Tenant improvement (TI) projects are pretty common which means most real estate owners can manage them with their eyes closed. No sweat, right?
Well, yes and no.
Often when we run any process over and over we start paying less attention to the details and we’re less likely to look for opportunities to optimize our methods. While most tenant improvement projects don’t cost an enormous amount of money individually, they have a big impact in the aggregate, making it very important that you reflect on how your process can be improved.
So, here are nine tips that can help you better track and manage costs on your TI projects.
1. Base your line items on CSI categories
According to the Construction Specifications Institute (CSI), there are 16 cost divisions of construction, listing everything from concrete and masonry to mechanical and electrical (see the entire list here). Most real estate owners and managers use these cost categories when bidding because they drill down to specifics and allow everybody involved in the project to be on the same page. By using a consistent ‘language,’ you can track costs across comparable projects, quickly compare them and develop an internal pricing index to make faster and more accurate estimates on future projects.
2. Stay on top of assumptions, qualifications and exclusions
As an owner, you want to minimize as many of the assumptions and qualifications as you can. Clarify in your legal documents that the architectural drawings and specs take precedence over any assumptions and qualifications. You’ll also need to make sure you list all of the material found within the plans in the contract.
Additionally, notify your vendors in writing of every one of your exclusions—these could include building permit fees, overtime work, scaffolding, and prep work such as floor leveling. Get this list to the vendors before they submit their bids so everyone’s line items will be ready to level and you’ll reduce the number of change orders that you receive later.
3. CONSIDER SKIPPING SUBCONTRACTOR BONDING FOR SMALLER PROJECTS
Performance bonds protect owners in cases where a subcontractor does not complete their work. They average about 1.3% of trade cost, or $13,000 on a $1 million tenant improvement project. Instead, consider Subcontractor Default Insurance (SDI) which can be more flexible than bonding and may also cost less.
4. Make sure your procedures are integrated across all projects
Your cost tracking process should be well-defined, user-friendly and replicable across tenant improvement projects. Choose a procurement platform that acts as a system of official record and keeps all the information relevant, current and accessible in real-time. Or, at least make sure standardized cost tracking templates are accessible to all members of your team.
Costs accrue quickly, but they can take a long time to be processed. You need a consistent, reliable system that closely tracks committed, anticipated and pending costs, and lets you know exactly how much is left in your budget.
5. Secure a unit pricing commitment
Don’t review a bid from the top down. Instead, real estate experts recommend starting from the bottom up. That means pricing the material at unit level. Doing this will help you more accurately evaluate the total cost of each trade. When it comes to change orders—and they will definitely come!—ask your bidders to offer unit pricing with detailed options. Make your vendors commit to solid unit prices ahead of time. That will make it easier for you to make decisions when the time comes.
6. Continually track and be aware of your experience modification rate (EMR)
The EMR is a number based on your safety history, specifically on job site incidents. This number is given to contractors, owners, and corporations, and it’s what turns the heads of construction insurance underwriters. If yours is a large project, you can save money by knowing as much as you can about your EMR number, and the numbers of your bidders. Also vital: make sure the right party is responsible for holding the insurance. Find out more here.
7. GET A BREAKDOWN OF EACH BIDDER’S CONTINGENCY
Because your contractor’s contingency can be as high as 10% of trade costs, plus general conditions (and in some cases, bonding), you want to know the details. Ask to see the numbers, which should be broken down and itemized on bids. Then see what costs you can reduce by further shaping the scope of the project.
8. Don’t gloss over the general conditions
When it comes to general conditions, don’t generalize—get granular and drill down. See if you can find ways to save. General conditions can range from 6-8% of trade costs, including the contractor’s job-specific administrative costs, which is nothing to sneeze at. You might be able to negotiate these off your plate.
Additionally, general conditions often vary widely, depending on the size, complexity, and level of supervision of the project. Ask for a breakdown of general conditions costs to get a window into how different bidders plan to administer your job. You may not need the project manager and full-time supervisor.
9. Dig deeper into building conditions, rules and regulations
• Conduct a site survey. Along with your environmental engineer, determine whether any conditions require remediation in the space -- asbestos for instance.
• Know your property’s conditions, rules and regulations ahead of time. If you don’t know if your building requires union labor for some or all trades, your cost is going to change, as well as your ability to track it. Get very familiar with what your property is contracted to require.
• Share the property’s rules and regulations in your RFP/bid package. Let bidders know about special conditions ahead of time so that they can make the proper allowances and adjustments, and save everybody time and money. For example, share whether work needs to be completed during or after business hours.