Today we will look at the situation where you need to acquire additional land to make your current project work. For example, consider an adjacent site, where if you can amalgamate, your combined site will achieve a much more profitable outcome. At the government housing department, we had dozens of inner-city single family sites potentially suitable for redevelopment into terraces and apartments. However, many were oddly proportioned, and not well suited to maximizing site density. The sites were literally shaped by decades of the government selling, buying and redeveloping. Quite often there was a neighboring property or two that if acquired and amalgamated would ‘unlock’ the development. For example, a larger site could open-up planning rules allowing a higher density, or it might enable a suitably sized road access. Sometimes the neighbor to be acquired was even larger than the original site.
If you require acquisitions, then
you can hire others to approach neighbors or you can do that in-house (maybe
yourself). It is quite a delicate situation. If the current owner knows you are
going to make more money by acquiring their site, then they may think this is a
great opportunity to up the price. If they are not really interested in
selling, they may just up their ‘price’ to ridiculous levels anyhow. With that
in mind, in-housing that alerts neighbors to you being the interested party
might not be such a good idea. Conversely, you (or one of your internal team)
may be the best messenger to leave the neighbor in no uncertain terms: if you
don’t take this deal now it won’t come around again. And because they don’t
have to pay a commission they will get more for their site. This strategy works
best if either you don’t need the land (nice but not necessary) or, if you are
negotiating during your due-diligence period (where you can choose to walk
away).
Outsourcing to a lawyer is a tactic sometimes used. The
lawyer will charge an hourly fee rather than commission. However, from an
existing landowner’s point of view, being approached by a lawyer is an instant
alert that something is up. I have been approached myself and just say, I want
to talk to the buyer direct please.
The other option is to use an
external real estate agency for acquisitions. That may help keep your anonymity
(if that is important) but also could put the potential vendor off (especially
if they are approached by realtors all the time). You can never really control
what the agent says either and they may not be prepared to hustle over the long
term, compared to someone you have involved in-house.
Dealing with a commercial land
owner is different from a residential home owner. The former may be more malleable
to a business deal, like a joint venture or to share in the upside, so it’s the
quality of the person being able to articulate this that’s important. However,
they will also be more experienced at negotiating and quite quick to lawyer-up.
Therefore, cost is rarely a consideration in the acquisitions in-house versus outsource debate. Yes, you can save a commission but it’s more about who can solicit the best deal out of a potentially unwilling or over-optimistic vendor.
[In a future post we will look at finding new development site strategies. There are various tactics and processes to find new development sites – going through listings in a disciplined focused manner every day, door knocking & cold calling land owners, approaching other developers, utilising ones networks. And you can either do it yourself, hire someone inhouse or utilise independent contractors / buyers agents who do this for a living (sometimes they are newbie developers who can’t quite follow through and do the whole project themselves yet).]
Deciding whether to in-house or outsource project management is a no brainer from my point of view. Just
don’t outsource! The cost is irrelevant (although outsourcing is likely to be
more expensive). This is where I stop even pretending to be objective. Really —don’t
do it. I’ll tell you why.
We should probably take a step
back and define what I call ‘project management’. The project manager is the
person responsible for the coordination between the main building contractor,
the civil contractor, the architect, the engineers, the cost estimators and all
the other design and construction related consultants. Sometimes on complicated
projects it may be just the design aspects — and that person might be called
the design manager.
A project manager who also looks after marketing, sales and
leasing, overall budgets and feasibilities and directly reports to the
developer is usually called a development manager or a project director.
Occasionally if there are multiple projects, they might be called a program
director. For the purposes of this
discussion, whether it’s a project manager, design manager, development
manager, project director or program director it all means ‘project management’
to me and I have the same narrow point of view: in-house it.
To explain my vehement position a
little more, let me take you through a couple of very personal real-life examples.
A little bit of background. I have hired, worked with and fired numerous project
management companies on residential and commercial projects. I have also been
hired to replace external project/development managers.
In one example, the key problem
that existed with the external project management company was a lack of
communication. The developer client, my
employer, liked to challenge people on their work — both the what and how it was being done. Relaying bad news was not easy. For an
external company, bringing the bad news was next to impossible. Their reporting
glossed over important risks and the true financial situation had not been
uncovered by the external project management company. They themselves had
relied too much on the advice of their consultants. So poor communication,
relying on advice at face value and a lack of uncovering the real situation
brought together their demise. To be fair, that project management company did
do some good work, but their job was made untenable by being on the outside.
Early on in my career, I was the developer’s
representative for two commercial office projects. As an in-house developer rep,
my job was to make sure the tenants, who had agreed to take on leasable space,
got what they had signed up to. So I started out by attending project control
group meetings ran by an external project management company. Over the next few
months I learned that, essentially, all the project management company would do
is push paper.[1] They
would receive variation claims from the contractor, send them to me to approve,
then write them up and send back to the contractor. I had to either make the
decisions or get my boss to. Then the project management company carefully
disclaimed who made the decisions in their reports. It got ridiculous; they
couldn’t make a decision on anything. But we were paying them for
expert decision-making advice! It was even a struggle to get them to query
variations and contest them with the contractor. Look, not all project
management companies are this complacent, but this was a big company in a busy
market. They had juniors at the coal face who frankly had no right to be there.
To improve the situation we asked for seniors to be present. The occasional
visit from a senior, often a different person didn’t work out much better. At
the time we persisted with the project management agreement, but in retrospect
I would have removed them and done it myself. I practically was anyway.
Fast forward 15 years and, once
again, I am attending a project control group meeting with (someone help me!) two
project managers from different project management companies. There was one
solely managing the civil construction and one managing the overall build,
including the other project manager. This project was a failed 100-plus home
development, already once resurrected and unfortunately failing again. Some of
the situations were farcical.
One of the
first issues arose when the project manager responsible for the overall build
told me in no uncertain terms that he couldn’t get the other project manager
(managing the civil works) to do what he needed. The project needed close civil
and house build coordination. Their relationship (and therefore communication) with
each other had broken down and neither took responsibility for decisions. Thus,
I wound back the project manager’s role to just concentrate on the house build.
As the newly appointed internal client-side development manager, I would sort
out the coordination.
Then, on the
house build, which was delayed, the project manager showed me a trail of paper
without clear decisions regarding builders’ time extension requests that had
caused further delays. He blamed lack of response from the developer (my boss).
I investigated and found the project manager had failed to adequately describe
the reasons for any time extension. The developer has not been presented with
the right information to make the decision. And the project manager had not
taken it upon themselves to make a recommendation nor issue a formal
instruction. They said the usual things like “that’s not my role”. Thus, I immediately made it clear it was their
role. As developer we would abide by the project managers’ decisions and we
gave them our full trust and contractual commitment. That still didn’t work. To
top it off, the project manager said they were spending more than the hourly
time amount allotted to this job and needed more money. That’s the last thing
you want to hear. A useless project manager is now going to cost you more money
because they couldn’t budget for your project correctly! I instantly removed a
whole heap of duties from the project manager.[2]
They eventually quit, and we dealt with the builder direct. It was initially painful,
as the project and the builder were haemorrhaging money, but necessary.
Eventually it was worthwhile.
Later, on the
civil infrastructure build, the meetings got really interesting. Every two
weeks there was a new project manager! This civil project management company had
massive staffing issues. I requested the that the director of the company send
their most senior project manager[3]
to attend all meetings to at least provide some consistency. That only partially
helped the issue as the juniors kept coming and going. A consistent approach
was never achieved. And then it got worse. When looking at a monthly progress
claim from the civil contractor, my heart began to flutter. There had been a
whole heap of urgent variations approved, by me on the spot, in the last few
meetings. These were shown on the monthly progress claim but the cost to
complete had not changed. Something seemed wrong. However, I wasn’t qualified
to figure it out.[4] Weeks
later, after relentlessly querying the bank’s quantity surveyor (who signed
everything off before the bank would lend us the money each month to pay the
contractor), the project management company, the civil contractor, applying financial
forensics and compiling a report as big as this book, I had it sorted. On a $5 million
civil construction contract we were $3 million over budget. It had accumulated
over time and the developer and bank were none the wiser. I disclosed the
situation and some arduous bank meetings ensued. It was grim.
In the end I
had to retain the project management company as the specialist engineering they
were also contracted for was too far through to replace them. But, to help clean
up, I hired another project manager to look after that project manager. Yes, he
was external, but in this situation, I told everyone that if he made a call, assume
that I had said it. Basically, I absolved the project manager of all liability,
just to get things double checked and done. It was a short-term fix. It worked,
at a financial cost, to get this project completed without further financial
deterioration.
On another development, the
developer was sold the services of a senior project manager. When I arrived to
take overall control, it was juniors doing the work. I had learned so much
about gaining the final council signoff (not because I wanted to but because
that project manager was also no good) that I essentially became this junior
project manager’s teacher. They were fresh from overseas and their superiors
did not have enough oversight. My words of warning: in a resource constrained
market you might not be getting the service you are paying for and not know
until it is too late.
And on yet another project I
discovered the project manager had a conflict of interest. We were struggling
to get our final council sign off, so I told them to pressure the local
authority. To us we couldn’t settle millions of dollars’ worth of completed
sections. Some had sunset dates[5]
expiring very soon, meaning we were close to losing those sales altogether. The
project manager though believed any pressure they applied would hurt their
relationship with council and would affect their ability to get things done
with their other clients. A developer typically does not care about the project
manager’s other clients! I had to take on that part of the project manager’s
role: influencing council to deliver our consents. I also had other projects
that I did not want council turning a blind eye to should I pressure them too
hard. So I just pressured them politely, but every single day for about two
months. This simply demonstrates when project management is in-house, people
naturally act more in the client’s (their employer’s) interest.
All those and I still have plenty
more for another book. The fundamental reason why you shouldn’t outsource
project management is that many developers, like me, are not typically good
clients. Communicating risk is difficult and if something goes wrong the
project manager is always running scared of being the scapegoat. That means
external project managers are reluctant to make decisions. But it’s decisions that the
developer is hiring them to do. Therefore, hiring internally (in-housing
project management) at least breaks down those barriers. An employee should be
better at full disclosure of the potential issues than an external project
management company will be (as the employee has typically less chance of being
replaced). Although this gets harder in larger organizations with hierarchical management
levels.[6]
Things change in the development world, and it’s easy for the developer to be
thinking in one direction and the project manager moving off into another, especially
at the design stage. Internalization improves control, understanding and is
more elastic to change.
I might be persuaded otherwise on
the occasion where a project that has failed needs specialized expertise that
cannot be hired in-house. Then you might be forced to use an external project
management company. The advice in this case is that you still manage them more
closely than you would normally think necessary.
If you simply can’t directly
employ project management, then an independent contractor who is working
exclusively for you is the next best solution. So long as they have a direct
line to the final decision makers, without contractual issues confusing the scene.
The more times I re-read and edit
this chapter the more it sounds like there is a market gap for a decent project
management company! The decision between in-housing or outsourcing project
management is really a risk adjusted one. Err on the side of caution and what
gives you maximum control with minimum risk. Double down on the caution if your
project still has very curly aspects to navigate.
Henry Ford is often quoted as
saying, “Nothing is particularly hard if you
divide it into small jobs.” This
is the key when deciding to bring functions inside or keep external. Understand
what is currently being delivered in its entirety, price each individual piece,
price the management of those pieces and consider the risks along the way. Then
you can make an inhouse or outsource decision.
[2] There are always two sides to a story. If I
was to generously oblige them with a defence, the construction contract wasn’t
set up correctly in the first place, before they were engaged.
[3] I threatened it had to be the director, but
he managed to twist out of that one.
[4] At least when I first encountered the
problem. I was an expert by the end!
[5] A sunset date is a
date in the contract which the developer commits to having a milestone
complete, in this case, title to the land. If the sunset date is missed, then
the purchaser has the option to cancel the contract — not particularly great in
a declining market.
[6] Especially if there is a poor culture where upper management seeks to absolve themselves of responsibility.
A number of developer clients over the last 12 months have asked me about bringing the sales team in-house. It’s an interesting topic, so here is my experience doing residential sales just about every way thought possible.
If you have to sell or lease anything as part of your development project then you will come across a little line item called commission. Depending where you are in the world this can run as high as 6% of gross sales or 15 to 20% of the first year’s rental. It might even be higher if you are selling via some sort of pooled investment scheme. This is a lot of money and is something to seriously consider in-housing to improve development project profit. However, savings can be eroded if slow sales or lower sale prices result. When you are looking at a sales commission of 3%, hiring internally and paying them 1% seems appealing. But the cost must be compared to the potential issues. Weigh up the factors that concern:
Managing a sales and leasing team
Commission
Motivation
Negotiation and hustling
Attracting and keeping the right talent
Sales back office
Sales channels
Managing a Sales and Leasing Team
Managing a sales team can be challenging. You have one or more
emotional, living on the seat of their pants type individuals who go all out
for the mighty commission. They are a different breed to the standard salaried
employee and that often comes with higher maintenance. If you in-house, then
look to an old experienced head to keep themselves and the team together. There
are also legal and professional association regulations, all sorts of liability
issues and accompanying paperwork that need to be considered.
Commission
Although you are paying an agency say 4%, the actual agent
may only personally make 1.5% to 2% of that commission. The rest goes to head
office. Remember that also includes overheads like administration, marketing
support, office space that internally you will need to provide in one form or
the other. So the true saving is not a drop from 4% to 1%, but somewhere in
between.
Motivation
If you in-house, it is much easier to match commission to motivation. You can offer bonuses to
move certain types of product. Or you could have a graduated commission
structure that suits your project (as opposed to the external agency).
Negotiation and Hustling
External real estate agents spend a lot of their time pitching and hustling
for listings. They are really in the listing business, selling to vendors as
much as to buyers. Internal sales agents don’t need to do this as they have the
product provided for them to sell. External agents are constantly negotiating
with vendors to get the listing and then to get the price down, and with
sellers to get them interested and get the price up. Hot markets might mean
more listings but there are also more competing real estate agents. Competition
also sharpens an external agent.
Internal sales consultants are often
given a price list and told to sell from it. In hot markets internal sales
people become order takers. If the market stays buoyant for long enough
internal sales consultants can lose their drive. The money is still coming in
and they don’t have to do a lot beyond turning up to claim it. Yes, internal
sales consultants get to negotiate with buyers, but that doesn’t create the
same negotiating exposure that an external agent has. External agents are also
often exposed to many different types of deals and sets of conditions, which
they can draw from to seal future negotiations. Therefore a balanced internal
team with plenty of practice in different (especially tough) markets is
important, and so is the occasional injection of some fresh enthusiasm and
external agency experience when hiring. Relevant training and a collaborative approach
between internal sales consultants can also help keep everyone sharp.
Attracting and Keeping the Right Talent
You also don’t want to attract order takers, or lazy agents
wishing for an easy ride. You want them to have all the soft sales skills to
influence and close. To attract the right talent you may need to provide a
pipeline of product that will be sold, otherwise you will lose them if they see
potential sales drying up and look to move elsewhere. You may also have to
provide training and licensing, and access to industry events just like
external agencies do so they stay relevant, up to speed and motivated.
Sales Back Office
If you don’t have any sales agency expertise, then it may be
wise sticking with an external sales agency that can provide back office sales support
services for you (typically administration, like contract preparation as well
as advertising and marketing). Although, if you are going to be producing all
the marketing collateral using an external marketing agency, the back office
will be less burdensome to in-house.
Sales Channels
For some development product types established agency sales
channels are all important. For example, if you are developing an inner-city
apartment project suited to offshore investors then using an
external agency who specializes and has done this for many years would be
sensible. An internalized sales team would have a lot to do to get up to speed,
let alone get overseas. Unless, of course, you grabbed an entire experienced
team and in-housed them.
For other products, sales channel relationships
come down to the individual agent, who he or she knows in the marketplace and
has their trust. For example, the industrial leasing broker who has been in the same area for 20 years and
knows all the business owners (future lessees) like they are relatives.
One thing to question: are you
gaining access to sales channels because of the individual or the real estate
agency? If the individual, then you need to in-house that type of individual.
If it’s the agency, then you need to create the resource and support they need
to enter that channel. If that is too hard, then you should stick with the
external agency.
In a flat or declining market, with
an already failed project, and no prior experience in managing an internal
sales team I suggest stick with external agents. If the market is hot, and the
product practically sells itself, then in-housing might be preferable, especially
if the in-house commission saving can instantly translate into a price
reduction that speeds up sales velocity. But there is also a middle ground.
At the turn of the millennium, I
was a manager developing terrace homes in up and coming city fringe suburbs. We
had an established relationship with one agent (working for a boutique local
real estate agency) who did all our selling. We wanted to bring him in-house. We
already had a junior working in marketing who wanted to get into sales (to make
the big commission!). Plus, we had spare administration capacity and for each
project we would create the display suite and marketing using other specialists
anyway. The agent didn’t want to jeopardize his long-term aspirations though.
For us, he was the talented go-getter that we must have. The win-win resolution
was we would set up our own real estate agency and he would be a director of
that and responsible for sales. We had a pipeline of projects and the theory
was he could grow the agency to sell on behalf of others as well. Financially
he would get paid a commission percentage comparable to what he was personally
earning at the external agency. That reduced our commission costs. If there
were new sales listings to unrelated parties, then we would get a cut of that
as well. This arrangement worked well for both us and him for a couple of
years.[1]
[1] Ultimately though the head agent moved cities and the team was not advanced enough to operate without that agent, so it was dissolved. Although we had taken enough out of the relationship that does highlight a potential problem of being tied too much to a single agent.
Right now I am organizing a design build vertical construction retail project, in the middle of a design build civils project (yes they do exist!), and recently was looking at hiring subbies direct versus main contractors on a luxury apartment project. Prior to that I ran a vertically integrated development and construction company doing 200 to 400 mult-unit homes a year. AND over the last five months on behalf of construction company and developer clients have looked at hundreds of CV’s and have interviewed dozens of Project Managers, Site Managers, Commercial Managers, Quantity Surveyors – and all the key roles that comprise ‘construction’ – so have a few different perspectives on this subject.
BUT back in the day the first development company I worked for was a private developer who had started out (as many do) by renovating individual homes and flipping them. Although he was an ex-real estate agent he now acted as main contractor, directly employing subcontractors. As his company grew and he moved into multiple-dwelling new build terrace projects he hired a construction manager, then two of them, to do all the management of the building work. This is about the time I came aboard. The next project was a larger and more complicated apartment project and the decision was made to use an external main contractor. Over the next few years the projects became larger and more complex and there was no longer any work for in-house construction managers as everything was done externally.
This is a common pathway for a
private developer — start out building yourself and then pass on construction
to external main contractors. This is not the only journey though. Some developers
go down the spec (as in speculative) builder route. Buying land or developed
sections with a construction team in-house and then selling completed homes,
shops, offices (or whatever development product). Others grow into large
construction companies and then diversify into development companies, becoming
a similar one-stop shop.
Once again, it does depend how you
are currently set up. Are you a developer or a developer/builder? To explain
the pros and cons of in-housing versus outsourcing construction, let’s take the example where you
are a developer who intends to also adopt the main contractor role — i.e.
in-housing construction.
Essentially you need to set up a
construction business. The most important first step is to hire someone who has
experience in running a construction business! The business will require
systems and processes. At a minimum you will need to fill the roles of a
quantity surveyor/cost estimator and a construction manager. Maybe they can be
the same person if it’s a small project. Preferably their experience includes
the type/scale/value of project you are taking on. You might need a site
foreman (the hands-on site guy or gal) and an assistant or two. That’s the minimum for a small project (like
a 10-unit terrace home development). If it’s a large project you can be talking
about dozens of directly employed staff. Significant back office financial
management resource will also be required. The question becomes do you have the
fortitude to go down this track?
To help you answer that you will
need to weigh up the reward versus risk dynamics. And by dynamics, I mean the
plethora of issues that can easily sink your new construction business and sink
your project. You haven’t inherited this project because the previous
contractor went broke, have you?
The main reward is obvious. You
grab the contractor’s profit margin. This could be anywhere from 4% to 15%
of the total construction cost. All the costs to run the construction business,
including salaries and office expenses, are typically paid by you anyway.
Whether it’s in-house cost as described above or passed on to you in a tender
via the Preliminaries and General
expense item. There might be a small percentage saving here as well if you in-house,
albeit for a single project you will have initial set-up costs to first absorb.
Other benefits are control,
flexibility and legal simplicity. I have grouped these together because they
all act in unity. Using an external main contractor means a main construction
contract. A construction contract creates an adversarial relationship. Changes
and mistakes can be painful, expensive and litigious. If you build yourself,
you don’t have to endure such a relationship. It’s not like you are going to
charge yourself an exorbitant extension of time claim.
On the other hand, the risks of
in-housing construction are numerous. Firstly, let’s look at the risks that are
a function of company-wide experience (or lack
thereof):
Will the
bank let you do it? Your funding line might be contingent on getting a
fixed price contract from a reputable contractor, a performance bond and even a
tripartite agreement.[1]
Staff
turnover. Project managers, construction managers and site foreman become recruitment
target commodities when construction markets are buoyant. If you have created a
construction business for a one-off project, then near the end of the project
you need to make sure you retain your key staff. Six months out from completion
they will be looking for their next gig.
Pricing
mistakes. In a new company one of the biggest risks is incorrectly pricing
a job. The person doing the cost estimating is new. Subcontractor and supplier
relationships are new — trust is yet to be established. It is more difficult to
simply ring someone up and get an indicative price. With all the new business systems
being set up, the business focus may not yet be on pricing accuracy. Further, to
make it all work you might suffer from optimism bias.[2]
This issue hit a construction company specifically set up to work on a
development I was involved in by our joint venture finance partner.[3]
They were optimistic on their pricing. It went downhill from day one, including
miscalculating quantities and appointing site management without the requisite
experience. Effectively the development made money, but the contractor went
broke, on their first project.
Subcontractor
and supplier management. Beyond all the skills, systems and processes
required to manage a construction project an established company has trusted enduring
relationships, sometimes through thick and thin market conditions. History
shows whose pricing you can trust, or who is variation hungry. You know who
will maintain capacity for your job and who can return a quick but reliable
subcontractor tender price. When the going gets tough during, you can
appreciate who will stick it out, who will absorb price inflation and who will
solve problems on their own. Similarly, the subcontractor also has trust in the
main contractor, that they will get paid on time and change requests will be
dealt with justly. When setting up a construction business from the start, none
of this exists. Even if the people you hire say they bring all these
subcontractor relationships with them, the very fact it is a new entity will dilute
that trust. This can easily mean you will pay more for work and encounter more
teething problems. Yet another area where a very experienced person at running
a construction company is paramount — don’t promote someone into this role flippantly.
Consider an old head on broad shoulders.
Cashflow
management. If you hire a main contractor, then you will have one
construction related payment claim to process each month. You will have an
estimated cashflow and know approximately what that amount should be. If you
run construction management in-house then you take on 20 to 50 new suppliers,
each with their own payment claim, complete with variations and mistakes. You must
vet each claim when you pay them, and you might have to pay them out of sync
with your funding. Software will help, but cashflow management is an important and
difficult aspect of running construction.
Then there are the risks that a
main contractor takes on that a developer can (try to) contractually opt out
of. These present reasons to consider outsourcing construction if you already build
in-house:
Unfixed
price. If you are a developer, typically you strive for a fixed price from
your contractor. If you are the developer/contractor then you will wear any
cost inflation, pricing mistakes, onsite measurement mistakes and the like. You
might be able to fix some of the prices with your subcontractors down the line,
but that is not always possible.
Legislation.
Building codes change. Changes need to be interpreted and implemented. This can
happen mid-job. You may find that a new ruling means inspectors look at details
differently. One of our contractors had this example, overnight, even with a
building consent stamped, the inspector decided a bracing detail needed to be
modified. It required a lot of rework (and dollars) from the main contractor
(who did try and blame the engineer’s inspections), but at the end of the day
it was the main contractor’s responsibility.
Cost inflation.
This deserves its own bullet point. When the market is busy costs can rise
quite rapidly. If you are a developer with a fixed price contract, or a
schedule that has fixed rates for each element, then you are contractually
protected, for the entire duration of the contract. For the main contractor,
suppliers may only hold pricing for a few months. Subcontractors, even if they
have fixed the price, may be prepared to just walk away from their commitment and
leave nothing worth you legally pursuing. Now, occasionally, it works the other
way. For example, a main contractor acquaintance priced a government prison job and agreed to a fixed price. This
was just before the global financial crisis. During the three-year project, their
input costs from primarily unfixed subcontractors steadily reduced (there
wasn’t a lot of other work on). The government price was fixed so the
contractor’s margin increased.
Liability. As the main contractor you are usually
the first port of call when something goes wrong. At least when you are the
developer only, you can (try to) blame the builder. Contractors have
increasingly complex and stringent ‘health and safety’ obligations. There are also
practical items to deal with like contract works insurance (in case
construction catches on fire), employee safety and site security.
The other main reason why you
might outsource construction is when you lack the experience in the type of
project you are about to embark on. If you are an experienced residential home
builder, but now grab the opportunity to save a commercial office project, the
skill base in your existing team may not suit. Or the project may simply be too
large for your in-house construction team.
[1] A tripartite agreement provides the bank
with step-in rights to finish the project if the contractor or developer fails.
A good source of failed projects for you to pick up!
[2] You have embarked on setting up a
construction business for this project after all, so it must work!
[3] Although the intention was to build other clients’ projects and grow a successful construction business.
Over the years, I have worked in three different developer design
environments:
Architectural
design and documentation completed by external consultants.
Architectural
design and documentation completed by internal staff.
A
mix of both, including freelance contractors.
The first thing to consider is when it is a one-off project. Unless it is a multi-year development, there is probably little point in hiring and managing an in-house architectural design team. There are set-up costs and your ability to attract good staff (who want a career path, not a one off) will be severely hampered. The possible exception is a potential prize-winning project — where working on it is an attractive status symbol on an employee’s résumé. However, even in that situation you would probably look to contract out to individuals for a fixed term than to in-house them.[1]
Assuming the project is of sufficient
size or nature that recruitment won’t be a problem, then it’s a relatively
simple equation. First calculate these internal costs:
Salary and potential bonuses, including annual
increases
Office space
Software licensing and requirements
Managing the employee — is this you? Do you have
time?
All the admin, HR and employment law
Then, compare those costs to what
an external architectural firm will charge you. More than likely you will save
money — if you can recruit the right people. However, there are intangible
qualities and pitfalls that need careful consideration.
Capability.
Can the people you hire undertake all the architecture that is required? From concept
to developed design to specifications to working drawing documentation and BIM modeling. In a professional architectural practice,
the concept is done by a senior architect, the developed design by an associate
and the working drawings by juniors or specialist CAD technicians (i.e. they
may not even be architects). An option is to hire external architects for
conceptual design and in-house consent and working drawings.
Control.
You lose control by outsourcing and gain it by in-housing. Being able to keep
tabs on costs and delivery program is another reason to in-house consent and working
drawings.
Creativity.
Your project is not likely to attract the sort of creative candidate who is best
suited to a high-end architectural practice. This doesn’t matter if your
product is relatively benign but can become important if your product depends
on spectacular design.
Mentor.
Are you, as developer, a closet architect? Many think they are. Do you have the
flair and artistic inclination to drive a somewhat less creative architectural
employee to the result you want? If so, then you may not need the all-out
creative type in the first place. Be realistic about your abilities though!
Network.
An architectural practice has established relationships with engineers, town
planners and other consultants that you may want to tap into. Especially if
your project is in a new market where you don’t have those contacts yourself.
Capacity.
Often touted are the benefits of hiring an architectural firm because they
bring a wealth of experience, across disciplines and across people, to your job.
In my experience, it is the individuals that are of prime importance and any
beneficial cross-fertilization of ideas is secondary. However, on several
occasions, I have had a situation requiring a specialist and it was easy for
the architectural practice to throw another expert onto that problem. On one
job the third-party landscape architect had gone AWOL, so we asked the current
architectural practice if they could oblige with landscape signoff inspections.
Quality.
With an inhouse architectural resource you must make sure you have suitably
experienced managers to check and double check drawings. You also must think
about the capability of in-house staff to do onsite construction inspections.
Fees. External
architect’s fees may be exorbitant, but you should also be able to obtain a
fixed fee agreement, capping costs. And from there on they will be under
pressure to perform to meet your budget. The corollary though, is if they are
over their own internal budget, they may not be throwing the right resource
onto your job in the latter stages.
Insurance
and liability. Running architecture in-house
means you are responsible for the output of your architectural staff. If you
use an external firm, then they have the responsibility and the professional
indemnity insurance to go with it. In practice though, as developer, you will
be one of the last ones holding the baby. It is often difficult getting much
out of other’s professional insurance without an expensive lengthy legal
battle.
The above scrutiny also applies to
other design professions, like engineers. But liability is the main reason why
I wouldn’t consider in-housing engineering functions. For items like fire,
acoustic, structural, civil infrastructure, services, surveying and
geotechnical engineering the inherited liability — and lack of ongoing work — makes
it less likely to be worth in-housing. Of course, if your background is
engineering (so you know how to deal with the risks), and the work is
substantial enough to justify full-time internal resource, then by all means
consider it.
Town planning is a design
profession where it might be cost effective to in-house this resource, but you
would have to be a large organization or project to justify dedicated town
planning staff (the same applies to most specialist engineering functions). It’s
unlikely you can fill someone’s day, every day, on a single project. In
addition, it may be counter-productive. Often in the eyes of the people you are
trying to convince to get zoning changes or planning dispensations, an external
consultant will appear more at arm’s-length. External town planners also absorb
valuable experience from all their different clients’ work. Since they are
dealing with multiple projects they can (usually) establish more consistent
relationships with local authority planning departments.
[1] Although that gets confusing in reality, as
many contractors are essentially employees if this is their only client.
