Welcome to Volume 2 of our Frequent Development Mistakes series. We introduced this series in a previous post, which you can find by clicking here.
Successful real estate development depends on two very different management approaches. As the owner of a firm, the primary concern must always be managing the big picture of your company’s business- finding new projects to add to the development pipeline, balancing financing considerations, relationship management, human resource considerations, etc. Many Developers excel at this upper management approach.
Conversely, the success of any one individual development project requires a completely different management approach. As developers know, development project management is exceptionally complex and requires an unwavering attention to the thousands of details involved. Unfortunately, balancing the oversight of architects, engineers, civil engineers, title companies, general contractors, Xcel Energy, Sales Brokers, City Inspectors, Plan Reviewers, etc. can be almost impossible to give complete attention to while also focusing on the big picture of a development business. Often, this split approach can result in simple errors that can cause budget overruns ranging from annoying to devastating.
Below are more Frequent Development Mistakes that can cause budget issues:
Exterior Material Selection
How much attention are you giving to exterior material selection? Many developers spend considerable time working with their architect on maximizing unit counts and optimizing floorplans but attention to exterior elevations and the notes that call out materials may be an afterthought. Unfortunately, the cost of exterior materials can wreak havoc on a Developer’s budget without proper oversight. Architects love to design buildings that incorporate stylistic elements that they personally find appealing, but may be quite costly or inappropriate for your project’s price point. Custom materials or applications may also have lead times that make scheduling difficult for your General Contractor. Paying attention to these details up front, prior to plan completion and approval can save you and your general contractor time, money and hassle.
It’s understandable, you’re trying to move a project forward and investors/partners and your bank are pushing for a GC budget and contract to finalize your loan but plans aren’t fully permitted and approved. What do you do? Often developers try to use a “working budget” and have their General Contractor assemble a bid off an incomplete, or not fully approved, set of plans. The risks of doing so are extreme. Every detail in the plans that changes from the time of budget and contract finalization with your General Contractor are fair game to be charged to you as an item outside your GC’s “Scope of work”. What’s worse, if your architect doesn’t cloud every single detail that changes, your GC may find items that need to be charged back to you throughout the entire project. This causes enormous headache for a GC, as it may require them to have subcontractors revise their bids numerous times. You can bet that subcontractors, many of whom can already pick and choose the projects they work on, aren’t going to be cutting you any deals on added work. When budget negotiations happen during the bidding process, subcontractors often agree to cut the bottom number to secure work. Negotiations on added scope of work are rare, as there is no incentive and sub-trades know they already have the work. If anything, sub-trades have every incentive to make up margins on added scope, at the expense of your bottom line.
Somewhat similar to the issue of finalizing budgets prior to plans, allowances are a dangerous contractual provision that should be used exceptionally sparingly. There should be clear reason behind every budget category that your General Contractor proposes assigning an allowance value to. Of course, the risk of allowances is most problematic for Lump Sum (fixed price)/guaranteed maximum price (GMP) contract formats. Too often, allowances simply represent an unknown risk that the General Contractor is trying to assign to you as the Developer. Every category proposed to be an allowance should have a clear and undeniable reason for being do designated. Often, pushing for additional bids and full explanation may uncover some uncommunicated reason for why your general contractor is asking for an allowance. Don’t let impatience cloud your judgment when negotiating budgets and contracts!
At redT Homes we have development experts on staff that Developers we work with can consult at any time. If you have any questions about the Five Development mistakes listed above, contact our office to learn more about working with redT Homes.