Calculating return on investment (ROI) is relatively simple in theory.
(Net Returns / Cost of Investment) x 100
But when it comes to the world of construction, this equation takes on new
levels of complexity far beyond its original intent, as many items that we would want to
measure do not have easily identifiable values.
To better analyze the financial performance of construction projects and the
levers that can be pulled to improve profitability, let's discuss five different
categories of "net return" that general contractors and owners can use for evaluating
how they consider risk technology adoption.
Insurance cost reduction
Operation efficiency benefits
Direct construction cost reduction
Risk mitigation benefits
Competitive advantage
How to Use These Formulas
As we dive into this list, note that not all of these categories will apply to
every general contractor or owner, so select the one(s) that apply to your business.
Internet of Things (IoT) risk mitigation technology will also be referenced as part of
the equations. While we will not be going into exactly how each technology produces
these savings, you will want to further research these options and their corresponding
investment to use in your calculations with your own information.
Out of the five categories under consideration, insurance cost
optimization is the easiest to determine, as it pulls information directly from the
insurance quote to show premium relief based on IoT technology inclusion.
Historically, this calculation has been a challenge as underwriting methodologies
were kept under lock and key, but recent changes have started to normalize upfront
premium credits when IoT technology solutions are presented earlier in the insurance
quoting process.
Less immediate, but of greater importance, is the effect a loss
can have on your insurance for the next 5–10 years. Whether it is your modification
factor or simply an ask for 5 years' loss runs, every single loss will be analyzed,
and you will be paying more for it every year it remains visible.
The inclusion of IoT technology as part of a claim prevention
strategy sets general contractors and owners apart as a better risk, deserving of
stronger terms and conditions, lower deductibles and premiums, competition to write
your policy, and overall ease of program renewal. At the time of this writing,
adoption of IoT technology is still growing, meaning those who choose to incorporate
are rewarded, but that won't always be the case. Some time soon, the opposite will
be true: Those without the technology will see significantly punitive rates in the
same way that a building without fire sprinklers is seen today versus 100 years
ago.
Using the formula noted above, it's important to obtain a
technology quote to ascertain the savings. If IoT solutions are not a requirement of
your policy, your broker could ask during the submission process for a premium or
deductible credit for applying the technology. It's important to read up on what
insurance rates are doing in your area; many major insurance brokerages periodically
share state of the market findings, enabling you to judge your renewal terms
compared to your peers. If you didn't fare as well, your risk management or claims
are the most likely culprit, and you can add that opportunity cost to the formula as
well.
Direct Construction Cost Reduction
Beneficiary: general contractors
Ease of quantifying: high
Formula:
{(Claims / Project) ×
AOP Deductible + (Rework × Consumer Price Index Change)} / Cost of Tech
Directly correlated to project profitability, direct construction
cost reduction focuses on items that individually erode a project's profits but
collectively can amplify into a larger issue for the entire organization. Each piece
of cost reduction can be seen as small enough to ignore, but when taken as a whole,
they can have drastic consequences on profitability.
Let's start with insurance deductibles and uninsured losses. These
slowly but consistently eat away at profitability. On the deductible side, soft
costs, loss of rent, or loss of income have deductibles ranging from 7 to 30 days
per occurrence. Uninsured losses can also add up quickly: With 60 percent of water
damage losses under $50,000, general contractors and owners are left paying the
bill.
These claims also lead to drops in productivity. Although there is
little research into the effects of losses on productivity, The Revay Report sets out
to quantify the costs of rework with startling results: With no change orders,
productivity runs about 6 percent above plan, but at 10 percent change orders, it
drops to 90 percent. Hitting 30 percent change orders can make that number fall to
as low as 65 percent.
Adding to the effects of rework costs are the large and growing
labor shortages in the US. The 2025 Workforce Survey
Analysis completed by the Associated General Contractors of America
and the National Center for Construction Education and Research found that 45
percent of firms report worker shortages prompted a delay on at least one project
last year. This was more than government approvals (24 percent) or owners'
directives/changes (32 percent). Also uncovered in the survey was the effects of
immigration enforcement, with 28 percent of firms stating they have been affected by
immigration enforcement actions. This reduction in labor has led to significant
increases in pay to retain and attract talent, increasing the costs of any rework
well above the original cost.
Rounding out the large contributors to delays and increased costs
is supply chain management. Having the right equipment—and in proper working
order—at the right place at the right time means operational efficiency; anything
less means immediate disruption to the project timeline, which takes away from the
bottom line. Prepandemic, materials like steel and timber were available in 2–4
weeks; those same materials are now on order for 12–16 weeks.
How can technology help here? Knowing you have a water leak in a
building within 5 minutes instead of going unnoticed overnight or until Monday
morning after the weekend can be the difference between deploying a few drying fans
to ripping out thousands of dollars in drywall. Theft of materials, the most
frequent cause of loss on a construction project, has gone from an inconvenience to
a potential multiday delay. By adding sensors that work with geolocation software or
cameras with talkdown speakers and police notification, theft instances can be
minimized. Even on a $100 million job, none of these technologies should be more
than $100,000, but the benefits can be measured in the millions.
Operational Efficiency Benefits
Beneficiary: general contractors and owners
Ease of quantifying: medium
Formula:
(Burn Rate (or General
Conditions) Per Day / Cost of Tech) = Required Time Saving
At first glance, operational efficiency benefits may seem in line
with direct construction cost reduction, but this is separated out as operational
efficiency and does not relate to any insurance or physical damage to the project.
In this category, we focus on burn rate, liquidated damage, early completion
bonuses, and similar time-related elements. This formula shows the impact of reduced
downtime, better resource allocation, and streamlined scheduling and management.
To help drive operational efficiency, utilizing IoT loss
prevention technology, site progress tracking software, and their corresponding
platforms are recommended, as it allows you to view all the sensor data in one
place, without having to be present on site. This means daily "virtual visits" can
be made, a more cost-effective and streamlined option than weekly or monthly
physical visits—where teams are prepared for the visit, so site conditions may not
reflect what truly is happening.
Technologies around crane stability and wind detection are also
proving to have significant time and safety benefits, with lifts being able to be
performed in significantly higher winds, with fewer people in harm's way and with
great accuracy and need for pauses and restarts. This especially helps in markets
where crane operators are getting harder and harder to find.
Quantifying this data is easy: take the project burn rate per day
and divide by the cost of the technology you plan to use. This will equal how much
time you need to save to justify the technology's investment. If you want to get
more advanced for a more precise number, you can add the cost of rework, average
project delays, liquidated damage, early completion bonus, or any other time-related
cost to the numerator.
More challenging to calculate, but just as important to understand
as the total ROI of IoT risk management, are the risk mitigation benefits. Separate
from the benefits of insurance cost optimization, avoiding large claims is the first
step in avoiding costly compliance with inspectors, regulators, and other legal
issues that bog down construction projects.
OSHA fines can cause lasting, damaging effects on a project. Two
willful or repeated violations, or failure-to-abate notices, can land firms in the
Severe Violator Enforcement program, which necessitates follow-up inspections for at
least 3 years. If a violation is not corrected, the jobsite runs the risk of being
shut down. All the time, paperwork, and planning spent dealing with those issues are
expenses that can't be bid into future projects; they are a direct drain on
profitability.
At the same time that you are losing profits to OSHA inspections,
those violations are also impacting your experience modification rate, controlling
your ability to qualify for bidding on certain projects and having a large effect on
winning jobs.
IoT solutions—such as fall protection and monitoring, employee
tracking, geofencing, and no-go zones—help to keep employees safe and secure.
Solutions that measure concrete curing, rebar, vibration, and other materials
monitoring also reduce the potential for defective work, warranty claims, and
potential litigation costs that may come with fighting a claim in court. That
defective work can cost 10–100 times the cost it would have taken to catch and fix
the issue during construction.
Competitive Advantage
Beneficiary: general contractors
Ease of quantifying: low
Formula:
ROI = {(Rold − Rnew) × B × Project Value} /
Technology Cost Per Project
Where:
R = bid/win rate
B = average cost per bid
The mark of any successful contractor is a large backlog of
business with repeat customers who will wait in line because your work has been that
good in the past. Top contractors in the US typically see over 90 percent repeat
business and have backlogs measured in years. This allows for better planning,
reinvesting in the company, and better access to the reduced labor market, and the
competitive advantage formula helps quantify this improved performance.
From a customer retention standpoint, the Harvard Business Review
stated that the cost of acquiring a new customer is anywhere from 5 to 25 times more
expensive than retaining an existing one. Having a positive customer experience can
also positively impact your bid-to-win ratio—and your profitability. Using data
provided by Constructing Excellence's 2014
survey, the average cost of a bid is 0.1 and 0.3 percent of the total
cost of the project. Increasing your bid-to-win ratio from 1:6 to 1:5 would result
in 5 percent greater profitability.
Completing projects on time also has another benefit to customers: the ability to start the next project as scheduled. With the ability to properly finish and start projects on time, you are better able to schedule labor across projects, start more projects per year, and burn through less money moving funds and labor across multiple projects.
Not only do on-time projects matter to customers, but they also
impact the contractors and subcontractors on the job. Unnecessary delays in a
project can send your labor home for days or weeks while waiting for materials or
fixes to take effect. To subcontractors, this means lost opportunities, and lost
opportunities mean looking for other opportunities. When work does resume, you may
have to restart the project with labor unfamiliar with the jobsite, leading to more
delays, which can start the entire cycle again.
Most contractors are familiar with and use scheduling software,
building information modeling, and other systems to provide a holistic view of the
site. Less used is 3D site monitoring, where walkthroughs can produce life-cycle
views of the project and provide insights into sections of the project that are
ahead or behind schedule, allowing you to dedicate resources and shift them around
before a problem is too big to ignore. Many IoT systems that prevent damage from
water, particulates, and fire were invented for the property market, and when
properly integrated into your bids, can provide enticing perks to the owner as a
leave-behind "gift," helping you stand out as a value-driven partner.
Conclusion
Today's construction environment has general contractors focused
on multiple conflicting pain points: skilled labor shortages, skyrocketing materials
costs, constricting supply chain issues, increasing insurance costs, and tightening
regulations. Each of these elements operates as a lever that can increase or
decrease project timelines, contractor and subcontractor availability, and customer
retention. To say it's a challenging environment is an understatement. With so many
options to focus on, using some or all of these five formulas presents a fresh way
for evaluating risk and how IoT technology can factor into reducing costs and losses
while improving profitability.
The hope is that, by using these ROI calculations, the
conversation changes from discussing only the immediate financial return for
investing in technology to a deeper understanding of the benefits that can drive
your business forward for years and years. The right path to increased profitability
will be different for everyone, but having the tools to know where to start is the
first step.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
Calculating return on investment (ROI) is relatively simple in theory.
(Net Returns / Cost of Investment) x 100
But when it comes to the world of construction, this equation takes on new levels of complexity far beyond its original intent, as many items that we would want to measure do not have easily identifiable values.
To better analyze the financial performance of construction projects and the levers that can be pulled to improve profitability, let's discuss five different categories of "net return" that general contractors and owners can use for evaluating how they consider risk technology adoption.
How to Use These Formulas
As we dive into this list, note that not all of these categories will apply to every general contractor or owner, so select the one(s) that apply to your business. Internet of Things (IoT) risk mitigation technology will also be referenced as part of the equations. While we will not be going into exactly how each technology produces these savings, you will want to further research these options and their corresponding investment to use in your calculations with your own information.
Insurance Cost Reduction
Formula:
(Premium Credits / Cost of Tech)
Out of the five categories under consideration, insurance cost optimization is the easiest to determine, as it pulls information directly from the insurance quote to show premium relief based on IoT technology inclusion. Historically, this calculation has been a challenge as underwriting methodologies were kept under lock and key, but recent changes have started to normalize upfront premium credits when IoT technology solutions are presented earlier in the insurance quoting process.
Less immediate, but of greater importance, is the effect a loss can have on your insurance for the next 5–10 years. Whether it is your modification factor or simply an ask for 5 years' loss runs, every single loss will be analyzed, and you will be paying more for it every year it remains visible.
The inclusion of IoT technology as part of a claim prevention strategy sets general contractors and owners apart as a better risk, deserving of stronger terms and conditions, lower deductibles and premiums, competition to write your policy, and overall ease of program renewal. At the time of this writing, adoption of IoT technology is still growing, meaning those who choose to incorporate are rewarded, but that won't always be the case. Some time soon, the opposite will be true: Those without the technology will see significantly punitive rates in the same way that a building without fire sprinklers is seen today versus 100 years ago.
Using the formula noted above, it's important to obtain a technology quote to ascertain the savings. If IoT solutions are not a requirement of your policy, your broker could ask during the submission process for a premium or deductible credit for applying the technology. It's important to read up on what insurance rates are doing in your area; many major insurance brokerages periodically share state of the market findings, enabling you to judge your renewal terms compared to your peers. If you didn't fare as well, your risk management or claims are the most likely culprit, and you can add that opportunity cost to the formula as well.
Direct Construction Cost Reduction
Formula:
{(Claims / Project) × AOP Deductible + (Rework × Consumer Price Index Change)} / Cost of Tech
Directly correlated to project profitability, direct construction cost reduction focuses on items that individually erode a project's profits but collectively can amplify into a larger issue for the entire organization. Each piece of cost reduction can be seen as small enough to ignore, but when taken as a whole, they can have drastic consequences on profitability.
Let's start with insurance deductibles and uninsured losses. These slowly but consistently eat away at profitability. On the deductible side, soft costs, loss of rent, or loss of income have deductibles ranging from 7 to 30 days per occurrence. Uninsured losses can also add up quickly: With 60 percent of water damage losses under $50,000, general contractors and owners are left paying the bill.
These claims also lead to drops in productivity. Although there is little research into the effects of losses on productivity, The Revay Report sets out to quantify the costs of rework with startling results: With no change orders, productivity runs about 6 percent above plan, but at 10 percent change orders, it drops to 90 percent. Hitting 30 percent change orders can make that number fall to as low as 65 percent.
Adding to the effects of rework costs are the large and growing labor shortages in the US. The 2025 Workforce Survey Analysis completed by the Associated General Contractors of America and the National Center for Construction Education and Research found that 45 percent of firms report worker shortages prompted a delay on at least one project last year. This was more than government approvals (24 percent) or owners' directives/changes (32 percent). Also uncovered in the survey was the effects of immigration enforcement, with 28 percent of firms stating they have been affected by immigration enforcement actions. This reduction in labor has led to significant increases in pay to retain and attract talent, increasing the costs of any rework well above the original cost.
Rounding out the large contributors to delays and increased costs is supply chain management. Having the right equipment—and in proper working order—at the right place at the right time means operational efficiency; anything less means immediate disruption to the project timeline, which takes away from the bottom line. Prepandemic, materials like steel and timber were available in 2–4 weeks; those same materials are now on order for 12–16 weeks.
How can technology help here? Knowing you have a water leak in a building within 5 minutes instead of going unnoticed overnight or until Monday morning after the weekend can be the difference between deploying a few drying fans to ripping out thousands of dollars in drywall. Theft of materials, the most frequent cause of loss on a construction project, has gone from an inconvenience to a potential multiday delay. By adding sensors that work with geolocation software or cameras with talkdown speakers and police notification, theft instances can be minimized. Even on a $100 million job, none of these technologies should be more than $100,000, but the benefits can be measured in the millions.
Operational Efficiency Benefits
Formula:
(Burn Rate (or General Conditions) Per Day / Cost of Tech) = Required Time Saving
At first glance, operational efficiency benefits may seem in line with direct construction cost reduction, but this is separated out as operational efficiency and does not relate to any insurance or physical damage to the project. In this category, we focus on burn rate, liquidated damage, early completion bonuses, and similar time-related elements. This formula shows the impact of reduced downtime, better resource allocation, and streamlined scheduling and management.
To help drive operational efficiency, utilizing IoT loss prevention technology, site progress tracking software, and their corresponding platforms are recommended, as it allows you to view all the sensor data in one place, without having to be present on site. This means daily "virtual visits" can be made, a more cost-effective and streamlined option than weekly or monthly physical visits—where teams are prepared for the visit, so site conditions may not reflect what truly is happening.
Technologies around crane stability and wind detection are also proving to have significant time and safety benefits, with lifts being able to be performed in significantly higher winds, with fewer people in harm's way and with great accuracy and need for pauses and restarts. This especially helps in markets where crane operators are getting harder and harder to find.
Quantifying this data is easy: take the project burn rate per day and divide by the cost of the technology you plan to use. This will equal how much time you need to save to justify the technology's investment. If you want to get more advanced for a more precise number, you can add the cost of rework, average project delays, liquidated damage, early completion bonus, or any other time-related cost to the numerator.
Risk Mitigation Benefits
Formula:
Occupational Safety and Health Administration (OSHA) Safety Pays Program / Cost of Tech
More challenging to calculate, but just as important to understand as the total ROI of IoT risk management, are the risk mitigation benefits. Separate from the benefits of insurance cost optimization, avoiding large claims is the first step in avoiding costly compliance with inspectors, regulators, and other legal issues that bog down construction projects.
OSHA fines can cause lasting, damaging effects on a project. Two willful or repeated violations, or failure-to-abate notices, can land firms in the Severe Violator Enforcement program, which necessitates follow-up inspections for at least 3 years. If a violation is not corrected, the jobsite runs the risk of being shut down. All the time, paperwork, and planning spent dealing with those issues are expenses that can't be bid into future projects; they are a direct drain on profitability.
At the same time that you are losing profits to OSHA inspections, those violations are also impacting your experience modification rate, controlling your ability to qualify for bidding on certain projects and having a large effect on winning jobs.
IoT solutions—such as fall protection and monitoring, employee tracking, geofencing, and no-go zones—help to keep employees safe and secure. Solutions that measure concrete curing, rebar, vibration, and other materials monitoring also reduce the potential for defective work, warranty claims, and potential litigation costs that may come with fighting a claim in court. That defective work can cost 10–100 times the cost it would have taken to catch and fix the issue during construction.
Competitive Advantage
Formula:
ROI = {(Rold − Rnew) × B × Project Value} / Technology Cost Per Project
Where:
R = bid/win rate
B = average cost per bid
The mark of any successful contractor is a large backlog of business with repeat customers who will wait in line because your work has been that good in the past. Top contractors in the US typically see over 90 percent repeat business and have backlogs measured in years. This allows for better planning, reinvesting in the company, and better access to the reduced labor market, and the competitive advantage formula helps quantify this improved performance.
From a customer retention standpoint, the Harvard Business Review stated that the cost of acquiring a new customer is anywhere from 5 to 25 times more expensive than retaining an existing one. Having a positive customer experience can also positively impact your bid-to-win ratio—and your profitability. Using data provided by Constructing Excellence's 2014 survey, the average cost of a bid is 0.1 and 0.3 percent of the total cost of the project. Increasing your bid-to-win ratio from 1:6 to 1:5 would result in 5 percent greater profitability.
Completing projects on time also has another benefit to customers: the ability to start the next project as scheduled. With the ability to properly finish and start projects on time, you are better able to schedule labor across projects, start more projects per year, and burn through less money moving funds and labor across multiple projects.
Not only do on-time projects matter to customers, but they also impact the contractors and subcontractors on the job. Unnecessary delays in a project can send your labor home for days or weeks while waiting for materials or fixes to take effect. To subcontractors, this means lost opportunities, and lost opportunities mean looking for other opportunities. When work does resume, you may have to restart the project with labor unfamiliar with the jobsite, leading to more delays, which can start the entire cycle again.
Most contractors are familiar with and use scheduling software, building information modeling, and other systems to provide a holistic view of the site. Less used is 3D site monitoring, where walkthroughs can produce life-cycle views of the project and provide insights into sections of the project that are ahead or behind schedule, allowing you to dedicate resources and shift them around before a problem is too big to ignore. Many IoT systems that prevent damage from water, particulates, and fire were invented for the property market, and when properly integrated into your bids, can provide enticing perks to the owner as a leave-behind "gift," helping you stand out as a value-driven partner.
Conclusion
Today's construction environment has general contractors focused on multiple conflicting pain points: skilled labor shortages, skyrocketing materials costs, constricting supply chain issues, increasing insurance costs, and tightening regulations. Each of these elements operates as a lever that can increase or decrease project timelines, contractor and subcontractor availability, and customer retention. To say it's a challenging environment is an understatement. With so many options to focus on, using some or all of these five formulas presents a fresh way for evaluating risk and how IoT technology can factor into reducing costs and losses while improving profitability.
The hope is that, by using these ROI calculations, the conversation changes from discussing only the immediate financial return for investing in technology to a deeper understanding of the benefits that can drive your business forward for years and years. The right path to increased profitability will be different for everyone, but having the tools to know where to start is the first step.
Sources
"Immigrant Construction Workers in the United States," Forum, September 12, 2024.
"US Construction Outlook 2025: Tariffs, Recession Risks, and Sectoral Shifts," Steel Industry News, April 23, 2025.
Shefali Kapadia, "Supply Chain Headaches Persist 4 Years into Pandemic," Construction Dive, February 29, 2024.
Amy Gallo, "The Value of Keeping the Right Customers," Harvard Business Review, October 29, 2014.
Gerald McEniry, "The Cumulative Effect of Change Orders on Labour Productivity—the Leonard Study 'Reloaded,'" The Revay Report, May 2007.
"Bid Cost Survey Blog 1—Bid Costs as % of Project Value," Constructing Excellence, 2014.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.