There are many ways in which general contractors lose money when they work on large construction projects. Poor construction scheduling is one main way money is lost in a construction project. A poorly planned schedule can cause delays, increase construction costs, and cause the contractor to lose money.
To solve this problem, contractors should consider the use of modern technologies like https://www.alicetechnologies.com/solutions/for-general-contractors. This construction optioneering platform can be used for complex construction projects, saving general contractors money by simulating scenarios that ensure the best return on investment.
Regardless, here are some ways that general contractors lose money on large projects.
7 ways general contractors lose money on large projects
1. Poor productivity
Labor productivity is one of the major causes of time and cost overruns in a construction project. If your workers take longer than scheduled to complete a task, preceding milestones will be delayed.
Low productivity can be caused by several factors, one of them being poor supervision. On smaller projects, it’s easier to supervise workers. However, with major construction projects with thousands of workers, this quickly becomes challenging. Other reasons for poor productivity are poor logistics and low morale among workers.
To solve this problem, general contractors should use modern technology to identify unproductive workers. It doesn’t have to be expensive or complicated to set-up—an example of affordable technology is time tracking technology, which works by monitoring the time workers are on-site.
2. Poorly defined contracts
It’s always advisable to involve the services of a qualified construction attorney before you sign any mega-contract. An attorney can guide you on specific clauses to protect your interests during situations like when there’s a change order demanding that a design be added or removed.
In cases such as this, you’ll need to ask yourself who bears the cost of the change order—is it you or the client? If the change order is a result of the client’s wish, then the order cost should be borne by the client. If this is not made clear from the get-go, you’ll likely lose money, as you’ll be working for free.
3. Inaccurate estimates
If there’s one thing that you should always be careful of, it’s inaccurate estimates. Inaccurate estimates can destroy your profit margins and, in the worst-case scenario, force you to file for bankruptcy.
Inaccurate estimates are caused by several factors, the most common being the failure of the cost estimator to use a unit cost-pricing strategy. A unit cost-pricing strategy is more accurate, because the estimator will break the entire project down based on the number of resources needed. Other estimation methods used are educated guesses and capacity factoring.
If the construction project is expected to last for more than a year, the estimator needs to factor in externalities like inflation and increasing costs of labor. If you don’t factor in these externalities, you’ll lose money because you’ll have to pay for the increased cost from your profit margins.
4. Poor quality work
Another reason why general contractors lose money is hiring unqualified subcontractors. When you employ untrained subcontractors, they might end up offering poor-quality work.
Sometimes, the subcontractor might also misinterpret blueprint readings, causing an entire floor to have to be redesigned. And because your team made the error, you’ll be the one spending money to redo the floor.
To avoid these problems, always ensure that you vet your subcontractors. You can even take it a step further and demand a performance bond from them. A performance bond is crucial, because it guarantees that the subcontractor will deliver on what has been agreed.
In addition, it helps to have a contract that protects you from losses in cases where a subcontractor has errors in their work.
5. Poorly trained labor
Apart from subcontractors, general contractors must also ensure that their entire team is well-trained for the job. General contractors should have a fully functioning HR department to vet every member of the construction project. Some of the construction project members that need to be vetted are project managers, accountants, and designers.
Poorly-trained labor is expensive because it can cause construction delays and costly errors.
6. Theft of material
The easiest way a general contractor can lose money is through theft. Construction workers have been known to steal materials, and this can increase the cost of financing the project.
Subcontractors may also conspire with suppliers to submit invoices for materials not delivered. Additionally, suppliers can cheat contractors by delivering the wrong quantity but declaring the correct amount on the invoice.
You can protect your business from theft by maintaining an inventory of equipment and securing the construction site. It’s also crucial that every material delivered is confirmed to be of the correct quantity and specification. You can minimize theft by only purchasing equipment needed for use at the time.
7. Overpaying subcontractors
There may be instances where subcontractors try to cheat the contractor by sending multiple invoices. You might have to pay twice for the same job if you don’t have a proper record and invoice tracking system. You can also lose money if you forget to deduct discounts or if you fail to make deductions for breakages or errors caused by subcontractors.
Lastly, general contractors can lose money if material waste is not controlled. Material waste can be caused by several factors, one of them being poor material handling and storage. Another factor that can cause material wastage is having large amounts of off-cuts and poor quality work.