DFA is headquartered in Midtown Manhattan and the majority of our projects are for private residences on the island. A quick perusal of any week’s Sunday New York Times Real Estate section highlights how expensive home ownership is in Manhattan, and with internet search engines providing easy access to the public record, the wealth of our patrons has become ever more visible. To undertake a major project in this marketplace, homeowners need to have significant capital reserves and a willingness to invest accordingly.
No matter how much capital has been set aside for construction, clients frequently contend their project bids have come in too expensively, often shockingly so. Even when emotionally and financially well prepared, homeowners question the numbers; and we join them in trying to understand and manage the seemingly runaway costs. We first look at the scope and complexity of the project to see if a mismatch exists. Next, we assess the appropriateness of the contractors who have bid the project. When we can’t find a linkage between the plans and the estimates, we suspect that the project has fallen prey to extreme market pricing. While construction costs typically correlate to both specific market and supply and demand forces, pricing can also be affected by a client’s perceived wealth. We refer to the last criteria as zip-coding, a conceptual framework stipulating that costs are dramatically impacted by a client’s perceived affluence, by a specific project address, and by the value of the real estate, and not solely by supply and demand.
Naturally, project costs vary based on locale. Building in Manhattan is more expensive than in other communities due to regulatory concerns, limited work hours, traffic, insurance costs, labor costs, gratuities and graft; all of which (but one) qualify as legitimate overhead costs. While we have no choice but to participate in and endorse the high costs of doing business in Manhattan, zip-coding goes one step further, inflating prices solely based on the perception of what a client can afford and the specific cost of a particular property.
In boom markets – the seeming norm in Manhattan – expert labor and specialty materials command a premium, unavoidably yet reasonably increasing the market price of construction. When estimates fall victim to zip-coding, bids become detached from supply and demand and actual costs, and contractor pricing operates more like wealth redistribution. To best serve our clients, we endeavor to recognize and differentiate between appropriate expenses and those inflated through zip-coding. We employ a number of strategies to make certain construction costs stay connected to the market forces of supply-and-demand and to ensure fair pricing.
The first core strategy on which we rely is the development of close long-term relationships with contractors, and in turn, subcontractors, who collectively manage their overhead costs carefully, have a high quality-to-value track record, and are less prone to opportunistically inflating costs. We divide our portfolio of contracting firms into tiers, and carefully match the resources of the contractor to each project. While we occasionally work with the more expensive firms who have exceptional resources and, in turn, higher overhead rates, the majority of our projects are placed with smaller more efficient firms. We are proud of our contractors who are willing and determined to work collaboratively and effectively to manage expenses on behalf of clients.
The second strategy is to work closely with our clients to help them understand which scope elements of a project may be elective, and to offer guidance when a less expensive design solution may satisfy their needs. While we love beautiful (and expensive) things, we often propose alternate designs and materials to help economize.
Both strategies reinforce our fiercely held belief that sound fiscal management is in the long-term interest of our clients and construction partners. By defeating unwarranted zip-coding, and by giving clients better financial control of their projects, we increase the trust between all parties – enhancing rather than diminishing the process and the final result.