Market Insight: Guest Articles
How to Build Your Project
by Marty Wilson
June 2008
Project Schedules
It is axiomatic that as time frames to negotiate leases has grown substantially over the past several years, allowable design and construction schedules have shrunk significantly.
In the face of front end time extensions, it has become commonplace and too easy to say “we’ll have to fast track construction” to meet the move in schedule.
While this has led to desirable efficiencies in the management, planning and construction of projects, the reliance on ‘fast tracking’ has come at a significant, but largely hidden price! These costs are ‘hidden’ because they are included within each sub line item, as the subcontractors add costs to absorb expediting costs, on site inefficiencies, etc.
Most contractors today are proud to highlight their most amazing schedule accomplishments. Huge floor plates with large budgets are being built out in time frames that only 5–6 years ago would be characterized as impossible. (We just built out a 50,000 square foot call center with a $98 per square foot cost—in 7 weeks!!).
Most people equate extra schedule costs with overtime costs alone. However once schedules shrink past a certain point, although they are still ‘doable’, the inefficiencies in on site production become reflected in other overall costs that are not so readily identifiable, and aren’t called out as line items.
After tracking costs of similar types of projects over the years, we have found that fast tracking, or the reduction of as few as two to three weeks in the normal build out time adds 3%–7% (on mid sized to large projects) to the sub costs on a project.
To put that in real dollar terms, I am suggesting that a $40 per square foot build out will cost about $2 per square foot more due to fast tracking! So a 25,000 square foot buildout will cost $50,000 more to make up for lost front end time.
Most contractors won’t tell you this, because usually at the time you are asking them the die has been cast and who wants to be a bearer of bad news (shoot the messenger and all that). Ironically, because a contractor’s on site general conditions expense is a function of the project schedule, his direct project supervision cost may actually go down on a fast track project—but a reduction of supervision expenses by a few thousand dollars pales in comparison to the increase in sub costs above…
If everyone becomes aware of these potential costs up front, there might be more motivation to start planning issues sooner to avoid delays. Unfortunately once the time is lost it can’t be reclaimed.
Having set out a warning about allowing front end time to slip away, let me outline the recommended flow chart of how you should put the project together:
Project Flow Chart
- Real Estate Agent
- Architect
- Contractor
- Short List Potential Buildings
- Space Plans
- Conceptual Budget
- Construction Documents
- Sub Bids
- Construction
The following discussion deals with the selection of the architect and contractor for your project.
Leasing Due Diligence: ‘Buildability’ and Construction Cost Evaluations
Inspections of buildings under leasing consideration is the most under utilized benefit of early contractor involvement in a project. Although leasing decisions are largely driven by costs, the impact of a particular building on the project construction cost is frequently misunderstood. While Leasing Executives and their Leasing Agents are very well versed in market lease rates and the landlord offered construction allowances, they are much less familiar with the construction details and the relative construction cost comparisons of different building systems and designs.
To properly investigate and analyze total project costs, a general contractor who is equally versed in commercial leasing and tenant improvements must inspect all buildings under consideration, with a particular eye to total construction costs necessary to complete the project satisfactorily to the Tenant, Landlord, and City Building Inspectors!
No two buildings are really the same, even though they may offer the same rental rates and tenant buildout allowances. These differences are frequently not obvious, and may not even be uncovered within the space to be leased. To illustrate, consider two items that impact every project: ADA (American Disabilities Act) and Handicap Code compliance. Although the following examples reference projects in San Francisco, the code issues are similar in every major metropolitan area of the country.
ADA Issues
In the City of San Francisco, the Building Department aggressively enforces the most current ADA guidelines for the design and operation of Life/Safety devices (fire alarm strobes, horns, etc.), and Handicap accessibility. Very rarely are exemptions granted due to “grandfathered” or pre-code existing conditions. These codes are enforced without regard to the size (i.e. no matter how small) of the project. This means that even if you plan to occupy only a 2,000 square foot space on a 20,000 square foot floor of a high rise building in San Francisco, within your space you must install the latest Life/Safety ( e.g. light strobes) devices. Typically the installation of these devices is considered a ‘tenant’ construction expense.
But in order to work properly (and pass inspection prior to the granting of your Occupancy Permit), these devices must be connected to the ‘base’ building’s Life/Safety system and control panel. However because of recent code changes governing these devices, the existing base building control systems in many Class ‘A’ high-rise buildings is not compatible with the Life/Safety devices necessary to pass code!
The integration of the new devices can often require extensive modifications, and in many cases do necessitate complete replacement of the ‘base’ building control system. That replacement often is a significant expense. Typically tenants do not expect to pay to upgrade ‘base’ building control systems from their tenant construction allowance…
Handicap Access
A similar “Catch 22” can occur with handicap access in the building. As part of the permit plan review of our prototype “2,000 square foot space” the City of San Francisco requires that paths into and out of the building (not just on our floor) be handicap accessible. A new twist in this review is the requirement that any underground parking must also be accessible by a handicap van. Unfortunately these vans are so tall they won’t fit into many of the existing garage entrances. Both of these accessibility conditions could require extensive and expensive upgrades to areas of the building far removed from your floor, and they would have to be done before you could legally occupy your space.
Landlord / Tenant Cost Issues
The discussion of whether the Landlord or Tenant would be responsible for the implementation and payment of the above improvements hopefully would have been resolved prior to final Lease execution. However if these particular building shortcomings were not anticipated…
There are many other building design issues and systems that will have direct bearing on final tenant construction costs (e.g. electrical, HVAC, other code upgrades, etc.). Each building has its own unique subset that requires detailed investigation.
A general contractor specialized in commercial tenant improvements is best qualified to uncover these issues. We have seen supposedly ‘equal’ buildings vary by $5–$10 per square foot in costs after our investigation!
To help in this analysis, CIC maintains a constantly growing list (now 4 pages long) of the Landlord/Tenant construction/rehab issues we have encountered. We also have written work letter language that addresses each individual issue. Although full knowledge doesn’t guarantee a ‘win’ on every issue, it does guarantee a better analysis of options as the lease costs are negotiated.
Project Architect / Designer
Most clients would agree and expect that the Architect largely determines the character and style of the project. But it is not so obvious that the Architect also has the biggest construction cost impact on the project (and not the contractor!).
To explain: Whether a project is built in the range of $25–$30 per square foot, $35–$40 per square foot, or $45–$50 per square foot is established by the architect’s plans and specifications. (Hopefully those plans are not developed in the absence of a Contractor who provides updated budgeting as a reality check on the architect’s design— but more on that later).
Consequently the review of architectural candidates should also include consideration of their ability to adhere to budgets when designing a project. Unless you have already developed a prior relationship with an Architect or Interior Designer, you should seek at least 3 or 4 firms to interview. Focus on firms who have established track records within your type of business; you can save on inefficiencies and common mistakes by choosing firms who have already learned those lessons. I suggest you should particularly invite firms who specialize in commercial interiors; like most every other industry, architecture has evolved into areas of specialization and your project will enjoy the benefits of this experience.
After covering the basics of office planning and layout, good interior design, like art, is in the eye of the beholder and is a product of an individual architect’s ‘style’ and approach.
When considering and interviewing different firms, look for a ‘match’ with your own philosophy and tastes. Your selection of a firm should be on the basis of a compatibility with your (or your Company’s) personality, approach, and style.
Fee Comparisons
Although all projects are cost sensitive, the lowest fee proposal should never be the only (or even the main!) consideration for selection.
Architectural Fees are usually proposed (or analyzed) on the basis of a ‘cost per square foot.’ A ‘big’ spread (or difference) between two firms’ Fee Proposals might be $1.00 per square foot; which out of context seems like a lot.
However consider that on a $40 per square foot total construction budget, a $1 difference loses major significance; particularly if the more expensive firm has a track record of designing to meet their client’s budget goals (remember that architects have the most impact in determining the project’s costs).
An Architect who can design your space needs for $5 per square foot less in construction costs is worth an extra $1 per square foot in fees!
All firms will submit references; and although obviously nobody submits a bad reference, some important comparative information can be obtained from the right kind of reference.
To that end, I suggest you ask all the Architects to include the names of local, major multi tenant buildings they have worked in, along with the name of the building manager. Also ask every Architect to propose the names of 4 general contractors they would recommend for consideration.
Undoubtedly there will be overlaps in the names on both lists. Ask the building managers to compare how well the different firms met the design schedule and project budget. Also ask the general contractors how budget responsive the firms were; and ask for a comparison of the construction plan detailing and completeness of the drawings.
Design Team Compatibility
You should meet and interview the Architectural Team members (e.g. the designer, space planner, project captain and the field construction administrator) who will actually work on your project. You will want to see the work your proposed Team has done and not just the portfolio of the firm as a whole. Don’t get sold on an Architectural Office’s specialization in Law Firms to find that the Team assigned to your project actually does data center projects.
Also find out if the Team members doing most of the work on your project will have authority within their own office to make decisions. I’ve seen many projects delayed during construction because the architect’s representative assigned to attend job meetings had no authority (or experience) to answer questions, resolve discrepancies, etc. without first ‘checking with the office’—which always leads to unacceptable and expensive schedule delays. Finally, once you have selected a firm, be specific about your expectations: project design, style and goals; cost; schedule; etc.; then hold the Architect accountable to meet those expectations!
To avoid misunderstandings, I suggest you insist that both schedule and budget compliance requirements be written into the Architect’s contract. In response the Architect should want to include related provisions for your timely input about requirements, decisions, approvals, etc., but that only serves to help you better understand the project needs.
General Contractor
After months of analyzing options, negotiating deals, planning, weighing promises offered, etc. the project realization, and ultimately the final project success, falls squarely on the execution by the general contractor. Contracting has changed. The traditional contractor of old who is a jack of all trades (hence the name general contractor) has been replaced by a professional organization that more often than not focuses on a particular specialty of construction; e. g. tenant improvements, retail, high rise buildings, tilt ups, etc.
Today’s most successful projects are built by contractors who are selected early in the planning process, listen and buy in to your project goals, and then are willing to guarantee that those goals are met.
This philosophy and approach is best seen within the specialty of tenant improvement construction.
As a tenant improvement contractor, we no longer build projects in the traditional sense of ‘hands on’ construction. Rather, we actually provide professional management of the construction process to meet the client’s goals; although unlike pure “Construction or Project Managers,” we still retain the liability and risks associated with a project and will directly guarantee the project’s success.
Contractor Selection Process
The architect and/or your leasing agent can recommend a number of contractors they have worked with, and who they know to be experienced in your type of project.
Basically there are two approaches to retaining a general contractor to construct your project: 1) lump sum bid or 2) negotiated fee, generally with a guaranteed maximum price. Both approaches have their own benefits and disadvantages; the optimum method is project specific.
Bid
Usually defined as the process where final, ready to construct plans are issued to 3 or 4 contractors, who in turn obtain sub bids and submit a lump sum, fixed price to construct the project.
You should prequalify and solicit bids only from contractors you would seriously select to build your project. Consequently, the project should be awarded to the lowest bidder.
A very complete, well defined set of plans and scope of work is required for this process to be a success. Because more detail is required on bid drawings, be prepared to allow the architect more time during the construction documentation phase to finalize the prints.
The bid process is very applicable to projects in which there are no unknown conditions, and the probability of changes to the drawings, schedule, scope, etc. is low. For example the construction of ‘chain’ type restaurants is frequently bid because the owner and architect have refined the plans over several similar projects to eliminate all errors, discrepancies, etc. and the construction drawings represent completely and exactly what is expected in the finished product.
A ‘fast tracked’ project, or a rehab project with potential hidden conditions would not be good candidates for lump sum bid contracts.
Advantages: Assuming a complete set of plans, at the moment of the bid submission you can objectively determine who the lowest cost contractor is. And, at the moment the bids are submitted, you can be confident that you have the lowest cost for the job (as represented by the current drawings).
Disadvantages: Your quoted cost only covers what is clearly defined on the plans (regardless of what “catch all” notes about ‘intent’ or ‘completeness’ have been added to the plans). Subcontractors will include only what is shown on the drawings—nothing more. In the event of areas or redundancy or possible confusion, subs generally assume the last costly option. That’s what bidding is all about.
Any subsequent clarifications, or changes in scope or schedule can be (legitimately) expected to be met by change orders, which may play havoc with your budget at a time that you can no longer afford to make changes.
Projects that have incomplete or unusual (e.g. fast track schedules, unfinished specifications) goals leave too many openings and opportunities for added pricing that is no longer subject to competitive bidding.
Overall project schedules for bid jobs take longer than schedules on negotiated jobs. The architect will require about 2 weeks more time (and fees!) to complete the details for a bid set of plans, and the total time to bid and award the project will also add 2–3 weeks time to the process.
The bid process also sets up an adversarial relationship between the contractor, architect, and owner. This process eventually casts the Owner as an arbitrator to settle disputes throughout the entire project, and requires the Owner to be an aggressive manager to keep the project on track.
Negotiated
A Request for Proposal (RFP), usually written by the Architect, is issued to 3–4 prequalified contractors, describing the scope of the project in terms of size, budgeted cost and schedule constraints.
The contractors are asked to submit a Fee Proposal, outlining costs for preconstruction services, project general conditions expenses (i.e. jobsite ‘overhead’ costs) and an overall fee (‘markup’ or ‘profit). The first two are usually quoted as fixed costs (based on a schedule duration), and the fee is usually proposed as a percentage of total sub costs.
Fee Comparisons
Although a matrix of submitted costs can be used as an analysis tool, the lowest cost proposal should take a minor role in the selection of a contractor for negotiated work. And cost alone (i.e. without in depth review of other factors) should never, never be used to pick a contractor!
Relative contractor fee proposals are not true indicators of total project costs. Consider that the total of fees and general conditions paid to a contractor is really a minor part (frequently much less than 10%) of the total cost of construction; most of the costs are related to sub costs.
Different contractors enjoy different pricing levels from the same subs—sometimes related to their ‘working’ relationships—but usually related to the volume of work a sub does with the particular contractor. While these differences would show up in a total bid, they don’t show up in negotiated fee proposals.
Consequently a general contractor who has been losing market share of volume because he has not been competitive in the bidding marketplace (where the level of fees rarely determines the lowest bidder on a project), would probably submit a lower fee proposal on a negotiated project in an effort to pick up the project. And to pick such a contractor because you thought you would be getting the lowest cost project would be a mistaken assumption. A fee spread of 1% between contractors is typical. But 1% represents only $5,000 on a $500,000 project, or 40¢ per square foot on a $40 per square foot buildout.
Selecting a contractor more experienced in base building lease issues could avoid a $10,000 upgrade to the life/safety system, or one that is more capable in preconstruction services could easily save more than $5/sf in real dollars.
Proposal Review
I strongly recommend that as the client you also receive and at least review each contractor’s proposal—don’t assign that task solely to your architect or other consultant. Architects and consultants tend to receive many, many proposals; as a consequence they frequently ignore the background information as so called ‘boiler plate’ and turn directly to the Fee section. Which brings us back to the above discussion about fees.
Interviews
After receipt of the contractor’s proposal you should interview all members of the contractor’s project team, focusing on their approach to preconstruction services and support.
Look for a project team that is proactive during the preliminary stages of the project. Traditional contractors will tell you how good they are at “solving problems” and finding cost cutting measures after the bids come in too high. Unfortunately today’s project schedules can not afford the luxury of the traditional contractor approach. “Problem solving” and rebidding takes valuable time and delays projects.
Look for contractors with the philosophy of problem avoidance, and the skills to anticipate budget overruns before the Architect has completed the drawings.
References
You should personally check the references of the two or three firms you are finally considering. Do not assign this to the architect or consultant —surprisingly it is very rarely that references are actually checked. Architects are reluctant to call other architects for a reference check; which should be their most important source of information.
Ask the contractors for references from architects; and then call them to get a comparison of contractor services in different areas: preconstruction services, schedule, quality, budget vs. final costs, project management support during construction, etc. Ask these reference architects for an assessment of the contractor’s strong and weak points; you will probably get a better picture of a contractor with a little exploring.
Advantages to Negotiated Contracts: The most important advantage of a negotiated contract is the concept of forming a ‘partnership’ with a Contractor who will accept your goals as his own. Consequently the Contractor will use his expertise to help both you and the architect avoid budget and schedule overruns. Contractors are actually best at scheduling and avoiding cost overruns, it is the primary requirement of their business.
As an advocate for your project goals, the negotiated contractor will make it possible to undertake projects with large unknowns (e.g. rehabs and renovations where conditions are not necessarily visible), or projects with unusually short or fast tacked schedules requiring commencement without a complete set of drawings (a recipe for disaster in bid jobs).
The contractor can better prequalify the right subcontractors to look at your project, and can expand the bid list to 3,4 or 5 subs to insure the final costs are the result of the most competitive bidding.
The contractor should set up the bidding to the subs to anticipate and remove redundancy and omissions in the bidding documents. An important role of the negotiated contractor is to proactively help the architect produce a more complete set of documents.
Finally if the project ‘grows’ in scope, or shortens in schedule (both situations which have potentially huge cost implications on bid projects), the negotiated contractor will represent the Owner’s best interests to keep project costs down.
Disadvantages: The main disadvantage of negotiated contracts involves the perception that the only way to obtain the lowest cost is through competitive bidding of general contractors.
Many corporate policies insist on competitive general bidding; obviously a negotiated contract doesn’t exactly meet that requirement.
However when we solicit sub bids on our negotiated projects, we always take a minimum of three, but usually four or five sub bids. Our philosophy is that the Owner is paying us to prove to him that we are getting the best sub price.
When we bid projects, we usually only ask two of our favorite subs to bid the project (and we have a higher than average success rate on bid jobs…). It is also true that standard contractor Fee Proposals are based on a percentage of total sub costs; consequently it could be argued that because contractors are motivated by higher fees it is in their best interests to increase sub costs.
That dilemma could be handled by fixing the Contractor’s Fee (i.e. not directly dependent on the total of sub costs). This approach is frequently incorporated in larger projects.
It is safe to assume that my recommendation leans toward negotiated contracts. It does. Our Company philosophy and market approach addresses meeting the needs of clients through a Partnership arrangement. We enjoy the intellectual challenge of being a proactive part of a project’s development as opposed to being an ‘order’ filler. Different strokes… and all that!
