The electrical construction industry is a competitive market to operate in. The foundation to remaining successful within this market begins with accurate estimates to improve profitability. Poor estimates can result in massive loss of profits for a company. One of the effects arising from inaccurate estimates is overages.
Overages refer to expenses incurred during construction that can increase the overall cost of the project. Such cost overruns could mean the electrical contractor either makes less profits or, even worse, incurs a loss.
This article highlights common factors that could result in overages.
1. Construction Errors
Any errors that arise during the project need to be rectified and are typically costly. For example, if something is not built as it should be, or an error was made in the design, it has to be rebuilt. What this means is twice the originally estimated cost is utilized on one part of the project, and the contractor may have to pull funds from elsewhere to cover it.
The desire to maximize profits or reduce losses on an underbid job could be costly long term, especially if it results in call backs by unsatisfied project owners. Taking the time to work on the project as specified not only results in a successful project but also provides future job opportunities through recommendations by the project owners. By adding an extra level of scrutiny to the project and design, projects won’t have to suffer from overruns resulting from necessitated corrective work.
2. Wrong Assumptions
These include items that are assumed to be covered under a contractor’s or sub-contractor’s bid but aren’t. Project work based on inaccurate assumptions not only wastes financial resources but also time. The entire project could be in jeopardy and eventually fail if such assumptions are not corrected.
To avoid making the wrong assumptions, it is essential to have a clear communication in the plans, specs, and contracts as well as to document everything that comes up. Communication also includes getting input from stakeholders and key project team members to identify the project needs, set expectations, and identify risk mitigation strategies.
3. Inadequate Allowances
Construction contract allowances are itemized budget estimates provided by contractors and can be useful to help plan for cost of materials that are unknown at the time contract documents are executed. Provision of inadequate allowances is a common problem whereby electrical contractors provide estimates with low material allowances.
Sometimes electrical contractors put in unrealistically low allowances to keep their bids attractive. However, this only leaves room for costly losses and shrinking profit. Avoid this situation by setting realistic allowance figures.It is also helpful to pick materials early on, so the estimate reflects the actual costs of the materials. Another way to overcome this is to itemize and define allowance items clearly avoiding oversimplifying them or putting them in bulk portions of the project such as “landscaping.”
Read more on how to be competitive on job bids without having to be the lowest bidder.
An omission refers to materials or work that is accidentally left out of the plans or in the specifications at bid time and are required to complete the project. Omissions could lead to loss of profits since the costs of the omitted items are deducted from the original contract value.
Avoiding omissions requires a high level of organization. Coming up with a checklist and detailed plans and specifications could be the difference between making profits off the project and incurring huge losses off a project that was intended to be profitable.
5. Price Changes
Price changes are almost inevitable. The cost of materials and labor may rise between the time the estimate is provided and the occurrence of the project. Labor cost changes could occur mid-project when more workers are added in order to complete a project on time. More funds are normally needed to hire these workers, affecting the profitability of the project. This is because labor costs are the largest non-material cost in any project.
Change in material prices, on the other hand, happens for a variety of reasons; one of them being supply and demand. When there is perceived shortage of materials, dramatic price swings happen, and it is best to avoid this by paying close attention to factors that could affect pricing when estimating costs.
Checking material prices before committing to a project allows time and room for negotiation with suppliers in order to lock in prices for the project. Such early planning is also helpful in ordering materials on time to avoid expensive costs associated with material availability and rushed orders.
6. Job-site surprises
Jobsite surprises occur when there are unexpected hidden conditions that could have been detected by a more diligent inspection but did not. Examples of these would be underground ledge or water problems or hidden insect damage or wood decay.
Discovery of an unknown condition has the potential to greatly increase the costs of the construction project. These unexpected discoveries can be minimized by doing a thorough inspection upfront. Bringing in a specialist who is trained to identify such conditions could save the project a lot of unexpected high costs which can translate into a higher profit margin.
7. Unplanned Change Orders
Change orders refer to an amendment within the contract that changes a contractor’s scope of work. An example of this would be introduction of new specs, fixes, or additional requirements after initial models have been completed.
Because of the complex nature of the construction projects, change orders are inevitable. But failing to plan for them can cause cost overruns. The additional time, manpower, and materials required to complete such added-on requirements may negate the original project budget.
Anticipating change orders ahead of time in the contract phase could help avoid cost overruns. Using construction software that helps simulate different solutions for scope changes pre-construction could also be helpful. The key to managing change orders is to be proactive— anticipate and plan for them to reduce the likelihood of cost overruns in the construction project.
Learn more about shrinking profit margins and other problems that face the construction industry.