Is your project losing money? Do you know why?
Unfortunately some contractors lose money on construction projects. Sometimes these losses are huge (In 2016 Samsung announced they had lost a billion dollars on a project in Australia – yes that’s right one billion Australian dollars or over seven hundred million US dollars). The question to be asked in these cases are; when did the contractor realise the project was in trouble and what actions did they take. Could they have reduced the losses by implementing timely interventions? Of course equally important is what mitigating actions should be taken to prevent another loss occurring in the future.
Reasons projects lose money
There are many reasons for construction projects losing money. These may include:
- Poor productivity. This could be due to:
- Poor supervision
- Low worker morale
- Poor management and planning
- The incorrect resources – possibly too much of some resources and too few of others
- Production bottlenecks such as poor logistics
- Poor quality work resulting in rework and delays
- Theft which could include:
- Direct theft on the project site
- Suppliers and subcontractors submitting claims for materials or work they haven’t provided
- Suppliers not delivering the quantity of material claimed on their delivery documents
- Not invoicing the customer for completed work. This doesn’t sound possible, yet it happens surprisingly often, especially when the person preparing the invoice isn’t aware of the work that’s been completed
- Overpayments to subcontractors or suppliers. This could include:
- Paying invoices twice
- Forgetting to deduct discounts
- Not making deductions for breakages, damages or materials and other items supplied to the subcontractor which they should have supplied
- Not claiming for variations caused by the customer. These may include:
- Delays directly attributable to the customer
- Additional work requested by the customer
- Work being included on construction drawings which wasn’t in the original scope of work and wasn’t included in the contract
- Changes in specifications
- The customer not providing facilities or materials they were supposed to provide, or not providing them on time
- Material wastage which could be due to:
- Poor material handling and installation methods resulting in breakages
- Materials being stored incorrectly meaning they become contaminated or damaged
- Large quantities of off-cuts
- Poor quality work resulting in work having to be redone
- A poor price estimate which is a result of
- Not understanding the local conditions
- Failure to understand the scope or not pricing the scope of work correctly
- Arithmetic errors or failure to include items
- Incorrect pricing which could include using the wrong rates and misjudging the productivity of people and equipment
- Not understanding the terms and conditions of the contract
- Not completing the project on time which results in liquidated damages as well as the additional costs to remain on the project longer than allowed. These schedule delays could be due to:
- Accepting a construction schedule (programme) that was impossible to achieve
- Errors on the construction schedule which could include:
- Faulty logic
- Failure to allow for the expected weather conditions
- Incorrect resourcing of the schedule
- Failure to allow for client imposed restrictions including availability of information and access.
- The construction team not following the construction schedule, either because they aren’t aware of the schedule or because they don’t care
- Insufficient resources on the project which results in tasks taking longer
- Materials arriving late causing delays. Either the materials were ordered late or they arrived in insufficient quantities.
- The contractor’s employees have to remain longer on the project after it’s completed to rectify defects
- Ordering items that are the wrong specification. – a higher specification than was required.
What you can do
Completing monthly cost reports for each project enables the contractor to become aware that the project is losing money. Unfortunately often these cost reports aren’t completed correctly so they aren’t accurate and give misleading information. Often these reports are prepared nearly a month later meaning that the information produced could be nearly two months old. Sometimes the information from the reports is ignored by the project team – they can’t be bothered to take action, the project team believes everything will eventually work out, or the team is quick to make excuses and slow to take action.
All too often when action is taken the wrong action is implemented. Managers are quick to cut costs, such as cutting the number of people or equipment on the project to save costs. Sometimes this is necessary, but without properly investigating the reason for the losses cutting resources, or cutting the wrong resources, can exacerbate the problem and the losses continue and even worsen.
The other excuse for construction project losses is to blame the estimator and point out all the errors in the price that are causing the losses. Unfortunately, these actions often fail to highlight the good work the estimator has done, or even the errors that are in the contractor’s favour. In some cases there are errors that have contributed to the project losses, but often these losses only contribute a small part to the total losses, and there are other underlying causes for most of the loss.
It’s important to investigate the reasons your construction project is losing money and not focus on the first and most obvious excuse. The project team shouldn’t be focussing on finding an excuse for the loss, but rather be looking for the cause, so that appropriate action can be taken to prevent further losses and, if possible, to recover the money lost.
Of course the fundamental lesson is to prevent losses occurring in the first place. This is done by ensuring:
- The project team gets the basics right – which includes:
- Choosing appropriate construction methods
- Resourcing the project correctly
- Ensuring there are proper financial controls in place
- Checking that the team understands the quality requirements and that a quality control system is in place to ensure the required quality standards are met
- Preparing a workable construction schedule which completes the project in the shortest possible time, while making the best use of the available resources and achieving the required milestone dates. Then communicating this schedule to the project team and ensuring that they work in accordance with the construction schedule.
- Being contractually astute and claiming variations, changes and delays in accordance with the contract document
- Pricing the project correctly
Early detection of project losses can enable the contractor to take preventative measures to prevent further losses, and even possibly recover the losses. Knowing early that the construction project will make a loss will allow the company to take action to ensure that the negative cashflow and losses don’t destroy the company.
There is often more than one reason that a construction project is losing money, so losses need to be thoroughly investigated to uncover the true underlying causes so that they can be addressed.
Don’t wait until your construction project is in serious trouble before realising it is losing money. When a loss is discovered take the correct actions to stop the loss.
Have you had a project lose money? What were the reasons?
Paul Netscher is the author of the popular books ‘Successful Construction Project Management: The Practical Guide’ and ‘Building a Successful Construction Company: The Practical Guide’.
‘Construction Claims: A Short Guide for Contractors’ is an easy to read book explaining when and how to submit variation claims and change orders. These books are available on Amazon and other online bookstores. Paul publishes articles regularly on LinkedIn and his website. Visit www.pn-projectmanagement.com to read other similar helpful articles.
Paul writes regular articles for other websites, gives lectures, mentors, and is available for podcasts and interviews.
© 2021 This article is not to be reproduced for commercial purposes without written permission from the author.