What do you do when your construction project is LOSING money?

Unfortunately some construction projects aren’t profitable. What happens when a project starts losing money could drastically impact the outcome of the project – often making the problems worse and even damaging the contractor’s reputation.

So what does the Project Manager do when their project is losing money?
Well we know what their managers will do! They’ll probably be angry and order the PM to cut costs. The simplest way to do this is to reduce the number of staff on the project. They may even replace the PM. These actions seldom turn the project around. In many cases they exacerbate the losses. A change in PM is disruptive, staff cutting often demotivates the remaining staff who may have to take on additional tasks. Knowledge is lost when staff are moved off (knowledge which could include useful information required for claims to recover money from the client for changes in scope). Inevitably wild random cost cutting makes the project’s financial woes worse. Paradoxically a project may even be losing money because there isn’t enough staff, which results in low productivity, errors and tasks being left undone. However, sometimes, there are in fact too many people.

To avoid this unpleasantness PM’s often try and hide the problem, maybe hoping that things will improve. When the problem can no longer be hidden they may blame others – especially the estimator.

All of the above usually just makes the problem worse. Unfortunately financial problems seldom solve themselves and it’s unlikely that the project will suddenly reverse the losses, so action needs to be taken. It’s important to find the reasons for the loss. I say reasons because there’s almost always a number of contributing reasons. Knowing the reasons action can be taken to solve the problems to stop further losses and perhaps even to recover money already lost. Ask for help if necessary. Managers should see that their PM is supported, even spending more time on the project if required. (it’s sometimes amazing when a project is going badly how some managers are noticeably absent – only visiting their projects that are doing well.)

PMs need to stay calm. Be upfront with their manager, explaining the possible full extent of the loss and the reasons for the problem and possible solutions with the best and worst case scenarios. As much as their manager might not want to show their boss the full extent of the loss it’s important that they do, so the company can put contingency plans in place to safeguard their cash flow. I’ve seen a large construction company destroyed when a couple of projects lost money and senior management weren’t prepared for the losses.

Once the reasons for the loss are known, implement measures to prevent or reduce further losses and try and recover money already lost.

Having a reliable costing system will help the project detect losses at an early stage, allowing action to be taken sooner. If the costs systems are affective they may even provide an indication as to what the causes are. However, it is pertinent to remember that the project’s costing system is only as reliable as the data that’s entered, and is only useful if the information the report provides is interpreted and analysed correctly.

Next week I will deal with some likely causes that result in construction projects losing money.