Is your project losing money? Do you know why?
Unfortunately some contractors lose money on construction projects. Sometimes these losses are huge (recently Samsung announced they had lost a billion dollars on a project in Australia – yes that’s right one billion Australian dollars or over seven hundred million US dollars). The question to be asked in these cases are; when did the contractor realise the project was in trouble and what actions did they take. Could they have reduced the losses by implementing timely interventions? Of course equally important is what mitigating actions should be taken to prevent another loss occurring in the future.
Reasons projects lose money
There are many reasons for projects losing money. These may include:
Completing monthly cost reports for each project enables the contractor to become aware that the project is losing money. Unfortunately often these cost reports aren’t completed correctly so they aren’t accurate and give misleading information. Often these reports are prepared nearly a month later meaning that the information produced could be nearly two months old. Sometimes the information from the reports is ignored by the project team – they can’t be bothered to take action, the project team believes everything will eventually work out or the team is quick to make excuses and slow to take action.
All too often when action is taken the wrong action is implemented. Managers are quick to cut costs such as cutting the number of people or equipment on the project to save costs. Sometimes this is necessary, but without properly investigating the reason for the losses cutting resources, or cutting the wrong resources, can exacerbate the problem and the losses continue and even worsen.
The other excuse for project losses is to blame the estimator and point out all the errors in the price that are causing the losses. Unfortunately these actions often fail to highlight the good work the estimator has done or even the errors that are in the contractor’s favour. In some cases there are errors that have contributed to the project losses, but often these losses only contribute a small part to the total losses and there are other underlying causes for most of the loss.
It’s important to investigate the reasons the project is losing money and not focus on the first and most obvious excuse. The project team shouldn’t be focussing on finding an excuse for the loss, but rather be looking for the cause so that appropriate action can be taken to prevent further losses and, if possible, to recover the money lost.
Of course the fundamental lesson is to prevent losses occurring in the first place. This is done by ensuring:
Early detection of losses can enable the contractor to take preventative measures to prevent further losses, and even possibly recover the losses. Knowing early that the project will make a loss will allow the company to take action to ensure the negative cash flow and losses don’t destroy the company.
There is often more than one reason that a project is losing money so losses need to be thoroughly investigated to uncover the true underlying causes so that they can be addressed.
Don’t wait until your project is in serious trouble before realising it is losing money. When a loss is discovered take the correct actions to stop the loss.
Have you had a project lose money? What were the reasons?
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Paul Netscher is the author of the popular books 'Successful Construction Project Management: The Practical Guide' and 'Building a Successful Construction Company: The Practical Guide'.'Construction Claims: A Short Guide for Contractors' has just been published. These books are available on Amazon and other online book stores. Paul publishes articles regularly on LinkedIn and his website.
Read a preview of Construction Claims
Paul writes regular articles for other websites, gives lectures, mentors, and is available for podcasts and interviews.
© 2016 This article is not to be reproduced for commercial purposes without written permission from the author.
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Copyright 2016 - The attached articles cannot be reproduced for commercial purposes without the consent of the author.
The opinions expressed in the attached articles are those of the writer. It should be noted that projects are varied and different laws and restrictions apply which depend on the location of the contractor and the project. It's important that the reader uses the supplied information taking cognisance of their particular circumstances. The writer assumes no responsibility or liability for any loss of any kind arising from the reader using the information or advice contained herein.
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