Construction is a high risk, high reward business. While working on a job site is high risk from a safety perspective, the industry as a whole carries a high financial risk for contractors. With this risk comes the chance to make large profits when successfully completing projects, but the chance to lose a tremendous amount of money, too! Many contractors declare bankruptcy each year, while others barely cover their costs with little left to show for it. Other contractors do exceptionally well. So why do some contractors run into financial issues? This article will be solely focused on a comprehensive list of ways contractors lose money!
A Comprehensive List Of Ways Contractors Lose Money: The Consolidated List
While we explore each of these topics in greater detail below, here’s our giant list of ways contractors lose money in the construction industry!
- Not Having Proper Insurance
- Major Safety Violations
- Taking Out Loans & Paying Interest
- Underbidding Projects
- Signing A Bad Contract
- Agreeing To Contract Conditions They Cannot Uphold
- Cash Flow Problems
- Disorganized / Poor Document Control
- Inconsistent Billing & Budgeting
- Not Understanding The Contract
- Scope Of Work Is Not Fully Comprehended
- Delays On The Project (Self-Caused)
- Not Taking Any Payment Up Front
- Trying To Do Too Much At Once
- Opting For The Lowest Price Subcontractor/Vendor
- No Contingency Funds
- Improper Change Order Management
- Rework / Incorrect Performance Of Work
- Workers Who Are Unsupervised Or Left In The Dark
- Improper Means & Methods
- Having Too Many Employees
- Having Too Few Employees
- Not Accounting For Taxes & Fees
- Prolonged Rental Of Equipment & Tools
- Inefficient Use Of Overhead
Let’s get into the specifics of each!
PROMOTION
Not Having Proper Insurance
A great insurance policy costs a lot of money, but not having a great insurance policy can cost a lot more.
Whether it be an error that the contractor makes, an accident that occurs or a claim that’s filed, a good insurance policy will drastically limit the amount of risk exposure that the contractor faces. Any one of these can have a large six- or even seven-figure on a business on the higher end, which is more than enough to bankrupt many small and medium-sized contractors.
Insurance is like an umbrella, you’ll wonder whether or not you wasted your money until the day it begins to rain…
Major Safety Violations & Accidents
One of the biggest ways contractors lose money is through safety violations and accidents. Check out this link to the Occupational Safety & Health Administration’s (OSHA) website, where they discuss fines they issue for safety violations.
As of the writing of this article, OSHA fines equal the following:
- Up to $13,260 per violation
- Up to $13,260 per violation PER DAY after failing to abate (correct) by the deadline.
- Up to $132,598 per violation for willful or repeat violations
Those violation penalties alone are staggering. When you consider fines from the Dept. Of Buildings, other agencies’ fines and how much insurance premiums will rise in the following years, even a few relatively small violations can cost contractors big-time.
When you combine this with emergency expenses and lawsuits that follow safety accidents, it’s even more clear why EVERYONE in the construction industry needs to care about safety – even those not working onsite.
Check out our recent articles about construction site safety:
- What Is A Project Safety Plan? Free Construction Safety Plan Template!
- Basic Jobsite Safety For Project Managers In Construction
Taking Out Loans & Paying Interest
Whether it be to cover payroll, pay off other debt or expand the business, contractors can lose a lot of money on loan interest payments if they’re not careful.
Just like an individual person shouldn’t carry too much debt, neither should a contractor. Loans for large purchases should only be taken out when there’s a considerable backlog of projects to complete, there’s a demand for the particular item and it’s within the means of the contractor’s budget.
Loans to cover payroll and keep the company afloat should only be taken out in an emergency scenario. With the amount of interest that loans can accrue, even bankruptcy might be better solution than taking out a massive loan to save the business.
Underbidding Projects
We’ve all been there – you’re working on a project and all sorts of unexpected things come up. Hindsight being what it is – we underbid the project!
In a typical construction scenario, a contractor provides a bid on a project at the stage they know the least about it: the beginning. Once a price is agreed upon and a contract is signed, there’s little opportunity for a contractor to be paid beyond that price. Therefore, the bid MUST be correct and adequate for the job.
Once an item is forgotten, that’s it! You own it.
Check out our recent article titled “How To Estimate Construction Costs: Our Comprehensive Guide“!
Signing A Bad Contract
The contract is a legally-binding document – if a contractor signs this document and the terms are stacked against them, they’ll be in a lot of trouble.
First off, a contractor should ALWAYS have legal counsel on-hand to review a contract before signing it. They’re the experts and they’ll pick up on many things that non-attorneys won’t catch.
Additionally, one of the easiest things to do is to actually read the contract ourselves. This includes reading reference drawings and specifications that can be linked to the contract, too.
There are so many ways a contract can go south – our best advice is to review it like your business depends on it (it pretty much does), and bring in the experts to do the heavy lifting, legal-wise.
Agreeing To Contract Conditions They Cannot Uphold
Similar to the previous point, many contractors will agree to do whatever their client asks of them in order to be awarded the project. This includes agreeing to conditions that the contractor cannot uphold, even if they don’t know it.
For example, many contracts include a liquidated damages clause. This essentially means that the contractor will be penalized for every day/week/etc. they’re delayed in finishing the work, beyond a specified deadline. When a contractor agrees to this and fails to hit the mark, they will be fighting uphill against constant fines and penalties just to get the same project finished.
If the contract includes supervisory requirements, managerial services, guaranteed resources, liquidated damages or other special requirements, it’s extremely important to make sure these terms can actually be upheld.
Cash Flow Problems
Money makes the world go round, and the construction industry is certainly no exception. Covering payroll each week, paying salaries, rent, bills and project costs is a lot of money going out the door on a regular basis. Trouble arises when these costs keep coming, but the contractor doesn’t have the cash on hand to pay them!
In construction, contractors must do the work – which costs money – and then wait to be paid. If the project payment terms are Net 30, for example, the contractor must wait at least 30 days beyond when work is performed before they actually get paid.
In some cases, contractors can go several months without being paid, even though they’ve done the work and have spent the money.
Because of this, contractors must have deep pockets and a good amount of money on-hand to be able to avoid cash flow problems.
Here are a few of our articles related to project billing and finances:
- How Does Progress Billing Work In Construction? The 8 Essential Steps
- Cost To Complete Template: FREE Excel Download (ETC, EAC, BAC)
Not Understanding The Contract
It’s a running joke in Hollywood – people sign a contract without really reviewing it. There are many instances in the construction industry when a contractor signs a contract that they don’t fully understand.
This could be the managerial requirements, coordination, downtime, testing/inspections, performance specifications, payment terms – the list is endless. Regardless of the circumstances, not understanding the contract is one of the major ways contractors lose money.
I personally managed a subcontractor doing some hazmat removal about five years ago. Although their contract clearly stated that they’ll be paid within 30 days of us receiving payment (about 60 days after the work was finished), I was hammered with calls about why it was taking so long to release it and how we’re “playing games”. They even threatened to get their attorney involved. Seriously?!
I’ve had plenty of subcontractors try to claim work isn’t in their scope, or that their contract doesn’t include certain things. Thankfully, contracts are written, not verbal. Whether this is intentional or not, many contractors simply don’t fully understand what’s required of them.
Related: Is Construction Management Stressful? 7 Causes Of Stress
Scope Of Work Is Not Fully Comprehended
This is an elaboration of the point above – contractors agree to perform a scope of work that they don’t understand. The moment an issue arises, the words ‘change order’ and ‘extra work’ will start filling the air, even though the contract might say otherwise.
Oftentimes, this is because they did not provide any qualifications or exclusions up front when they submitted a bid. This list essentially tells the potential client what is NOT included in the price, plus any specific assumptions the contractor made when pricing the work.
When a contractor has put enough forethought into a project to exclude certain things, it at least tells me as a P.M. that they’re actually thought about the project.
Even if it’s obvious that a particular item of work is part of the scope, this doesn’t stop contractors from trying to claim more money, refuse to perform it or try to get out of the agreement. A problem is a problem no matter what.
Related: How Do You Manage Subcontractors? 7 Essential Tips
PROMOTION
Delays On The Project (Self-Caused)
The longer a construction project goes on, the more money it loses. This is inevitable. Not only will the project itself incur more costs than expected when a project is delayed, but resources will be tied up longer, which will make other projects suffer via the concept of opportunity cost.
Related: What Are The Basics Of Project Scheduling? 9 Essential CPM Steps
Not Taking Any Payment Up Front
We spoke of cashflow problems earlier in this list as one of the most common ways contractors lose money. One major mistake many contractors make is to not demand a partial payment up front. This will only be a relatively small percentage of the total contract, but it will give the contractor some money to fund project-specific expenses, such as mobilization costs, up-front purchases, a portion of worker payroll, etc.
Trying To Do Too Much At Once
“Jack of all trades, but a master of none”. This expression applies to many contractors out there who perform a huge slew of work types and projects. While having multiple specialties is a good thing for contractors, they must truly be experts in each field they’re specializing in.
When contractors take on too many types of work or just too many projects at a time, it increases the chance of a project having issues, being managed poorly or simple mistakes that an expert in that field wouldn’t make.
Related: How Do You Manage Multiple Projects Effectively? Our Top 10 Techniques
No Contingency Funds
Continuing the discussion of under-bidding projects, many contractors neglect to keep safety nets in their project budgets. These safety nets, or contingency funds, are often sacrificed in lowering their bid in hopes of being awarded the job. Without proper contingencies in place on the budget, there’s literally zero room for error! And we all know how perfectly the average construction project goes…
Improper Change Order Management
Guess what happens when contractors do work outside of their contract without a change order? They lose money! Changes happen on nearly every major construction project – contractors must treat each one the same exact way they treated the base contract. With the day-to-day hustle of the project, though, change orders often get left to the side and “settled” at the end of the project. By settle, I mean that contractors have done the work, spent the money and will receive pennies on the dollar of what they expected in many instances, if they get paid at all.
Check out our recent article, where we provide a complete guide of change order best practices.
Related: Change Order Best Practices: What Contractors & Clients Need To Know
Rework / Incorrect Performance Of Work
Doing work twice is the kiss of death for a contractor. Not only will the money that was spent on the work be gone, but the project has likely incurred a delay as a result.
The term “measure twice, cut once” applies to project management, too – the majority of battles are won before they’re ever fought. It’s vital to make sure the work is being done in a satisfactory and compliant manner from the start, which begins in the planning phase.
Workers Who Are Unsupervised Or Left In The Dark
In construction, a common expression is that “labor costs make or break a project”. This is because material and equipment costs can be realistically estimated a lot easier than the labor cost can. Things like production rates and proper workmanship are what make the final labor cost such a critical variable.
When workers are unsupervised, they may not understand or make an effort to reach the necessary production rates that the budget is based on. This also applies to products and construction details – when field crews are guessing or making assumptions, it’s because they don’t have someone telling or showing them exactly what to do. Not to mention, workers with lesser character will not hesitate to work a little slower, take breaks, leave early, etc.
Improper Means & Methods
There’s many different ways to climb a mountain, but there’s definitely a few routes that are way faster and more efficient to take than others. Approaching a construction project without a proper means and methods plan for doing the work is like approaching a mountain without strategizing or planning and expecting to get to the top in a certain amount of time, with little energy spent. It simply will not happen!
Having Too Many Employees
Too many cooks spoil the broth, as they say. When a contractor is employing too many people, there won’t be enough work to go around for all of them. In turn, the contractor is not paying a lot of people for not a lot of work output (per person).
Each employee serves a vital purpose and should stay focused on performing a specific set of tasks. When there’s too many employees, each one will only handle a handful of tasks, which they’ll naturally stretch out over the day (as all humans do, via LifeHack).
This goes for field crews, too. Everyone’s familiar with the scene of one worker digging and three others watching. Everyone who works in project management sees this as equal to lighting money on fire.
Paying too many employees – whether onsite or in the office – is one of the more avoidable ways contractors lose money.
Related: Construction Project Team: Roles And Responsibilities
Having Too Few Employees
I feel like Goldilocks talking about three bear’s oatmeal. Just like a contractor can lose money by hiring too many employees, they can also lose money by hiring too FEW employees, too.
This goes back to unsupervised work crews, improper project management and very little margin for error. Having too few employees is a problem that can’t go on for long – mistakes will be made and money will be lost.
So what’s ‘just right’? Everyone has their own opinion. Here’s my opinion as a project manager who has separately run my own business:
- For every 30 hours’ worth of tasks and processes that need to be done in a given week, the owner or manager should have an employee on board to handle them. This allows 10 hours per week as contingency to cover surprises, mistakes and emergencies.
- If one employee is already working 50-60+ hours per week, it’s time to hire another one to take some responsibilities from the current employee. Asking employees to work longer hours is a short-term solution at best – people get burnt out or find a different job.
- If possible, hire a service rather than a full-time employee – this protects contractors from the larger liability of having a full-time employee.
Of course, a contractor should aim to be as efficient as possible in every area of their business! This includes implementing time-savings processes and assets like equipment, tools, software, etc.
Not Accounting For Taxes, Fees & Other Similar Costs
I know of a company who won a high-rise project worth $65 Million. Within the scope of this project was the purchase of about $10 Million worth of finish materials from overseas. They worked for many months to win this project and submitted several revised proposals in that time. Unfortunately for them, they made the error of not including sales tax for that material in the bid!
Before even starting the project, they were already taking $700,000+ hit to the budget.
Sales tax, labor benefits, payroll taxes, interest, inflation, fuel/consumables and price escalation are a few ‘silent killers’ for contractors. When not accounting for them in project budgets, they’ll quickly diminish what the contractor was counting on as profit.
Prolonged Rental Of Equipment & Tools
Earlier, we stated that the longer a project goes on, the more money it’ll lose. Rentals like equipment and tools are a perfect example of ways contractors lose money in this regard.
Whether a task requires a specialty tool to perform it, or a particular piece of equipment is needed to do the work, they all cost money every day they’re on the job. When tools and equipment surpass several hundred or even several THOUSAND dollars per month, it doesn’t take much for contractors to be upside-down on their equipment budget.
Keeping these expensive rentals onsite for too long is a financial issue most contractors run into at some point.
Related: What Are The Disadvantages Of Remote Working? 5 Realities To Consider
PROMOTION
Inefficient Use Of Overhead
Last but not least on our list of ways contractors lose money is……..inefficient use of overhead.
Here’s a basic example. A hypothetical small contractor has 10 full-time employees. If they were renting out a 25,000 square foot office space, it’d be an obvious, colossal waste of money.
Scale it down a bit – what about a contractor whose office is twice the size it needs to be? They’re still leaving money on the table every month when they pay for extra space.
Other overhead items like vehicles, equipment, printers/scanners, laptops and day-to-day expenses can quickly eat away at the bottom line. These are devices that require money up front, and hold no inherent value (they do, but it’s a fraction of the initial cost) – they only have value when they’re being USED to perform work that the company gets paid for.
If a contractor has extra space, equipment or other resources just sitting around, they’re effectively losing money.
In Summary
Contractors take a big risk when they decide to go into business. There’s no guarantees, a lot can go wrong and the margin for error is very slim. In turn, successful contractors are extremely efficient, savvy and prepared for the work they must get done. When it comes to ways contractors lose money, they all have one thing in common – they’re largely preventable! With this list in mind, you’ll be prepared to drive your business onward and upward into the future. Thanks a lot for reading this article and I hope it’s been helpful!
