AMA: Thoughts on Design, GCs & Draw Schedules (a quick one)
Main topic: Ask me anything!
As promised, this week’s newsletter was based on four of Twitter’s questions. Many of the topics that came up were either already in the pipeline, or I added them as main topics for future newsletters.
...and with that, let's get into it...
Things to consider during the design phase
We don’t often talk about the importance of running a tight design process because, compared to construction, the cost and schedule risk is lower. However, some of the most significant project errors can only be averted during the design phase.
The design portion of a project can be overwhelming, with seemingly endless and fun design possibilities. This can be a major challenge for project owners new to the process.
To keep it simple, here are some general principles that can help you lead a successful design process:
Clear direction based on desirability and business plan. Make sure to start with a clear program. How large should the building be? How big is the amenity space? What unit mix do you need to meet your proforma? How much parking do you need?
There will likely be some give and take between the business plan and code requirements.
Neglecting to thoroughly review the programming is one of the most common mistakes I see on projects—often when it is too late to change the design without considerable cost and delay. I have worked on a couple of projects where the entire building had to be redesigned because the original program did not meet the proforma.Consider the budget & schedule. A design schedule should be part of the agreement with the project architect.
Holding weekly meetings, where the team keeps track of the schedule, is key. The meetings won’t be the same length every week, but keeping the recurring time will set a rhythm for the team and establish the expectation of weekly progress.
Holding the team to the schedule is the responsibility of the owner. If a design team is constantly missing deadlines, take a step back to ensure you are not the bottleneck, then address the concerns with the team. Issuing payment based on progress is the industry standard and the leverage you have as a project owner, so don’t be shy to discuss invoice amounts with your consultants if their work product is not keeping up with the schedule.Keep the goal in mind. Shiny object syndrome is the scariest trap! Through the design process, there will always be a ‘cool idea’ that will come up.
Deciding to design a rooftop pool in a 2-star hotel in a cold climate is not likely to be that cool. Especially when the first round of pricing comes back and the realization that this is not something within the project budget sinks in. It’s extra rough when the team realizes that it will take weeks to redesign the top of the building to put that genie back in the box.
This kind of ‘exercise’ is only ok on a limited basis when there is a likely upside to adding a ‘cool’ factor to a project. However, when something ‘cool’ is integral to the project’s success, that should be part of the initial programming.
What makes a good GC.
At the end of the day, when one party is paying for a service, the party providing that service is in the ‘service’ business. That applies to general contractors as much as it does to someone waiting tables at a restaurant. Using this perspective to vet the team you build for a development project can considerably impact the job’s success. This is particularly powerful when you’re interviewing GCs.
There are some specific things that I look for when selecting a GC:
Financially stability. Are they ‘bondable’ and willing to share their financials?
A clear team structure. Who is doing what, and what are their qualifications?
Good field supervision. There is nothing like a good super with existing relationships with local trades.
A project executive who knows all the details. Ask them how involved they typically get.
Aside from understanding how they run their day-to-day, I also pay close attention to the quality of the service they provide by looking at:
How they communicate. Are they professional, clear, and concise?
How prompt they are in responding. Do they return your calls and emails within a reasonable timeframe?
How knowledgeable they are on local trades. Have they worked with the local subs before?
How closely they listen to and follow direction.
Using these principles as a checklist can help take the emotion out of the selection process. Tracking response times is a great way to compare teams apples to apples. Often, a charismatic GC will get the project because they were able to build social rapport with the project owner, much to their dismay months later when it turns out that what seemed like a somewhat slow response time was indicative of their work ethic all along.
Once on a project, the marks of a good GC are:
Responsive leadership. Are you able to escalate and resolve an issue promptly?
Good subcontract management. Do they know what their subcontracts say, and are they executed per the prime agreement?
Strong accounting. Are their requests for payment issued periodically, timely, and mostly error-free?
Lighting fast response to site challenges. When unable to foresee, do they solve problems quicker than reasonably promptly?
Up-to-date scheduling and coordination. Are two-week lookaheads consistently issued and reviewed? Do they bring up questions to the design team promptly? Is their procurement in tune with the field schedule?
Pros & cons of GC and development firm in one.
Should I ‘vertically integrate’ a GC arm into my development shop? I get this question all the time. Usually, this is something newer developers toy with. Typically, after they get a couple of projects under their belt, they stop considering the idea.
My anecdata on the matter:
I only know of two developers who successfully GC their own projects.
I have heard about a handful of developers that tried and failed.
Curiously, I know many GCs who have decided to try their hand at development, most of whom have completed profitable projects. (How great of an investment these were to LPs is less clear.)
I have a theory of why this is the case.
The skills needed to be a successful general contractor transfer more easily to development than the other way around. Additionally, already-successful GC shops have the existing team structure required to perform as a GC on a project. Trying to do all the ‘things’ developers need to do while figuring out how to be a general contractor is madness.
Aside from the internal implications of being an established GC shop, the external expectations from lenders and equity partners that team up with a GC-turned-developer are different. Assuming the GC is well-established, the capital partners already know the GC can perform. Whereas when it is a developer-turned-GC, they have no track record to show for it. Lenders and equity partners recognize this difference in risk, too.
Let’s look at ‘the pros and cons.’
Pros
Efficiency in the process
Cost & schedule savings
Better quality control
Cons
Required expertise. Managing a large project as a general contractor requires skill and experience
Additional overhead. Construction projects require a lot more paperwork than most people realize. You’ll need site supervision, accounting, and clerical staff to run a project. Each of those categories can require multiple people depending on the size of the job. If you’re planning a big project (where the payoff to self-GC is most significant), you will need many employees to manage the work (unless you hire an external construction manager).
Additional risk. As the GC, you will execute every trade contract. More contracts mean more risk.
Potential conflicts of interest. The GC fee and general conditions are typically tied to project cost. As costs increase, so does the GC’s fee. This de-risks the project for the developer/GC since these fees can presumably cover their operational expenses and some of their downside, creating misalignment between the developer/GC and their investors.
Increased scrutiny from debt and equity partners (rightfully so, see point above)
To do this successfully, you need expertise, strong legacy capital relationships that are ok with the structure, a robust pipeline, and sufficient tolerance for the increased risk (via being well-capitalized or extraordinarily insured).
One way to mitigate the risks of assembling expertise and handling additional overhead is to outsource the construction management to a third-party CM.
This is how I have seen large shops tackle some of the negative aspects of being an owner/GC with the caveat that those developers had clear strategies to mitigate all the risks I enumerated above.
In short, this can be a great strategy, but it requires a lot of preparation and experience, and it is not appropriate for most development shops. Also, there are better structures to present to investors, given the potential for conflicts of interest of a developer/GC.
What are draw schedules & how do they work in the context of a project’s disbursements?
A ‘draw’ is the act of pulling funds from an approved loan. In the context of a construction loan, a ‘draw request’ is the process project owners use to ask their construction lender to release funding. There are some specific industry-standard requirements around a ‘draw request’ that cover their frequency, format, and conditions. While the terms vary depending on the financial institution, they are generally similar.
For example, draw requests can only be made monthly, most of the time, they can only be made for work already completed, and they need to be formatted according to the bank’s requirements. Initial mobilizations and stored materials can be included in draw requests, but they must follow additional requirements like proof of material purchase and delivery and storage insurance.
Typically, a lender will require a draw schedule as part of the loan approval process. Most of the time, the GC/CM will provide this to match their construction schedule. Draw schedules are essentially cash flow projections. This is useful to the lender and essential data for project owners to track project progress.
All project owners should review the draw schedule vs. the project schedule to ensure they match before submitting either document to the lender. Additionally, project owners should use the cash flow projection as part of their internal construction project management process.
Following the project cash flow is the quickest way to determine whether a project is on track in terms of schedule and budget. It’s essential to look at actuals vs. the projection, not only when actuals exceed the projection. When actuals are considerably lower than the projection, it often signals a delay in the execution of trade contracts or in the purchase of materials, which can indicate an overall schedule delay. This is how you catch an upcoming delay before it occurs, sometimes before it is inevitable.
When actuals exceed a projection, a budget increase is indicated unless the project end date is updated to an earlier date.
Ultimately, draw schedules are one of my favorite project management tools. Maintaining an updated accounting record of the project that can be mapped against the projected cash flow is the best way to ensure the project is on track.
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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.
How to scope out a contract
How hard is it to convert from office to resi ?
How to create an Anticipated Cost Report
Have a specific subject you want to see us tackle? Drop us a note!
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