Risks and Opportunities
The construction industry contains lots of opportunities and risks. Contractors mostly focus on the opportunities and profits but they overlook the risks. There are many contractors which are losing money on construction projects. In this article, we will explain the top reasons for the construction project loss.
WHAT IS A LOSS IN CONSTRUCTION PROJECT?
Contractors take new jobs to make profit out of new construction projects. Typical project profit margin for a mid-large scale main contractor in the UK is between 10% and 20%. For the specialist subcontractors this profit margin is usually higher.
If a contractor loses money after completing a project, this means a loss. There are many ways for contractor to lose money in a project. Here we list the top reasons for causing a loss in a construction project.
Reason 1: Wrong Estimation
Tendering department is one of the most stressful department to work in construction companies. Tight deadlines, wrong estimates, insistent directors? You face all of these if you are working for tendering.
Tendering team tries its best to understand the tender documents, make quantity and price estimations. But sometimes sometimes things don’t go right.
A. Pricing on an Ambiguous Tender Design
Tender team receive a tender package which includes design & specifications. Estimators & quantity surveyors work on the design drawings & specs and make estimations. This is not always a straightforward work. Since at this stage, design may be immature and you may have to price that ambiguous design. This may cause future problems, as the Client may be referring one thing, and you price another thing.
B. Scope Confusions
Scope confusions is one of the most common mistakes during tender stage. An overlooked sentence in tender documentation may cause you miss a complete package to include your price.
C. missing design requirements & Specifications
Sometimes design doesn’t contain all information. Estimator should also aware of specifications and local standards and take into consideration them whilst pricing.
If estimators do not check specifications deeply, they may just price for a cheaper product which does not comply with local regulations. During the further stages, the contractor may face paying more for a regulation complying product and do not get paid for the price difference.
Miscalculations are more common than you think. This includes mathematical errors, MS Excel errors, missing a complete floor, drawing and more. It will be a wise choice to double check the tender calculations.
In EU, and US, the yearly inflation was around 1% for a long time. Therefore, UK, EU & US contractors were not experts on pricing inflation in their tenders. But after Covid-19 pandemic, the things are changed. Now the inflation is around 7% for those areas, and this is almost half of a contractor’s profit for a project. So we strongly advise contractors to consider the inflation during their tender period.
Reason 2: Design Related Problems
Managing design is key for success in a construction project. Any problems with design will follow everyone like a ghost until end of the project and cause damage for stakeholders. Here we listed most common design problems which may cause you to lose money in a construction project.
A. Wrong Design at Tender Stage (RIBA4 and Prior)
Design responsibilities depend on the project. Sometimes clients take all responsibility for the design and give the construction & commissioning works to the contractors. And sometimes, they develop an initial design and ask the contractor to improve it and construct & commission it. For the second part, the risks are higher. Because design change hands during the half way.
For this item, you can imagine that the client gives a wrong design for RIBA4 and contractor realizes this during designing RIBA5. Now who is responsible for the money & time loss? Can we say client is responsible because they provided wrong design? Or, it was already in Contractor’s responsibility because they received the drawings and did not check properly?
B. Wrong Design at Construction Stage (RIBA 5)
This subtopic refers problems with application drawings. If RIBA Stage 5 is contractor’s responsibility and they designed something wrong and the site team realizes this during the site installation, then this means a re-work. A re-work means loss money and time.
Reason 3: Project Delays
This is very straightforward topic. If you delay the project, you lose money. This is not only because of the Liquidated Damages, but also the overspent prelims…
See our article here, for the top delay reasons.
Reason 4: Wrong Management of CHanges
Wrong Management of CHanges
Depending on the client and project, sometimes there are too many change requests in a construction project. For these kind of cases, as a contractor, you can consider every change is a small tender that you need to assess for cost and time wise. If you do some wrong estimates, or assessments -as described above- then you lose money similarly.
Unproductivity Due to Too Many Changes
If client issues too many change requests, this will cause an unproductivity on the contractor side. We call it the unproductivity due to changes. If you receive too many changes and this caused you losing money, please reach us to discuss claim options.
Reason 5: Communication Problems
Do we all agree that a strong communication prevent problems and increase project’s success rates? We think “yes!”. If there is any serious communication problem in a project, this may impact the productivity, cause wrong construction and reworks.
Reason 6: Supply Chain Problems
Managing supply chain is not easy. There are many problems a contractor can face with their supply chain. But here we list some:
- Bankrupt / fugitive suppliers
- Increasing prices after giving job (and threats stopping job)
- Dodgy suppliers, reluctant doing work
Reason 7: Quality & Productivity Issues
Productivity is usually overlooked by construction PMs & directors. Since the teams are focused on finishing project in time, productivity may become a second priority. But, as a contractor, if you are spending more resources to do the same work, then you are losing money, even you catch the deadlines.
Reason 8: Accounting Issues
There are plenty of issues that we can count for the accounting.
- Accounting mistakes, issuing wrong invoices, or forgetting issuing invoices
- Overpayments to subcontractors or suppliers
- Not deducting for breakages, damages, or supplies of materials and other items that they should have provided to the subcontractor
Reason 9: Unexpected Events
If there is good records such as progress reports, photographic reports, delay logs available, and also a good project programme exists, then planner & QS can assess the de
A. Natural Events
There are many natural events that may cause you to lose money, if you did not cover yourself in the contract. You can read our article here, for further information.
If you do not have a good Health and Safety management on site, accidents are unavoidable. Every accident means problem and losing money is at the bottom of the list of those problems.
Reason 10: Theft
Theft is another way to lose money in a construction project. Most commons are:
- Direct theft on the project site; such as machinery robbery, material robbery etc.
- Paying suppliers and subcontractors applications for materials or work they haven’t provided
- Personnel theft, such as selling construction material, or putting own profit to the subcontractor prices
To sum up, there are many different reasons for losing money in construction projects. If you are a construction manager, or company director, you must be aware of these risks and take required steps to minimize these risks.
If you need our support to analyse and minimise your risks, please contact us here.