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Executive Search Insights

What Does a Bad Executive Hire Really Cost a Contractor or Developer?

The direct and hidden costs of a failed executive hire in construction and real estate, with a simple worksheet to estimate your own exposure.

Shawn DesgrosellierOct 19, 20267-minute read
Key takeaways
  1. A failed executive hire commonly costs several times the person's annual compensation.
  2. Salary, severance and a second search fee are the visible part. Margin fade, lost clients, missed pursuits and departing people are usually far larger.
  3. Leaders rarely fail on technical skill. They fail because they cannot lead the people, culture or ownership group they joined.

A failed executive hire in construction or real estate commonly costs several times the person's annual compensation, and the largest costs rarely appear on the HR budget.

Salary, severance and a second search fee are the visible part. Margin fade on projects, lost clients, missed pursuits and departures of good people who worked under the wrong leader are usually far larger.

Illustrative
Figure 1. The HR budget sees the center. The cost ripples outward.
CLIENTS · PURSUITS PEOPLE MARGIN The hire HR budget Clients, pursuits and backlog Owners hesitate to award work. Lost work never shows up on a report. People Strong PMs and superintendents leave, taking knowledge and relationships. Project margin Poor staffing, missed risk and weak sub management erode fee on several jobs. The visible costs Salary, severance, relocation and a replacement search. Usually the smallest part.

01 · Executive hire failure ratesHow Often Executive Hires Fail

Research cited by the Center for Creative Leadership found that about 40% of new executives leave their roles within the first 18 months, and a Harvard Business School study referenced in the same work put the cost of a failed executive hire or promotion at more than $2.5 million (CCL via TUM library record). Those figures come from broad corporate studies, not construction specifically, but the pattern holds in our industry.

40%of new executives leave their roles within the first 18 months
$2.5M+the cost of a failed executive hire or promotion, per a Harvard Business School study
11%of new hire failures caused by missing technical skills

The reasons are worth noting. A Leadership IQ study of more than 20,000 hires found that 46% of new hires failed within 18 months, and only 11% failed because of missing technical skills. Most failed on coachability, emotional intelligence, motivation or temperament (IndustryWeek).

Data
Figure 2. Nearly half fail within 18 months, and rarely for technical reasons
LEAVE OR FAIL WITHIN 18 MONTHS 0%25%50%75%100% New executives who leave Center for Creative Leadership 40% of new executives leave within 18 months 40% New hires who fail Leadership IQ, 20,000+ hires 46% of new hires fail within 18 months 46% WHY THE 46% FAILED 11%: missing technical skills 89%: coachability, emotional intelligence, motivation, temperament and other reasons 11% 89% · Coachability, emotional intelligence, motivation, temperament, other Technical skills
Sources: Center for Creative Leadership research via TUM library record; Leadership IQ study reported by IndustryWeek. Broad corporate studies, not construction specific.

In construction, that matches what we see: leaders rarely fail because they do not understand building. They fail because they cannot lead the people, culture or ownership group they joined.

02 · Direct costsThe Visible Costs

These are the costs that show up on the HR budget. They are real, but they are the smaller part of the bill.

  • Compensation paid during tenure
  • Severance and contractual obligations
  • Relocation paid at hire
  • Fee or internal cost of a replacement search
  • Onboarding and ramp up for a second hire

03 · Margin, clients and peopleThe Hidden Costs, Which Are Usually Larger

  • Project margin

    An operations or division leader who makes poor staffing decisions, misses risk early or manages subcontractors badly can erode fee on several projects at once.

    $50M project × 2-point fade = $1M

  • Client relationships

    Repeat clients and lender relationships drive revenue. A leader who damages trust with a key owner, architect or capital partner can cost future work that never shows up on a report.

  • Pursuits and backlog

    Leadership changes slow business development. Owners hesitate to award work when they are unsure who will lead it.

  • People

    Strong project managers and superintendents leave bad leaders. They often take institutional knowledge and client relationships with them, and each departure starts its own recruiting cycle.

  • Time

    A failed hire usually takes 12 to 18 months to recognize and resolve. Add a new search and ramp up period, and the seat can go two years or more without effective leadership.

Hypothetical
Figure 3. One wrong division leader, felt across Texas
Loading map…
Division office, new VP of OperationsProject losing marginRepeat owner holding the next awardPM leaves for a competitor
A made-up Texas division to show how far one leadership seat reaches. None of these costs would appear on the HR budget.
Illustrative
Figure 4. How a failed hire turns into two years without effective leadership
Usually recognized and resolved Wrong leaderReplacement searchNew leader ramps up Months 0 to 14: the wrong leader is in the seat In the seat 14 months Months 14 to 18: replacement search, about 90 to 120 days 90–120 days Month 18 to 19: notice period Notice Months 19 to 25: new leader ramps up, about six months First six months About two years without effective leadership in the seat Month 06121824
Search length from a well run leadership search (see How Long Does It Take to Hire a Construction Executive). Ramp up reflects the six months of check ins recommended below.
Tower crane over an active project, where a leader's decisions show up in schedule and margin

04 · Estimate your exposureA Simple Worksheet

Use your own figures. The example below is illustrative, for a VP of Operations with $300,000 in annual cash compensation who leaves after 14 months.

Illustrative
Figure 5. The worksheet, drawn to scale
Cost item
Illustrative estimate
Compensation paid during tenureVisible
$350,000
Severance (three to six months)Visible
$75,000 to $150,000
Replacement searchVisible
$100,000
Margin fade on two affected projectsHidden
$500,000 to $1,500,000
Replacement hiring for two departed PMsHidden
$60,000 to $90,000
Lost or delayed pursuitsHidden
Varies, often the largest item
Estimated total
$1,085,000 to $2,190,000 plus lost work
Visible cost, low estimateHidden cost, low estimateUp to the high estimateNot quantified
At the low end, the hidden costs already exceed the visible ones. At the high end, margin fade alone is more than every visible cost combined, before a single lost pursuit is counted.

Even conservative assumptions produce a number many times larger than any search fee.

05 · Lowering the odds of a missHow to Reduce the Risk

  1. 1
    Before the search

    Define success before you search.

    Write down what the leader must accomplish in the first 12 to 24 months.

  2. 2
    During assessment

    Assess for fit as seriously as experience.

    Ask how candidates have handled conflict with ownership, underperforming teams and failing projects.

  3. 3
    Before the offer

    Check references thoroughly.

    Speak with former supervisors, peers and direct reports, not only the names the candidate provides.

  4. 4
    First six months

    Plan onboarding.

    Give the new leader clear priorities, introductions to key clients and regular check ins with ownership during the first six months.

06 · ClosingWhat This Means for Your Firm

When companies evaluate an executive search, they often weigh the fee against doing nothing. The more accurate comparison is the fee against the cost of getting the hire wrong.

Illustrative
Figure 6. Compare the fee to the cost of a miss, not to zero
$0$500K$1M$1.5M$2M Doing nothing How the fee is often judged $0 Search fee As in the worksheet Search fee: $100,000 $100K Getting it wrong Worksheet total Low estimate: $1,085,000 Up to $2,190,000, plus lost work $1.09M to $2.19M + lost work The cost of a miss is roughly 11 to 22 times the fee.

For a leadership role that touches backlog, margin and people, the cost of a miss is almost always the larger number.

Vitality Group has placed more than 500 construction and real estate professionals, with more than 85% retained. If you are preparing to hire for a leadership seat, we are happy to help you think through the profile and the risk before the search begins.

Sources
  • Center for Creative Leadership research and Harvard Business School study, via TUM library record
  • Leadership IQ study of 20,000+ hires, via IndustryWeek

About the author
Shawn Desgrosellier is Founder, President and CEO of Vitality Group, an executive search firm specializing in construction and real estate, and founder of Vitality Talent Acquisition, which helps employers improve talent acquisition performance.

FAQCommon Questions

How much does a bad executive hire cost a construction company?

Commonly several times the person's annual compensation. In the illustrative example of a VP of Operations earning $300,000 who leaves after 14 months, the estimate is $1.1 million to $2.2 million before counting lost or delayed work.

How often do executive hires fail?

Research cited by the Center for Creative Leadership found about 40% of new executives leave their roles within the first 18 months. A Leadership IQ study of more than 20,000 hires found 46% of new hires failed within 18 months.

Why do construction executives fail in a new role?

Rarely because of technical skill. Only 11% of failures in the Leadership IQ study were due to missing technical skills. Most failed on coachability, emotional intelligence, motivation or temperament: they could not lead the people, culture or ownership group they joined.

How can a contractor reduce the risk of a bad executive hire?

Define success for the first 12 to 24 months before searching, assess for fit as seriously as experience, check references with former supervisors, peers and direct reports, and plan onboarding for the first six months.

Hiring for a leadership seat?

Weigh the fee against the cost of a miss, not against doing nothing.

More than 500 construction and real estate placements, more than 85% retained. Let's think through the profile and the risk before your search begins.

Talk to Vitality Group