How to stop your business losing money on a Construction Project

By Rachelle Hare, Specialist Construction Lawyer, 18 March 2024

As a construction contractor, it is critical to address the issue of losing money on construction projects. The construction industry currently presents a number of challenges, including inflation, material shortages, labor scarcity, and insolvencies, all of which can impact profitability. Contractors need to recognise the signs of a failing project and taking immediate action to turn the situation around. Managing cash flow, dealing with contractual issues, and seeking professional help are essential steps in mitigating possible loss of money.


Discover what to do when your business is losing money

Images of a black hole sucking money into it plus a construction project. Caption reads, "How to stop your business losing money on a construction project." Blaze Business & Legal Logo.

In this article, we consider each of these aspects, providing practical insights and advice based on real-world experiences in the construction industry. We also explore effective strategies, real-world examples, and expert advice to help you overcome this challenge and strive for project profitability in your construction project.

Key Takeaways to prevent losing money

  • Recognise the signs of a failing project, including delays, scope changes, and cost overruns. 
  • Take immediate actions such as re-evaluating the project plan, negotiating better terms  in your contract (if possible), and improving efficiency.
  • Manage cash flow through accurate forecasting and exploring financing options - get a Management Accountant like Shannon Drew to help you if you don't have the skillset internally. 
  • Address contractual issues by understanding implications, negotiating revisions, and seeking legal advice. Rachelle Hare is an expert in front-end Construction Law and often advises clients in these situations.
  • Seek professional help from business advisors and Construction Lawyers - we are both of these at Blaze Business & Legal
  • You can also implement additional strategies like revisiting project scope and engaging stakeholders. 

Recognise the signs of a failing project

In my experience, identifying the signs of a failing project at an early stage is crucial for preventing further financial losses. Delays in the project timeline, frequent changes in project scope, increasing costs beyond the budget, poor productivity or quality of work, and disputes with suppliers or subcontractors are common indicators. By staying vigilant and monitoring these signs, contractors can take proactive measures to address the underlying issues and minimise financial losses.

Take Immediate Action When a Project is Losing Money

When faced with a project that is losing money, it is essential to take immediate actions to address the situation. In my experience, the following actions can be taken:

1. Re-evaluate the project plan and budget to identify sources of money loss

To effectively address financial losses, conduct a thorough review of the project plan and budget. Identify areas where deviations from the plan have occurred and assess the reasons behind them. Make necessary adjustments to the plan and budget to realign them with the project's current circumstances.


Why does my business lose money?


Action Items

  • Review the project plan for any inconsistencies or gaps.
  • Identify areas where the project may have deviated from the original plan.
  • Assess the reasons behind the deviations and adjust the plan accordingly.
  • Revise the budget to account for any additional costs or changes in scope.

2. Negotiate better terms with suppliers or subcontractors to reduce loss

Engaging in open and transparent communication with suppliers or subcontractors can lead to improved terms and cost savings. Explore alternative options and negotiate better rates without compromising quality.

Action Items

  • Initiate discussions with suppliers or subcontractors to explore opportunities for cost reduction.
  • Seek alternative suppliers or subcontractors who can offer competitive rates.
  • Negotiate favorable terms and conditions, such as extended payment periods or bulk purchase discounts.
  • Consider revising existing contracts to align with the project's financial objectives.

3. Improve efficiency on the construction site to prevent losing money

Enhancing efficiency on the construction site is vital to minimise losses. Identify areas where productivity can be improved and implement strategies to optimise resource utilisation and streamline operations.

Action Items

  • Conduct a thorough analysis of the construction site operations to identify inefficiencies.
  • Implement lean construction techniques to reduce waste and improve productivity.
  • Provide training and resources to enhance worker skills and productivity.
  • Optimise scheduling and sequencing to minimise downtime and maximise output.

4. Implement a robust cost control system to stay on top of losses of money

A comprehensive cost control system allows for effective monitoring of project expenses and identification of cost overruns. Regularly track costs, analyse trends, and take prompt actions to address deviations from the budget.

Action Items

  • Implement a cost tracking system to record and monitor project expenses.
  • Conduct regular cost reviews and analyze trends to identify potential cost overruns.
  • Take prompt actions to address cost discrepancies, such as revising resource allocation or negotiating prices.
  • Establish effective communication channels to ensure all stakeholders are aware of cost control objectives.

5. Seek professional help with your project (and business) finances

Engaging the expertise of business advisors and construction lawyers can provide valuable guidance in addressing financial challenges and ensuring project profitability.

Action Items

  • Consult with a business advisor who specialises in the construction industry for a comprehensive financial analysis.
  • Engage a construction lawyer to review contracts, provide legal guidance, and assist in dispute resolution.
  • Leverage their expertise to develop tailored strategies and action plans that align with your project's specific needs and objectives.

Managing Cash Flow

Effective cash flow management is crucial to prevent financial losses. In my experience, the following actions can help improve cash flow:

1. Implement accurate cash flow forecasting

Developing a comprehensive cash flow forecast based on projected revenues and expenses is essential. Regularly update the forecast to reflect changes in project circumstances, such as potential delays, variations, and unforeseen expenses. Anticipate cash flow gaps and plan for contingencies by ensuring sufficient reserves or exploring financing options.

Action Items

  • Develop a detailed cash flow forecast that encompasses all project revenues and expenses.
  • Regularly update the forecast to reflect changes in project circumstances.
  • Anticipate potential cash flow gaps and plan for contingencies.
  • Explore financing options, such as securing short-term loans or lines of credit, to bridge temporary cash flow gaps.

2. Seek short-term financing or renegotiate debt payments:

In situations where cash flow is tight, seeking short-term financing or renegotiating debt payments can alleviate financial pressures. Explore financing options to bridge temporary cash flow gaps, such as securing short-term loans or lines of credit. Communicate with creditors to renegotiate payment terms or seek extensions when necessary.

Action Items:

  • Assess the cash flow situation and identify periods of potential cash flow gaps.
  • Explore financing options, such as short-term loans or lines of credit, to bridge those gaps.
  • Engage in open communication with creditors to renegotiate payment terms or seek extensions.
  • Prioritise timely payments to maintain strong financial standing and build positive relationships with creditors.

3. Request advance payments or expedite invoicings

Improving cash flow can be achieved by securing advance payments for work performed or expediting invoicing processes. Negotiate with clients to secure advance payments, providing a cash injection into the project. Streamline invoicing processes to expedite payment collection, ensuring invoices are accurate, complete, and accompanied by necessary documentation. Follow up on outstanding invoices diligently.

Action Items

  • Establish clear payment terms with clients and communicate expectations.
  • Negotiate with clients to secure advance payments for work performed.
  • Streamline invoicing processes to expedite payment collection.
  • Follow up on overdue payments promptly, maintaining regular communication with clients to resolve any payment issues.

4. Monitor and control expenses

Effective expense management is crucial to maintain positive cash flow. Regularly review and analyze project expenses to identify areas for cost reduction and eliminate unnecessary expenditures. Implement cost-saving measures without compromising quality or safety, such as optimizing material choices and minimizing waste.

Action Items

  • Conduct regular reviews of project expenses and identify areas where costs can be reduced.
  • Implement cost-saving measures, such as exploring alternative material options or renegotiating supplier agreements.
  • Establish protocols to carefully evaluate each expense and ensure they align with the project's objectives.
  • Continuously monitor and analyse project expenses to address any deviations from the budget promptly.

5. Manage accounts receivable efficiently

Efficient management of accounts receivable is essential for maintaining positive cash flow. Establish clear payment terms with clients and enforce them consistently. Implement robust invoicing and collection processes, ensuring invoices are accurate, complete, and accompanied by necessary documentation. Follow up on overdue payments promptly, maintaining regular communication with clients to address any payment issues proactively.

Action Items

  • Establish clear payment terms with clients and communicate expectations.
  • Implement effective invoicing and collection processes, ensuring accurate and timely invoicing.
  • Maintain regular communication with clients to address any payment issues proactively.
  • Implement strategies to minimise the occurrence of late payments and improve cash flow from accounts receivable.

Dealing with Contractual Issues

Addressing contractual issues effectively is vital to prevent further losses. In my experience, the following actions can help in dealing with contractual issues:

1. Understand the implications of project delays on contracts

To effectively navigate contractual issues, it is crucial to review the contract terms and conditions. Understand the rights and obligations of all parties involved in case of project delays. Identify clauses related to time extensions, liquidated damages, and dispute resolution mechanisms.

Action Items

  • Thoroughly review the contract terms and conditions.
  • Identify clauses related to project delays, time extensions, and liquidated damages.
  • Understand the rights and obligations of all parties involved.
  • Seek legal advice to ensure a clear understanding of the contractual implications and available remedies.

2. Review and negotiate contract revisions, if necessary

When faced with financial challenges, it may be necessary to revise the contract to align with the project's current circumstances. Assess the feasibility of contract revisions, considering potential cost-saving opportunities and mitigating future risks.

Action Items

  • Assess the contract's alignment with the project's financial objectives and current circumstances.
  • Identify areas where contract revisions may be necessary to optimise financial outcomes.
  • Engage in open and transparent discussions with clients, suppliers, and subcontractors to negotiate revised terms and conditions.
  • Document any changes or modifications in writing to avoid future disputes and ensure clarity for all parties involved.

3. Seek legal advice for complex contractual matters

In complex contractual matters, seeking legal advice is crucial to ensure compliance with applicable laws and regulations. Consult with a construction lawyer who specializes in construction contracts to review and analyze the legal aspects of your project.

Action Items

  • Engage a Construction Lawyer to review the contract and provide legal guidance.
  • Obtain expert advice on contract interpretation, rights, and obligations.
  • Mitigate potential legal risks and liabilities by seeking professional legal counsel.
  • Collaborate with the construction lawyer in resolving contractual disputes or disagreements effectively.

4. Promptly address and resolve disputes with stakeholders

Timely resolution of disputes with stakeholders is essential to prevent further financial losses. Maintain open lines of communication with all stakeholders involved in the project and actively engage in dispute resolution processes to find mutually beneficial solutions.

Action Items

  • Foster effective communication with all project stakeholders.
  • Address any disputes or disagreements promptly and professionally.
  • Engage in negotiation or mediation to resolve conflicts and find mutually agreeable solutions.
  • Consider involving a construction lawyer to facilitate the resolution of complex disputes and ensure legal compliance.

5. Document all contractual communications and agreements

Comprehensive documentation of contractual communications and agreements is crucial for clarity and dispute avoidance. Maintain a well-organised filing system and record all written and verbal communications related to contracts.

Action Items

  • Establish a systematic approach to document contractual communications.
  • Keep a record of all written and verbal communications, including meeting minutes, emails, and other relevant documentation.
  • Document any changes, revisions, or modifications to the contract in writing.
  • Maintain a well-organised filing system for easy retrieval of contract-related documents when needed.

Seeking Professional Help

When facing financial challenges on a construction project, seeking professional help is essential. In my experience, the following actions can be taken:

1. Consult with a business advisor for financial analysis and strategic planning

Engaging the expertise of a business advisor with in-depth knowledge of the construction industry can provide valuable insights and guidance. A business advisor can provide comprehensive guidance by analyzing your financial situation, offering strategic planning, and implementing effective management techniques. They can help you identify the root causes of the financial loss, develop a recovery plan, and explore opportunities for improvement.

Collaborate with your business advisor to conduct a thorough financial analysis of your project, identify areas for improvement, and develop a strategic plan.

Action Items

  • Consult with a business advisor who specializes in the construction industry.
  • Share project information and financial data for a comprehensive financial analysis.
  • Collaborate to identify areas of improvement and develop a strategic plan tailored to your project.

2. Engage a Construction Lawyer for contract analysis and dispute resolution

Contractual matters can be complex, and seeking the expertise of a construction lawyer is crucial. A construction lawyer brings specialised legal knowledge and experience in the construction industry. They can assist with contract analysis, negotiation, and dispute resolution. They can also provide advice on legal implications, contract termination or modification, and regulatory compliance. Collaborate with your Construction Lawyer to review contracts, analyse legal implications, and provide guidance on dispute resolution.

Action Items

  • Consult with a construction lawyer experienced in construction contracts.
  • Share the project's contracts and legal documentation for analysis.
  • Seek guidance on contract interpretation, rights, and obligations.
  • Collaborate to develop strategies for effective dispute resolution and risk mitigation.

3. Collaborate with both professionals for comprehensive guidance:

By fostering collaboration between the business advisor and construction lawyer, you can benefit from comprehensive guidance in addressing financial challenges. Leverage their combined expertise to develop tailored strategies that encompass financial analysis, strategic planning, and legal compliance.

Action Items

  • Encourage open communication and collaboration between the business advisor and construction lawyer.
  • Share relevant project information and insights with both professionals.
  • Work together to develop strategies that integrate financial analysis and legal compliance.
  • Regularly communicate and seek guidance from both professionals throughout the project lifecycle.

4. Implement recommendations and strategies provided by professionals

Acting on the advice and recommendations provided by the business advisor and construction lawyer is crucial for effective resolution of financial challenges. Implement the recommended strategies and action plans in a timely manner to optimise project performance and mitigate losses.

Action Items

  • Review the recommendations and strategies provided by the professionals.
  • Develop an action plan based on their advice and implement it diligently.
  • Monitor the progress of the implemented strategies and make necessary adjustments when needed.
  • Maintain regular communication with the professionals to seek guidance and address emerging challenges.

5. Continuously assess and adapt your project approach

In the dynamic construction industry, continuous assessment and adaptation of your project approach are key to mitigating financial losses. Regularly monitor project performance, stay informed about industry trends, and be open to learning and improving your strategies.

Action Items

  • Regularly evaluate the effectiveness of the implemented strategies in addressing financial challenges.
  • Stay updated on industry trends, best practices, and regulatory changes.
  • Continuously seek professional development opportunities to enhance your knowledge and skills.
  • Adapt your project approach based on emerging challenges and lessons learned.

From my Perspective...

By incorporating these action items and concepts into your project management approach, you can take proactive steps to prevent and mitigate financial losses on construction projects. Remember that each project is unique, and it is essential to adapt these strategies to suit your specific circumstances and project requirements.

Action Items

  • Conduct a thorough review of your project plan and budget, identifying areas for adjustments and cost optimisation.
  • Engage in open communication with suppliers and subcontractors to negotiate better terms and secure cost savings.
  • Analyse your construction site operations and identify opportunities for process improvement and productivity enhancement.
  • Implement a robust cost control system to track project expenses and identify cost overruns.
  • Consult with a business advisor and construction lawyer to conduct a thorough financial analysis, obtain legal guidance, and develop tailored strategies.

Additional Strategies to Recover a Failing Project

In addition to the steps mentioned above, there are several other strategies you can employ to recover a project that is losing money. In my experience, these strategies can make a significant difference in turning the situation around.

1. Revisit Project Scope

Analyse the project scope and identify areas that can be simplified or removed without compromising the project's objectives. This can help reduce costs and streamline operations.

2. Engage Stakeholders

Regularly communicate with all stakeholders, including clients, suppliers, and workers. Their feedback and suggestions can provide valuable insights for improving project performance and reducing costs.

3. Consider Pausing the Project

In some cases, it might be best to temporarily pause the project. This provides time to reassess the situation, secure additional funding if needed, or make necessary changes to the project plan.

4. Implement Risk Management Strategies

Proactively identify potential risks and develop mitigation plans. This includes contingency planning, proper insurance coverage, and maintaining strong relationships with subcontractors and suppliers.

5. Focus on Quality Control

Emphasise quality control measures to ensure that work is done right the first time. This can minimise rework, warranty claims, and additional costs.

6. Enhance Communication and Collaboration

Foster open communication and collaboration among team members, subcontractors, and suppliers. Effective communication reduces misunderstandings, delays, and costly errors.

7. Continuously Improve Project Management Processes

Regularly assess and refine your project management processes. This includes optimising scheduling, resource allocation, and monitoring mechanisms to improve efficiency and minimise losses.

Conclusion

Preventing and mitigating financial losses on construction projects is crucial for the success of contractors. By recognising the signs of a failing project, taking immediate actions, managing cash flow effectively, addressing contractual issues, and seeking professional help, contractors can protect their business interests and ensure project profitability.

In my experience, adapting to emerging challenges, staying informed about constructio nindustry trends, and continuously seeking professional development opportunities are essential for long-term success. By staying proactive, open to learning, and implementing the recommended strategies, contractors can enhance their financial management skills and navigate financial challenges effectively.

Throughout this article, we have explored various strategies and provided practical action items to implement. By incorporating these action items and concepts into your project management approach, you can take proactive steps to prevent and mitigate financial losses. Remember to tailor these strategies to your specific project and circumstances - each construction project is unique, and the solutions may vary depending on the specific circumstances.

By leveraging real-world examples and tailored advice, you can adapt these strategies to suit your construction project's needs and challenges. By implementing a comprehensive approach and staying proactive in managing your construction project's finances, you can minimise losses, protect your business, and pave the way for long-term success.

FAQs

1. What are the early signs of a project that’s losing money?

Early signs of a construction project that’s losing money include:
– Delays in the project timeline
– Frequent changes in project scope
– Increasing costs that are not accounted for in the budget
– Poor productivity or quality of work
– Disputes with suppliers or subcontractors

2. What immediate actions can I take when my project is losing money?

Here are some immediate actions you can take when your construction project is losing money:
– Re-evaluate the project plan and budget
– Negotiate better terms with suppliers or subcontractors
– Improve efficiency on the construction site
– Implement a cost control system to track expenses
– Seek professional help from business advisors and construction lawyers

3. How can I improve cash flow in a failing project?

You can improve cash flow in a failing construction project by taking steps to:
– Implement accurate cash flow forecasting
– Seek short-term financing or renegotiate debt payments
– Request advance payments or expedite invoicing
– Monitor and control expenses
– Manage accounts receivable efficiently

4. When should I seek professional help for a failing project?

You should seek help for your failing construction project when:
– you’re unable to identify the cause of the financial loss
– the project is significantly delayed or over budget
– there are legal or regulatory issues
– you need to renegotiate contracts or debt payments
– considering restructuring the company or pausing the project.

5. How can professionals help save my failing project?

Professionals can help you save your failing construction project in the following ways:
– Business advisors provide financial analysis and strategic planning.
– Construction lawyers offer legal guidance, contract analysis, and dispute resolution.
– Collaborating with both professionals ensures comprehensive guidance for resolving financial challenges.

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