Was wondering how everyone's firm goes about estimating hard costs on a particular development opportunity early on before acquiring the site. I'm not talking about during the first pass of underwriting, more by 3rd or 4th right before making an offer.
This is a topic that has been a struggle for me as an analyst. Hard cost has the biggest impact on the pro forma. Seems like using historical data and making adjustments based off materials increase and scope is difficult to estimate in this high cost environment.
Do you guys use a generic plug number, if so how was this vetted? Those with in-house GC's- is anyone from your GC involved early on in giving a high level PSF or per unit number? How deep do you guys dive into estimating hard cost based on scope? Thanks.
During the first few iterations of the underwriting we use either the seller's projections or numbers from a previous underwriting for similar product in a like-market grown by x%. If our initial assumptions make the deal pencil, then we will reach out to a GC for pricing. Once we receive pricing from the GC we will add in our own contingency and inflation projections.
Does your group have an in-house GC? Do they give you a full schedule of values for projections?
What do you need a full schedule for before going firm? You’re generally looking for a rough PSF quote to firm up underwriting and a ballpark on site work.
You’re gonna be coughing up some money for a detailed quote.
The seller’s projections??? Lol
Comping off our other projects to start (with an inflation factor, depending on how old our past costs are). Once we get a little further down the road we'll usually talk with a contractor, especially if we have to go hard early or the deal is sensitive to cost or whatever. As I'm sure is the case with everybody else, the past 1.5 years or so have been a shitshow and you don't feel safe about the cost you're modelling until the day you sign the AIA.
Feels like you can't get a realistic cost estimate out of anybody these days, every GC and sub is burying tons of fat at every level of the budget to cover their asses.
It will be an interesting few months. Many commodity futures are way down from before. We're likely about to enter a recession which will likely make GC's hungrier for business. Current construction pricing can't stay for long- many deals in my market are on pause because costs are too high.
what is everyone's structure/arrangement with their GC? GMP?
As someone who's developed multifamily and did construction for multifamily and office, I've only seen GMP contracts. I think small retail (think standalone McDonald's or something) and industrial can work on a Cost Plus basis because the projects are simpler to build, but that's just what I've heard, I don't have any first hand experience of that.
Especially right now, GMP is almost necessary. You’ll have a really hard time getting a lender onboard without it
If the developer has enough experience working on that particular project type (e.g. industrial, multifamily, etc.), they have good enough cost estimates to get underwriting started. Once the site plan and drawings are underway, they'll go out to GCs to get estimates. At this point, I'd probably carry a higher contingency (7-10%) and then as we start getting real bids and select a GC, I'd lower the contingency.
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