As a 20 year veteran managing major engineering and construction programs for the companies I have worked for, there are a number of things that I have learned. Like most of us, we have had some fantastic experiences in our careers and also some experiences that we would like to forget. The problem is that those very experiences that we want to forget are often times those experiences were we learned the most. But when do I stop learning and start teaching I often think to myself? Its as if I am thinking, I'm either not going to make any more mistakes or that I have learned it all - and we all know that isn't possible!
So as I was contemplating this it occurred to me that I could start teaching, sharing, and giving insights to what I have learned - the good and the bad. In this first post I decided to focus on the importance of a two part funding approach to capital construction projects. But first I thought it might be helpful to give a little more background on some important construction footnotes.
We all have seen construction projects from afar, near by, and closeup, as they are literally all around us everyday on our drive to work and even in our homes. You may have worked construction as a young man or woman or perhaps you have a cousin or brother that was in the construction trades. One way or another though, we have all witnessed construction from a perspective that is unique and important. After all it is one of the oldest professions in the world and one would think we would have it mastered by now! After all isn't it just a bunch of uneducated labors working and slowing up traffic or making you take the long way around the building? I really don't think this way, but there are many that do because like any industry there are certain stereo types that persist. That said, the engineering, design, and construction industry has many of the most sophisticated, innovative, and risk taking individuals that corporate america has to offer. Design and construction executives really have earned their place in my heart as some of the most dedicated and sincere leaders that cross all industries and really do have a way about them that is unique to most industries.
One main thing that stands out to me is their ability to adapt to the various companies, we call them owners, you know the companies that "own" the building we build. I worked for the owner side of construction throughout my career in the capacity of providing internal expertise and leadership to the major projects that I have managed. In this capacity I have saved literally more than 100 million-dollars throughout my career. I've built relationships with CEO's and executives both internally to the organizations I've worked for and also externally with the leadership of the largest construction managers, architects, and engineering companies in the world. In construction, we talk about the Owner, Architect, and Constructor (OAC), as a very common acronym in our industry. When we talk about the architect we also typically mean engineer, because they work closely together and often the architect leads the design. The constructor in most cases is the general contractor or construction manager - by the way those are the same two terms. Ok, ok, technically there is a difference but we could write a whole post on terminology!
Some challenges with construction that many leaders (owners) do not recognize until it is too late; most times is that it costs more than you think it will and the other is that when you are asking for what it costs to build something, make sure you ask someone or a company that will actually be accountable for building it. Now this probably doesn't seem like a lot of genius that I am offering here, but after a career of this, sometimes it really is that simple. Managers and executives at all levels often get focused on the business plan or the proforma and quite simply other things than the cost of the construction. Sometimes they just assume that others have questioned or gone through the right steps to come up with the costs. If you haven't spent your career in a construction trailer or wearing a hard hat then the bottom-line is that you just can't learn construction on the back of a napkin, no more than you can learn about tax law or how to be a doctor; the only thing you really need to know is that spending money upfront on the design is well worth the return - in design & construction circles we call this upfront design or preliminary design and estimating. Oh, and by the way, architects do an okay job at project estimating, but remember ultimately the architect is responsible for the design not the construction. So, while I say spend the money on the design, I really mean spend the money on a lot of design and then spend some more on getting a comprehensive estimate completed.
Companies mature over time through shear growth and grit sometimes, but most times, what I have witnessed, is that each department within a company matures at different speeds. The current and prior leadership of these respective departments, their experiences, the companies they have worked for, and their vision for the way it should be is very important especially in challenging times in your respective industry. Those experiences they have to draw on during challenging times tests their vision and their teams willingness to make it a reality. One thing for sure is that your company will mature much more quickly when going through a major construction program, or investment in facilities. I think this is because, regardless of what your companies product or service is, often times, a new sales cycle, product launch, or governmental regulation is as challenging of an event as they have dealt with. Then along comes along a 200 million-dollar capital construction project and then wammo, design and construction consumes your leadership team with major decisions, schedule impacts, parking shortages, and even interior finish design questions. After all, the new board room construction really is important and highly visible - yes I have built these too and wow talk about stressful. That is for another article though, the size and/or visibility of the project is what makes it difficult not just the large projects.
Back to the focus here folks, the two part funding strategy is critical to the success of any project over 10 million-dollars. The way it works is that before the executive sponsor or executive leadership team presents construction capital request to the board - talk to your internal professionals or an external construction manager. Ask them for an estimate and resist the temptation to use cost per square foot estimates on your own. Most times it is the denominator that is wrong - square foot is usually the culprit of most projects that I do triage on. End-users, future building occupants, and departmental leaders, ask for more than what was originally anticipated in the preliminary design and then, after much design and consternation, your facilities person, the construction manager, and/or architect will have to reluctantly put a meeting on your calendar and it typically just reads "construction cost update" so when you see this just decline it because it is going to be bad news.
Now, there is another way, a proven way for you to be successful with your board and your annual capital forecast. Instead of going to your board and requesting 10 million-dollars for a project that, in all honesty, no one really knows what it is going to cost without a design completed, be patient and rethink your approach even if it is the way its always been done. Granted, some facilities are easier to build and less complicated than others and those are more easily estimated on the back-of-a-napkin. My rule-of-thumb for all building types and across all parts of the country is that any project that is 10 million-dollars or more have planning funding approved or some call this design funding. I have never seen the need for more than 2%, of the overall cost of construction, for Planning Funding. So for example, on a 10 million-dollar project the most you need to spend is $200,000 in design in order to develop a good estimate. This is easily represented and understood by architects/engineers as the amount necessary to take the project design through the completion of design development level documentation - design development completion represents a stage in the design process. Also, note that the percentage of design that you need to spend, to achieve confidence in your design and estimate, increases for smaller projects to as much as 4-5% of the construction costs.
With design development documents completed, utilizing your internal or external design and construction team you will be able to develop a true Definitive Funding request or sometimes it is called a +/- 10% estimate. At this stage the project still has risk associated with finalizing the design and many assumptions remain, but the improved scope for estimating is very significant. Most qualified owners and construction managers can build a good estimate that will have the appropriate assumptions from the documents in order to price it effectively - meaning that the design will need to be finished through construction documentation and then the construction can begin without concerns of going over budget. Clarification, your team will need lots of support to keep end-users from making changes during the final stages of design and through construction, but again this is another post!
This very basic rule-of-thumb, 2% of the construction, for planning and design funding is one of the most important things all leaders need to understand. And remember, leadership can still go to the board and tell them all about the project idea they have - just change your approach a bit. Instead of saying, we are requesting approval for a 14.5 million dollar construction project, you say, we are requesting approval of $280,000 for preliminary design funding (or planning funding how ever you wish to say it) for a 12-15 million-dollar (notice the range too) construction project and we plan to come back to the board if we are outside this range when the preliminary design is completed. I am sure there are so many of you that really understand this concept already, but it really is the old adage of under-promise-and-over-deliver. With this approach, everyone has a chance to be successful because design and construction really should be an exciting time for your organization. You won't find yourself dreading going back to board explaining that the 14.5 million-dollar project you presented 3 months ago is now 14.9 million-dollars. The range is important because it expresses uncertainty and that is what everyone needs to take away from it because you don't want to commit before the design is completed. Oh, and for those of you who are executives at large companies board members remember to ask those presenting to you if they have hired an architect yet, because if they haven't and they are asking for a "definitive" amount then you might want to ask a few more questions - I got to give perspectives from all sides of the table.
I have managed more than 3 billion-dollars in construction, facilities, real estate, property management, and I own a couple software companies that are also focused on assisting construction management for owners, builders, and architects/engineers be more successful and work more collaboratively. I thoroughly enjoy consulting with companies about how to improve their capital construction process - enabling them to make their dollars go further, do more projects, and be more effective.
Thank you all for reading and spread the news about obtaining Planning Funding for your major capital projects so that we can ensure the construction team has a good foundation to build an estimate with and also, so we can all have more fun during construction!
