Every job contains an element of risk, either that costs may escalate, estimating may be faulty, the owner will refuse to pay, work may be interrupted, or some liability may be created. The management of this risk directly affects the company’s profits both in the short and long term. Some of the risks that are inherent in construction projects are:
a) Not getting paid: Since profit usually represents a small portion of the contract price, uncollectible debts have a huge impact on profit. As an example, let’s assume that you perform a contract for $100,000 that would have had a 10% profit and are not paid. You will now have to perform $900,000 worth of work with a profit of 10% just to break even (with no profit).
The additional short term expense of doing a complete credit and reference check on a new client could save many times its cost in on just one job. Evaluating who you are planning to work for is as important as evaluating the job itself.
b) Faulty estimating: Anyone who has been in the construction business for long has paid to go to work at least once. Often these “learning experiences” don’t teach us nearly as much as we ought to learn from them. We keep making the same general error over and over: estimating work we are not skilled at and do not have accurate historical cost data for.
When so much is riding on an accurate estimate, it is amazing that more expertise is not used in this process, especially in smaller companies who can ill afford to loose money on even one job. Spending extra time to verify estimating assumptions or getting educated about estimating practices will cost more in the short term, but pay you back quickly.
c) Accidental loss: Some jobs are inherently dangerous and the cost of an accident can often be very expensive. The injury to employees or equipment along with additional cost of compensation insurance can result in loss of profits for many jobs to come.
Outside liabilities can also be incurred during the construction process resulting in large damage claims. Spending time to make your jobs safe will cost more now, but will pay off over the long term.
d) Loss of reputation: Since your ability to sell your services for a profit in the future is directly tied to your reputation, it is important to avoid damage to that reputation. This can be the result of failing to complete a job, or simply choosing a client with low integrity. Often taking a little extra time with a client or fixing a problem at your cost will lower short term profits, but allow you to charge more in the future.
e) Cost escalation: Material and labor costs are often in a state of flux and failure to plan for changes in prices over the course of a project can cause financial loss. Contract clauses that protect the contractor from such losses are often difficult to negotiate so care must be taken in getting firm quotes for materials and anticipating additional labor costs.
Working closely with suppliers takes extra time, but can result in savings not available to others. Negotiating better discounts with long term suppliers can result in large increases in profits over the long run.
f) Work interruption: Many factors can halt a project including changes in plans, weather, labor disputes, legal disputes, and material shortages. Overhead and job site costs can continue to accrue and may or may not be recoverable.
g) Product liability: it is more and more common that contractors are sued for poor quality materials or workmanship long after projects are complete. Certain types of projects like condominiums appear to be especially prone to this type of action. When one contractor on a job is no longer in business or unable to pay for damages caused by their work, others may be held liable.
Careful attention to plans and workmanship ahead of time can avoid large expenses later.
h) Lack of documentation: Poor control of contract documents can cause loss when change work costs cannot be collected, or delays are not adequately documented and liquidated damages are awarded.
“The guy with the best paper wins” is often the truth when disputes arise. A problem that might result in a lawsuit can often be settled amicably when it is well documented.
Please contact us if you would like to learn more about instituting a comprehensive training process. Thank you.