By now, you’ve likely heard the term “buying a project,” but what does it really mean, and is it always a bad thing? Buying a project typically refers to a situation where a contractor or subcontractor’s costs exceed the profit or even the total contracted price to complete a job. This issue can arise in two primary ways: during the bidding process, when the complexity, risks or scope of the project are poorly understood or during the execution phase, when unexpected increases in material, labor, or equipment costs outpace the original estimates. Both scenarios can strain cash flow, erode morale and hinder future opportunities, underscoring the importance of thorough planning, realistic risk assessments and robust cost controls. There are, however, rare situations where “buying a project” may be justifiable. One example is when breaking into a new market or sector.
For a business seeking to establish itself in unfamiliar territory, senior management may deliberately accept reduced or even negative profitability on a project to gain experience, build relationships and establish credibility. Similarly, fulfilling long-term contractual commitments or cultivating a partnership with a key client might warrant this approach. In these cases, increasing contingency budgets and leveraging advanced estimating tools are essential to mitigate risks. While such strategic decisions can yield long-term benefits, they must be made cautiously, with clear objectives and an understanding of the potential impact on cash flow, workforce stability and reputation. Short-term losses should only be accepted when they align with a broader strategy that strengthens the company’s competitive position.
Strategies for Deciding When to Buy a Project
Perform a SWOT Analysis:
Evaluate the project’s Strengths, Weaknesses, Opportunities and Threats to ensure alignment with company goals and assess risks.
Align with Strategic Objectives:
- Market Penetration: Use buying a project as an entry strategy into new markets.
- Client Relationships: Accept lower margins to build long-term relationships with key clients.
- Brand Building: Showcase capabilities through high-profile or innovative projects.
Conduct a Financial Impact Analysis:
- Evaluate cash flow tolerance and the cost-to-benefit ratio.
- Ensure sufficient contingency reserves for unexpected costs.
Assess Project-Specific Factors:
- Weigh complexity and risk against team capabilities.
- Favor shorter-duration projects to minimize exposure to escalating costs.
- Consider capacity utilization to engage idle resources effectively.
Analyze Market Conditions:
- Study competitor behavior and economic trends.
- Evaluate whether the project can open doors to future opportunities.
Develop a Risk Mitigation Plan:
- Use contingency buffers and negotiate favorable contract terms.
- Assign experienced personnel to reduce risks.
Use Decision-Making Frameworks:
- Apply scenario analysis, Monte Carlo simulations or scoring models to evaluate risks and potential outcomes.
Seek Stakeholder Consensus:
- Involve senior management, project teams and clients to align expectations and secure commitment.
Monitoring and KPIs for Projects at Risk
Clear, actionable Key Performance Indicators (KPIs) can help detect early warning signs:
- Financial KPIs: Cost Variance (CV), Estimate at Completion (EAC) and contingency burn rates.
- Schedule KPIs: Schedule Variance (SV) and milestone adherence rates.
- Productivity KPIs: Labor Productivity Index (LPI) and rework percentage.
- Risk KPIs: Change order impacts and risk resolution rates.
- Stakeholder KPIs: Client satisfaction and team morale.
- Quality KPIs: Inspection pass rates and defect density.
Implementation Tips:
- Use dashboards for real-time monitoring.
- Establish thresholds for automatic alerts (e.g., CV > -10%).
- Schedule regular reviews to address emerging issues promptly.
When to Abandon a Project
Determining when “buying a project” becomes too costly requires balancing financial metrics, time on the project and strategic objectives:
Key Factors to Reassess a Project:
- Cost Overruns Relative to Profit Margins:
- Conduct reviews if costs exceed expected profits by 25%.
- Pause the project if costs surpass total profit or exceed the original bid price by 15–20%.
Contingency Burn Rate:
- Reassess if 50% of contingency is used early in the project.
- Pause if 100% of contingency is depleted.
Time vs. Cost:
- Early-stage issues (e.g., <25% completion) warrant immediate reassessment to minimize sunk costs.
- For projects nearing completion (>75%), evaluate the cost to finish versus reputational or contractual damages.
Strategic Objectives and Risks:
- Consider whether long-term benefits outweigh escalating losses.
- Evaluate opportunity costs of continuing versus redirecting resources.
Reassessment Triggers:
- Costs exceed expected profits by 50% or original bid by 20%.
- Contingency is fully depleted without recovery plans.
- Project exceeds 30% of the timeline without meeting key benchmarks.
Decision-Making Framework:
- Pause for a Formal Review:
- Analyze financials, risks and alternative strategies.
- Evaluate the Cost of Completion:
- Compare the remaining cost to potential benefits.
- Consider Exit Strategies:
- Negotiate termination terms with the client to minimize reputational or financial damage.
- Reallocate resources to more profitable or strategic initiatives.
In conclusion, “buying a project” is a complex decision that requires balancing financial realities with strategic objectives. While it is typically associated with negative outcomes, there are rare cases where it can be a deliberate and effective strategy for market entry, client relationship building or brand enhancement. By employing robust planning, risk mitigation and continuous monitoring through clear KPIs, managers can identify early warning signs of trouble and take corrective action before losses become unsustainable. Ultimately, the key to success lies in understanding when short-term sacrifices align with long-term goals and knowing when to reassess, course-correct or abandon a project to protect the company’s financial health and reputation. Strategic foresight and disciplined execution ensure that such decisions are not only measured but also meaningful for the organization’s growth.