The Tenant Improvement Construction Pricing Dilemma - Timing

COLUMBUS, OH – 09/30/2022 – Rapidly increasing construction costs have made detailed planning and strategy a necessity for tenants to determine if their required improvements are economically feasible. The majority of standard lease deals in today’s market include an allowance from the landlord for tenant improvements. However, the continuous rise in construction costs has created a problem for tenants and landlords because it is very difficult to determine the actual costs of a project.

There are three options for managing a construction project during an ongoing deal: 1) pricing the project before execution of the lease, 2) pricing the project after execution of the lease, or 3) having a contractor “ballpark” the pricing. But which of these options is best for you? We evaluated these options to provide the pros and cons of each.

• Option 1: Pricing the project before execution of the lease. This requires engaging an architect to draw detailed plans. These will then be provided to multiple contractors for pricing bids.

• Pros:

1. Accuracy. Having an architect draw detailed plans provides you with the most accurate and realistic construction pricing.

2. Timing. You will be ready to execute the lease much quicker after receiving pricing.

3. Fewer surprises. Working with an architect early will allow you to iron out all the unforeseen issues.

• Cons:

1. Up-front cost. The cost of hiring an architect can be significant which makes it a large up-front investment.

2. Delayed commitment on space: Getting architectural drawings could take several weeks to over a month. Collecting hard bids will also eat up a few more weeks.

3. Occupancy risk: There is no guarantee the space will be available when you are ready to execute the lease.

• Option 2: Pricing the project after execution of the lease. This requires executing the lease before knowing the cost of the tenant improvements.

• Pros:

1. No occupancy risk: You have the space under lease and will not be concerned about spending money on architectural plans you will not use.

2. Control: This allows you to move at your own pace on the project and possibly choose your contractors.

• Cons:

1. Cost risk: Without architectural drawings and bids, you are committed to the space without knowing the exact cost of the project.

2. Time: Getting architectural drawings could take several weeks to over a month. Collecting hard bids will also eat up a few more weeks.

• Option 3: Engage a contractor to give you their best estimate of pricing based upon your description of the required tenant improvements. This requires engaging a contractor to give you a “ballpark” cost estimate.

• Pros:

1. Decision speed: This will take significantly less time than getting architectural drawings, allowing you to commit to a deal sooner and not risk losing the space in a competitive market.

2. No up-front expense: You are not coming out of pocket on a deal that might not happen.

• Cons:

1. Accuracy of bid: Without drawings, contractor bids will not be 100% accurate. You will be susceptible to unforeseen issues an architect would have addressed and the instability of construction prices makes it even more difficult to get accurate pricing.

2. No-bid process: Since this is a no-bid process, there is no competition created on the construction pricing. However, in today’s current environment, contractors are so busy almost all projects are bid at retail pricing.

If you want cost certainty and are not afraid to risk losing the space, choose Option 1. If you are absolutely certain you want the space and rolling the dice on cost is not an issue, moving forward with Option 2 will be your best bet. And if you decide you want the space but want some level of comfort on cost before you commit to a lease, choose Option 3. Each option has pros and cons, but having a clear understanding of them will help you make an informed decision that meets your needs.