In preparing the specifications and making decisions on what
items are wanted in the construction cost estimate, there is usually a tug of
war between the landlord (which wants to be very judicious with cash) and the
tenant (which has legitimate needs in spite of the cost. In addition to the
fixed realities of quantities of drywall, doors, hardware, ceilings,
sprinklers, electrical and HVAC, the cost estimate will also include
qualitative aspects such as grade of carpet, wall covering, grade of ceiling systems,
millwork, plumbing and specialized electrical. Tenants have the choice to price
the interiors as conservatively or liberally as they envision based on actual
needs or list of wants.
Construction cost estimates also are – or can be – impacted by
external factors not relative to quantity or quality. A few examples include
- Exploding/unforeseen recent cost increases in
product or labor (such as explosive petroleum costs affecting items like carpet,
wood products or demand-based pricing impacting drywall
- Broad, over-estimates by the contractor to cover
all aspects which had not been entirely specified – where the contractor just throws
money at a category
- Local ordinance demanding greater compliance
(such as number of exits, more or more sophisticated corridors, number of
sprinklers)
In this way, the construction cost estimate will be returned
based on real internal inputs of
quantity and quality of needs and wants, PLUS external factors of broad over-estimates and unforeseen exploding
recent costs impacts.
The construction cost estimate may or may not be within the
Tenant Finish Allowance (TIA) as offered by the landlord and additional costs
above the TIA will either need to be combed out to a level satisfactory to the
tenant along their needs/wants spectrum, added to the lease transaction as
amortized costs by the landlord, or paid for by the tenant…or negotiated that
the landlord increases the TIA at no cost to the tenant…or a blend of all four.
The process of reviewing construction cost estimates and combing
through quantitative and qualitative aspects seeking improvements is known as
Value Engineering, or VE. In plain English this means lowering cost.
Occasionally needs are so demanding that there is no cost reduction. It is good
advice (and good mental health) to erase all expectation of full coverage of
construction cost by the Tenant Improvement Allowance and expect to utilize the
Value Engineering feature to re-address all items and costs in relationship to
the needs versus wants. The goal in the
end is to identify as much cost available to be covered by the TIA and or added
to the lease as additional cost via amortization (or additional contribution by
the landlord).
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