Constructing your own commercial building? 12 tips to build wisely
Article Link: https://www.bdc.ca/en/articles-tools/money-finance/buy-lease-commercial-real-estate/pages/tips-new-commercial-builds.aspx Constructing your own commercial building involves an enormous investment of time and money, so you need to be sure it’s the right move for your business. Ask yourself whether such a project really suits your company’s needs. Do you need the additional space to accommodate more business or increase productivity? Or is your goal to boost revenues by renting space to other businesses? Once you’ve decided to proceed, don’t expect a smooth ride. “Unforeseen problems such as budget overruns, unreliable contractors and delays are common,” warns Elizabeth Olley, Senior Manager, Underwriting, Corporate Finance. “We see dozens of examples at BDC, and that’s just a part of the package. You have to be prepared to manage change when it happens. The more time you have, the better equipped you are to adjust your plans accordingly.” 1. Evaluate your options The sheer scale of a construction project demands a major commitment from any entrepreneur. Keep in mind that the time and energy invested in constructing a building could also be put into the business itself. Even if you hire a project manager to oversee the job, you’ll still need to be involved in daily decision-making, and that will inevitably mean more time away from daily operations. Consider other scenarios like renting office space, buying another building or renovating existing space. When in doubt, find a financial advisor or consultant to help evaluate your situation. Once you’ve carefully determined your objectives, you can also enlist engineers, architects and interior designers to help find the right solution for you. Whatever your decision, another important factor to consider is your long-term needs. Will the building be able to accommodate your growth down the road? You don’t want to find yourself outgrowing your new building too quickly and having to make additional costly investments. 2. Make the right projections A bank advisor can help you determine the affordability of your project, how much money you’ll need from start to finish and the right financing solutions for your needs. It helps to start with a good business plan so that you can make realistic revenue projections; this will help you gain the confidence of lenders that you can handle a project of this scope without endangering your company’s financial health. 3. Get your building permit in order Once you’ve made the decision to build, the next step is to be sure that you’ve satisfied all local rules with the right permit. It’s wise to do this as early as possible, since building without a permit is obviously not an option. Rules can vary greatly depending on whether you’re building new premises, altering existing premises, changing the appearance of a building or altering its use. Under Canadian law, regulation of building projects is a provincial responsibility and is often administered by municipalities. Building codes generally apply to new construction and have traditionally been concerned with fire safety, structural soundness and building occupants’ health. More recent codes have added rules concerning accessibility for handicapped persons and energy conservation. Check with your municipality to see exactly what you’re allowed to do with and without a permit. 4. Get a good architect or designer Deterred by the high cost of professional building designers, entrepreneurs will sometimes skip the essential step of hiring a good architect or designer. While you might think you’re saving money up front, you will lose in the end because of problems such as an inefficient use of space. “It’s not just a box that you’re building,” notes Olley. “It has to fit all of your requirements.” Experts should be hired to ensure buildings are both functional and efficient. In a manufacturing plant, for example, you need to be sure your building and layout can accommodate your equipment. BDC consultants offer planning and operational process improvements that help companies set up production lines that maximize productivity and eliminate waste. 5. Be realistic about your own involvement Olley cautions business owners to be realistic in assessing how much time they can devote to the project. Often, companies lose business during construction projects because the management team is less focused on performance and too anxious about the new building. Depending on the scale of the job, Olley recommends hiring project managers who can take care of complex logistics and ensure that the layout designer, architect, engineers and contractors work in harmony. “Ask yourself: Do I really have the skills to pull together a project like this? If the answer is no, then hire an expert,” she advises. “You still have to be very present on the site, of course, to take the pulse of what’s happening there.” But bringing in a project manager can ensure you’ll be able to give equal attention to your company’s well-being. 6. Do your costing up front It’s also essential to make sure your costing is done properly from the beginning. BDC and other banks can provide useful advice on assessing costs and budgets, and advise on whether you’re getting a fair price per square foot. In the same way, entrepreneurs should be wary of quotes that seem too good to be true. “Always read the inclusions and exclusions on your contract,” Olley says. “Seemingly minor details like paving your driveway or paying water servitude can greatly affect the price you pay in the end.” 7. Be ready with a contingency plan Still, it’s not always possible to predict costs, so be sure to cover extra costs with a contingency plan representing 5% to 10% of the total project cost. Even with a fixed-price contract, aspects of the job—such as additional landscaping costs, electrical and plumbing modifications to accommodate equipment and moving costs—can be overlooked. 8. Get your financing in order “Don’t wait until the last minute to see your bank about your financing needs,” Olley says. “Get your bank involved from the beginning. It’s never too early.” A bank advisor can help businesses determine a building’s affordability and how much money they’ll need from start to finish. Businesses seeking financing should expect to demonstrate that they have a healthy balance sheet and are showing sufficient profits. BDC offers building construction financing that covers projects from beginning to end. “No bridge loan is necessary, because the big advantage of BDC is that a single loan is dispersed as construction progresses. You’ll know all of your financing costs right away,” Olley notes. 9. Choose the right contractor A competent contractor is essential. When shopping around, don’t consider only a contractor’s quoted price. Other criteria should also be taken into account. Ensure the firm is licensed, financially stable and willing to provide references and guarantees on the work done. Ask if your contractor can provide maximum price guarantees to protect you from cost overruns. Such a precaution will give contractors an incentive to provide accurate estimates and manage costs effectively. Architects and banks can often refer you to contractors with good track records. A rule of thumb is to get at least three quotes. “It’s a good sign if they listen to you and if you feel a strong affinity for them,” says Olley. “After all, you’ll be working very closely together. A good contractor will take you to other buildings that they’ve constructed and show you their work. You want that reassurance that they’re going to deliver on their promises.” Determine whether your contractor has expertise in constructing sustainable buildings. Be sure to obtain references from satisfied customers, along with full information on any past legal disputes. Ask if your contractor uses new and innovative construction methods and is up to date on new ways to achieve energy efficiency. Also, be sure you know who is doing what. Small contractors often work only within specific geographical areas and are subcontracted by larger companies. Be sure, too, that your company does not have cash-flow management problems. 10. Avoid making last-minute changes Once the construction of the building is underway, one of the most common mistakes is to make last-minute changes. “I call it the while-we’re-at-it-let’s-just-do-this syndrome,” says Olley. “Never make hasty decisions on the spot, because they could cause delays and budget overruns.” She recommends that business owners stay in close contact with architects or designers to ensure any changes are truly necessary and don’t empty their wallets. “I’ve seen too many well-run projects exceed budget because of last-minute decisions,” Olley says. “Stay on guard from beginning to end.” 11. Know the role of your building team members A construction project involves many people, all with their own specific responsibilities. Often the designer of a building is hired to oversee its construction, since he/she has the best overall understanding of your objectives and parameters. Here is a typical division of roles: The owner assumes overall responsibility for the project. You decide what is to be built and ensure that work is carried out in compliance with existing laws and regulations. You are also responsible for choosing consultants and contractors. The designer works with the engineer and architect to plan the building layout. Your designer could be your spokesperson when resolving conflicts with the contractor or suppliers. The engineer and architect produce drawings and functional specifications that comply with laws, regulations and your requirements. As your representatives, they inspect the work to ensure that it is carried out according to the drawings and specifications. The main contractor, or project manager, assumes full responsibility for the construction work, including the purchase of materials, determining the work schedule, and hiring workers. Subcontractors are hired by the main contractor to perform specific construction tasks, such as the installation of electrical fixtures, roof work and setting up of a heating system. Subcontractors often also specialize in “ground-up work” (foundations, floors, walls and roof) or “finish-out work” (interior walls, electricity, painting and plumbing). Suppliers provide the main contractor with the necessary materials, which must meet industry standards. Finally, municipalities are responsible for examining drawings and inspecting work sites to ensure they meet the requirements of local laws and regulations. 12. Know how to resolve conflicts It’s almost inevitable that you will have to resolve conflicts during a construction project. These may involve discrepancies that crop up during a particular phase of the project, and should be settled by the designer—who represents you—and the main contractor, who is responsible for all work, materials and subcontractors. If you encounter obstacles, first get a grasp of who is responsible for what. In general, all parties with whom you have signed a contract must guarantee that their work complies with the terms of the contract. This means the main contractor is liable for any defects resulting from the work of subcontractors or others hired. In all provinces and territories except for Quebec, the contract lays out obligations concerning materials and workmanship. In addition to those guarantees, a contractor is legally obliged to meet established standards and construct a building free of dangerous defects. Under the Civil Code of Quebec, designers, contractors, subcontractors and developers are jointly liable for all defects in workmanship for one year. In the case of major defects, this liability is extended to a period of five years after completion of the project. When in doubt, seek legal help.