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6 Places Contractors Lose Money in the Construction Project Lifecycle

Jarone Ashkenazi
Published Apr 19, 2024

From different contract types to changing site conditions, every construction job is unique. But for all these differences, every project still flows through the same lifecycle. The construction project lifecycle happens in six main phases, starting with design and ending with closure. And while this linear formula allows for simple hand-offs from project stakeholders, each phase of a construction project introduces new risks that can impact your profitability. 

The construction project lifecycle is kind of like a game of telephone. Information changes and things can quickly get lost in the shuffle, especially if you’re last in line (which most contractors usually are). This is why you need to understand how each phase works - even if you’re not involved in all of them.  

Key Takeaways


  • The construction project life cycle includes six stages: Design, Contractor Selection, Pre-Construction, Execution, Control, and Closure.
  • While contractors aren’t a part of every phase, understanding how each phase works is critical to avoid missed scope.
  • Inaccurate cost estimates are one of the top reasons contractors lose money on projects. Carefully reviewing all contract requirements and specifications can help you avoid missing any key details. 

The 6 Stages of the Construction Project Lifecycle

Even the “simplest” builds are complex undertakings. From small home renovations to 40-story skyscrapers, every construction project has to move through the same stages to ensure a successful project.

And before project teams can arrive on-site, the project has to go through a planning stage.

1. Design Phase

The design phase begins with the owner presenting their idea for the project. This will be used by the design team down the line to create the drawings and specs. If the owner doesn’t have construction experience, they can bring on a construction manager to take the lead. 

During this phase, a feasibility study will be conducted to identify any potential roadblocks before moving onto the next phase. After this, the owner or construction manager will begin hiring architects, engineers, and design consultants to define the project scope and kick off planning. 

2. Contractor Selection Phase

Once the initial vision for the project has been laid out, the owner or CM will decide on the project delivery method that best fits the project's goals. Next, contractors will be invited to visit the construction site, review the drawings, and submit a bid to work on the project. 

During this phase, it’s important for contractors to carefully look over the deliverables, understand the details of the job site, and spend time creating as accurate of an estimate as possible. Once those estimates are sent in, the owner will bid level and award the job to a contractor. 

3. Pre-construction Phase

Depending on the project delivery method, this phase will be used to bring in select subcontractors, buyout the job, or partner with specialists to complete the project. This is also when the project schedule will be created, along with a work breakdown structure (WBS). This gives the construction team a clear roadmap of all activities and how they will be delegated. 

As the contractor, you’ll also want to use this phase to create a solid risk management and safety plan to protect yourself from any unforeseen circumstances and liability. 

4. Execution Phase

Now it’s time for the owner to find out if all the time, energy, and money they’ve spent during the first three phases were worth it. After a kick-off meeting with the team, the project formally begins both on and off-site. 

Now, you’re in the driver’s seat. Along with bringing the drawings and specifications to life, your primary goal here is to stick to the project budget and minimize change orders. 

5. Control Phase

As the project chugs along, you and the owner will track activities against the baseline schedule and make sure work is being performed professionally. This attention to detail will help keep the project both on schedule and on budget. 

6. Project Closure Phase (Closeout)

Once the project is almost to the finish line, you’ll start a punch list of any final items that need to be completed. The owner will also keep track of this list before turning over the project to operations or maintenance. The commissioning process also happens during this phase to make sure all systems are working as intended.

Finally, at project completion the budget will be closed out, and final payments will be made (and retainage released). This is also a chance for you and the owner to discuss any outstanding change orders, and provide necessary waivers. 

👀 Read our full guide to the phases of construction.

6 Ways Contractors Lose Money During the Project Lifecycle (And How to Avoid Them)

Because every project is unique, each of the six phases of a construction project will inevitably look different. This is where staying on track financially can get difficult if you don’t know what to look out for. 

In our experience, here are the top six ways contractors lose money during the construction process.

Inaccurate Cost Estimating

Cost estimating is a complex task that has to take multiple stakeholders and project planning into account to best address a project’s drawings and specifications. When a project is passed from the design team to the bidding phase, you should carefully review all requirements and visit the site to uncover any issues that could impact the project budget and schedule. 

Whether it’s overlooking a small item (i.e. pricing out wood A at $5/sf vs the correct wood B at $10/sf) or miscalculating the number of units needed (i.e. 10 sf vs 100sf), small mistakes here can quickly add up.

Contingencies

Because most projects start without finished drawings and specs, you’ll likely have to prepare your bid based on a bid set. This requires some guesswork on your part, and means that you’ll need to include contingencies in your bid. This covers unknowns on the project, including material call outs, undefined scope, or bad weather on-site. 

To make sure every potential situation is covered, you’ll want to overestimate how much you need in contingency, so you don’t have to go running back to the owner for more funds. It’s always better to overestimate and then underbill.

Design-Related Problems

Owners often fast-track projects with unfinished drawings to expedite contract approval with a contractor, but it leaves a bunch of ambiguous scope to deal with. If the design team has to continuously update the drawings, it can add additional cost to the scope of the project that was not in the original bid. 

What’s more, if the drawings don’t take certain site logistics into account, or if the architectural sheets don’t match the structural or other (mechanical, electrical, plumbing) MEP trades, it can impact your profitability as well. While you’re ultimately reliant on the design team, doing your due diligence and closely reviewing the drawings during preconstruction will help you avoid taking on the cost of missed scope later.

Procurement Delays 

Planning a schedule is just that, planning for the best outcome. Of course, you may include some float and added days for scope duration you think may go a bit longer, but planning versus reality is different. For example, if you need to procure stone from Italy and you take into account loading the stone in Italy, transportation, customs, warehousing and delivery to the site, delays in any of these stages can’t be foreseen. Whether it’s the ship running out of fuel or added delay in customs for a second review, these delays can severely impact your schedule and bottom line. If you’re expecting the stone on week 10, but it doesn’t arrive until week 12, you’ll have to foot the added cost of trades working overtime to gain back the two weeks you lost. 

Unexpected Events

Even if you plan for the worst and hope for the best, earthquakes, heavy rain, and accidents can still shut down the job site (or worse, trigger claims from third parties). Still, while you can’t stop nature or watch everyone on the job site, you can keep up with the weather forecast and make sure on-site crew has clear safety requirements.

Theft

From loaders and excavators to lifts and ladders as well as finished materials such as wood and tile, high-value goods and materials enter the job site on a daily basis. And according to the National Equipment Register, theft on construction sites costs the industry up to $1 billion each year, making theft prevention a must. 

If materials and equipment are misplaced or stolen, you’re directly responsible for replacing them. This will eat into your contingency (if there is one) and profit. Safety gates, security guards, cameras and other measures can help safeguard your cash flow against external and internal theft.

Last Thoughts

For better or worse, the construction industry is inherently a high-risk, and it requires exact coordination, open communication, and a healthy dose of luck when it comes to the supply chain. While there’s no avoiding every unexpected problem on the job, we hope this guide will help understand the entire project’s lifecycle and ensure a profitable job.

Keep Reading: Foundations of Construction Project Management


Author
Jarone Ashkenazi

Jarone started his construction career working for a commercial general contractor in Los Angeles, before transitioning to being an Owner's Representative for the past eight years. Jarone has led multiple projects and has been integral in cross-departmental communication and implementation of processes with design, leasing, planning and facilities/operations teams.

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