Are you really saving money?
Make the numbers, show me the numbers!
Our director Pedro, always tells this story when a client is trying to save some money.
There was a couple, friends of his parents, that loved to try to save money on even the most minute and insignificant expenses. They would tell everybody how smart they were and how they had found this service station 50km from their home that was selling gas 10c a litre cheaper than the gas station in their neighbourhood. Instead of $1.2 they were only paying 1.1$ per litre. Once they filled the tank with 50 litres they were saving a total of $5, paying $55, instead of $60.
However this couple never really made the numbers. In order to get to the Gas Station and back they had to do 100 Km. They would do this trip just to get gas, it was not on the way to anywhere. So, those 100km are part of the cost of getting gas.
Assuming they had a very efficient car (which they didn’t), you can say they consume 5 litres per 100km, which means you have to add $5.5 to the cost of your fuel. This means going to get gas to the cheap service station costs you at least the same ($0.50 extra) as using the gas station in your neighbourhood. Furthermore it takes you two hours of your time, which should also have a nominal value and it adds 100Km to the rest of components of your vehicle.
What once seemed a clear cut saving of $5 now it seems like losing money and time.
After several visits to the couple’s house and always hearing the same story, Pedro decided to put the numbers to the couple. After listening to Pedro they looked at him in bewilderment and started yelling that he didn’t know what he was talking about. Soon after they were getting their gas locally.
Saving money is good, being smart is better, but not everything that seems to save you money actually saves you money.
In a recent development we were asked to change the type of brick for the façade because in words of the project manager it would save the owner $25,000. That might seem like a lot of money but when your construction cost is over $4 mill, it is only 0.625% of your budget. Still, no matter how small, savings are savings, so let’s explore the issue in detail.
Our question is, are you really saving $25,000?
The suggestion to change the bricks came when we were about to tender the project. The brick selection had been made together with the local council after a court case granted development consent for the project. Changing the brick would therefore imply applying to council for permission, presenting new plans to the heritage consultant and changing the project documentation to get the construction certificate stamped again.
Overall, between council, heritage, certifying authority and architects fees it would cost approximately $15,000 to make the change. Your “savings” are now just $10,000.
The process will also delay the project a minimum of 4 weeks, one week to make the changes, and 2 to 3 weeks for Council to approve it. Once approved we would issue the amended documentation to the tenderers that would have to reprice their offers.
A delay of 1 month doesn’t seem too much, and it can be argued we could assume council would approve the change and proceed as planned with no delay and the tenderers could just put a provision on the contract and have the bricks as a separate item. However in this case the client was not very confident of Council’s predisposition to help given the past history and we would need to wait for Council to approve the change before a builder could be signed. Still, it is only a month, and how much can one month really cost?
The building was a residential development for 9 apartments, of which 7 were to be kept by the owner and rented out. A delay of a month now would imply a delay of a month in completing the project and therefore, one month of rent that the client will never get back.
7 apartments at an average of $400 a week is $2,800 per week, which over 4 weeks it comes to $11,200.
Your savings are now -$1,200, which looks much less attractive than $25,000
When doing a development people tend to look for savings with materials and finishes, and they tend to do it very late in the process, just before construction. However these savings focus on items that are only a very small percentage of your overall budget and the savings though might seem very tangible rarely pay off.
The best way to save money is by focusing on the big picture. The items that end up costing a lot of money and have a big impact in the development process are related with:
1 – Construction time and cost of labourers on site.
The longer you spend building your project the more expensive it becomes; this can be due to 3 main reasons.
- Choosing very labour intensive materials and methods
- Making a lot of changes once the project is under construction
- A lot of decisions have to be made on site because the project was not fully documented before.
An extra week during the design or documentation phases of a project might translate into an extra week of architectural fees but an extra week during the construction phase is a week of architectural fees, plus a surcharge from the builder and the site manager, an extra week of hoarding, and extra week of footpath permit, an extra week for the crane and the list goes on and on and on.
A week delay on site will also probably mean further delay down the track as subcontractors tend to have very tight schedules and being available one week does not mean being available the following one.
2 – Redesigns of the project due to changes on the brief.
Changes on the brief can happen due to numerous factors; it can be a mismatch between budget and ideal outcome, it can be the involvement of key parties very late in the process, it can be a shift in strategy.
Every time the brief changes, a new redesign is required and you need to pay a fee variation to every party involved, architect, structural engineer, mechanical engineer, town planner…
We have seen clients pay double in variations than the original fee. And it keeps happening all the time.
3- Inefficient infrastructure / over complicated detailing
The “bones” of the building (structure and services) are probably the most important and most costly part of any project and they are often overlooked because they are complicated and because nobody will ever see them, so people tend not to review it in detail or comment on it.
Having an efficient structure that works with your design is very important, structure, services and architecture have to work as one or else it will create complications that will cost thousands of dollars to solve. It will also create unpleasant spaces but that again is a topic for another day.
A similar approach applies to detailing and appearance. We live in an era where appearances matter more than essence, but when it comes to building you should focus on building things as they are; trying to make them look something they are not will only complicate matters and will make your cost skyrocket very quickly.
4-Poor income return.
This is possibly the most important element we need to address when talking about saving money and also the most elusive one. Potential income is hard to quantify and it never gets addressed.
In today´s market it is easy to assume your sales price will not vary if you change your materials, or you provide less insulation, or you do not put ducted air conditioning, but that is not true.
Given two exact same buildings on the same location, design has a big influence in price, and with equal design, quality will have an impact in price. Saving $1000 per apartment by hanging your AC unit on the wall instead of having it in your bulkhead might end up costing you $9,000 per apartment as people might get the impression that you are building on the cheap.
With those 4 items in mind we believe that if you are able to set your budget from the beginning, work to establish a clear process that will avoid critical redesigns down the track and document everything before starting construction you will have saved thousands and thousands of dollars and you won’t need to look at the penny when it comes to materials because you would have already selected the ones that match your needs and work for your project.
At TAMOSPAYA we spend a lot of time with our clients at the beginning of each project to work through these issues and tailor our work methodology to suit your needs and the project particulars so we can discuss the items that matter at the right time and make these decisions with you.
Budget is not something that comes later, materials is not something you choose before construction.
Saving money is not something you do by cheapening your project but something you do by having in place the right decision making tools.
Next time you want to save money, please let us help you make the numbers.