Clients are asking the same three questions of JE Dunn consistently to guide them through the current staggering escalation:
Clients are asking the same three questions of JE Dunn consistently to guide them through the current staggering escalation:
Answering this question is as difficult as it has ever been because month-to-month pricing is changing dramatically. A project that was procured even six months ago is considerably different than a new project today. At JE Dunn, our preconstruction teams use a national dashboard with current pricing for each project priced in today’s market – regardless of their level of design – to ensure our data is always live with today’s costs. This gives our clients an accurate expected range of outcomes for projects of similar size and scope in all parts of the country. Think of it as the live stock market for new construction.
Once we have a high-level range of expected cost from the dashboard, our teams dive a layer deeper into the data and look at a component
level range of cost to tailor to a specific client’s project parameters. A great example is mechanical systems. A client might have a specific energy star or sustainability goal for their project. We take that project parameter and adjust the benchmark accordingly to custom fit our metrics to know where the mechanical systems initial benchmark needs to be.
The result is a thorough cost evaluation that aligns with a client’s programmatic goals and expectation of component level scope parameters. We have taken an expected range of national comparable project live data and calibrated it to understand where a prospective project budget lands on this range.
The truth is no one has a crystal ball to foresee the future. Current trends have increased construction costs at a scale of 1% per month. This rate is historically high as ANNUAL escalation over the previous 10 years was a steady 2-3% per YEAR. Although there are hopes that the upward slope could be slowing, the data is still coming in to see if this feeling is hitting the project financials.
We advise clients to think of future escalation as a risk tolerance assessment when deciding how to fund this future unknown. The fact of the matter is we just don’t know the exact dollar amount that will be required for escalation on these projects that will not be procured in the marketplace until a year from now. Escalation could continue this pace of 1% a month, or we could see a slowdown of the increase.
Project leadership needs to look at this risk as a range of possible financial impacts and determine how best to approach this risk based on project specific funding parameters. Some clients are choosing to be conservative in their approach and budgeting a more cautious value up front in a funding request with a hard project cap, while others are ear marking the risk with leadership and re-aligning funding when it becomes known during final procurement. The mitigation strategy is a project-by-project study to find the best path forward for the client.
Start the scope small and deliberately add the pieces from there. The true programmatic baseline scope of the project must be pared back to the minimum space drivers that make up the specific capital project proforma. Without defining this minimum project scope starting point, it will be hard for the design and construction team to delineate the “wish list” items that naturally come up during the evolution of design. If properly defined upfront, now we can partner at a strategic level with our clients on a project financial minimum and create a funding strategy for programmatic and design flexibility as the “wants” come to light.
A common example would be provisions for vertical expansion or day one shell space. Both incur day 1 cost—but do not generate immediate revenue. Instead of muddying the waters and blending that into a baseline project, delineate this item as a shopping cart item to
be funded as such by project leadership. It makes the funding/scope communication much clearer for decision makers to align their strategic initiatives of the project with the appropriate financial commitment.
There also needs to be alignment on how to financially handle future risks. Establishing contingency levels for design and escalation is a team discussion. Design contingency has a direct correlation to design flexibility. The higher the fund, the more flexibility in decision making as pen goes to paper for the client. Again, escalation contingency is established by using the data we know, paired with a risk tolerance discussion of what to expect in the future. Each project needs to have the whole team on board as to how we will fund and track this risk.
It’s all about being a strategic partner for a client. We understand there is complexity in how projects are funded, scope is developed, and financial risks are addressed. We are here to align our data, our national project experience, and our process of partnership in all phases of project development to create the framework for a successful project.
