Adding Value Prior to Lease Execution

19 09 2013

The ink on the lease is still wet and the parties learn that the costs for improving the leased space far exceeds the tenant improvement allowance, or the landlord’s budget for turnkey delivery. Immediately, fingers are pointing as though they’ve been run through the meat grinder. It’s crazy how often this situation occurs, whether the real estate and construction advisers and participants are rookies or wily veterans. What’s the remedy?

A significant common factor among the successful real estate practitioners who’ve established client loyalty and are rewarded with repeat business, is the compilation of a reliable team of service providers (design, legal, furniture, teledata, construction, etc.). Surround yourself with willing, responsive partners and deliver a product that sets you apart from the average competition. Are you going to settle for average? Why should your clients? 

From the construction perspective, it’s vital to understand the exposure to you and/or your client related to the issues surrounding programming, design and construction. As a former office leasing professional, I can attest to the value of understanding the worse case scenario when negotiating the terms of a lease. 

As an end user, involving a general contractor early in the site selection and programming phase can help uncover certain building deficiencies, or excess costs associated with construction in certain buildings. The astute GC will provide feedback on electrical and mechanical capacity, potential code compliance shortfalls, life safety issues, and many other components that could help determine the short list of options in the marketplace. 

The building owner or landlord is well-served by engaging the GC early in the process to understand how quickly the space can be delivered in order to realize rental income; what code changes are looming that could affect construction costs; where mechanical or electrical distribution could exceed the prorata capacity associated with the space; and, to provide a realistic construction budget and schedule such that a turnkey delivery does not go over budget. 

Regardless of which side of the table you sit, it’s smart business to arm yourself and your team with as much knowledge as possible to tilt the scales of negotiation in your favor.

Typical services include touring existing or proposed space, whether for remodel or full build from shell; offering conceptual budgeting for tenant or capital improvements; defining realistic occupancy schedules; work letter review and negotiation; and conceptual scope definition. 

  • Comprehensive budget process
  • Project estimating
  • Value engineering
  • Site selection & feasibility
  • Project scheduling
  • Product research & recommendations
  • Cost segregation & life-cycle costing
  • Multi-dimensional Building Information Modeling (BIM)
  • Forecasting based on historic experience 

 





Landlord Build vs Tenant Build – Where’s the Value?

22 11 2011

The following demonstrates why the tenant should control the design and construction of its leased premises, rather than relying upon the landlord to deliver a turnkey occupancy. There are arguments in favor of turnkey deliveries, which are a topic for another post. 

The normal office lease transaction, if there is such a thing, involves a tenant and a landlord, both attempting to secure the best transaction for their respective organizations. The total occupancy cost for a business is traditionally one of its largest expenditures. Corporate real estate professionals generally understand the value of exclusive representation relative to their real estate transaction guidance; hence, the evolution of the exclusive tenant representative, or tenant-rep broker. These tenant-rep brokers have a fiduciary duty to focus their efforts solely on the interests of the tenant, which makes complete sense when negotiating with the savvy landlord whose main line of business is leasing space and operating real estate. In addition to the landlord’s internal resources, they often engage  brokerage firms through agency agreements to bolster their position and to represent their interests in the marketplace.

When considering the delivery of leased premises, many factors often get overlooked. For instance, occupancy delays, unforeseen existing conditions, constructability issues, availability of materials, and labor agreements are just a few factors that can blow a construction budget or schedule out of the water…  

CASE STUDY – Hard Bid Costs All Parties Excessive Amounts

There is a common misperception that the hard bid process returns the lowest cost delivery of TI construction; rarely is this the case. In the hard bid scenario, in which the low number is awarded, the contractors are merely bidding the plans and specifications with an eye on issuing the lowest price, often looking for opportunities to identify any discrepancies in the plans and existing conditions of the premises. In the bid scenario where the low number wins, there is rarely any value applied to quality nor to relationships.   The following is based upon an actual transaction that demonstrates why a turnkey delivery by the landlord on a hard bid basis will cost both the tenant and the landlord significant sums of money, time,  aggravation and relationships. There are confidentiality issues that require the parties not be disclosed.

Setting the Stage – A recent lease transaction in San Francisco involved a significant corporate user looking to occupy approximately 50,000 square feet of downtown, class A office space (Tenant), represented by its own tenant rep broker (Tenant Rep). The landlord is an institutional owner/operator (Landlord), with its own broker representation (Agent). The transaction was completed in early 2011 with desired occupancy by end of 2011 (Target Date). Currently, the Target Date is in jeopardy, and Tenant could be exposed to punitive holdover costs due to the inability to vacate its existing premises as scheduled. Further, Landlord is poised to realize an expensive delay in rental income and delivery penalties, among other things, driven by the inability to provide occupancy per the Target Date as set forth in the lease. Both parties are subject to sizable financial losses and/or delayed cash flow. How did this happen, and how can it be avoided?

 

 What Happened – The Tenant and Tenant Rep negotiated with Landlord and Agent for space to be delivered by Landlord on a turnkey basis per the mutually accepted design issued by Tenant. Landlord issued the plans for competitive bid based upon a predetermined occupancy schedule, which schedule was already pushing the envelope of reasonableness. The premises was reportedly in cold shell condition, ready for construction. The General Contractors (GC’s) bidding the project were not able to confirm existing conditions during the bid process, as the space was in containment (no access to verify existing conditions) for the Landlord’s demolition and abatement of ACM (asbestos containing material). All parties were advised that the space would be delivered free of ACM and in cold shell condition, ready for layout and construction upon award to the winning GC. Once awarded, the GC began to mobilize, only to find that the premises had not been fully demolished due to the presence of ACM.  The mobilization ceased immediately and the GC issued notice that ACM was present within the areas requiring further demolition. The targeted completion date of the first phase of work would be delayed by at least one month, which delays were mitigated  to the best of all parties’ abilities through expediting various trades, which in turn added further costs to Landlord’s overall cost of turnkey delivery.

 

Although Tenant and Landlord had representation from the Tenant Rep and Agent, they did not have a dedicated advocate from the construction sector representing their respective interests related to costs, feasibility and schedule. The parties negotiated a turnkey delivery by the Landlord without engaging a GC to validate the assumptions or findings. What was achieved  by taking the lowest bid in a hard bid scenario was a very expensive lesson in why one does not gain value in hard bidding office tenant improvement projects. Regardless of which GC selected, the results would have been the same, as there were existing conditions that materially affected the costs and schedule.

 

How to Avoid  – Tenant could have gained control over the construction process, including the design, GC selection and overall building process in order to perform its own due diligence to avoid the unforeseen conditions and the resulting delays. In order to do so, however, there are certain components that are necessary to gain confidence and to maximize return on the overall process.

 

Rather than putting the faith of the business’s operations in the hands of the Landlord, the Tenant could have minimized the base rent payable while gaining control over the cost, quality and delivery of construction through a negotiated TI allowance. Tenant and Tenant Rep should have engaged the services of a GC through existing relationships or referrals. Interviewing a short list of select GC’s would give the team an obligated party willing to deliver value as an advocate of the team based upon negotiated fees and general conditions. Reputation and trust are key factors when evaluating and securing the GC’s. With the GC, the architect and the project manager all in place and working together to serve the tenant, the team will evaluate various properties and conditions. The GC could have verified the existing conditions of the premises prior to Tenant signing the lease for turnkey delivery, and the Tenant would then be in a position of strength to negotiate further concessions and terms. There may be further tax benefits associated with the depreciation of the TI costs, which statement is not considered to be tax advise and should be confirmed by a CPA or tax consultant.

 The landlord is in the business of maximizing value relative to the economic terms associated with the tenancy; in other words, analyzing the net present value of the rental income versus the marketing costs and concessions offered. Typical costs or concessions might include free rent, tenant improvement allowances, leasing commissions, signage/naming rights,  professional fees, options, etc. The landlord has a vested interest in minimizing exposure to the overall costs of occupancy. One of the larger concessions, the cost of fitting out the premises, is frequently negotiated (in simplified terms) as either a turnkey delivery controlled and paid for by the landlord; or, as a tenant improvement allowance for tenant-controlled build, payable by the landlord to the tenant for a pre-negotiated amount to offset the TI costs. To drill deeper into this particluar subject, please visit these blogs – Controlling the Costs of Tenant Improvements, by Richard Mallory of Allen, Matkins, Leck, Gamble & Mallory, as published in The Office Times by Jeffrey Weil of Colliers International

 Whether the landlord builds or the tenant builds, the costs of the tenant improvements (excluding base building upgrades), are paid for by the tenant, either directly as an out-of-pocket expense, or indirectly through the rental rate. From the perspective of the tenant, engaging an exclusive general contractor (GC) as part of the tenant team to provide constructability and feasibility reviews, preliminary TI budgets and construction schedules, and to assist in any potential cost segregation matters, the team is duly armed with reliable information to make confident decisions and commitments revolving around securing the best possible real estate transaction in the market place. In the spirit of negotiating on behalf of the client, the broker representing the tenant will engage its team, consisting of the attorney, architect, contractor and project manager as soon as the tenant’s program begins to take shape. Those parties, understanding that they are exclusively engaged to serve their mutual client and have a moral obligation to protect the interests of that client, beginning from the point that pre-lease services are needed through the warranty of goods and services delivered.

As a tenant or occupant of corporate office space, the idea of exclusive representation for real estate services has become widely accepted. As the real estate broker provides definitive value, so too does the concept of engaging the qualified general contractor on an exclusive basis. With a commitment and obligation to one-another, the general contractor and the tenant can rest assured that each will be an advocate for the other throughout the entire process. Again, there can’t be enough emphasis on relationships, trust and personal commitments.    

 Building a team of competent professionals is paramount to delivering a successful project for all.





Pre-Lease Resources Enhance Return

14 01 2011

Are you giving yourself, your company and your clients the best opportunity to succeed with a particular real estate/construction transaction? Perennial, top-performing deal-makers tend to surround themselves with top-tier alliances that consistently deliver best-in-class services, information and resources, giving that deal maker the confidence to pull the trigger on critical decisions that will affect the level of success and the return on investment of both time and capital.

Enhancing ROI through professional pre-lease guidance and preconstruction services is a process that involves trust, commitment and focus. Gone are the days that a tenant rep broker can walk his or her client through a variety of available locations, issue an RFP for lease consideration, negotiate the terms, sign the lease and move to the next transaction. The same holds true for any third-party project manager or A&E firm guiding their respective clients. A thorough understanding of the potential constuctability issues; scheduling implications; latent defects, long lead items; MEP design build benefits or detriments; long-term benefits of sustainable design and construction; cost-segregation opportunities, etc, will lead to greater confidence and a consistent economic result.

Further, in markets where landlords are delivering turnkey space to their tenants, the parties representing the landlord have a fiduciary duty to maximize the deal value for the landlord/building owner. Attention should be paid to minimize downtime and improvement costs via lean construction practices, while contemplating the use of sustainable design and materials for long-term function.

Financially qualifying the general contractor will be important to avoid potential mechanics lien issues, project delays caused by poor financial management of the project, costly insurance premiums for poor safety records, and, in some cases the capacity to procure the materials and complete the project. Engaging general contractors with a long history of exemplary safety records and high bonding capacity will greatly reduce the risk associated with the project.

Early planning and engagement of the project team allows for proactive design, consultation and overall project management rather than a reactive approach, which tends to be more costly for a similar, if not inferior product. In most instances, the real estate advisor’s fiduciary role is to identify product alternatives, educate the client for optimum decision-making capacity, negotiate terms based on market conditions, and manage their client’s expectations.  The best way to serve that client, is to consistently deliver reliable information and guidance from credible resources/vendors. If the vendor values relationships and repeat business, care will be taken to deliver with integrity, such that there are no surprises as the project nears completion. 

Utilize expert resources to maximize success! Are you partnered for success?





Show Me The Money!

24 08 2010

You’re a corporate executive, tapped by the executive committee to manage the build-out of your new corporate offices in an urban market place. If you are not an experienced construction, project or facilities manager, you might consider engaging a third-party project manager to oversee the process. That’s a topic for a different post, however. The following should provide a baseline for understanding the expected costs associated with the construction project.

The title of this post reminds me of the Tom Cruise movie, “Jerry McGuire“; but, it also brings to surface another movie that Cruise co-starred in with Jack Nicholson, A Few Good Men“, in which, after much interrogation by Cruise, Nicholson loses his cool and yells, “I want the truth!” “You can’t handle the truth!…“. Similar to Nicholson’s sentiment, I often wonder if some owners turn a blind eye to the negotiated fee structures and costs of general conditions submitted by varying contractors in a proposal for General Conditions and Fees. Is it  because they don’t want to know the true costs? I suggest to you that the person who elects to proceed with the contractor which has submitted a proposal to deliver services for less than the actual costs is not facing reality. Contractors, like any other professional service, aren’t in business to perform services for nothing, particularly with the liability and costs associated with product warranties. If the proposed fees and general conditions are less than adequate to manage a project effectively, and to cover the cost of the contractor’s overhead, what is going to motivate that contractor to complete the project at all, let alone on time; pay the subcontractors; maintain a lien-free environment; and maximize safety conditions? It’s got to be money, which has to be somewhere in the haystack; otherwise, someone will be holding the bag on an incomplete project with a bunch of irate subs pounding on their door! Be wary of the shell game.

Effective evaluation of the proposal for general conditions, profit and overhead will identify shortfalls and should include the following costs of the contractor’s general conditions at a minimum. If the proposed costs are not included in the breakdown of general conditions, ask yourself how the project can be managed effectively, and where the costs might be covered.

  • Estimated project schedule – be sure that the proposed schedule appears realistic, and that the general conditions reflect the proposed schedule.
  • Weekly or daily costs for extended general conditions – In the event of a schedule overrun due to owner’s changes or unforeseen circumstances out of the contractor’s control, there will typically be a change order for extended general conditions. Understanding the hourly labor rates will help minimize exposure here.
  • Preconstruction costs and time commitment by the precon team – How much time is the team able to commit to the project, and at what cost?
  • Full time supervision should be based on the hourly rate of the fully burdened cost of the superintendent at forty hours per week.
  • Is the superintendent qualified as such? Or, are you paying rates for a superintendent and receiving a foreman or laborer?
  • Estimating and project management – How much time are these disciplines devoting to the project, and at what hourly rate?
  • Project engineer and administration – How much time are these disciplines devoting to the project, and at what hourly rate?
  • Project foreman and labor – How much time are these disciplines devoting to the project, and at what hourly rate?
  • Safety director – How much time is this discipline devoting to the project, and at what hourly rate?
  • Temporary facilities – This may include equipment for maintaining indoor air quality. Is the project being charged for utilities, portable sanitary facilities, etc., and are these facilities necessary?
  • Field office – The project superintendent will require an on-site office or trailer, including office supplies, dependant upon the project magnitude.
  • Safety program and supplies – In addition to the safety office, what is being charged to the project; is it necessary?
  • Daily clean up – Necessary debris removal; maintaining a clean and safe environment.
  • Final cleanup – Often times this is considered a cost of work, and is bid to vendors as a separate line item.
  • Finish protection – The cost to protect the path of travel and all existing finishes. The removal, repair and cleaning of existing window coverings can be included in this section.
  • Trucks, oil, gas – Applicable to the general contractor’s project team only for the vehicles required for use on the project.
  • Project parking – Applicable to the general contractor’s project team only for the vehicles required for use on the project.
  • Security – Is security required? Are you being charged for security?
  • Insurance and bonds – The contractors’ liability insurance should be identified as a percentage of the construction cost. Other insurance items to consider: Subguard, performance bonds and builder’s risk insurance. Depending on the project, these items may be necessary, particularly with a general contractor that is not financially secure.

The general contractor’s fee for profit and overhead (often referred to as “Fee”), is intended to cover the contractor’s overhead and costs associated with managing the project not included in the costs of general conditions; i.e. project accounting, executive management, and other corporate overhead costs.  Once all corporate overhead is accounted for, the balance should be the contractor’s profit. Most general contractors in this sector operate with overhead costs ranging from an extremely lean 2.0% to a more standard 5.0%.

In most design/bid/build projects, the fee is typically applied to the hard costs of the project. The fee is added to the costs of liability insurance, general conditions and any construction contingency that is carried by the owner. This enables them to arrive at the total costs for construction, excluding fees for permits, special inspections, design and third-party management.

Including an experienced architect, designer or construction manager to your project team, among other things, will ensure industry accepted costs of general conditions are defined and addressed; reinforces a realistic schedule; and establishes a fee schedule which reflects current market conditions.

With the correct attention paid to negotiating the fees and general conditions with your contractor, one is assured of having a partner in the project; one that should be dedicated to meeting the project goals and collaborating with the balance of the project team in an effort to maximize the return on investment.

Swinerton Interiors, a division of Swinerton Builders, specializes in relationship based delivery of a full menu of construction services. Please visit our site to read more about our industry leading LEED experience, the innovative use of virtual design and construction (BIM/VD&C), and our commitment to preconstruction services. You can reach me directly at gwells@swinerton.com.





Scheduling Guidelines for Office Relocation

19 05 2010

Business expanding? Contracting? Lease expiring within the next two years? In the market for new office space? If so, this information could be quite useful. The following outlines the typical process and related timing expectations for planning your office relocation. There are extraordinary circumstances in most cases that tend to affect the “typical” process; so this should not be viewed as gospel, only a conceptual outline.

As an example, let’s assume that the use is a 20,000 square foot office user in an urban market with no extraordinary space or fit-out requirements. There are critical milestones to identify to achieve desired occupancy dates through the critical path method of project scheduling.

Milestones

  • Programming – The process in which the design team surveys the tenant’s (often referred to from a contract perspective as the “owner”) business practices, uses of space, flexibility in growth and contraction, and desired culture in order to determine the conceptual minimum space required.
  • Identify Adequate Office Space – The owner’s real estate professional (broker or consultant) will identify the available space in the marketplace that fits within with the program, location and economic parameters.
  • Create Short-List of Real Estate Options – The total inventory of feasible options is reduced to a manageable short list in an effort to create a competitive environment for securing one of the desired short list properties.
  • Develop Test-Fit Plans – The design team will create a test fit for the short-listed properties to ensure that the program as identified will fit the available space. Often times, it’s this process that uncovers certain inefficiencies of a building’s footprint that may eliminate it from contention. On the other hand, if a footprint is extremely efficient, the resulting program may indicate the opportunity to commit to less square footage, increasing the economic desire of that location.
  • Obtain Preliminary Construction Budgets and Schedules – Once the test fit plans (or, preliminary space plans) have buy-in from the owner, the contractor will provide preliminary estimates (often referred to as “budgets”) and the associated construction schedules for owner review and compare. This practice allows the owner to gain a greater understanding of its total financial exposure for various occupancy alternatives, a key component to the lease negotiations for the owner and the broker.
  • Conduct Lease Negotiations – The information provided by the design and construction teams will arm the brokers with the data necessary for an apples-to-apples comparison of the alternatives. There are generally two elements involved in the negotiation, the financial terms and the legal terms; the process of negotiating much of the key points (mostly financial or business terms) in the letter of intent (LOI) is one that can expedite the process and reduce legal fees.
  • Pursue Final Design, Permitting and Construction – As the short list is reduced to one, the process begins to develop the construction documents (CD’s), to pursue the permit process, and for the contractor to bid the final documents to the sub-trades in an effort to maintain a competitive final estimate. This component of the process may be shortened significantly via the collaboration of the design and construction team on behalf of the owner. See the discussion about the Design Build Project Delivery for Tenant Improvements for further discussion of the benefits of working as a team.
  • Substantial Completion of Construction – The point when construction is sufficiently complete in accordance with the construction documents, that the tenant (owner) can occupy the building or space. Typically, the architect or engineer will certify that the space is deemed “substantially complete”, which date becomes the date of substantial completion. The significance of this date is that it’s often a trigger for rent or term commencement per the lease – another point of negotiation that should be considered by the broker during the pre-construction phase.
  • Installation of Furniture, Fixtures & Equipment (FF&E) – The owner’s furniture, fixtures and equipment are moved in and installed. A prudent business practice is for the design and construction team to be actively involved with the various vendors in the early stages in order to avoid potential code or installation issues, which could become costly occupancy delays.
  • Commissioning and Certification of the Premises as Pertinent – With typical office space, the commissioning and start-up procedures are minimal when compared with that of mission critical facilities. However, although the magnitude of the owner’s teledata requirements might not be that of a 500MW data center, it doesn’t do the owner any good if their server room isn’t functioning as designed. There may also be a LEED Certification process that might require off-gassing of new materials prior to occupancy, for example. The related professionals should be consulted during the pre-construction phase in order to determine the time allocated for this final phase before occupancy.
  • Occupancy – Substantial completion has been achieved; all inspections have been successfully completed and signed off, the authorized agencies have issued a certificate of occupancy where necessary, and any commissioning processes have been completed, the owner may occupy.

In order to maximize leverage in lease negotiations, and minimize the unnecessary costs of expediting design, permitting and construction, Greg Fogg, Managing Director at Jones Lang LaSalle, suggests beginning the initial process about one year prior to the target occupancy date of the new premises.

“The caveat”, Fogg states, “is if a tenant has a renewal option that is relevant, requiring exercising one year prior to expiration… in that instance, we would likely trigger the early stage of our process (vetting the market) sooner so that the tenant is ready to make an educated decision by date of exercise.”

Before the brokers are able to accurately represent the user’s requirement in the market place, and as a prudent business exercise, the tenant should engage the services of a design firm to identify the actual size of the space needed. A common mistake is for an executive committee to give early directive about space needs without consulting a design professional. As an example, a 20,000 square foot user takes their footprint, assumes growth and proceeds with the direction to their real estate consultant to find 25,000 square foot alternatives in the marketplace. This can create costly problems if the user is in late stages of negotiations when it finds through the diligence of its design team that modern design efficiencies allow for greater use of space and ultimately a reduction in required office space, such that the necessary space may remain at 20,000 square feet. Thus, engaging the design team for early programming can save time, headaches and money.  The entire team benefits from early knowledge of the actual requirement and program.

A common method used for identifying critical milestone dates by the design, construction and real estate consultants, is to determine the desired occupancy date for “butts in seats”. What good is a space that has been deemed “substantially complete” if your business is not able to function in such a space? Working backward from the day that all systems are go with butts in seats, the design and construction team prepare the critical path schedule necessary to achieve the milestones for occupancy. Referring back to our sample user, the minimum time required to effectively perform the necessary steps is 34 weeks, on average, per the table below. However, in construction more than anything, it’s best to allow for contingencies where possible, and the more time one has for lease negotiation, the higher the probability for a better deal.

Tenant Relocation Process – Conceptual Time Line
Step Avg Time Allotment Cumulative Time
Programming 3 weeks 3 weeks
Identify Adequate Office Space 5 weeks 8 weeks
Create Short-List of  Options 1 weeks 8 weeks
Develop Test-Fit Plans 2 weeks 10 weeks
Preliminary Budgets and Schedules 2 weeks 12 weeks
Initiate Proposal & Conduct Lease Negotiations 6 weeks 18 weeks
Design, Permitting and Bidding (simultaneous) 6 weeks 24 weeks
Construction
12 weeks 36 weeks
Installation/Commissioning FF&E 2 weeks 38 weeks
Systems Commissioning and Certification 1 week 39 weeks
Occupancy – The typical schedule for a 20K SF office tenant to identify, design, build and occupy new space is approximately 39 weeks from start to finish (assuming no delays). 
Assumes that there are no changes or delays in approval process. Some of these steps can easily triple in time required if the process isn’t managed effectively.






The Value of Negotiating With Your General Contractor

22 04 2010

Tired of re-bidding, re-designing, or managing excessive change orders typical within the design/bid/build project delivery process?

Hiring a general contractor with negotiated general conditions, profit and overhead (“GC & Fee“) may be a delivery solution for you. However, it’s a process that requires trust and dedication from all parties involved. Although the competitive environment of the low-bid process is diminished slightly, the beneficial gain is realized through the team striving to achieve mutually accepted project goals in which all parties have contributed value input. Projects performed under these terms are often times more collaborative, resulting in greater overall satisfaction with the value and quality of the end product. Much of the project’s success stems from the early involvement of the entire team; providing preconstruction budgeting and scheduling in order to determine project feasibility, to establish economic parameters, and to gain preliminary “buy-in” from ancillary departments. The process of negotiating terms typically reduces the overall project schedule from concept to completion, in large part by avoiding the re-design, value engineering, and re-bid phases common to the design/bid/build delivery process.  For instance, the level of finish is agreed upon early in the design phase, and the pricing impact is provided by the Contractor on the spot, thereby avoiding the eventual sticker shock that might occur once the design documents are bid out in a design/bid/build scenario. The Owner obtains a higher level of confidence of maintaining the project goals by virtue of the team being committed with valuable input throughout the process.

The circle of trust required between the contract owner or its representatives, such as the project manager or construction manager (the “Owner”), the architect, design and engineering team (the “Architect”), and the general contractor (the “Contractor”) is a circle in which all parties will rely up the others to deliver with integrity in accordance with the negotiated terms and contract language.  For instance, the Architect will design the vision that is conveyed by the Owner, and the Contractor will act on behalf of the Owner to build the vision of the Owner in collaboration with the Architect, while achieving the best value possible as the Owner’s advocate; and, the Owner will pay for all services in accordance with the negotiated terms. If all parties play nicely together, the process leads to repeat business and extended relationships.

When the Owner does not have preexisting relationships with companies that have a proven ability to perform, it will qualify a list of architects and contractors via a request for qualifications (RFQ) process; followed by a request for proposal (RFP) to those that best qualify. As the proposals are short-listed, a selected subset of candidates are typically interviewed by the Owner to determine which company understands the project, has the chemistry to collaborate with the team, is able to display competency throughout the proposed team, and offers the best solutions and strategy. The chosen Architect and Contractor will enter into a contract with the Owner based upon negotiated terms.

The Owner should view the GC & Fee proposals with a critical eye, understanding that having a team with maximum focus, responsiveness and overall understanding of the project, the budget and the schedule, may be more important than the initial “lowest” fee. When evaluating the Contractor’s proposed financial terms, it’s important to understand if the contractor is truly able to manage and deliver the project in accordance with the proposed general conditions. The general conditions are the contractor’s direct costs associated with managing the project (including preconstruction expenses). If the contractor is afforded the opportunity to cover its true costs of AIA accepted general conditions, to receive a fee for overhead and profit to manage and warrant the craftsmanship throughout the process; then, the contractor should excercise its fiduciary role as the Owner’s advocate in maximizing project value and return on investment. It’s not uncommon for Owners to eliminate the low and the high numbers, acknowledging that projects that are under priced most often end up under resourced. Experience shows that it’s usually the candidates in the middle of the pack that best understand the project, yet are still hungry enough to be competitive.

This summary is just scratching the surface when it comes to understanding the overall costs of general conditions for any given project. I’m happy to be more specific with answers to any comments.

Subscribe to this blog to receive future posts discussing, among other things, The Value of Pre-Lease Services for Brokers & Project Managers; The Growing Demand and Implementation of LED Lighting; Engaging Project/Construction Managers; Integrated Process Delivery (IPD); Typical Tenant Improvement Schedule & Process; and much more.





Design Build for Tenant Improvements?

5 04 2010

David Klein of Cassidy Turley BT Commercial posted a great  question recently.  I initially planned for his question to be one of my scheduled blog topics. So, David, thank you for teeing me up…  Paraphrasing the question, “Does design/build have a place in office tenant improvements; what are the pro’s and con’s; and, does it save money?”

Project Delivery Methods

There are a few acceptable project delivery methods for commercial construction projects, including the traditional Design/Bid/Build process; the more collaborative Design/Build process;  the emerging Integrated Process Delivery (IPD) method; the  Construction Manager at Risk; and the Job Order Contracting method. Each of these delivery methods have their place; therefore, each will have its own time for discussion. Our focus today is on the design/build process for tenant improvements per Mr. Klein’s inquiry.

The design/bid/build method is a linear process with the owner, architect and contractor each playing their own roles, of which the owner (any reference herein to “owner” shall mean the owner of the contract) controls the design, materials selection and features through the architect prior to the selection of a contractor. The best suited projects for this manner are those with a defined scope of work, are not schedule sensitive or subject to change after bidding. The least suited are those projects with sequence or scheduling sensitivity and/or are subject to change after bidding.This process normally results in a longer delivery schedule, late stage pricing, and has generated widespread frustration of many owners, leading to the implementation of the design/build process, in which the owner, architect and contractor work in a collaborative manner from the inception of the project. Advantages include open, aggressive bidding, and that it is an established and familiar method.

Notable Disadvantages of the Design/Bid/Build Method:

  • contractors take advantage of the “competitive process” – translation: bidding construction documents without identifying potential unforeseen conditions and/or cost implications; reliant on quality of design and engineering details
  • no design phase assistance – the design suffers from lack of input from contractors and specialized trades
  • firm price not established until after the bid process, often leading to re-design and/or re-bid
  • change orders are common, of which the owner has full exposure
  • delay claims and disputes are common
  • minimal control over contractor selection and quality

An increasingly accepted, and recently adopted as the preferred delivery method by many public or quasi-public agencies, is the design/build method of delivery. Design and construction services are through one entity, either a joint venture between the designer/architect and contractor, or through a single entity that has both capabilities. According to Sascha Wagner of Huntsman Architectural Group,  “A design-build approach usually leads to a high degree of collaboration among the team – the design is happening with constant input from the contractor, which can lead to more cost-effective and buildable solutions.” He adds that one of the primary benefits is that the owner has a single point of contact and contractual responsibility. This reduces the tendency of finger-pointing over contentious issues. Larger, complex projects with schedule sensitivity are the best suited for this method of delivery.

Notable Advantages of Design/Build Method:

  • potentially the fastest delivery method
  • enables construction to begin before design is complete
  • provides integrated project team
  • design phase builder assistance/expertise
  • single point of liability for design and construction
  • early construction cost commitment
  • reduces likelihood of design related change orders and construction delays

Some of the things that are lost in the design/build process include: checks and balance between architect/engineering and contractor, and it can be more difficult to rely on contract clauses to get the job done, as this process requires more of a partnering attitude in which relationships and trust play a large role.

Does design/build work for tenant improvements?

The tenant improvement sector tends to be very dynamic, in that schedules are compressed due largely to late engagement of brokerage, design and construction services; and, terms change frequently with all parties dependent on reliable budgets and schedules in order for their targeted returns to be achieved. Office leasing and construction management professionals often rely upon the pre-construction services of the general contractor in order to forge the economics of the lease transaction; and therefore, they look for early commitments by the owner to engage the design and construction teams.  In this sector, the design/build method is frequently supplanted with a hybrid version in which the owner, sometimes via a third party construction manager, will qualify the design team and the construction team through a separate process, hiring both under separate contract to collaborate and deliver the owner’s project in a fashion similar to the formal design/build process, often referred to as a “negotiated contract”. Typically, the owner will dictate which party will be the lead from inception through completion, and often it’s the design firm or a third party construction manager, due in large part to the construction administration responsibilities that are best managed through the design process or the construction manager (not to be confused with CM at Risk, to be discussed at a later point).

As summarized by designer, Sascha Wagner, “Clearly, there are pros and cons to this type of project delivery. Quality projects can certainly be delivered on a design-build basis, led by either Architects or General Contractors. As with traditional project delivery methods, the quality of the delivery is usually directly correlated to the quality of the participants. That being said, having an independent Architect provides a level of checks and balances on the contractor’s performance and protects the owner’s interest in terms of quality assurance on the project…”

Leasing and construction management professionals rely on pre-construction services

Sophisticated tenant rep brokers often realize the value of pre-lease and pre-construction services through early engagement of the design/build team such that they are informed with reliable information, allowing them to maximize the leverage in their negotiations. Equally important, as the tenants arrive at the table fully armed with pertinent information, landlords leasing agents or owners reps, owe their client the same fiduciary responsibility, and also lean on the design build team for accurate and timely information. As Karen Wells of Jones Lang LaSalle states, “Time Kills Deals”. When representing landlords, she wants to know what her tenant improvement cost exposure is as early as possible in her effort to lock in the economic terms for securing tenants.

To answer Mr. Klein’s question, yes, design/build does have a place in the tenant improvement sector; however, the hybrid version in which the contractor’s fees and general conditions are negotiated for early engagement, may provide the owner with the comfort of checks and balances between the architect and contractor, yet still realize the collaborative benefits of a unified team. Cost savings are generally realized by virtue of the shorter delivery schedule, and the prospect of less potential for unforeseen circumstances affecting the budget and / or the schedule.








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