Recently, Real Projectives® Principal, Jonathan Williams, joined industry experts, Thomas Fahs, Director, Development & Construction, COPT Development and Construction Services, and Brian Rennie, Construction Director, Bozzuto Construction Company for a wide-ranging discussion around keeping development and construction costs under control, particularity relevant in the current economic environment. The webinar was hosted and moderated by James Goodrich, Vice Chair of the Construction Practice at Saul Ewing Arnstein & Lehr.
As cost is always at the forefront of everyone’s minds in the real estate industry, we share some highlights of the great conversation that was had around controlling those costs, including how Real Projectives® approaches those important services for clients. While approaches varied by each firm’s role in the industry, a few common themes emerged.
Fahs kicked off the conversation, emphasizing that COPT takes a long-term ownership view, so looks at how short-term costs impact the long-term investment and cash flow. As a developer, he emphasized that the biggest unknowns relate to the land and what you can’t see, “First, have to get my arms around the unknown, when I’m thinking about costs. Old adage, 70% of your costs are behind you once you’re out of the dirt.” Thereafter, he explained that once you get the project going vertical (out of the ground), if you mitigate the risks on several key divisions (structural, mechanical, electrical) of construction, you have a much better opportunity to bring the project in on budget.
Williams shared his thoughts on budget, and how we best approach keeping costs in line for our owner and investor clientele. “Control usually means measuring against a budget. Whether its pro forma, if it’s a new development that has both costs and income element, or a renovation with only expenses, there are always expectations about budget.” Creating a realistic budget starts by defining the scope of intended work, and then understanding the key underlying assumptions: the conditions of the work, the existing property, etc.. Also essential is establishing the relative priorities and related ability to tolerate misses or failures?
Williams further explained, “If you are an institutional owner, you have different perspective on cost than a merchant builder looking to get your money back with a return in a short period of time. Or if you’re Amazon in need of a distribution center or a cloud data center, time may be more important than money, so we might find ways to build faster and be willing to spend the money to do so, versus being worried about getting the cheapest costs. Having those critical discussions upfront and factoring them into the planning and budgeting processes, enables the team to wisely manage all resources and energies, since there are a lot of things to address.”
The Bozzuto Group performs construction management, development, property management, and homebuilding. As Rennie leads the construction arm, he emphasized that pre-construction planning is paramount. “We put value on our preconstruction side more that most do (we think). The reasoning for that you know is that if the job’s not planned well before we begin operations, it’s really duped. Hard to fix it when you’re under the gun, especially if you’re talking about a student housing deal or data center, there’s not time to make up your errors….High level focus on pre-construction, making sure we think through all the possible risk factors before we get in operation is something we’re hyperfocused on.”
All three coalesced around the need for thorough due diligence (understanding, investigating, and challenging statements) as the driving force toward controlling costs in development and construction. Seeking out and evaluating the unknowns allow you the best opportunity to mitigate risks, including cost control.
Real Projectives drives results and manages risks for our real estate clients. Construction costs are one facet of those risks for which we strive to understand relative priorities, memorialize expectations, set realistic budgets, procure smartly, and intently track labor and materials as they come together to achieve the intended outcome on each project.
As a real estate investor or owner, you can rely on our experience, knowledge, expertise, and ambition to drive your project to success. Contact us today to start a conversation.