Real estate owners and developers know the difference between success and failure often depends on how well the costs are managed. For example, with construction costs in a typical deal accounting for 50% of the sellout value, every dollar in construction cost overruns degrades the bottom line by fifty cents. More often than not, the erosion of the bottom line can be attributed to a systemic failure to carefully manage the design and construction process, a lack of a precise scope of work generated at the outset, and/or a false expectation that a Guaranteed Maximum Price contract (GMP) was going to protect the owner from pricing risk.
The process of deriving a thorough scope of work, establishing a reliable construction budget, negotiating a construction contract and maintaining the integrity of the budget from inception to execution and through construction completion can be the single most important value-add an operating partner can make to the ownership entity.
That is why the key to successful cost control starts by joint venturing with an experienced operating partner possessing a track record of success and with the requisite skill set, including:
- Defining a complete and thorough scope of work
- Establishing budgets
- Implementing a cost-containment strategy
- Working with governmental authorities to secure approvals and entitlements
- Choosing the right design team and consultants based on the asset class
- Challenging the design team to increase efficiencies, floor plan flexibilities and deliver a fully delineated set of plans and specifications
- Value engineering
- A methodical bidding process that achieves the highest quality at the lowest price while mitigating the owner’s risk of cost overruns
- Executing and managing the construction phase
- Micromanaging costs and meeting or exceeding budgetary expectations of the deal.
The Operating Partner must be experienced, nimble, resourceful and able to micromanage the design and construction process from project inception to completion. The OP should be willing to take risk and commit equity to the deal.
If the need is for a “boots on the ground” OP that advocates for the owner, thrives on doing the “heavy lifting” and is willing to commit equity to the deal, consider BDC as your joint venture partner for your next development project.