Insights: your Tenant Improvement Toolbox

Imagine you have a client looking to build a basic metal building, or maybe you are pricing out some interior office construction and looking at a few spaces. You need a basic price to see if the numbers will work. You may call your favorite contractor and ask for some "ballpark numbers." When your contractor says, "it depends," you reply that you simply need a rough per square foot number, and it doesn't have to be perfect.

This idea, though, that pricing can be accurately distilled to one price per square foot across all of commercial construction, or even across a specific type of construction, is all wrong. It's hurting your business, whether you're a broker, a landlord, or a business owner looking at your options.

Why contractors shouldn't give you a guess-timate

Pricing for construction depends on so many factors that even if you have seen a project bid before, you may still not realize how many factors influence the price. A few, but not all, the factors in even a simple interior project include things like:

• Is the space a cold dark shell or a plain vanilla shell?

• Is the electrical or HVAC capacity appropriate for the space?

• Will the contractor have to saw into a concrete floor to lay plumbing?

• Can any fixtures be reused, like the lighting or ceiling tiles?

• Are you changing the ceiling type?

• Is the space up to code?

• Are you permitting the work?

• Are there architectural drawings, or do you want a sketch from the GC?

• Is this really only paint and carpet, or will the space also require extra labor such as removing existing flooring glue or scraping hundreds of vertical square feet of wall covering?

• Is asbestos hiding in the existing flooring or ceiling tile?

The risks in ballpark numbers

When someone is throwing a price per square foot at you with little to no details for the final project, you incur multiple risks.

If you are negotiating a lease, and you negotiate a tenant improvement allowance on a low number, you have locked your tenant into a price that may, when the actual bids come in, be unatainable. In the best-case scenario, your tenant needs some value engineering. However, in the case of retail especially, inaccurate numbers usually result in cut corners, friends-of-friends and third cousins doing the work, and in the case of franchisees, devastatingly expensive consequences when franchisors select finishes and give little wiggle room to the tenant who is now locked into a space and a franchise agreement.

If the per square foot number is too high, it may kill a deal entirely, yet unnecessarily.

If you are looking to get approved for a bank loan based on a ballpark estimate, especially in the case of Small Business Administration [SBA] loans, you may come in too low and not be approved for cost overages once costruction bids come in. On the other hand, you may be declined outright because you've asked for too much money when a GC could have worked with you on a better estimate.

What you need instead: a budget, which is not a bid

Many people use the words "budget" and "bid" interchangeably, but in fact, these different documents have similar scopes, yet they have different purposes and methods for getting the information. Requesting the right one makes a big difference.

A bid is a hard number, or a number with a few alternates, submitted by a contractor to compete with other contractors. You want to know what a job will cost and have all of the architectural drawings and finish specifications [specs] that the contractor needs to provide an accurate price. Likely the contractor will have involved mechanical, plumbing, & electrical [MP&E] contractors in the pricing, as those are specialties where exact pricing is the most important.

A budget, on the other hand, is a soft number. There may be no architect involved yet, and finishes will not have been selected. The deal may not even be signed yet. Ideally, a contractor will get to walk a space or see the land to see the conditions, sketch the layout, and do some rough measurements. The contractor will inquire as to desired finishes, such as open-ceiling or acoustical, the type of flooring, and other things for which the contractor can incorporate an allowance. With an allowance, you know exactly the cost per square yard that was estimated for flooring, or the cost per light fixture or bathroom fixture, and how much more it will cost to choose nicer finishes. The GC may send some details to an MP&E contractor for a better estimate even lacking final drawings. For out-of-the-ground work, a civil engineer should be engaged to understand the land work required; the engineer will charge a fee, but the contractor likely will not.

Some Ins and Outs of Requesting a Budget

While some people claim to not want to waste a contractor's time if the deal is not done, or if plans haven't been finalized, it is part of a day's work for GCs, and it will make creating a bid easier for the contractor later. Also, you will establish an understanding of how a contractor analyzes a job, and if you like how they work, you will get priorty service as your relationship develops.

There are a few unethical practices to avoid, however:

• Don't use one contractor for budgets but never give that contractor a chance to bid the project.

• Don't get a budget from a contractor who is less busy in order to save your preferred contractor some time. Not only is it unethical, it will backfire when you get cut off for future pricing or when your preferred contractor can't make those numbers work.

• Don't only use a contractor for small work but never give them opportunities for larger jobs.

• Don't give one contractor's sketches or great money-saving ideas to another contractor. Just as you have skills for which you charge clients, contractors have skills for which they can only charge if they win the work, and having winning ideas should be a factor in the bid evaluations. Stolen work is why architects and now some contractors charge even for for simple sketches.

What if I really only need a quick number?

If you truly believe you only need a per square foot estimate for a project, the question is not, what should I ask for, but the question is, why is an inaccurate number acceptable here but nowhere else?