Kakkad Thesis 2017
Kakkad Thesis 2017
Kakkad Thesis 2017
A Thesis
by
MASTER OF SCIENCE
May 2017
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.
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DEDICATION
iii
ACKNOWLEDGEMENTS
my committee members, Dr. Fernández-Solís and Dr. Li for their guidance and support
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
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CONTRIBUTORS AND FUNDING SOURCES
Contributors
All work for the dissertation was completed independently by the student.
Funding Sources
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TABLE OF CONTENTS
Page
ABSTRACT .............................................................................................................. ii
ACKNOWLEDGEMENTS ...................................................................................... iv
vi
Page
REFERENCES ........................................................................................................ 24
vii
LIST OF FIGURES
FIGURE Page
viii
LIST OF TABLES
TABLE Page
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CHAPTER I
INTRODUCTION
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
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
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,
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.
dynamic industry, which involves the input of a number of parties’ before, during and
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
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
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,
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
3
CHAPTER II
LITERATURE REVIEW
Starting any business has its risks and the survival of companies is difficult, as
seen that for a time period of 5 years, construction industry has the lowest survival rate.
(Shane S. 2012)
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,
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
Another risk that sets the construction industry apart from other industries is the
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
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.
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
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
6
Labor, Equipment and Material Availability
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.
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
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
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
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
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
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
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
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CHAPTER III
METHODOLOGY
Discussion
&
Analysis & Conclusion
Results
Data
collection
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
and utilities (TCU), wholesale, retail, finance, insurance and real estate (FIRE) and
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Variables and Measurement
The variables for the study consists of business survival rates for agriculture,
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.
The data collected for each industry is as shown in the Tables 1, 2 & 3.
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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
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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
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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
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CHAPTER IV
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
A Chi-Square test for independence compares two variables to see if they are
expected value.
H0: There is no significant difference between construction and other industries, that the
The results from running the Chi-Square test for independence are shown in
Table 4.
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Asymptotic
Significance (2-
Value Df sided)
Pearson Chi-Square 55.297 8 .000
N of Valid Cases 342
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 indicates that survival rate for construction companies from 1977-
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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
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
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
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
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
industries using general linear model was done. The results are shown in Table 4.
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Pairwise Comparison using a General Linear Model
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
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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
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CHAPTER V
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
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.
differ it from other industries. The construction industry is extremely sensitive to the
because of the large number of firms and because of the ease of entry into the industry.
construction very high. Further when compared to the other industries, because of the
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
1.20%
18.20%
Assets and Capital
Experience
11.20% Disaster
59.80% Expenses
0.30% Customer
6.20%
Economic Factors
1.30%
22
It can be seen from Figure 4 that economic factors is the leading reason for construction
business failures.
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
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.
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