In the commercial construction industry, the actual construction isn’t always the most difficult part – operating at a profit is. Indeed, most contractors already have all of the connections, tools, talent, and skills needed to design or build just about anything. Although winning a project is always exciting, the most successful organizations also know how to balance the optimism of winning new projects with the need to remain profitable. Also known as a risk assessment, let’s review how to determine if a construction project is worth the risk.
Go/No Go Tests
The best place to start is by building a team of the best construction estimators in your marketplace. It gives you a competitive advantage when it comes to using financial criteria to make project decisions. Here is a checklist of criteria that should always be considered before giving new projects the green light:
- Geographic location – If you’ve completed a project in the same region and it was profitable last time, then takes on a lower risk compared to taking on a project in a new location.
- Payment history – Construction is often deemed a credit-heavy market, and good construction leaders know how and when to leverage mechanics liens, pay-when-paid clauses, etc. in order to shift the allocation of risk.
- Project size – A standard rule for determining low vs. high risk projects is to examine past developments that were similar in size yet profitable. For instance, a new project that is 10% larger than that would be considered low risk, whereas something twice as large would be high risk.
- Project type – The project type has to be comparable to one that was profitable in the past to be successful.
In addition, firms are encouraged to consider any past experiences with clients before moving forward with new projects.
Although some projects were deemed essential during the pandemic, many construction jobs ground to a halt during this time forcing many contractors and firms to assume more risk than normal to stay out of the red. New projects are unpredictable by nature, but there are still plenty of the red flags to watch out for. First, you may want to screen owners to confirm their reputation. Perform a background check to make sure there are no lawsuits and liens already filed against the owner. Pump the breaks on any project that seems disorganized. Request complete drawings and specifications before signing contracts. Some final steps include investigating the owner’s finances, looking for unfavorable contract provisions, and learning if and why you are taking over for another contractor.
The best piece of advice that we can provide at this time is to avoid signing new contracts out of desperation. Due diligence, and good estimators, project managers and strong field management are still essential or you risk taking on no-margin projects.
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