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By Missy England
July 24, 2016
If you're managing a construction project, or are a construction business owner, there are plenty of ways for you to lose money every hour, let alone every day. Construction projects are filled with risk; they require exacting coordination, and there are many physical assets to keep track of. If you want to minimize the money you could potentially lose today, here are three areas to focus on:
Risk is a large part of any construction project, hence a big part of project management is managing risk. When you use accurate estimates for your work breakdown structure, and when you build your schedule with careful consideration of the almost limitless variables, you can eliminate the potential for a lot of risk. For each risk you mitigate or remove, the lower your chances of losing money. But there some more hidden risks in your project contracts that can often cost you money under the radar.
If your contract goal is to push all risks downline, it will result in one-sided contracts with your partners. This, in turn, will create adversarial relationships from the very beginning of your projects. Insisting on oppressive indemnity, warranty, and payment provisions will increase project costs and create contracts that may not be enforceable. One way these tactics siphon money is through defensive project actions on the parts of the parties whom the contract is stacked against. Those on the unfair side of the contract will scrutinize every minor modification from specifications to changes in the schedule, looking for opportunities to use change orders and seek reimbursement for delays.
Every little detail that is not accurate in the design documents will also become points of contention. All of this adversity not only has direct costs, but also indirect costs. The time and resources spent dealing with changes, claims, and rework will quietly drain your wallet. It is far better to structure contracts that are fair and to assign risk to those in the best position to manage it.
When it comes to managing your own risk, one overlooked aspect of contracts is the insurance on property. When the owner of the project is carrying the property, or builders risk coverage, then contractors and subcontractors should consider having their own installation floater to cover damage to equipment and supplies from the time they acquire them until signed for by the owner. This type of insurance coverage makes sure you are reimbursed for damage or loss of materials and equipment while you are moving, storing, or installing them.
There are countless ways for you to lose money every day from a bad schedule. The sad part is, you often aren’t aware of it until the project is over and you're reviewing performance.
One of the chief culprits of this is incomplete work sequence breakdown. This happens in a couple of ways. If the sequence of work is missing necessary steps for tasks, not only will the activity itself fall behind schedule, but all of the successive activities that rely on its completion will also face delays.
What’s almost as bad as missing tasks are hidden tasks. When a schedule shows that an activity needs four tasks when it really requires six, schedulers probably haven’t accurately assigned resources and time. You're going to lose money in this instance when the lack of resources delay completion of the activity, or when dependent activities get delayed or also come up short on resources.
As pointed out by Bob Muir, PE, in his paper “Supplemental Reading for CIEG 486-010 Construction Methods & Management,” proactive control of the schedule is a must if you want to avoid multiple avenues of lost money. If a project manager, superintendent, or other person responsible for project outcomes is in reactive mode to the schedule, then events are driving the project. This leads to a schedule that is constantly getting changed and updated to account for the chaos––causing even the simplest things to have major effects on project outcomes.
Projects in reactive mode will have lower productivity, compromised delivery, resource constraints, multiple and frequent changes in scope, and will suffer more from changes in weather and site conditions.
Theft of tools, equipment, and materialsare a multi million dollar problem for construction, according to a study by LoJack Corporation. Equipment theft gets much of the attention because of the dollar amounts involved on a per incident basis, but the aggregate losses from theft of smaller items like tools and materials are potentially even greater considering much of it is never reported or even accounted for.
Every time you reorder materials because the original order ran out before workers finished the task, doesn't necessarily mean you have a problem with estimating. It's possible that you have a problem with theft.
Lost and damaged equipment, tools, and materials are a fact of life. You generally account for material waste during estimating, but you're usually not thinking about materials left unprotected in the weather, or stolen materials. You are also not taking into account the tools and equipment getting stolen as you put together your annual operating budget.
All of the unplanned-for losses arising from theft or carelessness represent operating capital or profits that are slipping through your fingers. Controlling losses like these require systems and processes that account for tools, materials, and equipment throughout their expected usefulness. It's also helpful to have regular reminders for people on the importance of protecting company property to prevent theft and loss from other causes.
When you avoid losing money by following good contracting procedures, managing the schedule, and taking care of physical assets, you end up with other bonuses like less stress and better project outcomes.
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