What failure costs in construction really cost, and where they arise

The short answer. Failure costs are the costs in a construction project that come from mistakes, miscommunication or missing information, not from the building itself. According to a 2019 survey by the Dutch bank ABN AMRO of 151 participants from the Dutch construction and real estate sector, almost 4 in 10 (39%) put their own failure costs at 5% of revenue or more, and 9% even at 8% or more. They arise in every phase of the building process, but mostly surface during execution. The common thread is always the same: information that is not with the right person at the right time.

What exactly are failure costs?

In the Netherlands, “faalkosten” is the common construction term for costs that would not have been needed if a project had been done right first time: rework, delays caused by miscommunication, duplicate work based on wrong or outdated information, and disputes about variations (extra and omitted work). ABN AMRO uses a narrower definition in its research: the extra costs of repairing what was not made to specification or does not meet the client’s expectations.

Failure costs are not a fixed line in the accounts. Companies estimate them themselves, based on what goes wrong in practice. That makes the figures below useful as a direction, not as an exact measurement.

How big is the problem, according to research?

The most concrete Dutch figures come from the report Verspilde moeite: over faalkosten in de bouwsector (“Wasted effort: on failure costs in the construction sector”) by ABN AMRO, published in April 2019. The bank surveyed 151 people from the Dutch construction and real estate sector and also interviewed industry experts. The results:

• 57% put their own failure costs at less than 5% of revenue.
• 39% put them at 5% or more.
• 9% of all participants even put them at 8% or more.
• Of the installation contractors, 53% think their own failure costs are above 5%.
• Of the building materials producers, 58% are above 5%. Of the main contractors, by contrast, 67% put their failure costs below 5%.

Put these figures in context. They are the participants’ own estimates, from a 2019 survey of 151 people in the Netherlands. They are not audited figures and not a current measurement for the whole sector. They do show how the industry itself rates the problem. ABN AMRO concluded that failure costs in the Dutch sector probably run into billions of euros a year.

Why installation contractors rate their failure costs higher

Installation contractors often work late in the building process. Mistakes, delays and ambiguities that arose earlier, in estimating, in work preparation or on site, pile up with them, even when the installer has done nothing wrong. On top of that, the technology they install keeps getting more complex. That is also the explanation ABN AMRO gives.

Notably, building materials producers rated their failure costs even higher in the same survey. ABN AMRO calls that remarkable, because they produce in a factory, in a controlled environment. Main contractors and subcontractors are the most positive.

Where in the building process do failure costs arise?

In the survey, 54% of participants see failure costs arising mainly in the execution phase, and 32% in the design and preparation phase. According to ABN AMRO, part of what goes wrong in execution can be traced back to mistakes in preparation. Time pressure is the most frequently cited cause, poor work preparation the second, followed by mistakes and poor communication on site.

Per phase, the patterns are recognisable:

Estimating and tendering. Unclear or wrong drawings lead to wrong measurements and quantities. Incomplete or outdated price information in the estimate produces forgotten cost items, which come back later as a loss or as a dispute about variations.

Work preparation. Material choices made during execution instead of beforehand, too little preliminary research into permits, the existing structure or the ground conditions, and verbal agreements about changes that are never recorded. That last one is a classic source of later disputes about variations.

Handover between systems. Estimating, work preparation and execution often work in separate systems that do not talk to each other. That creates duplicate work, and every time something is retyped, a mistake can slip in. This point does not come from the survey; it is our own observation from connecting business systems. How to tackle it is covered on our page on connecting systems.

Execution on site. Site managers sometimes work from an outdated version of a drawing, because the latest revision was not passed on in time. Under time pressure, people assume rather than check.

The common thread: information, not the building

Almost every cause comes back to the same underlying problem: information that is not with the right person at the right time. An outdated drawing, a verbal agreement that is recorded nowhere, an estimate that does not match what is actually spent. They are variations of one information problem, not of the building itself.

That also makes failure costs something you can influence. When estimating, planning, purchasing and execution work from the same source, part of the causes disappears. That starts with a data foundation in which project data is recorded properly once, and with system integration, so nobody has to retype anything. What disconnected systems cost a business in general is covered in the hidden costs of disconnected business systems.

What AI can and cannot do about it

AI does not remove time pressure, and it does not automatically fix poor work preparation. What AI can do is take over the reading and retyping where mistakes slip in: going through a specification for vague or contradictory items, recording changes from email and messaging apps against the right project, and giving the estimator a well-founded starting point instead of a blank page. People keep checking and deciding.

What that means in concrete terms for contractors and installers is covered on AI in construction. Why AI in construction is only now starting to land is explained in our piece on the digital lag in construction.

Sources

• ABN AMRO, Verspilde moeite: over faalkosten in de bouwsector (April 2019, in Dutch)

Frequently asked questions

What are failure costs in construction?

Costs that arise from mistakes, miscommunication or missing information during a construction project, not from the building itself: rework, delays, duplicate work and disputes about variations.

How high are failure costs in construction on average?

There is no exact average. In a 2019 ABN AMRO survey of 151 participants from the Dutch construction and real estate sector, 39% put their own failure costs at 5% of revenue or more, and 9% at 8% or more. These are the participants’ own estimates, not a sector-wide measurement.

Why do installation contractors rate their failure costs higher than main contractors?

In the Dutch survey, 53% of installation contractors put their own failure costs above 5%, while 67% of main contractors stay below 5%. According to ABN AMRO, installers often work late in the building process, so mistakes and delays by earlier parties pile up with them, and the technology they install keeps getting more complex.

In which phase of the building process do most failure costs arise?

Of the participants in the ABN AMRO survey, 54% see failure costs arising mainly in the execution phase and 32% in the design and preparation phase. Part of what goes wrong in execution starts in preparation: wrong drawings, choices made too late and agreements that were never recorded.

What is the main cause of failure costs?

Time pressure is cited most often, followed by poor work preparation and then mistakes and poor communication on site.