Note to Investors: A Roadmap to Best Practices

Note to Investors: A Roadmap to Best Practices

Before investing in a building project, consider these points:

In commercial life, it is a common best practice to have a business plan before spending a lot of money. This concept applies to planning, designing, and building (and paying for it). Why then is it so common to hear: "it cost more", "the schedule was really late", "I was disappointed in the design but it was too late to change". Here is our perspective based on many years experience.

Contracts are an agreement about how risk is allocated in the deal; risk is priced into the deal.

Each party to the contract negotiates for, and eventually agrees to the price of performance

The specter of risk sits on the shoulder of the contracting parties. When risk is substantially speculative, as compared to known, then contract negotiations and subsequence performance are distorted.

Many processes in the AEC+dev industry are “poster children” to the proposition of contract and performance distorted by mis-allocated risk. Cost ignorance is high among the usual suspects.

The classic design-bid-build delivery system proposes that the contract sum for construction will be established after 70% of the design fees are expended and then only after considerable time and effort have been invested by those that pay the bill, otherwise known as the Owner. When the bids don’t conform to the budget, then the re-design process kicks in. In most cases the Owner pays that bill too: more time and money.

A popular myth is in play here: the low competitive bid is the cost.

Consider these numbers with respect to risk allocation:

  1. 70-75% of development period costs are “hard” costs; construction costs
  2. A faulty sum of the parts estimate can miss the mark by 20%
  3. Thus the speculative error is perhaps 15% of development period total cost
  4. (5% or less is considered an acceptable tolerance in many circle)

With this much uncertainty in the deal, who carries the risk ?…. negotiations ensue. Is it the designer, or the builder, or the Owner?

Cost analysis can only be based on market-derived facts. These facts must be applied during the front-end work of project. Analysis resources can be brought to bear in a variety of ways.

Examine your project's "fitness" by downloading the Project Fitness Guidelines.

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