

3
 CHAPTER II

LITERATURE REVIEW

Starting any business has its risks and the survival of companies is difficult, as

shown in Figure 1, this is especially portrayed in the construction industry, where it is

seen that for a time period of 5 years, construction industry has the lowest survival rate.

(Shane S. 2012)

Figure 1: Comparison of Business Survival Rates (Shane S. 2012)

In a research by Knaup & Piazzi (2006), monitoring the survival rates of

different sectors of the industry, it was found that the construction industry showed the

2nd to last survival rate when compared to other sectors of the industry. The study,

4
which looked at businesses launched in the second quarter of 1998, projected that 30

percent of construction companies survive after seven years. Again, that was better only

than the information sector, with 25 percent surviving after seven years.

The construction industry is a high risk and high hazard industry, with different

risks which won’t be seen in other industries. The risks often seen in construction

include,

On-Site Worker Injuries

According to Kisner & Fosbroke (1994), the construction industry is plagued

with injuries and hazards. The construction industry has the highest fatal injuries and

work days lost out of all the industries. Also, the construction industry had the highest

injury incidence rate. In another study by Dong, Largay & Windau (2014), it was found

that construction workers are at high risk. It was found that in 2011, the construction

industry had a total fatalities of 781, which is more than any other industry in the United

States. Because of the difference in occupational hazards and exposures that construction

has, safety of workers and the liability associated with injuries and fatalities can be one

the largest risks that the construction industry faces.

Seasonal Slowness of Construction

Another risk that sets the construction industry apart from other industries is the

seasonal slowness that is seen in construction in the months of winter. According to

Kraus (2016), work in winter is often stalled or slowed down because of the extreme

weather conditions in most of the United States. In 2014 and 2015, the extreme

conditions in weather, produced a real slowdown in the work. Construction companies

5
that are unable to cope up with the unavailability of work and increased competition

during this season, might find it difficult to keep their business up. Hence seasonal

slowness is one of the risks that can have a massive impact on construction businesses.

Excessive Change Orders

In construction often times, as a result of faulty work, contractors have to process

change orders. The risk associated with change orders is of one the most commonly

occurring risks in the construction industry. The impact of this risk will depend upon the

type of work that needs a change order. According to Moselhi, Assem & El-Rayes

(2005), change orders often have a negative impact on the productivity and efficiency of

a project. Further change orders often cause problems to the contractors and the owners

which results in cost and time overruns. In another study by Serag et al. (2010), change

orders are the most commonly occurring expense in construction and can often lead to

overall increase in contract price by 5-10%. Thus, the risk associated with change orders

can often times be too much for some construction businesses to undertake.

Delays in Projects

Project delays is another risk in construction that occurs frequently. Because

construction projects are long and can last for years, the chance of delays in project

completion can be high. In a study by Srdic & Selih (2015), it was seen that delays in

projects can often lead to additional costs, conflicts and litigation. The cost associated

with a delay can often times make businesses vulnerable and can lead to businesses

hanging on for their survival.

6
Labor, Equipment and Material Availability

In a study by Alonso et al. (2007), it was mentioned that the unavailability of

materials has a visible effect on the construction industry, this is mainly because of the

high tonnages of materials that construction requires and also because of the high degree

of alternatives available. Further, all product supply chains are vulnerable to the

unavailability of materials but not all businesses have found a way to adapt with the

unavailability of materials.

Equipment in construction plays an extremely important role. According to

Tatari & Skibniewski (2006), construction equipment is of the most important and

valuable assets that a construction company can own. 50% of top 400 contractors in the

United States own their own equipment, hence the proper availability and management

of equipment is extremely important for the success of construction businesses where the

profit margins are low.

Availability of skilled workers can play a critical role in the way construction

projects are planned and carried out. In a study by Rasdorf, Hummer & Vereen (2016), it

was identified that an adequate supply of skilled workers is one of the key dimensions to

the aging transportation system in the United States. Further, the unavailability of skilled

workers in 2013, posed a problem for the construction of chemical facilities on the US

gulf coast. Hence, it is extremely essential to plan for the requirement of labor in

construction.

7
Labor and Equipment Productivity

Labor productivity has an important role in the construction industry. As

construction is a labor intensive industry, the productivity of labor plays a critical role in

construction projects. It was found that labor productivity can have an impact of up to

10-15% on the construction costs and schedules. Thus construction businesses can save

valuable resources and time by investing in labor productivity. (Thomas, 2012)

Equipment in construction are needed in large quantities. Hence, it is necessary

that construction equipment deliver the productivity expected from them. Productivity in

equipment refers to the amount of work done by an equipment in a given period of time.

Hence to save on costs and delays, it is necessary that construction equipment have good

productivity and minimal repairs. (Kannan 2011)

Acts of God

Natural disasters don’t occur frequently but when they do they have a massive

impact on construction projects. Theses disasters are risks that have a low probability of

occurrence but can have a huge negative impact. The disasters included in acts of god

include, heavy floods, landslides, hurricanes and earthquakes. Any business that has the

misfortune to come across an act of god can have huge financial losses if not insured.

Hence, the risks related to an act of god is not to be understated. (Balaoi & Price, 2003)

8
Quality of Work

Quality of work in construction is of foremost importance as compared to other

industries. Construction is not a rapid production industry, products of construction are

singular and can take years to develop, and hence the quality required in these products

is of grave importance.

Poor quality can gravely affect the cost and schedule of the project. As poor

quality of work leads to increased change orders and increased work hours for labors and

equipment, the overall expenses for a contractor keep on increasing. (Love et al., 2016),

regulation, rapid growth and lack of experience also play a huge role in the overall way a

construction business is operated.

All these risks add up in a construction business and can lead to major losses and

reduce the overall business survival rates of businesses in the construction industry.

Thus, in order to prove that the construction industry has the lowest business survival

rate amongst all the industries, data containing the business survival rate of all the

industries was obtained from the United States Census Bureau.

9
 CHAPTER III

METHODOLOGY

Discussion
&
Analysis & Conclusion
Results

Data
collection

Figure 2: Stages of Research

The research is carried out in 3 stages as depicted in Figure 2.

Data Collection

The data for the study was collected from the United States Census Bureau. The

data for the study consisted of business survival rates for all the industries within the U.S

such as agriculture, mining, construction, manufacturing, transportation, communication

and utilities (TCU), wholesale, retail, finance, insurance and real estate (FIRE) and

services from the year 1977 to 2014.

10
Variables and Measurement

The variables for the study consists of business survival rates for agriculture,

mining, construction, manufacturing, transportation, communication and utilities (TCU),

wholesale, retail, finance, insurance and real estate (FIRE) and services from the year

1977 to 2014.

For the purpose of the study, business survival rate for a particular year is defined

as the difference between the number of businesses that entered and the number of

businesses that exited for any particular year. The business survival rate is considered

‘high’ if the difference is positive and is considered ‘low’ if the difference is either 0 or

negative.

Business survival rate is given by the formula:

Business Survival Rate =

Number of Businesses Entering – Number of Businesses Exiting

The data collected for each industry is as shown in the Tables 1, 2 & 3.

11
 Construction Agriculture Mining
Business Business Business
Year Survival Rate Survival Survival Rate Survival Survival Rate Survival
1977 24984 HIGH 223 HIGH 1154 HIGH
1978 27793 HIGH 1159 HIGH 362 HIGH
1979 26726 HIGH 2445 HIGH 1555 HIGH
1980 -6026 LOW 1129 HIGH 1008 HIGH
1981 -21294 LOW 504 HIGH 2547 HIGH
1982 -11682 LOW 2262 HIGH 3585 HIGH
1983 -2526 LOW 2141 HIGH -1074 LOW
1984 26571 HIGH 3289 HIGH -81 LOW
1985 25183 HIGH 4046 HIGH 244 HIGH
1986 21481 HIGH 3777 HIGH -1215 LOW
1987 28607 HIGH 4745 HIGH -2830 LOW
1988 10918 HIGH 2975 HIGH -765 LOW
1989 4214 HIGH 2724 HIGH -760 LOW
1990 20628 HIGH 5808 HIGH -135 LOW
1991 -4167 LOW 3101 HIGH 21 HIGH
1992 3429 HIGH 3084 HIGH -924 LOW
1993 12124 HIGH 2357 HIGH -598 LOW
1994 18045 HIGH 3292 HIGH -456 LOW
1995 23366 HIGH 4506 HIGH -480 LOW
1996 12439 HIGH 3058 HIGH -509 LOW
1997 15839 HIGH 3537 HIGH -193 LOW
1998 9667 HIGH 2474 HIGH -405 LOW
1999 12074 HIGH 2776 HIGH -826 LOW
2000 4116 HIGH 2489 HIGH -110 LOW
2001 -6145 LOW 1477 HIGH 19 HIGH
2002 -4919 LOW -61 LOW -25 LOW
2003 -6987 LOW 3172 HIGH 100 HIGH
2004 -6481 LOW 4110 HIGH 333 HIGH
2005 -10282 LOW 4056 HIGH 850 HIGH
2006 -3473 LOW 5025 HIGH 1438 HIGH
2007 -11767 LOW 3146 HIGH 1214 HIGH
2008 -24222 LOW 2050 HIGH 1037 HIGH
2009 -45364 LOW -1710 LOW 378 HIGH
2010 -30127 LOW 328 HIGH -150 LOW
2011 -19615 LOW 140 HIGH 656 HIGH
2012 -5629 LOW 4363 HIGH 1069 HIGH
2013 -10841 LOW -491 LOW 188 HIGH
2014 -2695 LOW 2335 HIGH 577 HIGH

Table 1: Business Survival Rate - I

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 Manufacturing TCU Services
Business Business Business
Year Survival Rate Survival Survival Rate Survival Survival Rate Survival
1977 7614 HIGH 64114 HIGH 7287 HIGH
1978 2184 HIGH 35865 HIGH 3606 HIGH
1979 8365 HIGH 62507 HIGH 6548 HIGH
1980 3149 HIGH 41543 HIGH 2599 HIGH
1981 -2107 LOW 22436 HIGH -538 LOW
1982 6475 HIGH 89701 HIGH 7454 HIGH
1983 -2128 LOW 47791 HIGH 3609 HIGH
1984 6389 HIGH 80106 HIGH 7579 HIGH
1985 7335 HIGH 67727 HIGH 6396 HIGH
1986 2446 HIGH 70558 HIGH 6600 HIGH
1987 3141 HIGH 75957 HIGH 9799 HIGH
1988 4797 HIGH 36155 HIGH 2417 HIGH
1989 986 HIGH 28959 HIGH 4519 HIGH
1990 7294 HIGH 72648 HIGH 6383 HIGH
1991 359 HIGH 56494 HIGH 8872 HIGH
1992 -2079 LOW 51280 HIGH 9199 HIGH
1993 2396 HIGH 42508 HIGH 5381 HIGH
1994 3031 HIGH 49217 HIGH 8610 HIGH
1995 4359 HIGH 59924 HIGH 9449 HIGH
1996 1395 HIGH 54579 HIGH 6300 HIGH
1997 -416 LOW 64273 HIGH 4902 HIGH
1998 56 HIGH 45894 HIGH 8207 HIGH
1999 -3370 LOW 33620 HIGH 3997 HIGH
2000 -3763 LOW 20570 HIGH 2222 HIGH
2001 -6344 LOW 13624 HIGH 6100 HIGH
2002 -9200 LOW 40532 HIGH -1078 LOW
2003 -3201 LOW 83857 HIGH 5186 HIGH
2004 -1633 LOW 95447 HIGH 4010 HIGH
2005 264 HIGH 111255 HIGH 5469 HIGH
2006 713 HIGH 89450 HIGH 8667 HIGH
2007 -1729 LOW 69298 HIGH 6040 HIGH
2008 -3834 LOW 45098 HIGH 2029 HIGH
2009 -10720 LOW -19104 LOW -5863 LOW
2010 -9044 LOW 12102 HIGH -2927 LOW
2011 -4050 LOW 24134 HIGH 5906 HIGH
2012 -2867 LOW 39313 HIGH 3815 HIGH
2013 -4378 LOW 25119 HIGH 3871 HIGH
2014 -2814 LOW 41875 HIGH 9969 HIGH

Table 2: Business Survival Rate - II

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 Wholesale Retail FIRE
Business Business Business
Year Survival Rate Survival Survival Rate Survival Survival Rate Survival
1977 13784 HIGH 42692 HIGH 9889 HIGH
1978 5147 HIGH -7623 LOW 9354 HIGH
1979 12339 HIGH 31212 HIGH 18195 HIGH
1980 6008 HIGH 1305 HIGH 5234 HIGH
1981 237 HIGH -31380 LOW -2108 LOW
1982 18170 HIGH 55767 HIGH 3025 HIGH
1983 159 HIGH 3382 HIGH 5011 HIGH
1984 8261 HIGH 13534 HIGH 13509 HIGH
1985 8162 HIGH 9399 HIGH 14382 HIGH
1986 9133 HIGH 27153 HIGH 12735 HIGH
1987 7493 HIGH 37385 HIGH 12879 HIGH
1988 4941 HIGH 9189 HIGH 18093 HIGH
1989 5031 HIGH 7417 HIGH 2173 HIGH
1990 12569 HIGH 22340 HIGH 13533 HIGH
1991 7321 HIGH 7583 HIGH 29923 HIGH
1992 1290 HIGH -963 LOW 16336 HIGH
1993 3644 HIGH -1708 LOW 4830 HIGH
1994 5388 HIGH 10743 HIGH 17263 HIGH
1995 9162 HIGH 12617 HIGH 14026 HIGH
1996 6783 HIGH 13529 HIGH 10592 HIGH
1997 1123 HIGH 4310 HIGH 17838 HIGH
1998 -3468 LOW -2982 LOW 8509 HIGH
1999 -4246 LOW -4688 LOW 16788 HIGH
2000 -6843 LOW 1563 HIGH 5348 HIGH
2001 -7308 LOW -6461 LOW 8103 HIGH
2002 -5846 LOW 10209 HIGH 13731 HIGH
2003 1967 HIGH 36270 HIGH 33588 HIGH
2004 3035 HIGH 23445 HIGH 18775 HIGH
2005 6074 HIGH 39951 HIGH 31491 HIGH
2006 5287 HIGH 20652 HIGH 32876 HIGH
2007 769 HIGH 28346 HIGH 23142 HIGH
2008 92 HIGH 16128 HIGH -1829 LOW
2009 -8267 LOW -8603 LOW -20897 LOW
2010 -4439 LOW 5607 HIGH -5152 LOW
2011 -1004 LOW 12296 HIGH -3404 LOW
2012 -2357 LOW 15466 HIGH 13569 HIGH
2013 -2220 LOW 2165 HIGH 5424 HIGH
2014 -69 LOW -28535 LOW 13148 HIGH

Table 3: Business Survival Rate - III

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 CHAPTER IV

ANALYSIS AND RESULTS

In order to prove that construction industry has the lowest survival rate amongst

all the industries, a Chi-Square test of independence was conducted. For further

comparison between the construction industry and other industries a general linear

model was run.

Chi-Square Test for Independence

A Chi-Square test for independence compares two variables to see if they are

related or not. A Chi-Square test for independence is based on the formula,

where, X = Chi-Square value, c = degrees of freedom, O = observed value and E =

expected value.

The null hypothesis in this case is,

H0: There is no significant difference between construction and other industries, that the

rate of survival of companies is similar for all the industries.

The results from running the Chi-Square test for independence are shown in

Table 4.

15
 Asymptotic
Significance (2-
Value Df sided)
Pearson Chi-Square 55.297 8 .000
N of Valid Cases 342

Table 4: Chi-Square Tests

A Chi-square value of 55.297 which is greater than the critical value of 17.535

for df = 8, α = 0.05, signifies that the null hypothesis is rejected and that there is a

significant difference between the construction industry and other industries. A

significant difference indicates that survival rate for construction companies from 1977-

2014 has been significantly different as compared to other industries.

16
 Figure 3: Comparison of Survival Rates

Out of 38 years of business survival data seen through Figure 1, agriculture had

high survival in 35 years and low in 3 years, meaning that more businesses opened rather

than closed in 35 out of the 38 years, proving that agriculture had a high business

survival rate from 1977-2014.

FIRE had high survival in 33 years and low in 5 years, meaning that more

businesses were opened rather than closed in 33 out of the 38 years, proving that FIRE

had a high business survival rate from 1977-2014

Retail had high survival in 37 years and low survival in 1 year, meaning that

more businesses opened rather than closed in 37 out of the 38 years, proving that retail

had a high business survival rate from 1977-2014.

17
 TCU had high survival in 34 years and low survival in 4 years, meaning that

more businesses opened rather than closed in 34 out of the 38 years, proving that TCU

had a high business survival rate from 1977-2014.

Wholesale had high survival in 27 years and low in 11 years, meaning that more

businesses opened rather than closed in 27 out of the 38 years, proving that whole sale

had a high survival rate for a majority of the years from 1977-2014.

Manufacturing and Mining had high survival in 20 years and low survival in 18

years, meaning that more number of businesses opened rather than closed in 20 out of

the 38 years, which is a majority but still low as compared to some of the other

industries.

The construction industry had high survival in 19 years and low survival in 19

years, meaning that more number of businesses opened rather than closed in 19 of the 38

years from 1977-2014. Thus, proving that construction industry has the lowest survival

amongst all the industries.

Further, a pairwise comparison between the construction industry and other

industries using general linear model was done. The results are shown in Table 4.

18
Pairwise Comparison using a General Linear Model

General Linear Model - Pairwise Comparison

95%
Confidence
Interval for
Difference
Mean
Difference Std. Lower Upper
Type (i) Type (ii) (i-ii) Error Sig. Bound Bound
Construction Agriculture -0.421 0.093 0 -0.604 -0.238
FIRE -0.368 0.093 0 -0.551 -0.185
Manufacturing -0.026 0.093 0.778 -0.209 0.157
Mining -0.026 0.093 0.778 -0.209 0.157
Retail -0.263 0.093 0.005 -0.446 -0.08
Services -0.474 0.093 0 -0.657 -0.291
TCU -0.395 0.093 0 -0.578 -0.212
Wholesale -0.211 0.093 0.024 -0.394 -0.027

Table 5: Construction vs Other Industries

A comparison of construction against other industries is done through a pairwise

comparison using the general linear model. A general linear model is a statistical

technique used to test the relationship between two or more variables. General linear

modelling was needed in this study to specifically measure the relationship between the

survival rates of construction businesses and the survival rate of businesses in other

industries.

It can be seen from Table 5 that for industries such as, agriculture, FIRE, retail,

service, TCU and wholesale, the p-value is less than α = 0.025. Hence, this rejects the

null hypothesis that there is no significant difference between these industries and the

construction industry. This indicates that the construction industry is significantly

19
different from these industries except for manufacturing and mining where the p-value is

greater than α = 0.05. The negative mean difference between the construction industry

and other industries proves that the survival rate for businesses is much less in

construction as compared to other industries.

20
 CHAPTER V

DISCUSSION AND CONCLUSION

The above results from the Chi-square test for independence and the pairwise

comparison using general linear model, prove that the construction industry has the

lowest business survival rate amongst all the industries.

According to Knaup & Piazza (2007), industries which start with survival rates

less than the national average tend to continue below average, those which began at the

national average tend to continue at national average and those which started with

survival rates more than the national average tend to continue with survival rate greater

than the national average. Thus, the construction industry will continue to portray this

trend, unless some major changes concerning these businesses are made.

According to Kangari (1992), the construction industry has characteristics that

differ it from other industries. The construction industry is extremely sensitive to the

economic cycle and is also fragmented. It is also an extremely competitive industry

because of the large number of firms and because of the ease of entry into the industry.

These characteristics particular to construction make the rate of business failure in

construction very high. Further when compared to the other industries, because of the

complexity and longevity of construction projects, clients face a greater risk in

construction as compared to other industries.

The construction industry is one of the few industries that is labor intensive and

has projects involving the product to be built right from scratch. Because of the high

number of parties involved in every project, the number of risks and their impact
21
increases significantly. According to Awad et al. (2005), construction is a labor intensive

industry, in that the only way a construction schedule be accelerated is through increased

labor productivity and equipment productivity. Thus, construction business risks tend to

cover labor and equipment risks in depth as compared to other industries. Further, in

construction, work is affected by the site conditions and the environment, unworkable

site conditions may result in work being halted for months and unstable environment

such as natural disasters can lead to entire projects being put on hold resulting in severe

losses to construction businesses.

Some of the common reasons for construction business failure as suggested by

Kangari (1992) are as shown in Figure 4.

1.20%
18.20%
Assets and Capital
Experience

1.90% Fraud and Neglect

Sales

11.20% Disaster
59.80% Expenses
0.30% Customer
6.20%
Economic Factors
1.30%

Figure 4: Reasons for Construction Business Failure (Kangari, 1992)

22
It can be seen from Figure 4 that economic factors is the leading reason for construction

business failures.

Similarly, in a research by Arditi et al. (2000), it was seen that 80% of

construction businesses fail because of low returns, high operation costs, insufficient

capital, industry weakness and high debts. Out of the five major reasons for business

failure, four were monetary issues. Thus economic well-being plays a significant role in

deciding whether a business succeeds or not.

In conclusion, the construction industry is an extremely volatile industry. With

risks varying from capital, high number of personnel, equipment, time, productivity,

environment and natural disasters, the list of risks in construction is endless. While,

other industries also have a lot of risks, construction seems to encompass them all and

have room to spare. With larger investments and larger risks, construction professionals

need to take a deeper look at the way businesses are run and need to try and fix the

underlying causes for failure. Having the highest rate of failure and still contributing the

most to nation’s GDP, the potential that the construction industry possess is enormous

and the measures taken to help construction businesses survive will only help the

nation’s economy.

23
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