How much do delays actually cost construction projects?
Time performance is one of the most crucial factors when working on a construction project. Every contractor (and customer) wants the works to be completed on time. However, a good number of projects experience time overruns, and due to the financial implications of those construction delays, they often result in claims notices as well. So just how much do construction delays cost construction projects?
How often do delays happen?
In a recent survey including 61 respondents, all representing various players in the construction industry, only nine said that they have never been involved in delayed construction projects. In general the estimated construction delays equated to less than 20% of the estimated delivery time.
However, in 9.8% of cases, participants had experienced projects that went on beyond 20% of the expected time, figures consistent with several studies conducted in other countries that suggest a 10 to 30% delay in delivery of some projects. Then again, another study indicated that over 91% of projects are subject to delays, it’s just that most are not so severe as to constitute significant action.
What do delays cost?
The findings from the same survey suggested that delays can cost companies up to 20% more than the original estimated cost. The largest group, 31.1%, pointed to a 0-10% increase followed by 26.2% of the respondents pointing to an 11-20% increase. Only 3.3% of respondents suggested an increase in cost greater than 50%, but then when you’re talking in millions, even 10% is going to be an unpleasant surprise.
Take a project that has a contract value of $50 million with a duration of three years. That breaks down to a value per day of $45,662. If you use an average delay of 30%, that puts the average cost of delay around $15 million, bringing the total project cost to a cool $65 million.
As a case in point, in 2017 the contractor who was constructing Austin’s largest hotel, the $350 million Fairmont Austin project, filed a lawsuit against the subcontractor seeking approximately $27 million for allegedly causing the project to fall behind schedule. When you get into those figures, 10% is looking pretty serious.
Who pays for costs caused by delays?
How the costs of delays are recuperated depends on a number of factors, not least the terms of the initial contract.
Often, insurance will cover at least part of it, but no one is ever going to willingly hand over millions without an iron clad case being made. The problem with disputes over construction projects is that often the details, the conversations and the communications have not been well documented so as to constitute an easy timeline of events. In many cases, the client bears up to 90%, and that’s just the upfront monetary impact.
It does not include the breakdown of relationships and the less tangible consequences of lost income if a project like a hotel opens late or apartments can’t be sold for another year. That’s why we do what we do – whether it’s getting involved at the start of a project to help prevent claims occurring or handle disputes before they get serious, or whether it’s getting involved once a claims notice has already been raised. Our role is to protect the client’s contractual and commercial interests, whilst maximising their financial return.