Best Practices to Ensure Commercial Real Estate Development Project Success
If you haven’t already, check out the first blog in this series, The Real Estate Developers Handbook: The Role of Budgets in CRE.
Picture this: a majestic skyscraper reaching for space or a serene community nestled amid lush landscapes. These captivating visions start as blueprints and evolve into something tangible.
A real estate development project combines creativity, strategy, and resource management to transform visions into reality. From groundbreaking to ribbon-cutting, every step holds the promise of a thriving property that will stand as a testament to your vision and determination. However, amidst the excitement and anticipation, one aspect often stands as the bedrock of project success: budget tracking.
In this series, we delve into the compelling reasons why meticulous budget tracking is the cornerstone of prosperous real estate development projects. From its role in ensuring fiscal discipline to its power in anticipating and mitigating potential challenges, we will uncover how budget tracking empowers developers, investors, and stakeholders to navigate the often unpredictable terrain of real estate development with confidence and finesse. So, let’s embark on this exploration, where numbers tell a tale, and financial acumen lays the foundation for real estate success.
With the ability to effectively centralize and compare the budget, contracts and costs, a developer can prevent future issues on a development project.
This begins with the following key items:
1. Thorough Initial Feasibility Study
Conduct a comprehensive feasibility study before initiating the project. This study should include detailed cost estimates, market analysis, financial projections, and risk assessment. A well-informed decision at this stage can prevent unexpected budget overruns later.
Rabbet Recommendation: Review previous similar projects to understand where and why cost estimates proved incorrect.
2. Detailed Budgeting
Create a detailed and realistic budget that includes all possible costs, such as land acquisition, construction, permits, fees, design, marketing, contingency, and financing. Make sure to account for inflation and potential price fluctuations.
Rabbet Recommendation: Tracking the trades either at the breakdown of the General Contractor’s G703 or at minimum to 16 CSI Divisions.
3. Contingency Planning
Allocate a contingency fund within the budget to cover unexpected costs or changes in the project scope. A common rule of thumb is to allocate around 10-20% of the total project cost for contingencies.
Rabbet Recommendation: If the project is a Renovation, we recommend 10% contingency. New construction can have a 5% contingency depending on environmental studies.
4. Regular Cost Tracking
Implement a robust cost tracking and reporting system. Regularly monitor and compare actual expenses against the budget. This will help you identify cost overruns or discrepancies early, allowing for timely corrective actions.
Rabbet Recommendation: Track all budget, contract and cost information is a central location to check the interdependence of these items.
5. Value Engineering
Continuously review the project design and scope to identify opportunities for cost savings without compromising quality. Consider alternative materials, construction methods, and design elements that could reduce expenses.
Rabbet Recommendation: Involving your contractor early in these discussions specifically around material selection and submittal requirements can ensure opportunities to improve deliverability and save costs on the project.
6. Vendor and Contractor Management
Establish strong relationships with reliable vendors and contractors. Obtain competitive bids and negotiate contracts carefully to ensure favorable terms and pricing.
Rabbet Recommendation: Review your history with various vendors on the project to see their history of project performance and proclivity for change orders.
7. Regular Project Meetings
Hold regular project meetings to review progress, address challenges, and ensure that the project is on track. Effective communication among team members can help prevent misunderstandings and costly mistakes.
Rabbet Recommendation: Understand that key RFIs, Submittals, and Lead Times can impact the budget and should be paid close attention to.
8. Change Management
Implement a robust change management process to assess the impact of any changes to the project scope and budget. Obtain necessary approvals before implementing changes that could affect costs.
Rabbet Recommendation: Most contracts require the GC provide any Potential Change Orders within 21 days. Making sure you are getting regular updates from your GC on potential costs is important.
9. Regular Reporting to Stakeholders
Provide regular updates to stakeholders, including investors, lenders, and partners. Transparency about the project’s financial status and progress can build trust and help garner support when needed.
Rabbet Recommendation: Closely monitoring the project contingency and ensuring the budget and contracts are being tracked properly will give confidence to stakeholders the project is moving forward as planned.
10. Leverage Technology
Use project management software and tools to streamline processes, enhance collaboration, and maintain accurate records of expenses, contracts, and project milestones.
Rabbet Recommendation: Use Rabbet.
By implementing these best practices, you can effectively manage your finances on your real estate development project and increase the likelihood of a successful outcome.
Stay tuned for the next blog in this series, The Real Estate Developers Handbook: Anticipated Cost Tracking in Rabbet Reports Made Easy or visit rabbet.com to learn more.
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