The process of a build-out, whether enhancing an office environment, developing a new retail location or upgrading an existing one, can often result in delays and unanticipated expenses. However, defining a project’s priorities and early planning can help mitigate these issues.
During September’s 2015 Real Leasing Conference in Toronto, industry members discussed such risks related to the design, cost and management of commercial buildouts and leasehold improvements, while offering tips on proper budgeting.
“People think projects fail at the end, but they actually fail at the beginning,” noted Gary Stanhope, vice-president of MHPM Project Managers Inc. “But when you can plan it right from the beginning, the project should go smoothly.”
Establishing a reasonable and robust budget from the outset and making sure that a design is working in the overall budget are important steps. Since one of the biggest drivers of cost is trying to cram things in a short period of time, a reasonable schedule should be identified.
Planning, communication and leadership
Michael Harvey, managing director of MJH Realty Advisors Inc., noted that three main elements for determining a successful build-out are time, cost and the quality of the proposed project, which should all be balanced together and considered from the start. Meanwhile, defining and collaborating on a project’s priorities is key, along with communication.
“There’s no doubt projects will fail almost immediately if they don’t have a collaborative effort between what the owner or client is anticipating to be the end result, what your designers and engineers are going to proceed with in the head design and eventually, what your contractors are going to build,” noted Stanhope. “The leader of the project should own the collaboration and take a lead role.”
Yet, he also says communication and leadership are usually the main reasons projects fail because there is an “undefined authority who can give direction to those who need to keep the project moving.”
As the leaders of a project assume capability, such capability should be assessed internally and the authority must be knowledgeable and given proper time to deliver the project.
Upfront planning and adhering to a design in the early planning process is key. As changes usually impede a contractor’s work or are damaging to the overall schedule.
Jon Taylor, senior partner and co-owner at Govan Brown & Associates Ltd., pointed out some hard construction cost estimates in the Greater Toronto Area (GTA). For open office concepts with systems furniture, like the typical bank, costs can range from $70 to $80 per square foot.
Yet, in the suburbs, his company is seeing a reduction of about $10 per square foot for a number of reasons. Such reasons include logistics, tenant design standards, less union arrangements and transportation of materials being easier in lower buildings as opposed to 30-storey towers.
Professional services, including accounting and law firms, are running from $100 to $120 per square foot for a build-out, while hospitality, such as high-end restaurants, are seeing $500 per square foot, and stores like Nordstrom and Holt Renfrew cost $200 to $250 per square foot to build.
The typical construction costs of an office can vary, but Taylor says for a typical $80 to $90 square foot office in downtown Toronto, technical trades like HVAC, plumbing and electrical are totalling about 25 per cent of an overall project’s cost, with personnel at 10 per cent, millworks, such as doors and cabinetry, at about 15 per cent and flooring at 22 per cent
Besides understanding these general costs, project teams should be able to control them.
“Once we get to a building, we’re just spending,” noted Taylor. “But before we get to a site, we can work with designers, consultants and project managers to come up with the optimum way to build in terms of value, engineering and constructability.”
“In construction everything costs more than the initial budget,” added Gerard McCabe, managing director at Turner & Townsend (Canada). “Delivering the success of the project typically means delivering it on budget. It’s not that difficult to do if you manage the expectations of the criteria.”
McCabe says one of the simple mistakes he sees clients make is when they apply cost per square foot.
“They don’t realize that over and above natural constructions costs there’s a lot of other costs they have to include,” he said, adding that the difference between construction and total project costs can be almost double.
In one project his company worked on, the total hard construction costs of the overall project represented 47 per cent. Therefore, he advises when developing a construction budget, make sure it is complete and not only based on cost per square foot as there are many variables involved.
Also, taking time to develop accurate complete documents is key, along with the lease agreement, which can often include variables directly affecting construction, the landlord’s work, access to the building and restrictions on the contractors, like the logistics of when they can work.
Prior to a lease, having a review or assessing the impact would be more prudent as logistics can drive the capital cost of a project. Landlords being considered should provide rules and regulations for tenant fit-out during the discussion, as there is significant risk in the impact of what the landlord will expect.