June 2018

A Capital Idea

Capital project management starts with carefully drawn project scope definitions and detailed budget allocations.  A recent 2-day program at the University of Wisconsin - Madison, Department of Engineering Professional Development where I was co-instructor included much discussion of the topic.  Let’s start the curriculum.

We’ve seen that it’s not uncommon for Financial Managers to inadvertently assign the estimated construction cost as the expected total expenditure.  Sadly, this approach can overlook many unavoidable expenses that contribute to the full project expense.

What are these?  Based upon varied experience in different venues, I suggest seven categories:

• Construction
• Consultants
• Owner's Representation
• Internal Operations
• Fixtures, Furnishings, & Equipment
• Testing and Abatement
• Contingency

Let's explore each one.

Construction

Perhaps the most obvious, but likely with many more elements than originally contemplated.  Common construction cost elements often overlooked are:

• Construction Manager’s preconstruction services fees
• Building Permit Fees
• Sitework preparation
• Demolition and/or removal of existing construction, both buildings and interiors
• Final Cleaning
• Telecommunications and Information Technology installations
• Audio Visual installations
• Security installations
• Design Fees, when the construction process is “Design/Build” (a subject worthy of a full newsletter of its own)

We all know there are likely to be Architects involved, but what about the others?  The typical ones:

• Engineers
  • Structural 
  • Mechanical
  • Electrical 
  • Plumbing
  • Fire Protection 
  • Soil 

But, there are often others:

• Cost Estimator
• Telecommunications Consultant
• Sitework preparation
• Landscape Architect
• Interior Designer
• Signage Consultant
• Graphic Designer
• Artwork Consultant
• Move Coordinator

For complex, multi-million-dollar projects, there may be dozens more.  It’s daunting.

No project runs completely on Autopilot (not even Tesla’s).  Any management effort, even if you do it yourself, comes at a cost, which should be attached to the capital investment represented by the project.  This includes the use of Owner’s Project Managers (OPM’s).

Apart from the obvious cost recognition, there can be the advantage of fully accounting for the cost basis of a capital improvement, which is “capitalized” and not “expensed” in accordance with Generally Accepted Accounting Principles (GAAP).

In large scale commercial or institutional settings, renovation and new construction projects instigate activities needed to make them possible.  These may include:

• Utility shutoff and turn on, including
  • Power
  • Water
  • Air Conditioning 
  • Fire Protection
• Security Operations
• Contractor Escorts
• Fire Watches​

Once again, these are costs which can be capitalized if that were advantageous.

If it’s not bolted down and part of the building, it’s usually considered FF&E (yup, the acronym).  The obvious:

• Tables
• Desks
• Chairs
• Floor Lamps
• Area Rugs
• Artwork
• Anything called "furniture"

• Appliances
• Electronic Gear
• Laboratory Equipment
• Industrial Shelving
• And Lots of Others

The nature of modern construction requirements is that many elements require testing before, during, and after actual construction activities.

These may include:

• Soil and Geotechnical Studies
• Hazardous Material Identification
• Concrete Testing
• Steel Welding Tests
• Steel Bolt Tests
• Air Quality Testing
• Flow Tests for Mechanical and Plumbing Installations, Both Air and Fluid
• Water Infiltration

Abatement is the encasement or removal of hazardous materials, including:

• Asbestos-containing materials (ACM’s)
• Lead Paint
• Polychlorinated biphenyls (PCB’s), a fluid formally used for electrical insulation.

The categorization of “Testing and Abatement” items to some extent is discretionary.  Some financial managers see some of these as a component of the “Construction” category, while others prefer it to be segregated as a way to maintain some purity in the construction cost for future data analysis.

Aah – the big debate.  Contingency in the context of a fully developed project budget is the additional monies reserved to protect against unexpected or concealed conditions.  Conservative financial managers recommend no less than 10% of Construction Cost be maintained as a project contingency.  For complex renovations or project with many uncertainties, the contingency is advised to be no less than 15% of construction cost.

Experienced project managers will see no real issues with the foregoing, and may well have tuned out by now.  On the other hand, those who assemble only the occasional capital project may be incredulous.  The fact remains that a full capital project budget may be no less than 40% more than its included construction cost.  In fact, it can easily be much more.  Here’s a hypothetical breakdown for a modest interior renovation:

Institutional or corporate practices may dictate slightly different categorization of project costs.  That’s okay, as long as all projections are adequately covered.  Also, of course, the recommendations above could be greatly expanded, with many more components in each category of project cost.

In the execution of the work, as a project moves through the typical phases of design, construction, and close-out, oversight of the budget allocations and cautious use of project contingency is imperative.  Typically, too, contingency percentages, may reduce as more information is gained in the course of design development and construction costs are proscribed more carefully.  Under any circumstances, tight controls are essential, since lax management can allow a project to run wild, with consequent financial losses or unneeded spending.

Come to class and we'll teach you more!

Missed earlier newsletters? Find them here:

March 2018  “Me Too?”
January 2018  “R U Trending?”
October 2017  “Do You Measure Up?”
August 2017  “I'm an Architect and I'm Here to Help”
January 2017  “The Future of Higher Education”
November 2016  “The Owner as CM?”
August 2016  “Don't you just hate...”
June 2016  “Duck Testing”
April 2016  “Once Upon a Time...”
January 2016  “I want to take you higher”
November 2015  “Moderating in all Things?”
July 2015  “Alphabet City”
May 2015  “Acey Trey Trey Trey?”
January 2015  “Nature or Nurture?”
August 2014  “Acey Trey Trey?”
June 2014  “The Seven Deadly Sins”
March 2014  “Thar She Blows!”
November 2013  “Giving Thanks”
September 2013  “Back to School?”
June 2013  “What Time is It?”
March 2013  “Acey Deucey?”
January 2013  “A Swamp Full of Alligators”
October 2012  “Plan to Live Forever, Part Deux”
July 2012  “A Midsummer Dream”
May 2012  “Are you Virtually Working?”
March 2012  “Your Huddled Masses”
January 2012  “Observing Observations”
October 2011  “I Want What I Want”
August 2011  “A Beach Read”
May 2011  “NeoLuddite or Technophile?”
March 2011  “Do Your Silos Leak?”
January 2011  “Plan to Live Forever!”
November 2010  “May I Have A Plan, Master?”
September 2010  “How do we choose?”
July 2010  “Good People Behaving Badly”
May 2010  “LEED: LEADing or Dead Weight?”
March 2010  “Why does it cost so much?”
January 2010 “Design/Builders show us your softer side.”
November 2009 “What the Facilities?”
September 2009 “Why Do Architects Make Good Owner’s Reps?”