Today, more than ever, it’s important to avoid costly delays and unexpected overruns associated with providing solutions to corporate real estate needs. As vacancy rates drop, landlord-driven markets strike out at tenants with a harsh one-two punch. Not only are rents on the rise, but the Tenant Improvement Allowance is shrinking while the cost of construction and related services grows.
Rick Martin, who leads project management activities for Cresa Partners of Orange County, says he believes this should be anticipated, negotiated and actively managed as part of the real estate transaction process.
Smart Business talked to him about keeping project costs in line and the dreaded “gotcha.”
Where do you start with clients when planning a project?
You engage a real estate broker to find a building or negotiate rent. But it is risky to then use in-house resources to marshal the professionals, contractors and other service providers through the tangle of scope definition, service agreements, schedules, bidding, change management, risk management and nonperformance issues that are part of every project.
A key differentiator is our approach to actively protecting our client against unexpected cost and delays through the early and effective use of project management.
Do you have a process you recommend so clients can protect themselves against “gotchas”?
Project managers should bring to the table a five-step process tailored to the specific needs of each client.
It begins with the early establishment of a comprehensive master schedule that is inclusive of all transaction activities in addition to those related to design, construction, technology, furniture, fixtures, equipment and expansion/relocation. This important tool guides the efforts of the entire team and works as a ship’s rudder to keep the project on course and protects against delays and added cost.
A cost forecast provides a comprehensive accounting of all non-reoccurring expenditures including design, documentation, permits, technology, construction, furniture, fixtures, equipment, and move costs is developed by the project manager. This forecast helps the transaction manager analyze each real estate opportunity clearly, with a well-grounded understanding of the “out-of-pocket” costs associated with each location, not just the reoccurring cost of rent and operating expenses.
To determine the exact amount of space required by a business and to facilitate the creation of the cost forecast, a space use program should be developed. The project manager uses competitive forces to help select the most qualified architect to work with the team and develop the space use program — which is the accumulation, and tabular presentation of, objective and subjective space needs. Objective space needs include the size and quantity of private offices, work stations, conference rooms, work rooms, specialty areas, reception and all other space needs.
Utility and service needs such as unusual HVAC and electrical requirements should be identified. Importantly, subjective needs are also identified that may involve corporate image, or indicate the need or desire to occupy smaller or larger floor plates, multiple floors versus single floor, single-occupant building versus a multi-tenant building. This tool provides the criteria that will ultimately qualify available space for consideration and will be used to develop a space plan to evaluate each building’s efficiencies.
Each transaction should include a “work letter” and a description of “landlord’s work.” Together, these two documents should:
- precisely define the physical condition the space will be in when delivered to the tenant, and
- define specific conditions and requirements the landlord (or its lender) may have related to the use of materials, architects, engineers, and contactors, restrictions on the use of the Tenant Improvement Allowance, and other performance-related obligations.
In a strengthening landlord market, each issue within these documents will have a direct impact on cost.
What’s your advice on change orders and modifications to the work process?
The preceding four steps serve to set the course. Developing and using an implementation plan is the final step. The implementation plan steers the ship through the straits and narrows of design, engineering and construction.
By employing current market knowledge of service provider capability, contractor availability and labor and material costs, the project manager uses competitive forces to assure the best teams at the best price.
The project manager should use past success and experience to craft comprehensive service agreements that protect the client and provide for open bidding of the construction — thereby assuring the highest quality and lowest cost. Acting as the team quarterback during this phase, the project manager should continually represent the client’s best interest: protect against inappropriate change orders, prevent delays, and advising in advance of important decisions.
RICK MARTIN leads project management activities for Cresa Partners of Orange County and exclusively represents users of commercial real estate. Reach him at [email protected].
