Common Sources of Financial Risk in Construction
Construction margins are notoriously thin. This guide identifies the six most common ways builders lose money, from fixed-price contracts to latent conditions, and offers mitigation strategies.
1. "Fixed Price" vs. The Market
Signing a fixed-price contract with a client while holding variable-price arrangements with suppliers is a recipe for insolvency.
Mitigation: Back-to-back contracting. Lock in supplier pricing before or immediately upon signing the head contract.
2. Scope Creep (Unbilled Work)
Doing "small favours" for a client without raising a Variation.
The Death by a Thousand Cuts: $500 here and $200 there adds up to $20,000 over a project. If it's not in the scope, it's a variation.
3. Over-Claiming (False Profits)
Claiming 50% of the contract value when you have only incurred 40% of the cost feels good (positive cashflow), but it creates a "Work in Progress" (WIP) liability. If you spend that cash on overheads instead of saving it for the back end of the job, you will run out of cash at lock-up stage.
4. Latent Conditions and “Unknown Unknowns”
Latent conditions (rock, undocumented services, unsuitable subgrade, contamination) are where fixed-price jobs die. The best mitigation is contractual and operational:
- Contract clarity: define what is included and how latent conditions are valued and notified.
- Early investigation: service locating, test pits, geotech review, pre-start walkthroughs.
- Notice discipline: notify immediately and gather evidence (photos, reports, quantities).
5. Insolvency Risk in the Supply Chain
One trade failure can cascade into delay and cost. Watch for red flags: missed milestones, poor communication, repeated “cash” requests, and quality slippage. Mitigate with staged payments tied to measurable deliverables, retention where appropriate, and backup options for critical trades.
6. Make Risk Visible
Maintain a simple risk register on every project: risk description, probability, likely cost/time impact, mitigation actions, and who owns it. If you can’t see risk in writing, you’re probably carrying it unknowingly.