By Carl Haines
Published in the August 2005 issue of Today’s Facility Manager
Over the past two years, much of the building industry has been impacted by an unprecedented increase in the cost of construction. This increase has facility managers and real estate developers scrambling for solutions in order to continue with planned and future projects, move forward with projects already slated to begin construction, and compile budgets for maintaining existing properties.
Historically, construction costs have increased at a steady rate of 2% to 4% per year, a pace the industry has relied on to project construction costs accurately. However, the past two years have seen costs increase significantly over this average annual rate of increase. These spikes are attributed to a variety of factors, including the large amount of development in China (thus leading to a worldwide steel shortage), the widespread hurricane damage and materials required for rebuilding in Florida, California’s residential boom, and rising crude oil prices that have led to much higher manufacturing costs.
Rising labor costs also have severely impacted the market, which have a negative impact on everyone involved in a construction project. Facility managers have especially felt the pinch, as they struggle to maintain budgets established during previous calendar years.
Faced with a volatile market, facility managers can involve their general contractors as early as possible in order to identify and mitigate potential cost overruns before they happen. Taking the following tangible steps can help to ensure accurate budget projections and identify potential cost overruns.
Contractor Selection. Selecting the right contractor entails obtaining recommendations, developing a short list of candidates, reviewing qualifications, checking references, conducting interviews, and making a final selection based on a competitive fee and the personal interaction between the facility manager and that contractor. Never before has the relationship between a facility manager and contractor been more crucial. A good team can mean the difference between viable budgeting and exceeding budget cost projections.
Working with a firm that subcontracts its specialty work can help maximize cost efficiency. On the other hand, a self performing contractor does not put out for competitive bids for each scope of work, so getting the best possible price can be more difficult to identify or negotiate.
The most cost efficient time to hire a contractor is when the project is still in its early design stage. It is more economical to make changes in preliminary drawings than it is to modify completed construction documents. Further, it’s important to have someone directly involved in construction who can provide counsel on availability and cost of building materials and suppliers. Ideally, the general contractor should be able to provide valuable alternatives that will assist in the decision making phase for the final project plan.
Budget. Facility managers want to be smart about how they approach any project and budget projection. It is prudent to develop project budgets as early as possible in order to ensure cost estimates will accurately reflect the current and projected market. Budgets should be updated on a regular basis, in order to identify and isolate any areas where costs could increase.
The larger and more extensive the project or budget, the more proactive the facility management team needs to be. This particularly applies to projects with a longer schedule and budgets extending into the next calendar year.
Value Engineering. Early in the budget planning process, the facility manager’s general contractor should proactively offer value engineering suggestions in order to assist in attaining budget goals and saving on project costs while still maintaining the budget intent. With value engineering, virtually all components of a budget—construction materials, techniques, budget constraints, and schedules—are analyzed in order to find cost-effective alternatives that bring value to the overall process.
Contractor/Subcontractor Relationship. The relationship between the general contractor and its subcontractor is a vital part of maintaining a successful budget and construction project. Together, the right team can ensure quality while remaining cost-effective. Subcontractors will perform better and provide lower pricing for a general contractor they have a strong relationship with and whom they know has secured the project. Considering all the work that might be required for even a small project, using general contractors who maintain a close relationship with their subcontractors is ideal.
Facility Manager/Contractor Team Relationship. Establishing a construction team familiar with the inherent processes of working in a particular building is a huge benefit for any facility manager. Maintaining internal environmental systems, working around specific occupants, addressing access and egress issues, selecting specific building finishes, and determining various material requirements all come into play on a daily basis. Having the right construction team dedicated to a building not only helps mitigate budget impact, it also yields the benefit of having all the intangibles covered through the construction team’s ownership of its ongoing work in that building.
Today’s fluctuating construction costs require smart, timely information. There also needs to be a commitment on the part of every team member to work in cooperation with one another for the benefit of the whole.
Together, the team members must think outside the box to find the most cost-effective ways to meet project budgets and goals. Following the strategies above, a facility manager can take the necessary steps to safeguard against today’s volatile marketplace.
Haines is senior project manager with Johnson & Jennings General Contracting, a San Diego, CA-based firm specializing in corporate, retail, health care, and industrial facility improvements.