Play it Safe

PROJECT BUDGETINGWatch out for these pitfalls to accurate project budgeting.   

By Steve Nelson

Those who have ever had to create a construction project budget know that it’s part science, part art form, part relationships and – to be frank – part luck. Having said that, these are some common pitfalls that – if left unaccounted for – will cause a great deal of problems when trying to manage costs and the project design.

Ensure Strong Communication 

By far, the most important factor in the budget process is strong communication with the owner and the design team. Poor communication leads to unmet expectations, a faulty project design, project design delays and costs and something no one ever wants: a budget and design that does not work for the client. It is important that the design team establishes a basis for the project at this stage and that the contractor assists in this endeavor.

Besides construction-related issues, you must attempt to understand the financial impacts of the project with the owner. Does the owner intend to keep or sell the asset? If keeping the building, how long does the owner plan to do so? This directly impacts how expensive or economical a building to design and construct. How flexible does the owner want the asset to be? For example, during the design phase there may be permanent shear and load bearing walls required for the structural design, and if an owner or tenant wants to remove or alter these walls in the future, it may not be possible (or extremely cost prohibitive). These are only some of the many key considerations to communicate with the owner and design team.

Know the Building Codes

The California Building Code, including Title 24 and Cal Green Standards, serves as the minimum basis for the design and construction of buildings in the state. However, cities and counties may have more stringent and restrictive building codes and regulatory construction ordinances. In essence, this means each construction site will have its own unique set of challenges. In some cities, local ordinances may mandate no construction activities prior to 8 a.m. Construction crews cannot open the fence, stage any materials or construction equipment or start any prep work. In some cases, failure to abide by this law could land the superintendent in jail and/or a fine.

Another example is how some cities classify high-rise buildings. While the California Building Code establishes a minimum height requirement for high-rise construction, some cities may have more restrictive building heights for the high-rise requirement. El Segundo and Ontario are just two examples of cities with lower height limits. In these cases, if you unknowingly design the building height in excess of the cities requirement, the project will be classified as a high-rise by the planning and building departments. The cost impact to the budget could be as much as a 10  to 15 percent increase to the total project cost.

Choose the Right Building Occupancy and Building Type

This initial building code assessment is how the building is to be “used.” Some occupancy assessments are simple: office, retail, etc. Other occupancy assessments are more complex: mixed occupancies in one building, hazardous use occupancies (there are several types), and so on. Sometimes, the owner will communicate the wrong use for the building. Design consultants may use the wrong occupancy or mixed occupancy classification or use a conservative occupancy classification. Many contractors are unaware of this initial determination for the building design. It is vitally important that this first step in the design process is communicated and established correctly, and a general contractor with this type of knowledge assists the design team.

Once the building occupancy has been determined the building type must be established, which will ultimately determine the final design and cost of the project. Most projects have many building types available to them, but others may only have the option of a single building type. Ultimately, the building type determines what “type” of building you can construct, the proximity to other buildings, how big the building will be, the height, number of stories and even the types of structural systems available to the design team. Besides ensuring which system will be the best fit for the owner’s use, having the ability and skill set to determine the correct building type for your client will greatly improve the accuracy of early budgets.

Be Ready for Conditions of Approval

When the owner submits a project for planning approval, the municipality, county, state and/or federal government may come back with conditions of approval that you must fulfill in order for the project to be built. Frequently, these stipulations are not predictable. On a 24-story condominium tower in Northern California, the city determined that one of the conditions of approval was the purchase of a specialized, high-rise fire truck, which the local fire department wanted. This condition of approval had nothing to do with the physical building project.

Some conditions of approval can be especially onerous. In a downtown City of Los Angeles project, one of the approval requirements was a designated 14-foot setback off the existing right of way intruding into the private property for street widening. Unfortunately, the project was already designed with the assumption that it had all the available land, without any setbacks.

How do you cope with these types of “gotchas?” You may have to meet with the correct city personnel and discuss any new codes, variances, ordinances or anticipated conditions of approval. You must approach this process with honest communication and in-depth research to fill as many of these “unknowns” as possible. Sometimes, you may advise your client to hire a planning and permit expediter that specializes with the municipality, county, state and/or federal government that the project is located in. When you cannot ascertain an answer from the city on conditions of approval, it’s important to be transparent with the owner so additional funds can be put in the pro forma or other ways to mitigate the potential risk can be found.

Anticipate Escalation

A robust and busy construction market creates cost inflation with the subcontractor community, who can pick and choose their projects based on higher fees, relationships with general contractors, labor availability and if they can negotiate the project in lieu of bidding for the work. 

Natural disasters (fires, hurricanes, etc.) will have an impact on commodities and labor as well. An even larger area of concern is the escalating costs of commodities: lumber, steel, metal studs, gypsum board, etc. While the consumer price index in the U.S. ranges annually from 1 to 2 percent for everyday consumer goods, in the robust construction market that inflation rate is 5 to 6 percent. That means a project from two years ago cost approximately 10 percent less than one today. On a $50 million project, that’s an additional $5 million in costs in 24 short months.

The ability to project an accurate budget in an escalating construction market requires communication and involvement of subcontractors and material suppliers at the earliest stage possible. It may mean negotiating or bidding out subcontractor trades earlier during the design process to purchase materials sooner and to secure a labor force to build the project. This has the positive impact of utilizing these subcontractors on a design assist basis to maintain costs as the project progresses. It also requires constant communication with the design team and owner as to cash flow requirements and early bid document deliverables.

How do you manage escalation during the bid process? One approach is for subcontractors to provide the name of their material suppliers and a quote of the price they will pay for the materials when they bid a job to a GC. The GC should utilize an accepted cost index for that material. When the subcontractor buys the material to install it in the field, the GC should re-visit the price index. If the price has gone up 1 to 2 percent since the project was awarded, the subcontractor may absorb the difference in cost. If the price goes up 5 to 6 percent, the subcontractor cannot take that type of margin hit. If the price has gone down, the owner can demand a credit. Contract language will have to be written to establish when the percentage increases and/or decreases merit a change. A process like this enables the GC to control the escalation and helps ensure there is no “blank check” with materials purchases.

 Effective, strong communication with the owner and design team, knowledge of the building codes and occupancy type, research into the conditions of approval, early award of subcontractors, awareness of current and future construction market trends, and the management of cost escalation with indexing will set you up for success as you put pen to paper to create your budget.

Steve Nelson is the senior vice president of estimating and preconstruction at C.W. Driver Companies, a premier builder serving California since 1919. Nelson is responsible for the estimating functions company-wide, which includes conceptual estimating, budgets, negotiated, hard bid, value engineering and design/build estimates. He can be reached at (626) 351-8800 or [email protected]


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