What the CFO Needs to Know: Construction
▲Construction and construction costs are not an exact science: Information derived from data may be predicable; people are not.
▲ The process takes time: Construction encompasses more that just the time it takes to physically build a store. It also involves the lease-negotiating phase, drawing phases, permit phase and bidding phase.
▲ Smaller spaces don’t always translate into big cost reductions: It’s often assumed that as store square footage gets smaller, the overall costs go down. But due to fixed items, such as restrooms, cash wraps etc., the cost reductions may not be as significant as expected.
▲ Calculate total costs to build out a store: The construction team only knows and/or controls a portion of the costs. Visual merchandising, IT, POS, security, fixtures, store start-up supplies, pre-opening labor, etc., are all costs that, in many cases, may not fall under construction’s hat. Some of these expenses may be forgotten when a CFO is calculating all the costs.
▲ The lowest price isn’t always the best price: Driving down lowest initial cost of construction may actually cost more money in the long run by resulting in increased operating and maintenance expenses. Optimizing total costs of ownership (initial construction, operating, maintenance, insurance, depreciation, etc.) will improve the bottom line.
▲ Technology is impacting store development: The increasing deployment of Web-based collaboration systems, along with the greater integration of outside partners into a retailer’s enterprise data systems, is affecting the store development process. It’s important that adequate controls over vendor access, password protocols and the like are carefully developed and strictly enforced to avoid the potential for data breaches that originate from invasion of vendor companies that lack the sophistication and data security of the host organization.
▲ Room for improvement: Any retail construction program where construction change order costs exceed 5% of base-contract amounts has significant opportunities for improvement. Creating and closely monitoring analytics that identify the cost of construction contract change-orders and their root causes, and systematically eliminating those causes, can significantly improve the accuracy of facility capital cost projections and ensure achievement of pro forma financial objectives.
▲ Building codes are changing: Building codes now require more alignment with sustainable construction/design. Consequently, initial cost will go up, but operating costs — particularly the cost of energy — will go down as stores become more efficient.
▲ Market demand impacts costs: The better the economy and the busier construction consultants and contractors are, the more you will pay for construction. Count on extreme cost increases when building in or near such boom markets as the oil/gas fields in West Texas and North Dakota.
▲ Dallas is hot: A recent study by CBRE Group shows that the Dallas-Fort Worth area is the top retail construction market in the country. About 2.6 million sq. ft. of shopping, retail and entertainment space was under construction here at the start of the year, which is slightly more than Las Vegas and New York City, the No. 2 and 3 building markets on the CBRE ranking.
In the Know
CFOs should make sure they receive timely and accurate information regarding construction budgets, schedules and ethics:
• Budgets: The CFO should be updated with a weekly budget status on all projects. Some retailers require that the construction team forecast costs for all pending or potential changes, and that it keep a change order log on every project that included actualcost increases/decreases, as well as including “placeholders” for potential budget impact. The CFO (at that time) would approve any significant budget increases.
• Schedules: Time is money. In addition to budget impacts, the CFO should be provided weekly schedule variances. After all, time is money.
• Ethics: The CFO should be alerted to such things as lawsuits, contractor kickbacks, etc., all of which have a potential cost impact.