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Business bankruptcy during a construction project

On Behalf of | May 9, 2023 | Business Bankruptcy |

Business bankruptcy is an unfortunate reality for many businesses undertaking construction projects. These projects are often expensive and require significant capital to begin and complete. If a company goes bankrupt during a project, it can cause serious financial and logistical issues that can be difficult to manage.

Many businesses fail to plan and budget adequately for construction projects, leading to unexpected costs. For example, a small business owner may underestimate the cost of labor, leading to a shortage of funds. In some cases, clients may not pay on time or at all, causing a strain on cash flow, which is especially challenging for small business owners who rely on steady payments to keep their businesses afloat. In other cases, a small business owner may not have enough experience managing large construction projects and may make mistakes resulting in financial problems. 

Consequences of bankruptcy during construction

Since bankruptcy during construction can have serious consequences, businesses should take practical steps to avoid such complications. Common challenges with bankruptcy include:

  • Project delays: When a business claims bankruptcy during construction, the project may stop completely until the issue is resolved. This delay will typically result in additional costs to the company. For example, bankruptcy filed during the construction of a new office building can cause the owner to lose months of rental income.
  • Legal battles: Bankruptcy during construction can lead to legal battles over ownership of materials, work completed, and contract obligations. Creditors and suppliers may sue for unpaid debts, and suppliers may file lawsuits for outstanding invoices and materials. 
  • Loss of investment: Business owners and investors may lose their investment if the company goes bankrupt, resulting in personal financial hardship and loss of future opportunities.

How to avoid bankruptcy

A well-planned project can mitigate common causes of bankruptcy, avoiding costly mistakes. Business owners should consider the following:

  • Secure sufficient financing: One of the leading causes of bankruptcy in the construction industry is running out of funds. Companies must secure adequate funding for their project to avoid defaulting on loans or being unable to pay subcontractors.
  • Plan the project efficiently: A carefully planned project identifies potential issues, prioritizes the budget, and tracks progress. Businesses should create a project timeline with milestones to stay on track and within budget. 
  • Detailed contract negotiations: A comprehensive contract that outlines payment schedules, change orders, and other crucial details is essential in minimizing misunderstandings or disputes that can derail the project. 
  • Monitor income and expenses: A well-defined and accurate cash flow statement is critical to ensure that a construction project runs smoothly. The ability to track income and expenses throughout the project can help identify potential cash flow issues before they become severe problems.

When to file for bankruptcy

Filing for bankruptcy can discharge debt, pause collection efforts from creditors, and allow the company to redirect its resources toward more profitable ventures. By taking advantage of these benefits, businesses in the construction industry can restructure their operations, reduce their liabilities, and become more profitable in the long run.