As an industry, construction is no stranger to distressed projects. Some estimates say as many as 90 percent of major construction projects will experience significant delays or cost overruns, while others suggest nearly two-thirds of projects are failing.
In the context of construction, a distressed project is one that is substantially off of its earning and schedule targets and has missed milestones and key deliverables, but there are other signs that a project is heading off track long before this threshold is reached. Slow progress, resources that aren’t available when they’re needed, and staff and supplier turnover can all be early warning signs of trouble ahead.
Often the reasons a project has become distressed were built-in from the beginning, when an ambitious timeline didn’t leave enough room for delays in the project.
Late starts that are caused by missing paperwork or late access, for example, can get a project off to a rough start. In other cases, well-meaning contractors trying to offer good customer service allow too many owner changes that impact the project and go beyond the tolerances built into the schedule. Supply chain interruptions can cause significant backlogs at critical points in a project, as many people have experienced throughout the past year as a result of COVID-19.
When a project gets off track like this, the contractor stands to lose quite a bit of money, even if the project is eventually finished.
Along with the stress that comes along with breaching a contract, there can be significant penalties associated with distressed projects.
Liquidated damages are pre-decided amounts of money written into the contract that are owed when either party breaches the contract, often through late completion. The amount represents an estimate of actual damages to the others involved in the contract, such as when the owner can’t use the finished project as soon as planned.
Combined with ongoing overhead costs, liquidated damages chip away at the profit the project was intended to produce, known as margin erosion. These costs, along with anxious owners, can mean a lot of pressure to get an action plan into place.