Cursed By Knowing The Numbers

To be a successful developer, you need three human capital assets--You need to know your numbers, you need the right relationships, and you need the juice or startup capital to get deals to a point where you can perfect the cap stack.

This blog is about refining the numbers--getting your algorithm right. By looking at situations with a keen sense of both the cost and value side, you get a better sense of where you should be deploying the juice and depending on your relationships. Top down and bottom up composition of the cost and value components of a project.

What is the value of good design? How do you characterize good design? Can you enumerate all the project risks? How do you eliminate/shift/mitigate project risk? How do you characterize the value side in a constantly shifting marketplace? Can you produce an algorithm for a constantly moving value indication--managing the moonshot?

They did put a man on the moon, didn't they?

is how some describe the construction process. "It takes twice as long, and costs three times as much" is a common refrain when getting the update on a project. 

Our industry is a storied one, and customer relations like this have been going on for far too long.  Part of the reason lies with scope creep, part lies with poor risk management, part lies with crappy construction.

It doesn't have to be this way. On-time, on-budget delivery is about defining scope, managing risk, obtaining quality, and making decisions. The goal is maintaining a pace and intensity to get to the end faster, better and smarter than your last project.

The critical path of any successful project starts with you and your dream.  Breathing life into this dream involves four things:

1. reducing the dream, and any perceived options, to a 101 for your architect, who is the person who will articulate this dream to the building team;
2. finding the architect who has the voice to articulate your 101 and surface design constraints for resolution/acceptance;
3. resolving the articulated 101 (schematic design) with the budget;
4. recruiting a building team to can buy out the job within the budget without fatal cuts to the schematic design.

The design and the budget iterate until equilibrium is reached. Additional resolution and reducing the over/under on the budget is achieved by producing the permit set, and pricing version 2.0.0 of the finish schedule. My firm provides instant feasibility scope/budget checks that help to iterate faster and identify trades that need to be brought in early to resolve open items. Frustration is reduced, and the questions about scope become clearer.

The numbers to do this?  Getting to a schematic design that provides enough information to get to a +/- 20% of your budget number should burn 15 to 20% of your architectural budget. 

a dream of a home, a home you may have seen, experienced, or just dreamt of. A custom built home, no matter how large, is the ultimate tool for a well lived life.

No less than Robert A.M. Stern recognizes that the typical American house reveals in its design subliminal and overt expressions of the realities and myths of our individual and collective experiences.

"Virtually every aspect of the American single family house--defines who we are as well as who and what we would like to be."

Stern goes on to note that "Architecture should be an affirmation of place--that is the physical product of a truly environmentally responsive approach."

Your dream begins with a place, and a sense of that place, both externally aware and internally focused.

This tome is a great way to stoke the dream-making process. 

Architectural styles are very portable--a drive through a modern neighborhood is a catalog of architectural voices.

The numbers behind this dream? All things considered, your total development cost ( everything other than the land) will run anywhere from $350 to $1000 per square foot in the areas we work in, and the average new home is roughly 2,400 square feet.

What's your dream?

is that all an Owner needs to be concerned about is when tasks are completed--not when they are started. It is when you finish, not when you start, that needs to be understood.  Are milestones often enough (every week), are they sequenced in an understandable way, and if recovery is needed, is it apparent where the critical path runs?

There are three types of schedules:

• the Marketing Schedule--used to sell the job and to give an optimistic view of the pace, intensity and completion.  Gantt chart is a pretty picture.  Note where close-in milestone is, and where the certificate of occupancy/final inspection milestones are.
• The Owner's Schedule--milestones only on construction tasks, folds in designer tasking and decisions that need to be made.  Should include delivery of complete finish schedules to builder as well as any owner equipment or owner contractors that are sequenced after particular milestones.
• The Tracking Schedule--a gantt chart look at critical path milestones to be accomplished in the next four weeks, and compares them to the most recent schedule.  Needs to call out where the critical path lies as this changes due to slack, early completion or changes of sequence of the schedule.

What are the numbers behind a good schedule? 

• The needed burn rate--the daily, weekly and monthly work in place dollar amounts necessary to reach the agreed upon delivery date.  A first pass at this is to take the contract cost to complete and divide it by the unit of time you want to track by.
• The time to complete--the number of days on the critical path to certificate of occupancy/final permit signoff.
• Days ahead/Days of recovery needed to meet the next milestone.  Catching up in three milestones is not the way to recover time in a schedule.

How often should a schedule be published?  Whenever the critical path changes.  Everyone on the time needs to understand the critical path--who is on it, who they hand off to, and what this person requires in a handoff.

How do you make sure you are working off a current schedule?  Tie it to making progress payments.

A good schedule makes an owner understand the real costs of changing an element of the project so that a proactive cost/benefit check can be made, and it compensates a builder if the critical path changes.

All this talk about costs going up made me wonder.  My company has been improving property for almost 20 years, and although the $PSF number is creeping up, I wanted to understand where the exposure was.

We went back and sorted our historical construction cost data for our distinctive homes  to see what the relative weighting of the different trades were.  Our data base was based on the approximately $125M of distinctive homes we have developed or project managed over the last ten years. 

This is what we found:

Conclusion:  finishes are what you have to watch. The two single biggest variables are cabinetry and casework, and finishes.

And in our business, where the dream is sold from the finishes in, but built from the inside out, I start to understand why it is so difficult sometimes to keep these jobs on-time and on-budget.