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Best Practices: How To Keep A Lid On Construction Costs

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The Best Practices series asks CRE leaders around the country about how to best execute a single aspect of their business. 

Construction cost hikes have been buffeting the commercial real estate industry especially vigorously since the last recession. In 2018 alone, U.S. construction costs rose 5.7% overall, according to Rider Levett Bucknall’s Q1 2019 North American Quarterly Construction Cost Report, about double the rate of inflation.

How can developers and contractors cope? We asked executives who deal with construction costs every day — most of them in California, where the development process is particularly thorny, but also in Chicago, where costs were up 7.6% last year — for answers to that question. 

This is the second in a series on best practices in commercial real estate that will ask CRE pros to focus on a single aspect of their business and how to make it better.

Murphy Development Co. Senior Vice President and Director of Development John Couvillion

John R. Couvillion
Murphy Development Co. Senior Vice President and Director of Development John Couvillion

Treat your general contractor as a trusted adviser rather than a commodity. We have a long-standing, exclusive relationship with a single general contracting firm. We can leverage that relationship to get the most favorable pricing from our general contractor’s vendors and subcontractors.

We also rely heavily on our general contractor’s participation in the building design process and value-engineering exercises to ensure we're both designing to our budget and providing feasible cost-effective alternatives to design elements without compromising quality or appearance. 

Another strategy we consider when possible is pre-purchasing materials to hedge against scarcity and price inflation. This can include structural steel, metal studs and drywall, glass and building switchgear. We rely on our general contractor’s purchasing power to secure these items at the best prices. 

When possible, we also complete our shell building construction and tenant improvement work concurrently through the same GC. This saves by reducing the supervision and overhead costs of the general contractor. The same general contracting crew can often run both the shell building construction and the tenant improvement work simultaneously with little or no additional project management personnel.

Murphy Development Co. is a developer based in San Diego.

RAAM Construction President and CEO Richard Lara

RAAM Construction President and CEO Richard Lara
RAAM Construction President and CEO Richard Lara

Developers are increasingly looking to general contractors to find strategies to combat high prices while still delivering a high-quality product.

One way that developers can do this is by getting a contractor involved early on during the initial design and planning stages. Contractors are sourcing materials on a regular basis and have a deep understanding of how to keep costs down. By conducting thorough pre-development planning with a contractor, developers can identify from the start materials that are essential and materials that can be replaced with lower-cost options.

Often, contractors are brought in after the design has been finalized, resulting in ancillary costs that can come from design changes after a project has been approved.

Another strategy is to implement economies of scale. Developers who can bundle purchases and buy materials in bulk and in advance can often take advantage of discounts providers may offer.

Beyond this, developers can combat rising labor costs, which is largely a result of a nationwide labor shortage. One way is to have a long-term network of subcontractors who are less likely to be negatively impacted by a macro-level skilled labor shortage. 

RAAM Construction is a general contractor based in Pasadena, California.

CBRE Chicago Chairman Bob Wislow

CBRE Chicago Chairman Bob Wislow
CBRE Chicago Chairman Bob Wislow

Our first step in mitigating our construction cost risk is what we call our flight to quality. Now more than ever, we believe it's essential to drill deep into a builder’s experience, financial capacity and the quality of the builder’s supply chain. We also like to see a track record of highly successful partnerships with design team members and subcontractors.

Utilizing integrated delivery and design-build solutions gives a developer a single point of contact and sole source of responsibility, creating a much more streamlined approach than dealing with multiple layers of architects, engineers, consultants, general contractors and subcontractors. 

We also believe that it's equally important to work closely with all local officials and community constituents to address their most urgent and sensitive needs, such as supplier diversity and local workforce engagement. This kind of upfront engagement helps us avoid project delays in zoning and permit approvals, and helps keep our projects on schedule.

CBRE is an international real estate company. Bob Wislow is in the Chicago office and is developer of Fulton East project in that city.

Ware Malcomb Regional Vice President Tom Myers

Ware Malcomb Regional Vice President Tom Myers
Ware Malcomb Regional Vice President Tom Myers

There are two important factors to consider when trying to mitigate construction costs in the design process. First, having a general understanding of current construction material costs and predominant construction method expertise relative to the location of the project. Second, employing creative solutions to deliver projects.

We aren't estimators, but we do take advantage of our established relationships with the general contracting community to solicit current cost information. Having a GC involved in the beginning of the design process typically results in significant time and cost savings. Our teams frequently collaborate with general contractors during the design phase for initial feedback on building material selection for cost and availability. 

Our ongoing partnership with local GCs provides assurance that the final design is efficient, well thought out and most importantly, meets their objectives. We encourage our clients to involve a general contractor early, and if appropriate, we suggest a design-build approach to delivering the project.

Employing creative design solutions outside of the norm also helps mitigate costs. Having a diversity in projects and construction methods, as well as our international presence, allows us to suggest alternative construction methods. For example, considering a tilt-up concrete facility for an education or office building may allow for significant cost and time savings, as opposed to a typical steel framed structure.

Ware Malcomb is an international architecture and design firm. Myers is in the Irvine, California, office. 

Primior CEO Johnney Zhang

Primior CEO Johnney Zhang
Primior CEO Johnney Zhang

There's no doubt that good risk management is imperative to construction projects. In worst-case scenarios, unmitigated risks lead to cost overruns or delays, and eventually disputes, liquidated damages, even litigation.

We've found that the best way to mitigate cost risk is to address all considerations at the beginning of a project. Our team of architects, contractors and financial analysts works together to identify potential risks and make detailed project models. These models allow us to create additional contingencies, insurances or contractual clauses to protect our clients' investments.

Next, during the construction phase, we perform comparisons to the initial budget at key milestones to ensure the project stays within the anticipated parameters. Also, because we have our own in-house building professionals, we're able to respond to contractor RFIs in a very short time, dramatically reducing the risk of time overruns and providing significant cost savings.

Primior is a developer based in Diamond Bar, California.