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.





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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