Cost Corner
by Michael J. Dwyer, Principal, Cost & Review Group
This current issue of Observations is focused on Merritt & Harris’ accomplishments over the last 75 years. These accomplishments are certainly “Worthy of Merritt” and I am proud to have been a part of some of those years. As the chief Cost Analyst, I have seen many changes in the economics of the construction industry. Historical data, once heavily relied upon, was, for a time, ignored because there was so much construction happening, Contractors would issue high bids on projects with the attitude “If we should be awarded the contract for this amount, the profit will be so high we’ll find a way to do it.” That approach may work well for Contractors during busy times, but it is an unsustainable approach when the economy takes a downturn.
I joined Merritt & Harris in 1989 and, over the past 23 years, I have seen our industry progress dramatically. Improved technology has had the most dramatic effect cost estimating, as the construction industry has seen an increase in efficiency resulting in savings on both material and labor costs.
Cost estimating was also more time-consuming in the past. Rolling out the plans, letting the plans “breathe” so you didn’t get knocked out by the ammonia, and then using a scale ruler sheet-by-sheet was replaced by digitizing and now Building Information Modeling (BIM.) With BIM technology, the bid estimating process is condensed, as materials are automatically specified throughout the building and the pricing by Contractors differs primarily on labor costs.
Understanding how the costs of the project affect the “deal” is now more critical than in the past. Years ago, the Lender or Investor was primarily focused on scope, costs, and schedule. While these remain the most important issues, a broad understanding of credit agreements, loan agreements, and disbursement agreements is required during the initial due diligence by the Construction Consultant.
A Client recently asked me, “What is more important - maintaining budget or finishing on time?” As a Cost Analyst, I, of course, said that the budget was most important. “If there is no other source of funds, the project could come to a screeching halt if there are cost overruns,” I said proudly. I was only half right. Extended project duration could also cause the Developer to default on interest payments, miss leasing projections, and be exposed to delay claims. Late completion could have more long-term effects on the finances of the project.
When I first joined Merritt & Harris, the average project was in the $8 to $10 million dollar range. Care facilities, strip-centers, and office towers were the norm back then. Now, the typical project is not less than $20 million and some are greater than $2 billion.
Merritt & Harris was founded in a recession and has gone through economic upturns and downturns over its storied 75-year history. Today, we proudly serve our Clients with the guiding principles of: Receive, Review, and React. It is incumbent on us to receive the information required to assess the project, review the information diligently, and react by responding professionally and accurately to our Client.
No other firm in our industry has the legacy of 75 years, and those of us who work at Merritt & Harris know that our professionalism, timeliness, and expertise will enable us to endure for another 75 years.
If you would like to discuss your project or have general construction cost questions, please contact Mike Dwyer, Principal, Cost & Review Group, at 212.697.3188, ext. 309.