Creating Value for Clients Through a Total Development Solutions Approach

By Curtis C. Terry

Owners want answers. The design and construction of facilities are a means to achieve certain specific business goals, or to satisfy needs. Usually the motivators that lead a client to enter into a building program revolve around expansion of capacity, becoming more efficient, reducing costs, improving image, increasing sales, etc. This is fundamental to business owners, and foremost in their minds. Therefore, the basic approach of professional development consultants, planners, designers, and constructors must focus on the motivating issues and the preparation of comprehensive solutions. The need for more "glass and steel" is just symptomatic of what ails the client. The real prescription is much broader. In order to serve the industry well, we must create value for our clients through a total development solutions approach.

Creating value for the client is achieved in a variety of ways, including:

• Management of first costs appropriate to the needed facility
• Monthly or annual occupancy costs
• Ability to capture market and increase revenues
• Throughput capability
• Staffing efficiency
• Other operational costs
• Expandability and flexibility
• Resale marketability

• Market-based planning and scope determination
• Land requirements and location
• Design
• Construction
• Ownership and financing structure
• Building operations

The total development solutions approach starts with a careful examination of the market-based planning data, and/or the ownersí strategic initiatives that have led to the initiation of the project. Regardless of whether the development consulting/planning firm has prepared this research, or is just a party to it, a thorough understanding of the business case for the project is paramount. In order for a project to move forward, in a straight line, and on target, the clientís leadership must clearly define the business purpose of the initiative. The fundamental goals of the project must be clearly articulated and prioritized in order for the project to be properly conceived and developed. Projects often lose their compass heading and become merely a "bricks and sticks" exercise, rather than a strategic initiative, without a metric to measure success or failure. The mandate of the business purpose must be clear and originate from the top of the organization.

With respect to land requirements and location, value for the client is created when the site increases revenues or helps to reduce costs. The site evaluation criteria and the potential for client benefit, of course, vary depending on the project type (industrial manufacturing, retail/entertainment, hospitality, corporate office, healthcare, etc.). In any case, due diligence with respect to limitations on use, hidden costs, future potential for resale, and the question of long-term land lease or purchase must be addressed.

Excellence in appropriate design always creates tangible and intangible value for the owner. Starting with a right-sized building based on the business plan, a facility must produce the throughput projected and flow efficiently. A well-designed facility will have many attributes that will lead to the best possible use of employees, retention of valuable staff, logical expansion of the facility, and optimization of life cycle cost returns. Public image has high value for many clients, so creative aesthetic design (not necessarily synonymous with expensive) is very important and can provide significant financial benefits. Creating exceptional facility environments in which people may live, work, shop, play, entertain, think, rest, or heal is always good business for owners in the short and long term.

Selection of the appropriate construction methodology and contractor will enhance short and long term value for the client. The fundamentals of price, quality, and time must be balanced in favor of the owner. Consideration of the nature and complexity of the project, size and scope, schedule demands, business opportunities, local construction market considerations, and a myriad of other factors must be carefully organized for the owner. Only then can the best development solution be devised with respect to contractor procurement for a specific project. These factors will also lead to the best contractual methods for the owner, whether design-bid-build, negotiated design/build, cost plus fee with a GMP, or others.

Building operational costs are incurred throughout the life of the facility. These recurring costs usually increase over time, and directly affect the bottom line of the occupants. The magnitude of these expenses is influenced by the location, design, and construction of the facility, and they often equal one-third or more of the annual occupancy cost. On behalf of the owner, the professional design and development team must strike a careful balance of first costs and long-term operational costs in order to create true value.

The interplay of the variables in the total value equation will significantly impact the bottom line for the owner. The optimization of each will create value for the enterprise. Using an 80,000 square-foot suburban office building as an example, the relative impact of proper development solutions on the occupancy cost (rent) if each of the following components of cost changed by 20% would be:

Land	1%
Construction	15%
Financing	5%
Building Operations	4%

Although construction costs have a significant impact upon end-user costs (and normally receive a lot of attention during the planning/design period), one can see the other components of cost, in total, can have a similar effect. The financing structure alone for a project, which may provide options for synthetic leases or beneficial occupancy agreements, can affect the blended cost of money (equity and debt) by as much as 4.5 basis points. This can mean a savings of several dollars per square foot per year in occupancy (rental) costs.

In summary, a client is best served when all development factors that create value are considered. The development team should help the owner identify those factors that enhance revenues, including: location, business mix, organizational structure, affiliations, and other strategies. Generally, no component of development cost will override generation of significant new revenues. The development team should maintain and lead a total development solutions outlook and keep the relative effect of costs on the bottom line in mind.

The owner needs credible, objective, and comprehensive answers. Is providing these answers the role of design and construction firms? It will be for those who thrive in an increasingly demanding and competitive marketplace.

About the author: Curt Terry is a Vice President of RTKL and leads the Development Solutions Group. He can be reached at 901.366.2290, or at cterry@rtkl.com.

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©  Copyright 2007, The Construction Sciences Research Foundation, Inc.  Updated January 12, 2007.