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 to aggregate and leverage historical cost and vendor data to reduce risk and decrease project costs
Here’s an often overlooked truism in real estate development and construction:
A project with a bad initial budget never finishes on budget.
No matter the competency of your project delivery team or the amount of project oversight, a project that starts with an incorrect budget is doomed to issues from the beginning.
Underestimating project budgets has clear consequences. The promise of outsized returns leads teams to invest valuable time and capital as they commit to new acquisitions and lengthy, often painful pre-development and entitlement processes. As the scope of work is formally bought out and real estate teams commit to vendor contracts during pre-construction or worse, change orders during construction, the cracks in an underestimated project budget begin to show. This forces real estate project teams to either make painful value engineering decisions that can reduce the original project vision – or be forced to raise additional capital while watching their potential returns diminish.
On the other hand, real estate teams can always overestimate project budgets. But overly conservative teams can soon find themselves on the sidelines as competitors snatch up opportunities or even out of business, as deals fail to meet returns threshold or attract investor attention.
The most successful development teams start their development lifecycles with accurate project budgets.
Which begs the question. Who on development teams is typically responsible for assembling these initial development budgets?
On many teams, those assembling development budgets are often acquisitions and finance leads who specifically focus on underwriting new development opportunities. While specializing in acquiring and identifying new development projects is a vital skill, these professionals rarely are responsible for managing a development project and budget through the entire project life cycle, which can often create a disconnect between estimated and actual project costs.
Furthermore, learnings and reconciliations informed by project budget overages and underages often never make it back to finance and acquisition leads for implementation on future projects as these issues and opportunities are easily siloed with project-management focused colleagues.
And thus, an age-old predicament forms where teams commit themselves to the same budget issues, while failing to implement past learnings.
So how can your team improve? How can your team build a virtuous cycle that ensures everyone across your organization has access to credible budget and cost data that can inform accurate budgets during early project planning?
Savvy real estate developers have long recognized the importance of capturing and leveraging their historical cost and vendor data to deliver their current and future projects more efficiently and accurately.
These development teams have invested in modern, cloud-based solutions that allow them to aggregate, benchmark, and compare previous project costs across flexible portfolio groupings defined by geography, asset class, project type and completion year.
Instead of siloing this valuable data in one-off spreadsheets saved on desktops (or living in the mind of a single employee), data-driven project teams can automatically assemble new project budgets in a matter of seconds while leveraging historical cost and budget data. By taking this route, leading real estate teams ensure that every potential scope of work is captured with reasonable budget assumptions informed by past project learnings. Teams leveraging these tools act with confidence, are nimble and work with speed and efficiency when forecasting budgets for new projects – all while ensuring they never make the same mistake twice.
Novel technologies ensure everyone across your organization, from project managers to finance leads, has access to credible project data that can inform accurate project budgets and prevent gross over or underestimations that undermine projects before they even begin.
By replacing the static spreadsheet buried on desktops with technology that organizes, indexes, and benchmarks their project data, real estate teams can negotiate proposals, contracts and change orders more effectively, put together deals faster, stay on schedule, eliminate information silos, and ultimately bring control and visibility to projects.
Forward-thinking project teams are utilizing purpose-built software to remove the guesswork and eradicate common pitfalls involved in early-stage pre-development, thereby reducing project cost overruns, significantly improving productivity, boosting pipeline growth and hastening the speed with which projects deliver to market.
Read Part 3 of the series, which explores the keys to running a competitive bid process.
Tag(s):
Real Estate Technology