Approaches to Claim Reduction for Real Estate Developers

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Contractor addenda and construction cost overruns are an unfortunately familiar problem to most developers. Depending on the extent of the claim and the developer's financial resources, the impact can range from unpleasant to lethal. From the developer's point of view, the construction companies are always to blame (and vice versa). It is not uncommon for the partnership to end up in court.

Of course, there is no patent remedy for claim reduction, but some approaches can help.

Approach 1: Step by step

The saying who fails to plan, plans to fail also applies to real estate development. What is meant here is the implementation planning, which should always be the basis for the tender. In this, a competent planning partner calculates all masses and determines the products together with the developer.

The execution planning is followed by the invitation to tender and after that by the construction.

In the case of a commercial tenant share, the plans are coordinated with the anchor tenants before the start of tendering.

From the time construction begins, the project is not changed any more.

Approach 2: Playing with open cards

The construction industry's margin squeeze is well known. Most construction managers are happy to create 3% margin on full costs. To believe that much is hidden here (or can be hidden) is unrealistic. It is therefore worthwhile for both sides to go through the concept as well as the hours, masses and costs item by item in the course of the award talks. This avoids misunderstandings and makes the cost estimates comparable. Honestly, if something sounds too good to be true, it usually is not.

Approach 3: Single contracting instead of a general contractor

Banks and lawyers like to recommend awarding contracts to renowned general contractors. I view this critically for several reasons.

First, the coordination and risk assumption costs the general contractor quite a bit of money. JV markups of between 6% and 12% are not unusual, depending on the complexity of the project. Experience shows that regular construction supervision by the developer/project manager is nevertheless necessary.

Secondly, it is objectively unlikely that one supplier has the best ideas on all topics (see above). The general contractor is not a specialist for everything, but must also put together the sub-contractors.

Thirdly, large, renowned general contractors are often better at contract and claim management. And paying the enemy rarely makes sense.

And last but not least; if it really comes to a dispute, it is better to argue about a small part than about the whole.

Approach 4: Stress avoidance

Day-to-day business in construction is almost always stressful, even without super-ambitious construction schedules. Tight schedules are always justified by the high construction overhead costs that make long construction sites expensive. In my experience, real time-related construction overhead costs in residential construction amount to roughly 3%-4% of construction costs. Thus, depending on the construction duration, one month costs 0.15%-0.25%.

Disruption over many months adds up, but I am convinced that breakdowns that occur under stress cost even more. With sufficient buffer, problems can often be solved inexpensively and disputes avoided.