HOW IMPORTANT IS THE DEVELOPER/BUILDER RELATIONSHIP?
It is all too common in the Property Development industry for the developer and builder to have a contentious relationship. Usually they start off with different ideas and goals – the developer aims for the cheapest price for the highest specification, whilst the majority of builder will go for the highest price for the lowest specification. This creates a situation whereby both parties end up with a strategy to protect their negotiation positions looking to achieve the best outcome for themselves.
But it doesn't have to be that way.
There was a time prior to the GFC that construction prices were rising at 1% per month! The good old days when there was an abundance of work around, that finding a good builder to price work, let alone securing a competitive price was almost impossible. Usually the only way around this was for the developer to form a strong relationship with a partner builder.
Since the GFC the process has changed dramatically. Builders are now willing to provide cost estimates and is prepared to assist with structuring projects. But the developer should be careful that this willingness to help is not taken for granted.
I have listed three preferred methods on how the Developer and Builder can move towards a better relationship and a successful construction outcome.
If the Developer’s sole aim is to achieve the lowest possible price, then a competitive tender is often the most appropriate form of engagement. You do run the risk of variations and increased management time, as you are relying on the quality of your consultants and the documentation they have produced. As the old saying goes “you get what you pay for”. Usually you will find that if the developer’s focus is on the lowest construction price, then they have likely taken the same approach to selecting consultants, and as such the quality of their work can be lacking leading to the potential for variations.
Design & Construct
This is a “hands off” approach, and usually involves the builder taking a project with a Planning Approval, engaging all consultants and finalising design based on a scoping document provided by the developer. The plus side is that it reduces the risk of variations and management time for the developer, but on the other hand it increases the risk of lost specification intent. The developers’ initial vision does not necessarily happen, and it is difficult to write a scoping document in sufficient detail to completely cover all developer intent.
My experience has been that the best result for all parties is that the builder should be selected based on a different priority of selection criteria. Most importantly is their reputation, reliability, expertise and trust. These can be intangible criteria, but are built up over time and can be judged from market place reputation. From this selection, a quality builder can be selected prior to the lodgement of the Development Approval, on a fixed margin and prelims, and an open book subcontract tender process. In this way, the builder then becomes part of the design team and is involved with the feasibilities, budgets, specifications and intent from the very start, and the project is designed, reengineered and value managed to achieve positive outcomes by identifying risk and opportunities early.
This discussion is just the tip of the iceberg, with many variables to suit different projects. But the basic idea remains the same. It just makes sense that the component that is approximately 75% of your total development cost, should be part of your team right from the very start.