So. Much. Pain.
Main topic: Typical development pain points & (hopefully) how to avoid them.
I don’t want my clients to think this newsletter is specifically about any of them, but these issues are so common that most projects experience them from time to time. Despite our expertise at MADDPROJECT, we still must work through some of these things now and then.
The main point of this newsletter is to highlight these common pain points so you can foresee and, ideally, limit their impact on your projects.
Seeing projects through difficult times is the mark of a strong developer and acknowledging a project’s pain points is the best way to move forward.
1. The 'ebbs & flows'. Projects usually go through cycles. Some months are busy; some are pretty boring. While everyone talks about the busy months as the moments that define a project, it's the boring months that can hurt a job. These times include extended permit approvals, lags due to financing delays, pricing exercises, negotiation with a general contractor, and even those moments during construction when everything is going smoothly.
The lack of activity requiring immediate action can result in a design/construction team that gets a little sleepy and stops communicating frequently. Next thing you know, you haven't touched base with the design team for the last six weeks, and you lost the thread of those pending items that were not an emergency back then but now are.
The best way to counteract this is to keep your regular meeting time on everyone's schedule and cancel meetings as needed. The point is not to have meetings every week where half the team is wasting their time but to keep a constant reminder to check-in. The call can be canceled a few days in advance if no call is needed. If a call is necessary, a reminder should be sent to the required team members.
Few people understand how valuable this is. Not only do team members feel like the owner respects their time by not requiring unnecessary meetings, but they also realize they have an open line of communication via a standing touch-point they can choose to exercise once a week. Ultimately, ongoing communication averts most issues.
2. Contract Negotiations. This is an essential aspect of managing large commercial projects and one people quickly give up on. Often, contract details are overlooked, and developers end up in less-than-ideal situations. You don't want to know how I know.
I always advise that you should refrain from signing other people's contracts. In most instances, commercial projects will require agreements with many different parties. This means you'll want to have contract templates on hand to cover at least the cases in which you'll be negotiating repetitive terms under similar contracts-- like for (non-architectural) professional consultants. Having a template means you're not only ensuring your preferred terms are in the agreement, but you'll also save a lot of billable legal hours from having to negotiate other people's terms.
At a minimum, your contracts need at least these two things: to be unambiguous and for your team to know what the major terms say. You should be able to answer questions like: what is the GC fee? Can you terminate the contract for convenience? What markup is the contractor allowed to charge on change orders?
To ensure your contracts are favorable, you'll need construction counsel (and no, Aunt Marie, who did your neighbor’s divorce, is probably not an expert on construction contracts). There is no substitute for construction law expertise, and you'll be surprised how ‘not incredibly expensive’ contract templates can be.
There are a couple of options to manage contracts successfully. Your team and company structure may lend themselves to one strategy vs. another, so there is no 'one size fits all.’
One option is to have a designated team member create contract abstracts based on a template to distill the important terms into a readily accessible document. Another option is to let counsel manage the whole process and advise whenever a matter related to a salient contract term arises.
Finally, you can have a team member tasked with managing design and construction. This person would also carry the responsibility of knowing what the contracts say. This method is often the most efficient as there is no lag between contract knowledge and project management.
Foreseeing contract drafting and negotiation as a potential pain point is something every developer can be diligent about. Any of these contract management methods can be an adequate solution to ensuring their projects stay on track.
3. Contract Revisions (change orders). Change orders should not be a surprise to anyone on a project. They are also not the way a contractor profits.
If you're constantly getting hit with change orders that you cannot foresee, resulting in a situation where the project is over budget, you may want to reassess how you're managing the project. Not knowing when a change order will be issued indicates a lack of familiarity with the project and potentially a communication breakdown.
A change order is a contract amendment that changes the contract scope, resulting in an updated contract amount.
Change order terms include the conditions under which a contract amendment is warranted, the timeline, and the markup over cost allowed. Therefore, change order term sections are some of the most important paragraphs of a contract. These sections should be clearly discussed during contract negotiations so that all parties can be familiar with their contractual obligations.
After finalizing agreement terms, it is up to the parties to manage and enforce the contract accordingly.
Often, project owners begrudgingly agree to change orders without understanding them. This creates two problems: a growing ill will on the owner's part and the obvious budget bust from approving anything that passes through their desk.
You must assess and understand three things before approving a change order.
The first is the contractual hurdle: is this a change order? Is this 'additional work' required because the CM/GC did not coordinate properly? Is it needed because the sub and GC/CM missed something only listed in the spec and not in the drawings? If either of these conditions is true, it is likely not a change order per most contracts. This is what the contingency is for.
The detailed quantification of the work. What are the material vs. labor costs, how will the change affect the schedule, and is there a cost impact tied to a schedule change? If this is not clearly defined as required by the contract, the CO should only be approved once it is.
It doesn't hurt to have clarity on what work and materials will be required, and the CM should be able to walk you through it. Finally, I recommend spot-checking takeoffs for material quantities, especially if the rates look off somehow.
Suppose proceeding with the work needs to be immediate to preserve the schedule. In that case, there's nothing wrong with agreeing to a 'lump sum' or a 'time and materials' structure for the change order work, assuming the 'lump sum' number is reasonable and that you can closely watch the progress under the 'T&M' option.The markup: what fee is the contractor charging, and is it per contract? I am always surprised to see approved change orders with incorrect markups! This is a contract basic that is typically clearly defined. Usually, the work will be marked up under one of two categories: work performed by a sub or work that the GC self-performs. These markups are very straightforward, yet I have never worked on a project where I didn't catch an incorrectly marked-up CO.
To sum it up: change orders are contractual documents. They are an extension of the original agreement and should be treated as such. Signing documents you don't understand is never good and enforcing contract terms is part of your responsibility as a steward of your investors' money.
When project owners carefully and fairly review change orders, they set clear expectations of the CO standard. This decreases the number of unjustified COs issued and ultimately helps grow goodwill between all parties (including subcontractors).
4. Construction Accounting. Every developer should keep internal accounting on every project. Relying on the GC/CM's accounting as the only way to keep track of a project is not enough.
If you're working on a commercial project, especially using other people’s money, you need to keep accounting for the project in a document that tracks progress vs. the contract budget and schedule.
This industry-standard document, known as an 'Anticipated Cost Report,' should be used as a project management tool. Up-to-date accounting provides key data when making project decisions like approving change orders or pay applications. Investors and lenders will likely want to see the ACR as a condition of funding project progress.
At a minimum, all owners of construction projects should keep basic accounting via an invoice tracking log that includes their paid/approved status.
In addition to keeping track of invoices and contract values, two simple but effective methods can help ensure a project’s accounting is reflective of project progress:
Approving pay applications only when the work is completed as billed. This means that whoever approves payment applications has certainty regarding the project’s progress either through direct observation of the field or reliable information from someone tasked with it (like a project manager or owner's rep).
Requiring that corresponding lien waivers be provided along with payment applications. Ensuring that lien waivers are issued throughout the project means you’ll have a notarized agreement with the contractor on payment progress as the job moves forward and that you won’t have to scramble at the end of the project to collect waivers.
Lenders typically require unconditional waivers at the end of a job to close out a construction loan. They may also require progress waivers to release loan draws through construction. Additionally, lenders often require subcontractor lien waivers, which can be virtually impossible to track down if they are not collected as progress payments are issued.
Ultimately, project accounting is a major pain point for many development shops-- especially the smaller ones. Keeping accounting during a development project can be confusing since the level of detail necessary differs from one project to another. It's also tough to build an anticipated cost report without experience.
Typically, once the accounting standards are established, recording all accounting details can get very tedious and labor-intensive for a small team, especially when managing more than one project. This can result in accounting that is not up to date, which then leads to project management issues because real-time data is not available.
The best way to ensure accounting doesn't become a significant project issue requires two simple yet difficult tasks: setting up a system to keep internal accounting and then making sure the system is updated regularly (weekly is best).
5. Goals & Strategy. This one is tough to define precisely, but it includes strategy items I often see developers struggle with. Although these items span different project moments, they can all be generalized under this umbrella.
I often talk to project owners about "who they want to be." This should be an ongoing conversation at all shops since development has to constantly respond to its changing environment. It is often a tricky subject for many companies, particularly those just getting started, because it requires everyone to take a step back and answer questions that can sometimes lean towards the 'existential' and don't seem like a priority amid the never-ending to-do list of development.
This one seems a little fuzzy and less significant; however, it is one of the biggest struggles for developers, mainly because it cannot be quantified on a spreadsheet.
When you clearly define what kind of building you want to build, decisions regarding what kind of design team you need, what type of construction you should pursue, and what kind of funding you seek will become evident.
This also helps people see the limits of their competence more quickly and allows them to staff their teams intentionally to meet specific goals.
One of the most common situations I see occur on projects happens right at the start when the developer has gained control of the land and has generally identified the asset class they want to build, but not much more. Typically, the next step is to hire an architect. However, that process can be extra confusing since the specifics that can help narrow down a design team have yet to be determined, and as a result (sometimes), the wrong team is brought on board. This can cost the project a lot of time and money.
6. Closeout. In development, we often hear:
"The last 10% of a project always seems to be the same amount of work as the first 90%."
This experience is indicative of a prevalent miscalculation. Just because the physical work is nearly done, it doesn’t mean the administrative aspects are finalized. Lenders and municipalities typically have specific requirements before considering a construction project finished.
The beginning of the end starts with the punch list. Punch list tasks must be completed before the architect signs certificates of (substantial or final) completion, depending on the contract language.
The key to completing punch list items is maintaining momentum throughout the process via constant communication. Not providing timely answers during construction can result in delays; this is extra important during the last few months of a project, including the punch list process.
Permit and contract closeout both hinge on punch list completion. During this process, the CM/GC will also compile and assemble a project manual with all the instructions and warranties for the job. Many subcontractors will only finalize warranties as a condition of final payment on their contracts. So all these items are connected and require significant time and coordination (this is often where the miscalculation happens).
The best way to counteract delays during closeout is to tighten up response times as the work begins to slow down in anticipation of completion. Sometimes, towards the end of a job, response times slow down a little bit due to project fatigue. While this is easier said than done, a good project manager should be able to keep the team moving in the right direction and with the required momentum.
This list does not include all possible development pain points; however, these are the ones I’ve seen most frequently. It is also important to note that the descriptions are meant to be brief, so I sometimes oversimplify more complex principles. Despite the brevity of the descriptions, I hope they provide some insight into common pain points and how to foresee and counteract them.
Not sure where to start and think we can help?
Main topic ideas for future newsletters.
Between conversations with clients, industry professionals (and RE Twitter) these are some subjects we will be diving deeper into in future newsletters.
Deconstructing the GMP
What is Design-Build & when is it appropriate?
How to scope out a contract
Have a specific subject you want to see us tackle? Drop us a note!
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Project Audit
Contract Administration Oversight
Procurement management
For more details, check out our site!
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