The True Cost of Avoidable Errors in Construction

Construction spending has been rising, with recent increases in construction costs driven in part by an industry-wide labor shortage and skyrocketing building material prices. In an industry already laser-focused on the bottom line, investors, owners, developers and general contractors alike are increasingly focusing on ways to reduce or eliminate one of the key contributors to costs: rework.

There are an estimated $273 billion worth of construction errors made each year in the U.S. alone, which leads many construction firms to bake rework into the cost of construction, allocating costs to a contingency budget. Rework is defined as any activity in the field that has to be done more than once or that removes work previously installed as part of the project (excluding change orders or changes in scope by the owner). It accounts for a significant portion of the total cost (as much as 20%) and time (up to 52% of total project delays) of construction.

The compounding effects of errors can be felt throughout the project, increasing immediate and long-term risks for all project participants. And with average pre-tax net profits slim—between 1.4 and 2.4% for general contractors, according to the Construction Financial Management Association—there’s not a lot of room for error. Because the costs associated with these errors are borne by all parties engaged on a project, they all stand to benefit from a reduction in errors.

With projects becoming more complex and costs expected to continue to rise for the foreseeable future, rework has become a not insignificant challenge across the industry. Firms increasingly build estimates of rework into their budgets up front, and this inflates budgets to an unacceptably high level given that tools available today like digital construction verification (DCV) can eliminate rework.

Their calculations, however, are too often limited to the visible direct costs for the material, labor and equipment specific to a project; they fail to take into account hidden costs from indirect costs and latent liabilities—costs that are often more difficult to predict but quickly add up.

How to estimate the real cost of avoidable construction errors?

The Get it Right Initiative (GIRI) was created to improve the way the construction industry builds—not just from a productivity and profitability standpoint but also from a quality perspective as well. GIRI breaks the cost of avoidable errors in construction into four categories:

  • Direct costs The labor, materials, plant and other resources used in correcting an error. Direct costs amount to 5% of total project value, according to GIRI.

  • Unrecorded process waste Errors that occur are identified and corrected without being recorded. Unrecorded process waste, which also includes errors that are not corrected but that do not compromise the end performance of the project, amounts to 6% of total project value.

  • Indirect costs The effect on following work and the costs to other parties. Indirect costs amount to 7% of total project value.

  • Latent defects Defects that remain in place after the project has been accepted by the client and any defects liability period has passed. Latent costs amount to 3% of total project value.

The direct cost of avoidable errors, 5% of total project budgets on average, exceeds the general contractor’s average project fee. In other words, depending on the GC’s contract/delivery method, a GC could potentially double its margin on a fixed bid project by taking steps to eliminate these errors. And, depending upon how you account for the cost of errors, this might be just the beginning of potential revenue gain.

The industry often tackles these errors with a few practices, including implementing:

  • Open team communications Coordinating activities and expectations between teams in real time.

  • Standardization Using templates and workflows to ensure that all key items are addressed.

  • Prefabrication Leveraging manufacturing techniques to ensure quality and reduce errors.

  • Digitization and automation Digitizing information and automating processes for higher certainty and lower risk.

But while these measures will certainly benefit your project, the only true way to avoid errors is to guarantee that they don’t occur in the first place. Learn more about how SiteAware closes the gap between plans and construction in real time, ensuring consistent quality and preventing rework.