We’ve been studying data a lot lately, and most importantly comparing today’s performance data with previous cycles. Connecting dots and making plans.
One of the trends we have observed, and which our data supports, is that renovation project metrics in Manhattan are similar to post-recession projects following the 2008 financial crisis. We noticed this trend by correlating inflationary change order percentages with perceived client and contractor unhappiness. In 2009-2011 and again in 2016-2017, savvy owners purchased un-renovated homes during a soft market, and when making scope decisions and negotiating construction contracts showed great discipline. During construction, these same clients added back scope and made design decisions leading to increased change orders and schedule extensions. While clients, contractors, and DFA worked collaboratively and created beautiful homes, none of the parties were made happy by a process dominated by cost overruns and delays.
In 2012, the market conditions and trends we observed became the catalyst for the creation of our Studio Program. The Studio Program is very innovative, and the last seven years of projects have proven its success. When assessing the data this year, and upon seeing the similarities to 2012, our first impulse was to redouble our marketing efforts of the Studio Program. Relevance today is clear and introducing the Studio Program to a larger group of buyers, sellers, and real estate brokers benefits everyone. Having made this commitment, we next looked to see what else we could learn from the data and if we could other connections.
We conscientiously track construction expenses for our projects on a per square foot basis, always looking to understand if client tastes or market trends are evolving. This year we noticed a spike in per square foot construction costs. When we analyze our data, we make certain we look at total project expenditures, inclusive of change orders and split contracts. When we sat down and looked at the numbers together, we found a number of recent projects had pushed our average per square foot construction costs to record highs. This could be attributed to inflationary contractor expenses, including tax and insurance increases, as well as material, labor and subcontractor increases, etc.; and/or we may have lately undertaken more complex and expensive projects. As one might expect all of the rationales were found to be true.
Once we determine that project costs were increasing at a faster rate than market conditions would suggest, we sought to understand why so many of the projects had encountered headwinds. One obvious answer was explored above, that change orders and schedule extensions had tainted the process. We also learned a second lesson about contractor selection. As we lead clients through the contractor selection process, we often see widespread differences in proposals; bids can be as much as double when contractors with different overhead structures bid against one another. Even though the six recent projects were more expensive than our historic norms, and maybe because of this, each of the clients chose a contractor at the lower end of the expense spectrum (wouldn’t you?).
All but one of the six individual contractors were well-known to DFA; four of them had built many projects of similar size for DFA clients over the past twenty years, and each of the contracting firms was qualified and was awarded the contract after a competitive bid process. And yet each of the project sailed into headwinds.
We’ve always tried to best match contractors and projects, based on a contractor’s project management style, culture (corporate or artisan), size, overhead, reputation, price, and ability to cashflow a particular project. As long as the contractor was familiar to DFA and the chemistry between an owner and a contractor seemed good, we were confident in delivering a successful project. What we learned this year, is that the qualification process has to be even more rigorous, and that we needed to add two additional criteria: 1) is continued design development expected after construction commencement, and 2) are the specific materials, details, and finishes consistent with a contractor’s capability and experience.
For each of the six projects, post construction commencement design revisions and changes were numerous, and in two of the cases significant engineering challenges were encountered. The contractors for each of these projects struggled to keep up with the paperwork and management demands of their respective projects. Had the client chosen a larger firm with deeper project management resources, the late stage changes could have been more easily handled, and both clients and contractors would be more satisfied. Adding to the challenges of additional work and changes, each of the projects featured finishes and details beyond the comfort zone of the contractor. This breeds hesitancy. Hesitancy to make a mistake; hesitancy to provide clear direction; hesitancy to ask questions and admit unfamiliarity.
The contractor selection process, based on the usual and typical criteria, provided over-budget clients with economic efficiency, but was the economic benefit worth the delays, anxiety and corrective work? In the end of the day, our most expensive and complex projects deserve a contractor with the resources to execute, even if at a premium cost.