A new report from Procore and Dodge Construction Network highlights difficulties and opportunities experienced by specialty contractors as the industry continues to adjust to a faster, more complex market. One problem shared across contractors of all trades and sizes is lost revenue due to unbilled or unpaid change orders, much of which can be attributed to outdated processes and inefficient communication.
On average, respondents reported, 32% of project revenue is lost to these unpaid change orders. That’s an enormous hit to take by any measure, but some corners of the industry have it even worse.
Breaking that down to geographical regions, 38% of companies in the UK reported losing half or more of their revenue to unbilled change orders. That number drops to 36% in Australia and New Zealand, then down to 24% in Canada, and a much lower 12% in the US. If we look at different trades, steel contractors have it worst with 42% of revenue lost on average to these change order issues, while concrete contractors experience a comparatively low 19%.
As dire as that may sound, it is likely an understatement of the actual costs, since in addition to the lost revenue there is the increased cost of performing the work. That will contribute even further to an already serious erosion of margins.
Manual processes eroding profit margins
The causes of change orders going unbilled or unpaid can generally be narrowed down to two things: widespread use of manual and outdated systems, and inefficient communication processes.
Many specialty contractors still rely on manual systems for both administrative and field tasks. Whether you’re in the office or on the jobsite, documenting a budget or a daily log, these manual processes are susceptible to error. And while pen and paper certainly count as “manual,” traditional spreadsheets and other legacy document formats can also be time consuming and wasteful.
Fully half of small companies reported that they still rely on traditional methods to carry out and manage tasks relating to project execution. And among all companies, a third still use mainly manual methods for daily logs — where critical information like changes and cost impacts get set down first, as well as time and material tickets. Twenty-three percent use spreadsheets for their finances, and 22% use mostly manual methods for tracking change orders.
These methods aren’t just more prone to error than automated ones — they’re also slower. Needing corrections or missing deadlines to begin with, means a change order is unlikely to be billed correctly or paid on time, if at all.
Here the manual processes problem overlaps with the issue of inefficient communication. Improving one or the other is good, but bringing both up to date amplifies the benefits of both.
Communication comes first
A majority of contractors surveyed said field-to-office communication needs improvement. The simple fact of physical distance between offices and jobsites hampers effective information flow, which in turn negatively impacts project performance. If there isn’t an effective method of communicating changes and cost impacts from the field to the office, those items may go undocumented or misinterpreted — and the same is true going the other direction as well.
Poor field-office communication was a major cause of profit margin erosion for a quarter of respondents. Large and very large companies are more seriously impacted, which may reflect challenges unique to how big organizations implement internal processes across broad project portfolios. These projects are often at greater distances from the home office, making effective communication that much harder.
“Unforeseen jobsite conditions” was cited as a top reason for profit margin erosion by 41% of those surveyed. Whether it’s something as simple as bad weather or an equipment or supply chain issue, it’s crucial to communicate these situations from the field to the office as quickly and completely as possible.
If there’s no way to do so, contractors risk incurring extra costs and delays as they work around these conditions with no central decision-making, documentation or feedback. These added costs are at risk of not being billed for or paid for the same reason.
Outdated and manual systems in documentation and communication are some of the biggest contributors to narrowing profit margins at specialty contractors. If these companies want to do the best work they can and grow their business and income, they must evaluate ways to improve their business processes and protect their bottom line.
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