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.

Cinderella & Me – Looking for a Prom Date

21 03 2010

How’s your NCAA bracket? Not surprisingly, mine’s doing great! I failed to submit one  this year, so Murphy says I’m going to do the best ever! Growing up in Ithaca, NY, and having family nearby in Syracuse, I had to go with Cornell and Syracuse. Living in the East Bay and following Omar Samhan and the Gaels of Saint Mary’s, I’m riding their win streak as well; and, being a fan of the Pac 10, I gave both Cal and Washington one win a piece.  Those were the sentimental picks that have provided me more wins than I had ever expected. I only wish I had a relative in Northern Iowa… Oh well, who would have picked them to knock of Kansas? Many potential Cinderella’s remaining however. Who’s going to the big dance?.

As the Cinderella story unfolds in the tournament, my dance card is also looking to be filled. A significant shareholder of Teamwrkx Construction, I have recently come to the conclusion with my business partner to close and dissolve the San Francisco entity, consolidating the existing staff and projects into the San Jose office. I have elected to continue my focus on serving the Greater San Francisco region, rather than working from San Jose. With the regional competition as strong as it is, I feel the only viable option to serve San Francisco’s sophisticated market place is to serve it from within. Hence, my search for the best option to apply my skill set and lessons learned over these past two and a half years.

Although I’m optimistic about the prospective opportunities, I am further energized about the potential direction of the construction industry as evidenced by the requirement for design and engineering professionals in the various executive search websites. For instance, just to mention a few, I have noticed Gensler San Francisco actively looking for a project architect and urban designer. SmithGroup is looking to add architectural designers with health care and industrial experience. Hooks ASD may be looking for junior design assistance when some of the active projects begin to move forward.

So, as the velocity of the office leasing market is showing signs of life compared to this time in 2009; and, the architectural, design and engineering communities are looking to add personnel; there’s a very cautious sense that the construction of commercial interiors should see increased activity by end of 2010.

Much like the NCAA Basketball Tournament, the local construction industry is loaded with talent; some of which companies are blue chip prospects, while others are certainly the underdogs by virtue of experience and volume. However, in this day and age where service and value matter most, it’s not always the size of the dog in the fight, but more often, the size of the fight in the dog that determines who will earn the business, and who will make the best partner for your.  Future posts will include criteria for selecting the best general contractor for your project. Responsible business practices are key to survival and value enhancement.

Hello world!

15 03 2010

Welcome to the inaugural post from the Construction Corner, recognized as the leading resource for accurate, timely and relevant commercial construction information. Real estate professionals, architects, engineers and designers, building owners and managers, facilities managers and construction managers will find this site useful for tracking current trends and issues affecting the commercial real estate and construction industries. Your participation and recommendations for content are encouraged in order for the site to evolve at a rapid pace, and to be pertinent to your requirement for useful information.

Future posts will include the following:

  • Current Trends in Non-Residential Construction
  • Engaging Your AEC Team Early
  • The Value of Preconstruction Services
  • Understanding the Costs of General Conditions
  • Design/Bid/Build or Design/ Build?
  • Involving Third Party Services
  • Qualifying the Contractor
  • Guest Articles and contributions from design professionals,  construction managers, project managers and more

To leave you with a little bit of useful data, the Turner Building Cost Index reports that Q409 costs decreased 2.06%. According to Turner Vice President, Karl F. Almstead, “The decrease in construction costs is reflective of decreased private sector development and investment. Commodity prices have slightly increased due to global demand, but have not resulted in upward pressure on construction pricing. The competitive condition in the building construction industry is driving labor to increase productivity, therefore reducing labor costs.” The same report states that construction costs slid by 8.4% overall in 2009.

According to Jim Haughey on the Reed Construction Data news feed, Nonresidential construction drops 22% since October 2008. “For lease” construction spending will continue to fall slowly until late 2010. The largest declines were reported in the hotel (11%) and manufacturing (5%) sectors.  He noted that the trend of for lease office buildings has been trending up since the cyclical low point of June last year, and should realize an increase in amount of work under later in 2010.

March Madness is upon us; who will be the Cinderella of 2010?

Walter Payton
“I want to be remembered as the guy who gave his all whenever he was on the field.”

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