Published: May 3, 2020
Losing money on a construction project causes financial headaches (and in some cases, disaster) for the businesses and contractors involved.
Being experienced business advisors in the Perth construction sector, we understand how it can happen.
But more importantly, we also know how losing money can be avoided. Our business advisors put strategies in place for our building clients to ensure their ongoing profitability.
Here are our top 5 reasons why builders lose money on construction projects.
A building project can be headed for financial failure before it even starts.
It’s a tough, competitive market out there and some contractors simply quote too low to secure a client’s business. But that desperation (or quoting clumsiness) comes at a cost. Underquoting is not sustainable for any business.
Make sure that you quote competitively instead, even if it means missing out on a project.
A business advisor can help sharpen the focus on your costs, cash flow forecasts and profit margins, so you’ll be able to put in competitive bids for projects without setting yourself up for failure.
A poorly negotiated contract can also doom a construction project before it starts.
It’s especially important for building contracts to specify the scope of the work that the agreed price is based on.
In other words, what is (and isn’t) included, as well as appropriate timeframes for the specified work to be completed without any financial penalties being incurred.
Any changes or variations that a client wants to make to the contract specifications after construction has commenced should be re-costed and charged accordingly, before any work is carried out or any materials are ordered.
The contract should also allow for any project delays that are caused by the client to be claimed as additional charges by the builder.
Once a construction project starts, it’s crucial that it’s managed effectively from day one through to final completion.
There are so many potential risk areas that can lead to unnecessary delays, cost blow-outs, bottlenecks and wasted time on a building project. The major ones are:
- Poor planning and co-ordination of workers (including sub-contractors).
- Poor worker supervision and productivity.
- Poor co-ordination of materials (i.e. not arriving on time or in insufficient quantities).
- Material wastage (caused by breakages, inappropriate storage, ordering errors or over-ordering).
This can result in work needing to be redone, delaying project completion and often incurring additional costs for the builder.
If you are struggling to find the right people for the job, make sure you check out our blog article: 5 Tips to Recruit the Top Construction Workers in Perth
Theft includes material stolen from the building site, and can be quite common. It isn’t hard to see how theft can become a big money drain for a construction project.
However, not all the money that is stolen will be so obvious. Fraud and financial errors can be more difficult to catch.
Fraud and/or financial errors can include:
- Suppliers submitting claims for material that hasn’t been provided (or for more materials than have been provided, or at higher prices). Builders can fail to notice these errors, especially on larger projects.
- Subcontractors submitting claims for work that hasn’t been done (or at higher prices than were agreed). Again, some builders may unwittingly pay these claims if they aren’t diligently monitoring project costs.
- Poor financial management. For example, inadvertently paying invoices twice, forgetting to claim any discounts that they are entitled to, or even neglecting to invoice clients.
A business advisor can help a builder to put strategies in place to avoid the serious issues that can be caused by fraud and financial errors.