The overwhelming majority of commercial real estate (CRE) projects are coming in late and over cost estimates, experts say. And the best way to combat this unfortunate trend is by moving away from legacy systems to state-of-the-art CRE budgeting solutions.
According to a recent IDC survey, 78% of CRE projects are over budget, and projects are being completed an average of 70 days late. A variety of factors are responsible for causing this problem, including a massive labor shortage and steadily increasing supply costs. And, like so many other issues, it has been made worse by the pandemic.
According to the survey, developers that were dependent on outdated siloed or manual productivity solutions — such as Excel, Dropbox, SharePoint, local drive storage, archaic legacy solutions, etc. — often delivered projects past deadline and over budget. Meanwhile, developers that actively embraced integrated technology delivered better performance (i.e., met deadlines and budgets).
Analyzing costs for better budgeting
During the building process, after the site has been selected and the land acquired, the pre-development phase begins, followed by the development, construction and post-construction phases. At each phase, outdated tech threatens success, making late and over budget projects far more common than they should be.
So how can these problems be corrected? First, it’s helpful to separate out costs into distinct groups. In a very broad sense, expenses for construction projects can be divided into two major categories: hard costs and soft costs.
- Hard costs include those expenses that are directly tied to the physical construction of the project, such as materials and labor, parking and paving, sitework, utilities and landscaping.
- Soft costs include more intangible expenses, such as those associated with engineering, architecture, permitting, maintenance, insurance, inspections, legal and accounting.
Volatility in markets, issues with the supply chain and changes in prices can hugely affect a developer’s ability to accurately estimate hard costs. And soft costs can be difficult to predict due to their intangible nature. Unlike hard costs, soft costs — such as those associated with maintenance, operations or security — can continue after the project has been completed.
Additionally, soft costs can directly impact hard costs. Depending on design, for example, a particular project may call for more expensive materials and higher quality labor. A poorly managed soft-cost program can pose significant challenges to estimating real estate budgets.
Legacy systems are often lumbering and archaic, and Band-Aid fixes only help for a short period of time. The best way to solve the problem is to update the system to a state-of-the-art budgeting solution that allows for a more accurate breakdown of both the hard and soft costs associated with a given project.
Analytics, automation and AI are used in real estate development software to reduce the cost overhead of administrative tasks, eliminate human errors and improve budget and timeline estimates.
The software solution must address the complete life cycle of a real estate asset, from project inception to project completion, and from pre-development to property management, in order to minimize budget debt and maximize profit, efficiency and client satisfaction.
Giving project and finance perspectives equal weight
In the CRE industry, developers are very dependent on project budgeting software. The best solutions in this space should give the project perspective as much attention as the financial perspective. Independent perspectives are the key to addressing needs and reducing technical debt.
In this way, the project perspective permeates the software design, and the developer gets to see the project from the top-down. Since most developers hire a general contractor and subcontractors to implement projects, top-down financial control is more critical than bottom-up details.
Nearly all job costing software emphasizes the subcontractor or general contractor perspective where the detail level drives the reporting. But success in the developer market comes from its ability to go beyond the details and show management top-level project status and the various detail levels that support it.
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