Can real estate developers still make a profit?

By Alexander D. Tuttle, Esq.
partner, LePatner & Associates

Today’s real estate landscape is a minefield. Lending is scarce and conditioned with onerous terms against borrowers. Cash is reserved on the sidelines for only the sweetest of deals. Investors who have, in the past, demanded home runs, now must be content with singles or doubles.

Many developers are questioning their long-established development practices. With profits hinging on slim margins, developers are now focusing on reducing/eliminating construction delays and cost overruns that invariably eat into their development profit.

Now more than ever, developers must strategically evaluate and plan, assemble a first-class project team, critically oversee the design process, secure responsible bids from contractors, and administer quality and timely construction.

Construction planning requires more than simply allocating a design and construction budget. It requires evaluating sustainability goals, the quality of the design and construction, operations, project delivery options, and whether to use a general contractor or construction manager to execute the construction.

Most importantly, developers must identify and price foreseeable construction risks to mitigate potential loss. This can be achieved through the design and construction team collaborating to identify contingencies that may impact the project as well as mitigation strategies. Developers should not be held hostage to alleged “unforeseen conditions” and “change order” claims.

Developers’ Requests for Proposals (RFPs) to potential team members should seek not only the most experienced candidates, but also those qualified to meet the specific project goals.

Developers must carefully contract with their design team to ensure that design drawings are fully detailed and co-ordinated. This eliminates contractor claims for errors and omissions in design drawings, which otherwise serve as the single greatest source of project delays and cost overruns.

To this end, one key element is using design software that incorporates BIM, or other sophisticated filters that identify co-ordination problems between the mechanical, electrical, plumbing, and structural engineering designs.

Contractors must also certify that what’s reflected on the design drawings can actually be built within the contractor’s bid price.

The design process should permit developers, assisted by cost estimators, to understand the true cost of what’s being designed as it is being designed. Developers are often first presented with construction pricing when the contractor submits its bid. This is too late, and most likely, the contractor bid is not the true price. Only with accurate cost information in hand can developers maintain control over the construction process and make appropriate comparisons with contractor bids to ensure fair pricing and avoid “low-balling.”

Unfortunately, the opaque nature of the construction process can incentivize contractor theft of services. This can take the form of supplier kickbacks, billing phantom costs, low-ball bidding, and charging full-time rates for workers not even on the job.

Developers should have a systematic process of screening potential contractors. The RFP should include uniform bidding forms that identify each trade breakdown, itemized general conditions, insurance coverages, bonds, a fixed fee for the contractor, and a list of potential risks that may occur during construction.

The RFP should further contain specimen contracts that contractors will ultimately sign. Developers must implement certain controls over their project, such as a detailed project management plan with precise performance dates, a monitoring system of critical cost items, an auditing program against illegal subcontracting, a system to tally manpower on the project, a requisition process that verifies materials and equipment, and a program to confirm that all contract requirements are satisfied.

Successful projects require a competent and complementary team. Developers should be able to rely upon a range of experienced professional advisors to guide them efficiently.

The issues cited above are just a few of the concerns that should be addressed prior to embarking on a project. A misstep at any phase could mean the difference between millions in profit versus foreclosure, bankruptcy, and recourse against personal assets.

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  • Yes,real estate developers have still make many profit from construction.they have no large profit but have a many slim profit at many time.developers have good profit from their managing skill.they create or design a building and construct their profit well.

  • Rajib Dey

    More focus should be provided on the impact of BIM for Real Estate Developer

    Rajib Dey
    http://www.bimoutsourcing.com

  • Amazing,… the content are quite interesting.. it surely help me on ..Thanks for
    the helpful information…

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