Recently a reader wrote to me:
Dear Paul Netscher could you share your opinion on this painful problem, please? If my quote was too low for a project and we only notice after we started the project and are losing money like blood…. What can be done? Is there a mutual agreement system established so that we can be dismissed from the project (of course not quit) or talking frankly to the customer? If something like that happened to you how would you handle it?.
I think we’ve all had a construction project that seems to bleed money before it even begins due to be under-priced. The takeoff or quote is messed up and the project is hemorrhaging money every day. I really felt for the guy.
No matter what we seem to do on these projects the losses continue. You feel like walking away. Every day is a nightmare. Unfortunately, as we also know, these projects often only get worse. Other problems erupt. The painful losses increase.
So what can be done to stop the construction financial bleeding?
Unfortunately, we are bound by the contract we signed and there’s usually little escape from the contract. However, following these steps will help reduce losses and also avoid further problems:
1. Read the contract
Read the contract and understand both your rights and the client’s rights under the contract. Ensure you only follow procedures as laid out in the contract. To unilaterally terminate the contract will attract penalties which could far out-weigh your losses. Terminating the contract without a valid contractual reason will also negatively impact your reputation.
I haven’t encountered any contract that allows a contractor to terminate simply because they were losing money. But, if the client hasn’t fulfilled their obligations under the contract you may have other reasons to terminate the contract. But, I must urge caution should you pursue this option; consider the damage to your reputation, destroying the relationship with your client, possible legal costs and the possibility of failure.
2. Find the exact reasons for the project losing money
There is often more than one reason. The construction team may be quick to blame the estimator for mistakes in the takeoff or quote. Nevertheless, there are often other reasons for the losses, and fixing these may reduce some of the losses. Blaming the estimate for project losses is an easy option when in fact the true reasons may be poor project management.
3. Make every effort to finish the project as quickly as possible
When management is faced with a loss-making project they often avoid visiting the project since no one likes dealing with bad news. Resources are trimmed to save money. Yet, this often just makes the problems worse.
A loss-making project may need extra management time to come up with innovative solutions and boost productivity. Ignoring a project or stripping it of resources will only make the problems worse.
4. Don’t take short cuts in order to save money
The temptation of a loss-making job is to use cheaper inferior products or produce work of poor quality. This will almost always cost you more money later and negatively impact your reputation.
5. Boost morale on the project
Invariably project staff on a loss-making project have low morale. This will negatively impact productivity, result in mistakes and increase losses. As a manager, you may feel unhappy visiting or working on the project.
You may hate the project. But you cannot let these feelings impact your work, your relationship with your team or negatively influence the spirits of the team. You need to be positive. You must appear positive. Your team must be positive and focused on getting the job done.
6. Talk to your client and explain the project’s financial problems
They usually won’t help, but even a little sympathy may help in settling claims and variations more favorably. Sensible clients don’t want their project jeopardized by a contractor experiencing construction financial bleeding so they may remove work from your scope (with your approval) lessening their risks, and also reducing your final loss.
7. Re-look at the takeoff or quote and put a value on the mistakes
However, also look at the positive mistakes, because almost always if there are mistakes you’ll find some which are positive.
8. Ensure you claim for all change orders
However, resist the temptation to submit spurious or questionable change orders to claw back money. This wastes time and energy that could be better spent elsewhere. It will also annoy the client, even leading them to dismiss change orders you’re entitled to.
9. Re-budget the project
It’s pointless the project aims to achieve a profit that isn’t achievable. Also, you cannot have an open-ended goal where the project team accepts an infinite loss. Target a realistic loss and ensure your team aims for a final loss less than this.
10. Calculate the worst-case loss scenario
I can almost guarantee that whatever you think the answer is, it will often be too low. Ensure that company senior management is aware of the estimated loss. Check that the company can sustain this loss. The company may have to put a plan in place to mitigate the impacts.
11. Avoid taking on extra work
Avoid taking on extra work on the project where this could increase your losses.
Learn from your mistakes
Ensure that others in your company learn from the mistakes. Systems must be implemented to ensure similar estimating problems don’t reoccur.
Conclusion
None of us likes working on a loss-making project. However, we need to stay focused and finish the project as quickly and as efficiently as possible. This case again shows us how critical good estimating is, and that there should be systems and checks in place to minimize construction financial bleeding.
Have you worked on a project where the quote was messed up and you faced the unenviable task of trying to salvage the project?
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