This is a three-part series that explores how developers are de-risking projects and reducing project cost overruns by virtue of smarter planning and execution during pre-development.
- PART 1: How and why to scrupulously manage pre-development expenses
- PART 2: How to aggregate and leverage historical cost and vendor data to reduce risk and decrease project costs
- PART 3: The keys to running a competitive bid process
How and why to scrupulously manage pre-development expenses
Real estate owners are ramping up construction on both residential and commercial projects that were put on pause as a result of the pandemic. This increase in construction starts, coupled with an ongoing labor shortage and historically high material prices, has led to soaring construction costs. JLL estimates construction costs will jump up between 4% to 7% this year, according to its H2 Construction Outlook report.
Now, more than ever, real estate owners are looking to the early planning and pre-development stage of project delivery for smarter ways to temper escalating project costs in order to make deals pencil in on-budget and ahead of schedule.
Real estate development and capital projects can spend years in pre-development and pre-construction before a shovel hits the dirt. During this time, projects move (and sometimes fail to move) through critical phases such as acquisition, due diligence, planning, design, entitlements, procurement, permitting, and financing. All of this early planning takes place while incurring hundreds of thousands of dollars, if not millions, in costs and expenses.
That said, many real estate teams simply fail to properly manage and track their real estate pre-development costs, often leading to budget overruns before projects even break ground!
Why? There are two main reasons:
1) Managing pre-development costs is incredibly time consuming. Project leads are inundated with invoices and proposals – all of which must be reconciled within an ever-evolving budget. Traditionally, this critical information is organized across a series of static, fragmented spreadsheets and file management systems that take hours to update manually and are subject to human error.
2) Lack of internal accountability. Prior to financing, which typically mandates formal external cost reporting procedures, many real estate teams fail to establish formal processes that require development leads to track, manage, and report on their pre-development expenses. In fact, many project teams have no idea how much they have spent on a project in pre-development until they’re required to audit, reconcile, and prove-out their previously incurred costs to financial partners at closing.
As such, it is not rare for development teams to get to the closing table, only to find that they’ve spent hundreds of thousands more than they had intended during pre-development, requiring last minute budget increases, contingency reallocations, or even equity commitments to secure financing.
Even worse, as pre-development costs are often paid for at-risk by the developer, if projects do not close formal financing and move forward, development teams are left picking up the bill on precious working capital producing no return on investment that they could have allocated towards future development projects.
In short, maintaining control and visibility over expenses during pre-development and pre-construction is vital to any real estate team’s success.
Today’s leading development teams are reducing cost overruns before projects break ground by better managing pre-development expenses with modern cloud-based applications that reduce administrative burden, increase visibility, and standardize the process for how their team’s manage projects during pre-development. These systems provide real-time budget updates by syncing to emails and scanning vital financial documents (contracts, invoices, change orders, etc.) that keep teams apprised of the current status of budgets and reveal potential areas of overexposure and financial risk.
Removing spreadsheets from project management workflows has its benefits. Namely, it allows you to kick-off the project without commonplace budget discrepancies and errors during the early planning pre-development process. It also improves the speed upon which you can bring a new project to market, by dramatically reducing the amount of time spent analyzing thousands of rows of historical data to formulate various budget scenarios and forecast project costs.
Utilizing purpose-built, cloud-based platforms for early project planning gives all team members access to the same information – no one person is working off of outdated spreadsheets stored on hard drives, but rather everything is updated in real-time in the cloud. This improves collaboration and communication among team members, senior leadership, financial partners and project stakeholders. It also improves the institutional knowledge available to all employees.
Read Part 2 of the series, which explores how to aggregate and leverage historical cost and vendor data to reduce risk and decrease project costs.
Tag(s):
Real Estate Development