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.









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