In the construction industry, profit leaks — also known as revenue leakage — can quietly erode project profitability and undermine financial goals. With complex project dynamics and multiple cost factors at play, profit leaks are common and often hard to detect. They’re like tiny holes in a bucket — if not addressed, they can drain revenue faster than it’s earned.
While technology is vital for identifying and addressing these leaks, real success starts with establishing solid, disciplined business processes. Here, we’ll explore suggestions for setting up the right processes to prevent profit leaks and how construction software, like Sage Intacct Construction, can support your efforts.
Identifying common profit leaks in construction
Before we can solve the problem, we must understand where leaks typically occur. Here are some of the most common sources of revenue leakage in construction projects:
1. Labor costs
Labor inefficiencies can be a major drain on profit. Issues like overtime, untracked hours, or overstaffing certain tasks are common sources of profit leakage. Research shows that construction companies often lose up to 10-15% of project value to poorly managed labor expenses. In addition, labor costs can escalate when schedules are delayed, or work must be re-done due to quality issues.
2. Material wastage and management
Materials are often over-ordered or poorly managed, leading to waste and inflated costs. Whether materials go unused, misplaced, or damaged on-site, this mismanagement can significantly impact profitability. Studies indicate that as much as 30% of construction materials end up as waste, contributing to both financial loss and environmental impact. Tightening material management and tracking can help construction firms minimize these losses.
3. Change orders
Unplanned change orders can disrupt project timelines and increase costs. When change orders aren’t formally tracked or budgeted, including diligent variance analysis, they lead to unanticipated expenses that eat into profit margins. A Procore study found that unpaid change orders may cause contractors to lose an average of 32% of project revenue! The same study identified the widespread use of manual and outdated systems and inefficient communication processes as the major causes of unbilled and unpaid change orders.
4. Project delays
Project delays are another common source of profit leakage. While there will be unavoidable delays, others often result from miscommunication, poor scheduling, or even budgeting issues. These delays lead to increased labor costs and extended equipment rentals, all of which add to the overall project cost. Making adjustments that keep the project on track and within budget is difficult without a real-time view of project progress and timelines.
5. Scope creep
Scope creep — when a project’s requirements gradually expand beyond the initial scope — can drain resources and lead to unplanned expenses. Even seemingly minor additions can add up, consuming labor and materials not included in the initial budget. When firms don’t closely monitor project scope or communicate boundaries clearly with clients, profit leakage is inevitable.
Building the right underlying processes to control profit leaks
While technology plays a key role in detecting and managing profit leaks, the first step is setting up solid processes that support transparency, accountability, and efficiency.
1. Emphasize transparency and accountability
Workflow transparency is essential for preventing revenue leakage. Every task, budget adjustment, and schedule change should be documented and accessible to relevant stakeholders. Visibility like this helps identify issues early and makes sure that the right people are held accountable for tracking and managing project costs.
2. Establish regular monitoring and reporting
Implementing regular financial monitoring helps catch minor issues before they become major problems. For example, real-time reports allow project managers to take corrective action quickly if labor or material costs start trending above budget.
3. Define and enforce change order protocols
One of the best ways to plug profit leaks is to create a clear, structured process for managing change orders. This means having a formal process for documenting each change, assessing its impact on the project budget, and obtaining client approval before the work begins. By enforcing these protocols, companies can make sure that change orders contribute to revenue instead of becoming unbilled expenses.
4. Standardize project management practices
Creating standardized project management practices, such as consistent planning, resource allocation, variance analysis, and risk management, can help reduce inefficiencies and prevent unexpected costs. By establishing a clear set of guidelines for each project stage, firms can improve productivity, manage resources better, and minimize delays that lead to profit leaks.
How technology can support these processes
Once the right processes are in place, construction software like Sage Intacct Construction can further amplify efficiency by automating routine tasks and providing real-time insights. This automation enables management by exception, allowing project managers to focus on significant issues — like cost overruns, unexpected delays, or resource bottlenecks. By shifting attention to high-impact areas, technology allows construction firms to proactively address profit leaks and have tighter control over project profitability. Here’s how:
1. Automated tracking and alerts
Construction software allows for automated tracking of labor hours, materials usage, and budget variances. With real-time data at their fingertips, your project managers can set up alerts to notify them of budget overruns, labor inefficiencies, or material shortages as they happen.
2. Change order management tools
Change order management features streamline the approval and tracking of change orders so that every adjustment is logged, approved, and billed accurately. Close monitoring minimizes the risk of overlooked or unauthorized work and makes sure that every change contributes to the project’s bottom line.
3. Real-time financial insights
Access to real-time financial insights allows your construction firm to assess profitability throughout the project lifecycle. Software like Sage Intacct Construction provides comprehensive reports on labor, materials, and other key cost areas, enabling your management team to understand and address budget variances, proactively identify profit leaks, and take corrective action.
4. Resource management and scheduling
Efficient resource management is critical in construction, where scheduling labor and materials can make or break a project’s success. With scheduling tools integrated into construction software, your firm can optimize labor allocation, track equipment usage, and schedule material deliveries precisely when needed.
Closing the gaps to plug profit leaks
Profit leaks can undermine even the most promising projects but are largely avoidable. Your construction firm can identify and prevent leaks before they escalate by establishing solid processes emphasizing accountability, regular reporting, and clear change order protocols. With the support of technology like Sage Intacct Construction, firms like yours gain the real-time visibility and automation needed to plug those leaks effectively.
BT Partners works with construction and real estate development firms to implement strategies and technologies that protect your bottom line. Let’s work together to stop profit leaks and help your projects reach their full potential.
