The Pitfalls of Diversification

When work slows down in their specialty or lucrative opportunities arise in new sectors, many contractors consider expanding into different types of construction. Diversification can be a strategic way to stay competitive, but taking on unfamiliar work is also a leading factor in contractor bankruptcies when not carefully managed.

At first glance, branching out into new types of work might seem straightforward given the large amount of overlap in trades and processes between certain sectors. Unfortunately, the reality can be much more complex. Challenges that can arise when taking on a new type of project include the following: 

• Technical requirements and tolerances may be completely different

• Scheduling and coordination methods vary dramatically by project type

• Specialized subcontractor relationships need to be built from scratch

• Equipment and material needs may be unfamiliar

• Key personnel lack experience with the new type of work

• Estimating and bidding strategies may not transfer

• Project management complexities can be dramatically different

When taking on unfamiliar project types, it’s wise to start with small projects in the new sector and grow systematically. This allows you to test new methods and find the right partners while maintaining the efficiency of your core business.

This is the third in our five-part series examining the major causes of contractor failure, as detailed in Thomas Schleifer’s book Construction Contractors’ Survival Guide. Stay tuned for our next installment where we'll explore another critical risk factor facing today's contractors.