5 Signs of a Well-Run Commercial Construction Project
December 07, 2018
Undertaking a commercial construction project is fraught with peril that can lead to spectacular failures, ruined careers and bankruptcy filings. However, it certainly doesn’t have to and shouldn’t go that way! You can complete a commercial construction project on time and within budget if you manage it properly. The telltale signs of an expertly run project are there for all to see – you simply have to look closely. In this article, Assets America® reviews five hallmarks of a well-run commercial construction project as well as the indicators that show when a project is going off the rails.
1. Planning a Commercial Construction Project
Firstly, commercial construction projects can be exceedingly complex and can require many months or even years of careful, detailed planning. A well-run project will utilize all the elements of a complete plan. These include starting with a timeline that shows each step of the process and the interdependencies between the steps.
Secondly, you can obtain sophisticated PERT (Program Evaluation and Review Technique) and chart software. This software employs the critical path method for scheduling the activities that you must accomplish on time to avoid overall delay. Beyond the detailed breakdown of construction activities, including scheduling of deliveries, deployment of labor, a methodology for handling change requests, coordination with utilities, and procurement of permits and inspections, your plans should include a complete budget with contingencies to handle cost overruns.
Problems with Poor Planning
Poor planning can lead to inaccurate estimates, scope creep, delays and surprise conditions. An experienced project manager knows what to plan and the proper level of detail at each stage of the project. The foreman’s trailer at a well-run project site has all the plans available at the stroke of a few keys. These plans should be properly communicated to the critical supervisors and workers on a timely basis.
2. Properly Structured Commercial Construction Loans
A properly planned commercial construction project requires adequate funding for each stage of construction. Normally, lenders dole out commercial construction loans in a stepwise fashion. The lender releases the next tranche of financing only after the project completes a milestone. The period of greatest peril for lenders is before the developer actually breaks ground. This is because the building doesn’t exist yet and thus cannot serve as collateral. Rather, borrowers must supply collateral via other, non-project assets and/or cash. As construction proceeds, the building starts to acquire value, and can begin to function as collateral.
On a well-run commercial construction project, good communication between the developer and the provider of commercial construction loans is essential. It helps ensure the steady access to funds and close monitoring of cost overruns. The sign of a well-financed project is the lack of work stoppages due to funding delays. This requires a solid, communicative relationship between lender and developer. That’s why you want to borrow from Assets America®. With greater than three (3) decades of commercial financial expertise, we can help to ensures a comprehensive approach to funding that leaves nothing to chance. Our commercial construction loans start at $5 million, with virtually no upper bound. We will be happy to show you how much to borrow, based upon your needs and resources.
3. Just-in-Time Delivery
A large commercial construction project consumes millions of dollars of construction materials, from steel to concrete to wallboard. Managing the logistics of material supplies requires great expertise and experience. The project manager must order just the right amounts and varieties of materials with the proper lead times. He must stage them on site in the most efficient manner.
An efficient project manager ensures that he stages only the materials that he will use in the next short period. This technique, which we call just-in-time (JIT) delivery, minimizes the space required to stage materials and reduces the chance of costly theft or material damage. On well-run commercial construction projects, you’ll notice that materials don’t sit for months moldering away. Instead, a steady stream of deliveries stays one step ahead of material deployment.
Material shortages are even worse than overstocking. This is because it can bring the project to a grinding halt. While JIT delivery is the ideal, project managers must balance its use with the risk of material shortages and delivery delays. For example, when a hurricane lands in your region, chances are the demand for wallboard and lumber will skyrocket. An experienced project manager knows when to insist on early delivery, even if it requires additional staging space. On a good project, material shortages don’t delay construction.
4. Optimal Deployment of Labor
An efficient commercial construction project is neither over-staffed or under-staffed. Your construction plans should detail labor requirements for each workday. In the best of all worlds, you’d be able to ensure your project never suffers from laborers waiting on-site for a delay to resolve itself, and you’d never have to delay work because of a lack of sufficient labor.
If your project exists in a union milieu, you will want to establish excellent relations with the union leaders for the crafts you’ll need. The steelworkers, concrete workers, electricians, plumbers and the many other types of union labor expect to work hard and be well-treated. What you are looking for is an agreement to avoid featherbedding and no-shows, in which the union regularly over-staffs the project.
In many parts of the country, you can run a commercial construction project without union interference, especially on smaller projects. You should have access to a pool of skilled and unskilled workers that you can deploy in exactly the numbers you require. The nice thing is that many non-union workers make no demands and keep a very low profile. Your biggest task is to ensure that your cash management practices fully support your payroll requirements. On a well-run commercial construction project, you pay workers on time and they don’t complain.
5. Smooth Refinancing
Commercial construction loans are typically interest-only with terms from six months to a few years. The loan term is project dependent and differs according to property type, overall project size, complexity, number of phases, etc. A properly run commercial construction project will have planned out its refinancing before the construction phase is complete. Developers undertake some projects to generate income, while other projects result in the sale or internal use of the property. Refinancing income properties usually starts with a mini-perm loan of 18 to 36 months. During this time, the property is building its rent rolls and stabilizing occupancy. A mini-perm loan might be interest-only or a conventional amortizing loan, depending on the needs of the developer and offerings of the funding source. On a well-run commercial construction project, the transition from construction loan to mini-perm financing is seamless, and should proceed with no surprises.
Mini-Perm and Take-Out Loans
After a stabilized occupancy has been reached, a long-term mortgage, also known as a take-out loan, replaces the mini-perm financing. Commercial mortgages tend to have slightly higher rates than their residential cousins. On a well-run project, net operating income can easily support debt service and provide the return required by investors.
The best way to ensure a smooth staging of refinancing it to make arrangements in advance with the provider of commercial construction loans. Assets America® can pre-arrange all of your financing from construction loan (or bridge loan) to mini-perm through the permanent financing, the take-out loan. The advantage of this arrangement is risk reduction, in that developers can map out their access to financing years in advance. When we fund your construction loan, we often obtain superior terms by locking up the refinancing in advance, a move that saves you both time and money.
Borrow from Assets America®
Assets America® works with a large network of experts in every area of the construction industry, and we are happy to share our expertise with our customers. Together, we can work to take every precaution required to produce a successful, profitable commercial construction project. We also provide commercial & industrial loans for those financing needs that don’t involve real estate.