CREJ - Property Management Quarterly - May 2015
As most in commercial real estate know, two things are happening in the construction world – construction costs are increasing and labor availability is decreasing. The two are definitely related. As with any driver of the market economy, the laws of supply and demand apply to commercial construction. And two forces are in play that affect the industry. The first is the overall construction cost index for Denver, which increased 1 percent in fourth-quarter 2014, finishing approximately 4 percent higher year over year, according to the Mortenson Construction Q4 2014 Cost Index. Second, local construction employment increased by double-digit percentage points for seven consecutive quarters, finishing at 15 percent in fourth-quarter 2014, according to the Mortenson report. This trend is expected to continue through 2015. Just a few years ago, when there was not as much work and contractors were not as busy, they would price things low to keep their doors open or to retain employees. Times have changed. Because of pent-up demand, there are labor shortages in many trades, including management and supervision. Construction labor is the primary culprit for rising costs. Today, many area contractors have to turn work down because they are too busy or, worse yet, many contractors are pricing work high and hoping not to get it. Material costs also are creeping up, but not nearly at the same rate as labor. Many material costs tied to petroleum, such as roofing or carpet, have remained relatively stable or experienced smaller increases. Other materials, such as copper, have actually dropped slightly in price. Overall, however, material costs continue to rise. As managers of tenant finish projects, our job is to make sure that we are getting the best value for our clients. Sometimes that may mean negotiating a fair deal with one general contractor and having him bid it to three subcontractors. Other times it may mean getting three bids from general contractors. Using either approach can lead to a successful project. Following are some other takeaways that can lead to better pricing on tenant finish projects. • Use design firms that have appropriate experience. Using an architectural firm with experience in tenant finish projects can make the project go smoother, take less time and ultimately cost less. • Have the finishes selected prior to bidding. Not having finishes selected at the time of bid can add to the cost and schedule of a project. When finishes are selected prior to bidding, you can do a better job of locking in the price. • Minimize alternates in the bidding phase. While alternates are useful for evaluating cost options, try to do most of the cost analysis during the budgeting phases. Having too many alternates can be confusing, so reducing the alternates should be a goal. • Create a well organized and thought out request for proposal. Make sure the general contractor has all of the information he needs to put together a fair price. This includes insurance requirements, building rules and regulations, and a copy of the proposed contract format that will ensure that the contractor will not incur any surprises when awarded the project. • Hold a job walk. Make the space available for all of the general contractors and subcontractors to see the space in its existing condition prior to submitting a proposal. If the space is occupied, make arrangements with the occupant to visit the site. • Keep contractors informed of the status of a project. There is nothing worse than dropping plans on a general contractor’s desk unannounced on a Friday afternoon. From the general contractor’s point of view, the job needs to be evaluated, set up in the system and plans distributed to the subcontractors, so the better informed and the more lead time provided to the general contractors, the better the pricing. • Give general contractors adequate time to develop a proposal. A few extra days to obtain competitive pricing from the subcontractors may make a big difference in the pricing they acquire. General contractors often need to forage the land to find subcontractors with resources to bid and manage the project. Everyone wants pricing quickly; however, giving the general contractor six days instead of four days to bid often will result in better pricing.
• Be open to competitive bidding. Don’t limit the base of subcontractors from which the general contractor can choose. While there may be required subcontractors like fire alarm, fire sprinkler or controls contractors, other trades may qualify. • Plan for success. Time is money and the faster the job can be built, the less it should cost. The old adage of “measure twice, cut once” can be applied to managing tenant finish projects. A strong project plan requires fewer change orders. A few days spent planning at the front end will lead to a better, faster and less expensive project. Hopefully by employing some of these ideas, the time of pursuing a bid for a new project is more manageable, disruptions are minimized from current business obligations, the project runs smoother and the results are better.