Jan 25

Jan 25 Managing Construction Costs In Land Development

Land Development Construction Costs:

There is little in land development that gets my full attention faster than construction cost payouts. This is simply because they are always very attention getting! A smart land developer will take active and sustained actions well before any invoices are generated to manage construction costs from the very start. In a previous post we looked at estimating construction costs - now let’s look at ways to actively manage them!

Actually getting construction quotes isn’t all that hard since they come off the construction plans on the approved plat. The real work and success in controlling construction costs in land development starts at the very beginning and is an active process throughout the life of the project. Even though no land development project is the same as the last one, I have developed a standard sequence that I frequently use to manage land development construction costs.

Let’s take a look…

Pre-Acquisition Review:

A frequently overlooked birthplace of astronomical construction costs is acquisition mistakes. Complex land characteristics leading to inflated construction costs can be avoided if one is careful. This step applies to the situation where a given piece of land is under consideration for acquisition, but not yet closed on. During the contracted inspection period AND when the earnest money is still refundable, I use my engineer and any additional consultants needed for due diligence on the subject property.

This is not only a feasibility inspection, but also one that gives a glimpse of any unusual construction costs that might be anticipated. An experienced land developer and engineer can get a “minds-eye” view of how a project might layout along with the effect of unusual soil, topographical and other observable conditions that might lead to complicated designs. My engineers and consultants don’t charge for the field visit and initial workup since they are looking to get a job on the project, but make sure this is understood in each case.

More on Evaluating Land Development Opportunity can be found here: Evaluating Land Development Opportunity — Land Development Realities .

Conceptual Site Plan:

I task the engineer to devise a conceptual site plan for the project. This layout is not anything close in detail to what a final plat submittal would be, but it does give a “first glimpse” look at what the project might eventually turn into. We design what a road and infrastructure system would look like, along with an initial lot layout. Identification of likely ingress and egress points along with unusual offsite considerations are mapped out. A conceptual layout only provides the original thought and vision for the project. I format it as a scaled map with legend and footnotes. My conceptual layouts have gotten pretty good over time.

Let’s use roads as a specific example: I scale out the estimated linear feet against an estimated cost per foot or unit to get a beginning number for road costs. This is also where I get my first informal quote. I make contact with the asphalt supplier and others to find out what the going material rates are and whether costs are stable or unstable. Remember though, conceptual means nothing more than the initial effort!

Pro Forma Statement:

I prepare a standardized document to develop an initial financial statement. This includes asset value, liabilities, the expected income and itemized costs. I need this for a couple of reasons. The first is to get a working cost document that will be continually updated throughout the life of the project. The second reason is to inform current investors along with potential investors that might join in on the project. There are many software products available and I have used some of them extensively in the past. Over the years I have settled on an Excel Workbook that I and others have put together and improved over time. Whatever works as long as it is accurate, detailed and comprehensive.

Preliminary Design:

This is the engineered initial design. It is the first look at the project based on engineering science, functional form and aesthetic characteristics. It is also the time to carefully review each design feature to look for construction cost saving measures. The construction quote will come from the approved construction plans and time and money can be saved by making design modifications before submittal.

It’s amazing how many times I have seen developers accept initial designs based on singular factors, but not all of them. This can really show up in the ultimate effect of project design on construction costs. This step is also a great time to hold a preliminary design meeting with the key construction contractors and the design team together. Construction contractors can weigh in on design simplifications and anything else that can save time and materials, which in turn, saves costs for me.

Level 1 Cost Estimate:

I finalize the best cost estimate I can prior to plat submittal. This is the initial cost estimate, mostly because it has been my experience that it is never the final one (even though I would like it to be). This step occurs when modifications are made based on the previous 4 steps identified above. Usually we can find design improvements that lead to decreased estimated costs.

The engineering, consulting and construction groups have all had their say and the form, shape and function of the design has been viewed from all stake holders. The cost software or workbook is updated and becomes the new anchor point for estimated costs. This is active management that leads to continually improving cost estimates.

For more on estimates see: Estimating Construction Costs In Land Development see: Estimating Construction Costs — Land Development Realities

Final Project Design And Layout:

Prior to submittal of the plat application a pre-submittal meeting is held with the county planners that will be reviewing it. This includes any other departments that should attend, such as Public Works as an example. This meeting can often result in updates to project design with additional changes in cost projections. Sometimes the costs go up, sometimes they go down, but they almost always wind up changing somehow. With experience and careful planning, the pre-submittal meeting should hopefully result in minor modifications, not drastic ones.

Level 2 Construction Cost Estimate:

Using any changes made from the pre-submittal meeting, the next update on cost projections is necessary. A specific example was a time when I was informed in a pre-submittal meeting that Public Works was going to require an off-site traffic study. Although the design of the project itself was not affected by this requirement, the total project cost estimate was. I had to add another cost center for the study costs and project forward for additional time to complete the project. Once the Level 2 cost estimate is updated, I take the additional necessary step of updating the investors on cost changes.

Project Modifications During Plat Review:

The plat application is submitted and is being formally reviewed. Land development is speculative in nature and this is a place where the speculative part can really come to life in terms of cost management. As specific modifications by the reviewing staff are set forth, adjustments must be made. This can be in the form of design, materials, time, studies, or other compliance requirements for plat approval. I don’t remember any project that did not have at least a few modifications and the costs always seem to rise. A key to managing the cost projection sheets is continued involvement of the construction contractors. They should advise on the effect of the required changes on cost, time and complexity of upcoming construction.

Level 3 Construction Cost Update:

At preliminary plat approval there can be additional design and cost updates. These adjustments can be small or complex - preferably small! It is common that the planning department will require modifications resulting minor design changes. The goal is to anticipate these factors in the initial design of the project as described in the preliminary design. If done effectively there will not be major modifications required during review (even though it doesn’t always work that way). Whether the modifications are big or small, updates to the cost centers for the project need to be made so that the very best running total can be maintained. After the Hearing Examiner weighs in on the project at final, and God willing, the plat is approved and recorded.

(R.F.P.) - Request For Proposal:

Sometime just before and/or after preliminary plat approval the serious construction quote process should be well underway. Problems that require adjustments can emerge during preliminary plat approval, but the design elements that are not controversial can be sent out for quotes.

As the final plat approval hearing approaches the construction quotes from the R.F.P.’s should have been received and reviewed for cost and accuracy, Care needs to be taken to verify that they are also complete and are in line with each and every approved construction step.

Contractor selection is based largely on cost as long as there is confidence in the contractor and the quote is complete for the scope of work. If an exception is made to select a higher priced outfit, there should be documentable reasons why.

Construction Sequencing:

At this point construction plans are finalized in the recorded plat, the cost of construction is known, the contractors are formally selected and the contracts are signed. It might seem like construction cost management has been successfully completed. Not so fast…

There are ways to further reduce costs and construction time. One way is to look at phasing the contractors is a more efficient sequence. Is there construction activity that can be safely done simultaneously to save time? Can materials be staged at on-site locations that minimize hauling and machine time? Implementing construction efficiencies should be a constant focus for the most profitable project posssible!

Managing Construction Costs In Land Development:

As we’ve seen, the smart land developer will take active and sustained action to manage construction costs. This starts during pre-acquisition and continues until the last day of on-site construction activity, followed by required inspection approvals. Be proactive and diligent while using the right cost management process and tools. That’s a way to stay on top of your costs every single day to make the project as profitable as it can possibly be. Good luck!