Building a Process to Mitigate Real Estate Development Risk

Real estate development is a high-risk business. Taking any project from concept to finished product involves numerous steps, multiple third-parties, and a host of government agencies and regulators. At every step of the construction lifecycle, mistakes can add to costs, slow down delivery times, and increase the likelihood of construction claims and regulatory violations. So how do savvy developers minimize risk? One powerful tool in the risk mitigation arsenal is construction documentation. In this post, we’ll explore some of the basic models of construction management and unpack how visual construction documentation helps to reduce risk and maximize profit throughout the process.

Contractor Relationships

The more complex a project, the more people are involved in bringing it to completion. As a developer, you’ll be working with a variety of different subcontractors and specialists to deliver different aspects of the project. With every new individual brought onto a project, there’s added risk of mixups, miscommunications, mistakes, or even malfeasance. How you work with these third-party contractors depends on the type of construction process you use and the contracting system you select.

Owner/Developer Lead

Under this contracting model the owner/developer manages the project directly. You’ll enter into multiple primary contracts with various sub-contractors all of whom will report to you. The owner/developer is responsible for managing all the details of these relationships and has final sign-off on all the work across every aspect of the project. With so many factors under your direct supervision construction documentation helps owner/developers to stay on track, manage details, and maintain direct oversight.

Hire a General Contractor

For larger projects or for developers with multiple ongoing projects in their portfolio it may be advantageous to bring on a general contractor who will sub-contract out the project at his own discretion. In this case, you will have one direct contracted relationship and the general contractor will manage the subcontractor relationships. Under this model, both the owner/developer and the general contractor can benefit from visual construction documentation solutions to track progress, quickly address issues, and monitor the quality of work.

Construction Manager as Agent

Under this model the developer hires a  construction manager and that construction manager acts as an advisor on the developer’s behalf. The construction manager typically doesn’t have contracts with any of the subcontractors. The role of the construction manager is to help the owner/developer make decisions throughout the construction process. The construction manager can weigh in on areas of construction where the owner/developer is not an expert and provide advice and guidance. In this relationship, visual construction documentation helps to ensure that the owner and the construction manager stay aligned as they make decisions together from wherever they are.

Construction Manager at Guaranteed Maximum Price

Cost of job or percentage of job.  cost . Estimates the job and executes the job themselves. Obtain estimates from GCs and SCs. If there are changes an additional fee is produced for labor and materials, but if the job is constructed exactly to plan then they can’t exceed that price.

While these four models are common, some projects require a hybrid model that combines features from several depending on the specific nature of the project and the needs of the owner/developer. In all cases, however, visual construction documentation tools help to ensure the owner/developers are able to monitor every aspect of the project and share feedback with contractors, sub-contractors, and construction managers and resolve issues quickly from wherever they are.

Sources of Risk

Once you’ve identified the project management model that works best for your project, it’s important to map out a project plan that accounts for key drivers of risk.

Planning

Significant capital is usually laid out by developers in the planning stage. The planning process for a complex project can take several years and costs may run into the millions of dollars depending on the size and scope of the project. This is the phase during which architects and engineers are engaged to develop and redevelop plans and when potential sites are selected. Developers typically layout these costs upfront. Only once approvals and permits are obtained by the developer can the project begin to produce a return on those investments, therefore it’s critical that the planning stage is executed successfully and that visual documentation is maintained throughout in order to ensure a smooth approval process.

Once the approvals are in-hand  the project can be sold. Typically, a large project will be sold either to an equity firm that will finance construction or to other developers that will actually build the project. Given that tens or hundreds of millions of dollars may be at stake depending on the project size, this is a period of significant risk for the developer during which success depends on a smooth approval process.

Construction and Sale

The construction phase, ironically, carries somewhat less risk than the planning phase, assuming that the firm involved is able to deliver the finished project. However, this phase is not without unique risks of its own. The biggest risk factor at this stage is the sales market. While developers do their best to accurately forecast the value of a completed property based on comparable properties in the market, world events and economic conditions can still shape the price of completed work. For example, while the New York City real estate market has been relatively stable in recent years, current conditions have seen that market drop, in some cases by as much as 80% for high-end new condo sales. While that change wouldn’t have been easy to predict just a few months ago, it will undoubtedly impact developers negatively and may even cause bankruptcies.

While it’s impossible to manage the risk of a surprise global pandemic, this is also the phase in which unexpected costs, major changes, and potential construction claims can emerge to take a slice out of developer profits. Managing these known risks can help to minimize disruption and leave as much margin as possible should you face the unexpected and uncontrollable down the road. Visual construction documentation and photo records can help to minimize the more day-to-day risks of overruns, errors, and unexpected changes to installations that can lead to this sort of risk.

Key Tools

Every owner/developer needs an arsenal of tools and personnel to bring a project together on-time, on-budget, and at a high level of quality and avoiding major points of risk.

Experienced managers - Whether an owner/developer is managing a project directly or hiring construction managers and general contractors to oversee major aspects of construction it’s critical that the managers on the ground have experience equal to the size and scope of the project.

A highly organized site and staff - Along with skilled managers it’s critical that all staff maintains a high level of organization and attention to detail at every stage of construction. Creating detailed construction photo documentation can help to ensure that detailed records are always available and that information is relayed to stakeholders in a timely fashion allowing order to be maintained at all times.

Software tools - Technology has touched every aspect of the construction process from planning to execution to record retention. Specialized software platforms facilitate large scale project management and communication. Tools like OnSiteIQ allow developers to capture and utilize visual construction documentation, perform virtual walkthroughs, and provide timely updates, and perform aspects of Quality Control remotely, by consolidated field records into a single system that’s easily accessed.

Updated Contract Documents, Plans, and Specifications - All critical documentation needs to be available to all major stakeholders and managers at all times to ensure there is total transparency and thorough communication of terms, conditions, and any significant changes.

Quality Assurance and Quality Control Plans and Systems - Prior to the start of construction your team should have laid out a plan for quality assurance and put in place the systems needed to perform the quality control functions outlined in that plan. This is another area where visual construction documentation can help to facilitate a more efficient and low-risk process.

Photo records - Photography has always used to show the status of a system or the condition of a project at a fixed point in time. However, managing these photos and retrieving them manually or with in-house systems has always been difficult to accomplish. The high volume of images created by regular walkthroughs combined with the difficulty of interpreting them divorced from context is one of the core problems that OnSiteIQ set out to solve. We not only create but also carefully curate, organize, and make accessible all of your construction visual documentation using artificial intelligence to map your images to your floor plan and create virtual walkthroughs at every stage of your project.

Aside from creating and intuitively organizing visual construction documentation, the OnSiteIQ  System is able to tie into full construction management systems, such as Procore making it easy to manage your entire project through a single centralized tool. Users can also perform a 360-degree jobsite walkthrough on a regular basis on the same path, travel back in time to review previous conditions at the same place in the project with those photos being overpaid on the contract drawings, add notations and review other’s notations at key points of interest in the walkthrough, collaborate seamlessly across the room or around the world, use of artificial intelligence to find and highlight everything from points of interest to safety risks, measure opening sizes on-screen with sub-inch accuracy and report incongruities to other team members, and store and retrieve your onsite photo records so that no back-office IT is necessary from clients

Learn more about OnSiteIQ’s full range of capabilities and how our features help to mitigate risk at every stage of construction.







Author
Torrey Dye

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