You wouldn’t believe how many contractors reach out to us asking for help… They’re losing money on their projects… and they don’t know what to do.
For this reason, we put together a complete list of—what we believe—are the main reasons why a contractor loses money on a construction project… and what you can do about it.
Inaccurate Cost Estimating
If you’re watching this, you’re probably already aware that inaccurate cost estimating is a common problem in the construction industry—a problem that causes contractors to lose money on their projects.
Inaccurate cost estimating occurs when a contractor underestimates the costs required to complete a project, which often leads to performing work at a loss or losing a bid on the project.
The costs that are most commonly estimated incorrectly are related to material, labor, and equipment.
It should also be noted that if a contractor loses a bid on a project due to inaccurate cost estimating, they will likely lose the opportunity to perform other work related to the project—such as upgrades or maintenance.
Poor Project Management
Effective project management is essential to ensure that projects are completed on time, within budget, and to the required specifications.
If not managed properly—a construction project may result in delays, cost overruns, or even poor quality of work.
So what does poor project management look like? Can you spot it? We believe it manifests itself in different ways. For example, inadequate planning and scheduling can cause delays in completing a project. As a result, there will be increased labor costs and equipment rental expenses. Inadequate risk management can lead to unforeseen events—such as weather-related delays and even accidents.
In addition, poor project management can also lead to disputes with project owners and others involved with the project. This may cause delays in payments and result in additional costs—like legal fees, for example.
Inadequate Contract Management
Effective contract management ensures that contractors understand their contractual obligations, receive timely payment, and can manage changes to the project scope without losing profits.
So what does inadequate contract management look like? Like poor project management, we believe inadequate contract management manifests itself in various ways. For example, if a contractor does completely understand the terms of the contract, they may fail to meet contractual obligations. This will likely result in a contractor performing work at a loss or being penalized for failing to meet contractual obligations.
Changes in project scope should also be considered. These changes are pretty common with construction projects, and effective change management is essential to ensure that contractors are compensated fairly.
Furthermore, inadequate documentation can also affect contract management. Inadequate—or weak—documentation can make it difficult to track project costs or prove that the contractor has met the requirements set out in the contract.
Failure to Monitor Job Costs
Efficient job cost monitoring ensures that construction projects remain profitable by helping contractors track the progress of the project’s costs, timelines, and quality.
When contractors fail to monitor job costs—unfortunately, they may not be aware of the cost overruns until it’s too late—resulting in performing work at a loss or being unable to complete the project within budget.
Effective job cost monitoring involves tracking costs throughout the course of the project then comparing the actual costs to estimated costs. Healthy habits like this helps contractors identify cost overruns early enough to take corrective action before it’s too late. For example, if a contractor identifies a cost overrun, they might be able to negotiate with the project owner to increase the contract amount or to reduce costs elsewhere in order to offset the cost overrun.
It should also be noted that job cost monitoring can help contractors identify inefficiencies in their operations—such as areas where they are overusing materials or where they could be more efficient with their use of labor.
Inefficient Use of Resources
When resources are used inefficiently, it can result in higher costs and longer project timelines. For example—consider if workers are not properly trained, if they were not given clear instructions, or if they are not properly supervised.
In addition, the inefficient use of resources can also impact project quality—which can result in additional costs as well as tarnishing a contractor’s reputation. For example, if a contractor orders excess materials that go unused, it can result in waste and higher costs. On the contrary, if a contractor orders too few materials, they may run out before the project is completed—resulting in delays and potentially resulting in lower-quality work if materials are substituted or if the project is rushed to completion.
Delays in the Project Timeline
When a project is delayed, it can impact the entire construction schedule and push back work that follows. Of course, this triggers a ripple effect on the entire project timeline and can result in additional costs—such as overtime pay for workers—or additional rental fees for equipment. Believe me, these costs can quickly add up and will likely result in the project exceeding its total budget.
In addition, delays in the project timeline can impact a contractor’s ability to take on additional work—which will likely result in lost revenue. And—of course—these delays will negatively impact a contractor’s reputation and their ability to secure future work.
Insufficient Communication with the Project Owner
Insufficient communication with the project owner or its stakeholders can result in misunderstandings about the project plans and specifications. These misunderstandings are likely to result in additional costs related to rework or changes to the project scope.
For example, consider a plumbing job for a residential client—if the contractor doesn’t communicate the need for additional plumbing work—such as the installation of a new water line—to the homeowner—there will likely be delays and additional costs related to the project scope. Like most cases, both the contractor and project owner will be frustrated and will probably need to fork up additional money or time.
How can contractors stop losing money on projects?
Contractors can stop losing money on projects by implementing several strategies. These include accurate cost estimation, efficient project management, using the right equipment for the job, and continually improving skills and knowledge. Also, maintaining good relationships with clients, managing change orders effectively, and ensuring clear communication within the team and with clients can significantly improve project profitability.
What factors can lead to financial losses on construction projects?
Several factors can lead to financial losses on construction projects. These include inaccurate cost estimation, poor project management, use of inappropriate or inefficient equipment, lack of skills or knowledge, poor client relationships, ineffective handling of change orders, and communication problems. Addressing these factors can help contractors to stop losing money on projects.