How do the big guys do it?
Main topic: How do the country's big developers manage the construction process?
While every company has a unique structure, most large Real Estate Development companies tend to do some core things in similar ways.
Generally, they:
1. Create a set of standards for the work.
Most developers have modeling/deal assessment standards. The big guys have standards for a lot more than that! They typically have a set of standards for the aesthetic and performance aspects of their builds. These standards are widely referenced during the design and construction phases. Often, the standards are written down in a 'live' document that changes as technologies evolve and lessons are learned.
How can I apply this to my projects? Start out documenting the process, including material specs and vendors that have worked well for you in the past. Make a categorized checklist if is easier to track standard implementation. After you have a simple working document, make sure to kick off the next project by sharing that document with the project team. Then, take some time at the end of each project to document lessons learned and update as necessary.
2. Don't sign other people's contracts.
The idea of standards applies to everything, including contracts. For large, complicated projects, contracts tend to be heavily negotiated, so they end up being more 'bespoke' in the end. This, however, doesn't mean that a good starting point is not required. Typically, developers that use outside capital to fund deals, have very specific investor and lender-required construction terms they need to comply with. It is easier to ensure compliance when these terms are in a contract template created directly with outside construction counsel. Once the developer has negotiated several times from a standard staring point, they are more familiar with the required terms and able to support a faster contract negotiation.
How 'big' does my company have to be for this to yield a benefit? If you are expecting to have more than 2-3 projects in construction at the same time and particularly if they are not in the same jurisdiction, your team can benefit from setting up a contract standard. The process of creating these templates is very straightforward (and not as expensive as you think) when done with counsel that specializes in construction. It is always best to have more than one template handy, depending on the work your team typically does. For example: a standard stipulated sum contract that can be used with a general contractor vs. a short form contract that can be used when you're hiring a trade directly.
3. Have direct deals with vendors, contractors and consultants.
Most successful developers see the building process as a team effort, so they invest in creating strong relationships with vendors, contractors and consultants. These relationships are called upon during all stages of a project and as they grow, so does the quality of the work the team accomplishes together. Some of these strategies (there are many) include tiered incentive programs with vendors, where the project owner receives material or cash rebates based on total spend. Another way this works with contractors and consultants is when they are hired for more than one project at a time-- often, this can lead to some efficiency in the work and the contractor/consultant is able to pass the savings on to the owner.
How can I apply this idea if I don't have a lot of work volume? A couple of different ways. 1) Partner with consultants or contractors who already have preferential terms with vendors and ask about how any of those savings could be passed on to you. 2) Begin to invest in the (good) relationships you already have. Have a great contractor or architect? Talk to them about more than just what you're working on now and include them in the early stages of your next project.
4. Keep track of costs internally.
Big development shops don't rely solely on the construction manager's books and they additionally (sometimes within the same document) keep an eye on all pre-construction costs, including project management and design. Most (if not all) of the big guys keep an "anticipated cost report." This document is exactly what it sounds like: a lists of expected project costs tracked vs. the initial contracts signed. This not only helps the developer ensure they won't bust the budget, but in most large projects, the banks require some variation of this document updated with a certain frequency.
What if my projects are really simple? Then keeping a tally of expenses vs. contracts vs. budget should be very easy! The significant items to track are the changes in contract (either expected or not) and the total percent of the contract completed, which should be verified vs. the work in place. The main takeaway from this point is that as a sponsor, you should have a very good handle on the project costs by keeping your own accounting. It doesn't have to be complex as long as you own the data.
5. Hire a team.
Most large developers recognize that specific skills are required to manage design and construction teams. For this reason, they have either an in-house team or a relationship with an owner's representative that specializes in design/construction. These industry professionals are typically experienced project managers with extensive industry relationships and experience in design and/or construction. In some instances, generally in large, complex projects, lenders and investors require the developer to have an expert manage the construction process.
How can I determine whether or not I need to hire someone? If you're starting a project and you are struggling to figure out basic things like how to vet a contractor bid or how to develop a reasonable schedule, you should probably reach out for help. This doesn't meant you need to hire someone full time, but some expert guidance may go a long way. In the meantime, rely on the design team for technical things you do not understand, and don't be shy to ask the bidding contractors any questions that come up -- particularly if you see major discrepancies in bids. You may also want an extra set of hands if the project accounting is too much for your existing team to handle. This is particularly important if you have outside investors.
6. Charge for it.
Whether they have an in-house team or outsource construction project management, developers always charge a percentage of the hard costs as a construction management fee. This is typically outlined in the proforma offering and it is either categorized under the total construction costs or as a separate line, depending on limited partner and lender agreements. Regardless of how it is structured in the deal, it is always accounted for. The fee is customarily 3-5% of the total construction costs depending on the project size and if the project requires procurement services (like hotels or furnished apartments), then an additional percentage for purchasing and logistics is assessed.
How does this apply to my small projects, especially if I don't need to hire someone? Managing construction takes time. Someone's time-- so whether you're working on single-family projects or larger developments/improvements, make sure to account for the time it will take both in terms of cost and schedule. Also, as with all disciplines, someone with less experience will likely take a bit more time in moving a project along. Account for your level of experience as you develop a project's schedule and make sure that management time is paid for.
This list of 6 items is obviously not inclusive of all (or even the most important) ways in which real estate developers can optimize their construction management process. It is also important to note that the descriptions are meant to be brief, so in some instances, oversimplify the more complex principles, like the creation and upkeep of anticipated cost reports.
Despite the brevity of the descriptions, the hope is that these provide some insight into "how the big guys do it" and how you can optimize your processes too! Performing a quick audit of your team's capabilities using this list can be a helpful exercise to better understand and improve the way your team works.
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.
What not to DIY
Construction contract terms everyone should know
How to scope out a contract
Have a specific subject you want to see us tackle? Drop us a note!
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