From Minutes to Millions: The Financial Impact of Construction Delays

Do you know the ways that project delays are costing you money? In North America, 98% of construction projects face delays, on average stretching the duration of the work 37% longer than the projected scope. For megaprojects, almost 8 out of every 10 projects are at least 40 percent late. While hangups and lateness may seem commonplace in the industry, the financial setbacks of project delays are harmful to a contractor’s budget in many straightforward and non-straightforward ways. Let’s take a look at exactly how dollars are lost on lagging projects.

Direct Costs

This is the type of cost everyone thinks about first, as, most obviously, waiting periods can have substantial immediate financial consequences right there on site. On-site financial setbacks come in several different flavors, for instance, equipment rental costs escalate when delays prolong the need for on-site equipment, and idle equipment represents wasted rental expenses. The most prominent short-term cost of delays, however, is increased labor costs, arising from several different sources:

• Idle labor due to work stoppages is added to the actual working time
• Extended work hours to regain lost time necessitates overtime pay
• Scheduling of workers, subcontractors, and equipment incurs mobilization costs
• Project managers and supervisors require increased work time on-site to address delays and coordinate recovery efforts

For large scale projects with labor and equipment costs of tens of thousands of dollars per day, those financial costs add up quickly, biting into a contractor’s planned budget and erasing the profits planned for the project right before their eyes. Moreover, delays by one trade may push out other trade schedules if they're serialized in the plan, creating a compounding effect across the project.

Indirect Costs

Beyond immediate boots-on-the-ground costs, there are many ways that delays cost a project in indirect ways that are often dealt with off-site. One example of these medium-term costs is material expenditures, as delays can expose the project to market fluctuations in material prices that may lead to increased costs, or stored materials may need replacement after passing their expiration date, deteriorating in quality, or becoming obsolete. Another example is costs due to contract clauses that penalize contractors for failing to meet deadlines. The biggest medium-term increase in costs due to delays comes in the form of increased administrative burdens. Internally, change orders, contract modifications, and dispute resolutions affect profitability, whereas externally, project delays can result in additional regulatory and permitting costs. Depending on the jurisdiction and delay duration, there may be a need to renew or extend permits, obtain other approvals, or comply with new regulations. If the project is financed, there is another level of cost to consider here as well: the interest accrued during the waiting period significantly increases overall project expenses. This translates to higher interest payments, negatively impacting the project's financial feasibility by blocking a company’s revenue streams and putting a strain on cash flow.

Opportunity Costs

Project delays also have a significant financial impact in some ways that are often intangible, non-obvious, and not fully understood. For an owner of a commercial facility completed late, is it possible that a new big client deal or great new partnership would have been completed if the building was functioning on schedule? Is it possible the lost income from the delay could have been invested in a new and exciting way? Maybe the biggest question mark in terms of project delays is opportunity cost. Postponing the next planned project or failing to bid on a new project translates into major long-term financial losses, albeit ones that are ultimately unknown. In addition, another type of opaque opportunity cost arises from delays damaging a contractor’s reputation, making it harder to secure future contracts and thus damaging the prospect of future financial success.

Delays and Logistics

While we’ve covered a lot of the results of project delays, let’s now shift our focus to their causes. There are many types of reasons for a delay, including:

• Rework due to poor workmanship
• Permitting waits
• Late design approvals or changes
• Unworkable weather
• Miscommunication and misunderstandings

One of the most common — and most harmful — causes for a delay are supply chain related. Supply chain disruptions impact 70% of all projects, and are reported as a major concern for contractors worldwide. A significant contributor to these supply chain issues is poor logistics management, resulting in inefficient material flow, unexpected shortages, and in turn many of the different kinds of costs discussed above. So, while some project delays are unavoidable, supply chain disturbances can be prevented through strong material delivery planning and logistics execution. In fact, excellent logistics management can improve project performance by as much as 30 percent, simply by eliminating avoidable delays. To illustrate the financial savings that eliminating delays can represent, we can break down some general numbers. Let’s take the figure from above, that the average project overrun is 37% over schedule. Let’s also take some averages in terms of data center construction, penciling out a size of 100 MW and assuming a cost of $9.5 million per megawatt for a total project cost of $950 M over 3 years (just over $850,000 per day of project costs). By addressing all of the delay costs listed above, let’s say that solid logistics can negate half of those costs through more efficient material transport, storage, and on-site organization. That means a change from 37% over-schedule to 18%, translating to a dollar savings of over $16M over the course of the project.

Minimizing Delay Impact, Minimizing Delay Costs

By effectively addressing logistical challenges, construction projects can significantly improve their performance and eliminate many short terms, medium term, and long term financial costs. A robust logistics plan, executed by a skilled Logistics Service Provider, can streamline material delivery, minimize disruptions, and optimize resource allocation. This proactive approach can lead to a substantial reduction in project delays, mitigating a significant portion of that 37% average project schedule overrun – and their associated costs to the tune of several million dollars. Investing in a top-notch Logistics Service Provider not only helps avoid costly delays but also enhances project efficiency and profitability. Trangistics offers a comprehensive suite of logistics solutions tailored to the unique demands of high-complexity construction projects. By partnering with Trangistics, you can gain a competitive edge, ensure timely project completion, and maximize your return on investment.  To learn more about how to reduce and remove project delays on your high-spec construction project, check out our article about balancing a project’s priorities here. Or, read about how to keep schedules on track by correcting misalignments between on-site parties here.