Knowing where Development Problems might arise is the first step for prevention
Smart people learn from their mistakes, but the really sharp also ones learn from the mistakes of others. On development projects one cannot afford to make too many mistakes. Big ones or enough small ones together can lead to significant cost overruns which can have financially damaging effects on the developer. Managing the dollars is one aspect (cost control), but it is only effective proactively by timely anticipating, identifying, and mitigating the root causes of expanding costs. Conversely, unanticipated development costs surface too late when damage control unseats cost control. The underlying cause was either missed, mismanaged, or was genuinely unpredictable. Regardless, the consequential costs are subsequently owed.
Then the hunt for who was at fault – Who was responsible? Who should pay? This whole situation can seriously impair a development and sometimes lead to years of legal battling. Could this have been averted? How can you minimize or better yet avoid this on your development project?
Unanticipated costs usually arise because of one or more of the following:
- Inadequate information;
- Lack of impartial communication;
- Quixotic assumptions;
- Improper planning;
- Faulty execution;
- External forces; and/or,
- Unpredictable conditions.
The first five are manageable. The last two, if and when they occur, require appropriate reaction and recovery.
Information: First, adequate information is essential. Too little information or inferred information can be detrimental. Not gathering enough data in information at the right time is often the problem. How much do you need to know and when?
At the very early stages of a proposed development project due diligence is fundamentally aimed at feasibility and discovering all of the major challenges that are likely to be encountered. Raw land, for example, should always have a properly performed subsurface investigation, but when? Prior to closing on the land purchase? After? Surprisingly, the decision is often to have it done after the land is bought. The common rationale is either the seller provided a previous geotechnical report or the added costs of engaging a geotechnical engineer during due diligence is not justifiable. Unfortunately, luck isn’t always on the buyer’s side. Believe it or not we have seen a hotel developer purchase what turned about to be literally a buried dump because the soils analysis was pushed to the design phase under the civil engineering discipline. The ensuing extraordinary costs to “bridge” the unsuitable material was sorely unexpected by the developer. A half-dozen borings and a geotechnical report would probably have cost them about $5,000 at the time during their diligence period.
So why not have the seller provide the information? How dated is their geotechnical report? Where exactly were soil borings done? If the prospective buyer sets out to negotiate to have the seller perform an updated subsurface investigation, and while doing so make certain to direct where the soil borings will be located relative to their proposed development, the problem is sellers usually smilingly refuse, and moreover where on the property will the proposed construction be sited, at least conceptually? So now the wheels start turning: money for developing a conceptual site plan, more money for a geotechnical investigation, and, then what if the whole deal sours? All that money spent for what? Let’s say the conceptual site plan would conservatively cost $10,000 and the geotech $8,000. We don’t even have the land yet, so we can’t spend that kind of money on every property we investigate. OK, rely on what then? – a healthy contingency allowance built into the pro forma should the actual cost of site work fast exceed the line item amount budgeted? The added investigative costs can be a small fraction of what could be gigantic construction costs later. Of course, soil borings can’t reveal everything underground, but a well-timed geotechnical report provides very useful information that can be used to inform the decisions from offer to closing.
This is just one example of obtaining adequate information at the right time. There are numerous other decisions throughout the entire development cycle demanding the same decision-making means. And where is all the information coming from for these decisions?
Impartial communication: Are you relying on information being communicated by the right sources? Is the information accurate and are you getting the whole picture? Inaccurate or incomplete information can be costly. Sometimes the information can be innocently, unwittingly, or deliberately incomplete. So trust, but verify. A contractor communicating that the newly installed HVAC system is functioning per specs may not always be the most accurate information. The data is the facts. The information attempts to capture and reflect the data. So the data is always correct, but the information can sometimes be wrong.
In development many, many people are relentlessly communicating volumes of information of all sorts up and down various chains of management. The developer inevitably must rely on trustworthy sources for getting and relying on accurate information. The development team will invariably have changes in the set of players during progressive phases of the development cycle. So handoffs of information from group to group are potentially additional “fail-points” that can result in more development costs if information is missed, poorly communicated, or simply does not represent the data. A good development manager will ensure the proper transfers of information and manage the communications amongst the team while always verifying or drilling into the underlying facts as needed. It takes some instinct, lots of experience, and a very analytical, investigative mindset to be successful amid so much information.
Assumptions: When a real estate market seems hot idealistic assumptions seem to flow easily into development proposals without the same scrutiny applied to them as during tighter market periods. Sometimes certain assumptions belie true conditions. Whether for the markets’ conditions, project-specific conditions, or assumed external factors, the assumptions must be plausible, otherwise they could cost big. How much research has been done for vetting each of the assumptions? For instance, being overly optimistic on a change-of-zoning assumption could prove grossly misjudged. What are your contingency plans and strategies if needed, including an exit strategy? Have you adequately identified and planned for unanticipated complications? How much has been assumed for reserve equity if needed? If after the point of no return on a development project reserve capital is discovered to be not enough, expected return plummets and investors get grumpy. Being disciplined, even bearish, with the assumptions can avoid troubles that would rear up later in the development cycle.
Planning: The old analogy for how to properly plan (before the introduction of GPS-equipped vehicles) was planning a road trip across the US from NYC to LA. To save time you could have grabbed a US road map, some gas and food money, jumped in a car, and headed west navigating on the fly. On the other end of this planning spectrum you could have hired a team well before the trip to exhaustively survey the route, identify every construction lane closure, study traffic conditions at major cities, calculate gas stops and fuel costs, research restaurants, compare hotels, etc. Too little or too much planning can cost you either way. The same applies on development projects. Rarely, but it does happen, is a particular phase of a project over-planned. More often there is too little planning and likewise too little inducement to compel additional planning. Instead a plan – for example a construction phasing plan – is by some means endorsed, whether begrudgingly by certain stakeholders because of time pressures or perceived contractual constraints, yet the lack of appropriate planning becomes self-evident during execution. Nothing replaces a well-thought out plan whether for the construction drawings, project schedule, work phasing, financing, marketing, lease-up – the list goes on.
The old adage is painfully true on project after project: Failing to plan is planning to fail. Yes, planning takes time and resources, yet the consequences of saving these are discounted in familiar rationalizations that the same time and resources are fungible. Spend them now in planning or later during execution with a mediocre plan that will suffice. We don’t have time – implying there is more importance placed on getting it done than expending time planning how to do it. Schedule and budget are both massive pressures that are blind to inefficiency, wasted time and effort, and delays because of hurried or improper planning. Be cognizant of the importance and benefits of effective planning, and for what and when to commit the resources to it.
Faulty execution: What exactly is this? Is it underperformance? Not sticking to the plan? Incompetence? Under-resourcing? Or lack of coordination? You guessed it – all of these translate to poor execution to varying degrees on every kind of project. So what can be done? How can a development management team maximize the collective participants’ capacity to execute?
The development management tools are usually the same for every project: rigorous RFQ process; tight contracts; proven past performers; strong leadership; and, progress-monitoring metrics. Then there is driving the actual implementation.
Think about the project structure as being similar to any other organization striving to achieve a common goal distributed across a multitude of subsidiary objectives. Each unit of the organization is focused on its objectives which are aligned to the overarching organizational strategy. Inherently there must be collaboration among these units. Not just token collaboration, but successful collaboration is necessary, which demands coordination…communication… information…and, co-planning.
Knowing where a problem can start better positions you to when possible avoid it as well as to identify it timely for solving it. Properly managing what can be managed will save time, money, and resources on development projects. For more information visit us at www.promaneer.com or call us at 202-715-3990 to further discuss your current or upcoming projects.
