It is unfortunately becoming increasingly clear that there is no obvious end state for what it means to operate in the age of COVID 19. Instead there are a lot of big unknowns to be acknowledged and tackled. Some of the tools mentioned in this presentation including surveys & project management can help engage with your workforce. These are familiar tools that we can help put in place in your organisation.
While there has been much analysis and discussion recently regarding the National Children’s Hospital project and the governance approach taken to get the project to this stage - developing the optimal procurement strategy for a construction project is a key step to ensure the probability of a project’s overall success with a range of risks and benefits associated with any given approach. In the case of the Children’s Hospital the key project objective, to start early on site in advance of a fully detailed design being prepared, appears to have been a key decision criteria in the choice of the procurement approach taken.
As part of an overall project governance approach careful upfront consideration needs to be given to development of a procurement strategy to match a project’s overall objectives and a Developer’s risk profile. In the linked paper (Minimising Risk In Construction Procurement) the main approaches are described and the issues to consider in order to develop a procurement strategy discussed.
The procurement strategy looks to optimally transfer and minimise the risks that a Developer of a construction project will face during a project’s lifetime. This strategy comprises several elements including the overall management approach and procurement system. Inherent in each choice that a Developer makes for each of these elements is a trade-off between the competing objectives of schedule, cost and quality. In the case of the Children’s Hospital the benefits of an early start on site in an inflationary construction cost environment were to be balanced with the lack of cost certainty of the procurement approach taken.
Time spent up front, using the stepwise structured approach described in this paper, through considering the risks and constraints inherent in a project and their impact can help determine the optimal mix of delivery system and contract approach for a project. Deciding and delivering involves several steps:
1. Determine the Procurement Route
The procurement route (tactics) delivers the strategy. It includes the contract strategy that will best meet a Developer needs. Having an integrated procurement route ensures that design; construction, operation and maintenance are considered as a whole and that the delivery team work together as an integrated project team.
2. Contract Strategy
The contract strategy determines the level of integration of design, construction and ongoing maintenance for the project and should support the main project objectives in terms of risk allocation, delivery, incentivisation and so on.
3. Identifying the project constraints
As each development project has a set of associated risks and constraints these must be considered at its initiation in a structured manner. The initial stage of a construction procurement strategy evaluation involves detailed identification of the constraints which surround the project and looking to identify how such constraints impact on the risks associated with the procurement route chosen. The constraints can be broadly grouped as financial, physical, geographical, program, functional or design constraints.
4. Evaluate the risks of single v multi stage approach
The main objective of the process will be to establish the risks inherent in a specific procurement route for a project and to ultimately recommend a procurement route that will optimally allocate these risks between Contractor and a Developer. The initial step looks at a single v multi stage delivery system approach with the first stage identifying the critical issues for a Developer to choose the optimal delivery system. The system should be chosen that offers the desired risk level to a Developer. Having made that decision the approach then looks at each contract in detail and determines the optimal contract type to be used.
5. Determine what is important to the project and pick the right contract approach to deliver
The final step in making the strategy live is to finalise the procurement objectives and to compare the ability of each contract approach to meet the objectives (for each package assuming a multiple contract approach). The decision criteria used to make this choice are closely linked to project objectives, both tangible, such as time and cost and intangible such as buildability and relationship. They can be established through reviewing previous projects, thinking about past experiences and then selecting those criteria that are relevant to a project. The decision criteria are weighted in terms of relative importance using a suitable weighting approach.
In summary, project teams need to be aware of the advantages and disadvantages of each approach in order to best develop and deliver an optimal procurement strategy that balances risk, control and cost certainty in line with the overall project objectives. The delivery system and the contract approach chosen at the end of the process outlined becomes this procurement strategy – the approach which identifies the best way of achieving the objectives of the project and value for money, taking account of the project’s risks and constraints. The aim of the procurement strategy development process outlined in this paper is to achieve this.
Marlet Property Group is to pay €56m to acquire the site of the former Apollo House office block in Dublin City centre (Source: Sunday Independent http://bit.ly/KeoApolloHouse).
The figure represents a significant premium on the €40m guide price advertised when the site was brought to the market at the end of September 2018. This price represents an equivalent of €77.7m per acre based on the sites 0.72 acre size. There has been an amount of commentary regarding the closeness of this price per acre to the record paid in 2005 of €84m per acre for the former site of the UCD Veterinary College in Ballsbridge.
The most important difference for Marlet is the fact that the Apollo site came for sale with full planning permission for an 11 storey over basement office building extending to 12,622 sq m lettable area (17,415 sq m GIA including basement). In addition, the Apollo House building has been demolished and the site cleared. Our calculations estimate that the benefit of the planning permission and site clearance total c. €10.6m from savings in design, project management, demolition and cost inflation. i.e. a comparable site value of €64.5m per acre.
Figure 1- Estimation of Site Value Without Planning & Demolition
Nonetheless given the price paid it is interesting to analyse the transaction. Taking the building specification and location we have taken the recent letting of 5 Harcourt Road by Green REIT to WeWork on a 20-year leaseas a comparable benchmarkin order to facilitate analysis of the price paid by Marlet.
Estimated Rent 7,349,240 - Estimated on completion when fully let. €55psf
NDV 144,981,706 - NPV to allow for void & 8.46 % notional purchaser costs. Exit Yield assumed 4.75%
Total Cost 126,071,048 - Estimated build cost plus site cost, development levies & fees. Includes financing and tenant incentives
Profit 18,910,657 - Estimated total profit on cost
Yield on Cost 5.8% - On estimated build cost plus site cost, development levies & fees. Includes financing and tenant incentives
Profit on Cost 15.0% - On estimated build cost plus site cost, development levies & fees. Includes financing and tenant incentives
Unleveraged IRR - 10.8%
The analysis (download here) highlights the sensitivity of overall return to the construction cost, expected rental rate and exit yield assumed. The fact that the site is ready to go (with assumed completion in 24 months from start on site) and there will be a short time between sale completion and start on site de-risks the project somewhat, however, the rental rate assumptions are at the top of the market. It is to be noted that the Green REIT transaction offered a full fit-out of the building to the WeWork specification – this was equivalent to an 18-month rent free period. Our calculations indicate that this tenant incentive is equivalent to a €5 psf reduction in rent over the course of the 20-year lease.
Should you want to discuss any aspect of this analysis or how Keogh Consulting an assist you in the development and delivery of your property project please email us at email@example.com
Rent €60psf Y1-Y5, €65psf Y6-Y10, then rent review. Fit-Out by Green Reit equivalent to 18 month rent free period.
Source Green REIT Interim Result Presentation 2018.
The iOS App is a tool for the construction industry providing a cost database and calculator to facilitate project planning and cost benchmarking.
It presents a construction and development cost database for a broad range of project types in Ireland with international cost indices for benchmarking purposes. A calculator allows estimation of total construction cost, construction inflation and finance costs for projects.
The costs are based Q3 2018 and do not allow for inflation.
Inflation calculation is based on average cost for the project and internal Keogh Consulting inflation estimates.
Finance cost estimates takes a s-curve construction cashflow and calculates rolled up interest based on monthly interest charge in arrears on average current loan balance.
Property entrepreneurs are now required to prepare detailed and comprehensive business plans indicating the up front viability of a project and how a they intend to deliver the planned project.
Given these requirements a business plan should help a potential funder or investor to understand the property developers ability to repay and look to demonstrate the long term viability of both the property business and the project and in doing so to identify short, medium and long term working capital requirements.
The importance of preparing a property business plan is apparent and time and effort will need to be spent in preparation of the plan. The following article sets out to illustrate what should be included.
Keogh Consulting looks to help individuals and organisations deliver the right projects the right way. Here is some of our knowledge and a few case studies that we hope will help you on your project journey.
Project Cost Calculator & Database
Cost Rental Simple Model
Cost Rental Complex Model