Managing a Loss-Making Job: What to Do When a Civil Contract Goes Under Water

The job was tight at tender, the ground was worse than expected, the client was slow on approvals, and the subcontractor did not perform. Nobody said anything for four months because everyone believed it would come back. At month five the cost report shows a loss that is now most of the year’s profit.

The size of the loss on a bad job is determined mainly by how long it ran before anyone acted on it. The underlying problems are usually visible within the first fifth of the programme; the reporting that would have made them visible usually is not.

This guide is about what to do when it happens: how to find it early, how to work out what actually caused it, what to do in the first week, how to recover entitlement, and how to protect the business while the job runs to completion. It assumes the job will be finished, because in the overwhelming majority of cases it must be.

Why losses are always found late

• Optimism is structural. Site teams believe they will make it up in the back half, and occasionally they do, which is enough to sustain the belief.
• Cost reporting lags. Supplier invoices, subcontractor claims and plant charges arrive weeks after the work, so the cost you can see is always less than the cost you have incurred.
• Accruals are guessed. Work done but not invoiced is estimated, and it is estimated optimistically.
• Revenue is recognised on claims, and a claim that has been submitted but not certified is not revenue.
• Variations are counted before they are approved, which is the single most common way a forecast is made to look acceptable.
• Bad news is not rewarded. A project manager who reports a loss expects scrutiny, so the incentive runs toward waiting.
• The forecast is a target, not a forecast. Where the reported final cost never moves from the tender number, the reporting has stopped functioning.

A forecast that has not changed since award is not a forecast. On any real job something has gone better and something worse; a static number means nobody is doing the work.

Detecting it early: the forecast that tells the truth

• Forecast cost to complete, monthly, by cost item, built from what remains rather than by extrapolating what has happened.
• Compare quantities, not just dollars. Cost against budget tells you little without knowing what percentage of the work it bought.
• Unit rates achieved versus tendered, which is the earliest reliable signal — the cubic metres per hour, the metres of pipe per day, the square metres per shift.
• Accrue properly. Every subcontractor’s work done to date, every delivery not yet invoiced, every plant hour.
• Separate approved from claimed variations, and forecast only what is approved or genuinely probable, with the rest disclosed separately.
• Forecast the preliminaries against the actual remaining duration, not the contract duration. A job running two months late is carrying two months of preliminaries nobody has added.
• Reconcile to the programme. If the programme says fifteen weeks remain and the cost report assumes ten, one of them is wrong.
• Make it safe to report. A culture where a project manager can say “this job is going to lose money” in month two without being punished is worth more than any system.

Our guide to job costing and cost control covers building this reporting; the point here is that the forecast is the detection instrument, and if it is being managed to look acceptable, you have no instrument.

The warning signs that arrive before the numbers

• Production rates below tender in the first weeks, which almost never recover on their own.
• Rework, and non-conformances that keep appearing.
• Programme slipping without a corresponding extension of time claim lodged.
• Plant standing, waiting for access, materials, approvals or a decision.
• Overtime becoming routine to hold the programme.
• Unapproved variation work being done to keep things moving.
• Claims not being certified in full, month after month.
• Requests for information piling up unanswered.
• The site team going quiet, or becoming defensive about the numbers.
• Subcontractor disputes or a subcontractor slowing down.
• Nobody writing anything down — no notices, no diaries, no records, which means no entitlement later.

The last one is the most predictive. A job with poor records is a job where entitlement is being lost daily, and it is invariably also a job where the cost is not being reported accurately.

Diagnose the cause before choosing the response

The response depends entirely on the cause, and jumping to action before diagnosis is how contractors spend money making the wrong problem better.

Cause	Recoverable?	Primary response
Tender error — rate, quantity or omission	Generally not	Minimise, deliver efficiently, fix the estimating process
Scope misunderstood	Sometimes, if the documents were ambiguous	Test the interpretation contractually, promptly
Ground conditions	Often, if the contract allows	Latent conditions notice, immediately
Client-caused delay or disruption	Usually	Extension of time and delay cost claims, with notice
Variations done without approval	Sometimes, harder without records	Regularise now, stop doing unapproved work
Weather	Time usually, cost rarely	Extension of time claims to avoid damages
Subcontractor failure	From them, subject to their solvency	Contractual remedies and replacement
Own productivity or supervision	No	Management change on the job
Escalation	Only if the contract provides	Check the rise and fall provisions

Most bad jobs have several causes, and the mix matters. A job that is 70% client-caused and 30% own performance is a claims job with an operational component. One that is 90% tender error is an efficiency and containment exercise where pursuing claims wastes money and goodwill. Be honest internally about which you have — this is the point at which self-deception is most expensive.

The first week: stop the bleeding

• Get a truthful forecast, independently reviewed by someone who is not the project manager.
• Read the contract properly — notice provisions, time bars, variation procedure, delay costs, liquidated damages, suspension and termination rights. Most site teams have never read it.
• Issue every outstanding notice immediately. Time bars are unforgiving and a valid claim lost to a missed notice is the most avoidable loss in construction. If in doubt, notify.
• Stop unapproved work. Any work outside the scope stops until it is instructed in writing, and that instruction should be sought today.
• Start proper records — daily diaries, photographs, delay events, standing plant, labour allocation, correspondence. Records started today are worth far more than records reconstructed later.
• Freeze discretionary spend on the job.
• Review the remaining programme honestly and identify what is actually driving the remaining cost.
• Tell your own senior management. A loss disclosed by the project manager is a problem; a loss discovered by the accountant is a crisis and a trust failure.

The single highest-value action in the first week is issuing notices, because entitlement expires quietly and cannot be recovered. See our guides to contract administration for civil SMEs and extension of time and delay claims.

Recover what you are actually entitled to

• Audit the variations. Every instruction, direction, drawing revision, specification change and site instruction — many of which were never priced.
• Check the measure. On a remeasure contract, quantities actually built against those paid. Under-measurement is common and correctable.
• Latent conditions, if the ground differed from what was disclosed or could reasonably have been anticipated — see our guide to latent conditions in civil contracts.
• Delay and disruption. Extension of time protects against liquidated damages; delay costs are a separate entitlement that must be claimed and substantiated.
• Acceleration, where you have been directed or constructively required to speed up.
• Escalation, if the contract has a rise and fall mechanism — see rise and fall and cost escalation.
• Use security of payment. A statutory payment claim and adjudication is fast, binding on an interim basis, and it exists for this situation — see security of payment in Australia.
• Substantiate properly. A claim with records, causation and quantum is paid; a claim asserting that the job cost more than expected is not. See variations in civil construction contracts.
• Be realistic. Overstating a claim damages the credible parts of it and the relationship along with them.

Get help early if the claim is large. A quantity surveyor or claims consultant engaged at month four is worth several times the same person engaged at month twelve, because the records can still be created rather than reconstructed.

Change how the job is being delivered

Claims recover the past. Only delivery changes the future, and on most bad jobs the remaining cost is larger than the recoverable claim.

• Attack the largest remaining cost item first, not the most annoying one.
• Reduce the duration. On most civil jobs time-related cost is a substantial share of the remaining spend, so finishing sooner is the highest-leverage change available — provided it does not cost more than it saves.
• Fix the method where production rates are below tender. Different plant, different sequence, different crew size.
• Right-size the site team and the plant fleet to what remains.
• Eliminate standing time, which is pure loss and usually caused by something scheduleable.
• Stop rework — get the quality right, because doing it twice is the most expensive productivity problem there is. See quality management plans and ITPs.
• Renegotiate supply where volumes have changed.
• Consider self-performing or subcontracting differently for the remaining scope.
• Do not cut safety, quality or environmental compliance. An incident, a serious non-conformance or an environmental breach on a job already losing money turns a bad year into an existential one, and the regulatory consequence does not care about your margin.

That last point needs stating plainly because it is where the real danger sits. Cost pressure on a struggling job is the most common precondition for a serious safety incident, and the duties under work health and safety law are not reduced by commercial circumstances.

Talking to the client

• Keep the contractual and the commercial conversations separate. Notices and claims are formal and go through the contract; the relationship conversation is different and both are necessary.
• Do not tell them the job is losing money as an argument. It is not a contractual basis for anything, and it invites them to question your capacity to finish.
• Do put a solution on the table. Clients respond to “here is how we can complete this and here is what we need” far better than to a list of grievances.
• Look for things worth more to them than to you — a staging change, an earlier partial handover, a specification relaxation, a scope adjustment, release of retention, faster certification, or a change to a milestone.
• Be careful with global settlements. A deed settling everything is often the right outcome, but understand precisely what you are releasing, and take advice before signing.
• Maintain credibility. The client will still be a client after this job, and how you conduct yourself on a bad job is remembered longer than the job.
• Escalate within their organisation where the site-level relationship is stuck, carefully and after telling the site-level people you are doing it.

Our guide to dispute resolution after adjudication covers the formal path if it comes to that; the great majority of these situations are resolved commercially and should be.

Protecting the business while the job runs

• Ring-fence it. The risk is that a loss-making job consumes the working capital that funds the healthy ones, and that is how a single bad job takes a business down.
• Forecast cash for the whole business, weekly, with this job’s drain shown explicitly.
• Talk to the bank early, while you are performing. Facilities are available to a contractor with a problem and unavailable to one in default.
• Talk to your accountant about the accounting treatment; anticipated losses on contracts generally have to be recognised when they become known, which will affect the reported result and may affect covenants.
• Do not fund it by delaying subcontractors. It is often a breach of the contract and of security of payment obligations, it destroys the supply chain you need to finish, and it accelerates the collapse it is meant to prevent.
• Watch the tax and superannuation position, which must be maintained.
• Do not bid new work to fund it. Taking a job for cash flow reasons rather than commercial ones is how one bad job becomes two — see our guide to winning work in a downturn.
• Directors’ duties. If the business may become unable to pay its debts, directors have specific obligations, and there are formal safe harbour provisions that require early professional advice to access. Get that advice before you need it.

Subcontractors and suppliers

• Where a subcontractor caused the problem, deal with it contractually and promptly — notices, back-charges, and replacement if necessary, with the contract followed exactly.
• Where they did not, keep paying them. They are the resource completing your job.
• Pass through what genuinely belongs to them but do not use them as the funding line for your loss.
• Be alert to their exposure. A subcontractor on a bad job is also on a bad job, and their failure becomes your problem — see principal and head contractor insolvency.
• Suppliers may extend terms if asked early and honestly, and will not if asked after you have missed payments.
• Your reputation in the supply chain is an asset with real value, and it is spent quickly on a job like this.

Should you ever walk away?

Almost never, and the exceptions are narrow.

• Abandoning a contract is repudiation in most circumstances. The client can terminate, complete the work at your cost, call your security, and pursue the difference. The exposure is typically far larger than finishing.
• You may have contractual termination or suspension rights — for non-payment, for a prolonged suspension by the client, or under a specific clause — and there are statutory rights to suspend for non-payment under security of payment legislation. These are exercised strictly in accordance with their conditions.
• Exercising a right you do not have is itself repudiation, which is why this decision is never made without legal advice.
• A negotiated exit — a deed of release, a novation, a mutual termination — is occasionally achievable and is a completely different thing from walking off.
• Where the loss threatens the business’s solvency, the question stops being about the job and becomes a question for the directors with professional advice.

The default assumption should be that you finish the job. Almost every alternative is worse.

The people on the job

• The site team knows. Pretending otherwise damages trust and produces worse information.
• Blame produces concealment. If reporting a problem gets someone punished, the next problem is reported later.
• Distinguish a bad job from a bad manager. Most loss-making jobs are not caused by the person running them, and removing a competent project manager to demonstrate action makes the job worse.
• Bring in support rather than replacement where the issue is capacity — a commercial manager, a planner, a claims specialist.
• Protect people’s wellbeing. A prolonged bad job is genuinely hard on the people running it, and mental health on a struggling project is a real management responsibility.
• Do not let it become the culture. A team that spends a year losing money can start to accept it as normal.

Afterwards: extracting the value

• Do a real post-mortem, in writing, with the estimator and the site team in the room together.
• Reconcile the actual costs back to the tender, line by line. This is the most valuable estimating input you will ever get and almost nobody does it.
• Update your rates with what the job actually cost, not what you hoped it would.
• Fix the process failure. If a notice was missed, fix the notice process. If a scope was misread, fix the tender review. If a subcontractor was unvetted, fix the vetting.
• Update the bid/no-bid criteria if the job should never have been bid — see the go/no-go decision.
• Keep the record, because the same client, the same conditions or the same clause will appear again.
• Close it out properly — final claim, retention release, defects — because the last of the money is often left on the table by a team that has emotionally finished with the job. See practical completion, defects liability and the final claim.

A loss-making job that produces a corrected rate library and a fixed process is expensive tuition. One that produces nothing but a bad year is simply expensive.

Checklist

• Is there a monthly forecast cost to complete, built from remaining work rather than extrapolation?
• Has the forecast changed since award, and if not, why not?
• Are accruals complete, and are unapproved variations excluded from the forecast?
• Are preliminaries forecast against the actual remaining duration?
• Does the cost report reconcile to the current programme?
• Are achieved production rates being compared to tendered rates?
• Has the cause been diagnosed and split between recoverable and non-recoverable?
• Has the contract been read, specifically the notice provisions and time bars?
• Have all outstanding notices been issued?
• Has unapproved work stopped, with written instructions sought?
• Are daily records, diaries and photographs now being kept properly?
• Has every instruction and drawing revision been audited for unpriced variations?
• Have quantities actually built been checked against quantities paid?
• Is external claims support engaged if the claim is significant?
• Is the largest remaining cost item being attacked, and can the duration be shortened?
• Is standing time and rework being eliminated?
• Is safety, quality and environmental compliance being maintained without exception?
• Has senior management been told, and has the bank and accountant been engaged early?
• Is the job ring-fenced so it does not consume working capital from healthy jobs?
• Are subcontractors still being paid rather than used to fund the loss?
• Has legal advice been taken before considering suspension or termination?
• Is a post-mortem planned, with costs reconciled back to the tender?

Sources and further reading

This guide is general information for Australian civil construction businesses and is not legal, financial or accounting advice. It deliberately states no notice periods, time bar durations, adjudication timeframes, liquidated damages levels or accounting thresholds: those are set in the particular contract, in the security of payment legislation of the relevant state or territory, and in the applicable accounting standards, and they differ substantially between them. Notice and time bar provisions are contract-specific and unforgiving; read the contract. Whether a contract may be suspended or terminated, and on what basis, is a legal question and exercising a right you do not have may itself be repudiation — obtain legal advice before acting. Recognition of anticipated losses on contracts is governed by the applicable accounting standards; consult your accountant. Directors of a company that may be unable to pay its debts have duties under the Corporations Act, including in relation to insolvent trading, with safe harbour provisions that require early professional advice — obtain that advice promptly. Duties under work health and safety legislation are not reduced by commercial pressure.

• Security of payment legislation referenced in §06 and §11 operates separately in each state and territory, with different payment claim and adjudication timeframes and different rights to suspend work for non-payment. The applicable Act and its time limits must be identified for the specific contract.
• Notice, time bar, variation, extension of time, suspension and termination provisions referenced throughout are contract-specific. Standard forms used in Australian civil construction differ from one another and are commonly amended; the operative document is the executed contract.
• Recognition of anticipated contract losses referenced in §09 is governed by the Australian Accounting Standards as applicable to the entity.
• Directors’ duties, insolvent trading provisions and the safe harbour regime referenced in §09 and §11 arise under the Corporations Act 2001 (Cth).
• Duties of persons conducting a business or undertaking referenced in §07 arise under the model Work Health and Safety Act as enacted in each jurisdiction and are not qualified by commercial circumstances.
• Related TenderBuilt guides carrying the primary-source detail referenced above: job costing and cost control, contract administration for civil SMEs, extension of time and delay claims, variations in civil construction contracts, latent conditions, security of payment in Australia, rise and fall and cost escalation, dispute resolution after adjudication, quality management plans and ITPs, principal and head contractor insolvency, the go/no-go decision, winning work in a downturn and practical completion, defects liability and the final claim.