Cost certainty in construction has rarely been so scarce. Brexit, the pandemic and the situation in Ukraine are all impacting materials and labour costs. Whether a developer is constructing an industrial warehouse, a new neighbourhood in London or a variety of schemes across Ireland, managing capex is complex.
“The best way to keep a handle on capex throughout a project that can span years is to invest in the right software solutions”, said Mike Cook, UK & Ireland regional director for Yardi – and his clients agree.
Bisnow spoke to three users of Yardi’s solutions for development and construction about how they are navigating the complex world of construction today.
Rising Cost Challenges
“Having had a period of a benign construction environment and a positive, growing industrial sector, cost increases and shortages have been a dark cloud on the horizon,” said Will Oliver, finance director at Tritax Symmetry, which constructs logistics and industrial property. “The issue started as localised, materials and labour specific, but the disruption we’re now seeing is economy-wide; there are inflationary rises everywhere.”
Tony Palgrave, construction director at Yoo Capital, which is redeveloping Olympia with Deutsche Finance, has experienced similar price challenges. There are shortages of many products, such as concrete, joinery and dry lining,” he said.
“These shortages started to tail off at the end of last year and prices started to stabilise, then the situation in Ukraine began,” he said. “This has impacted materials that require high energy to produce – steelwork, aluminium and so on. Steel has increased in price by 250%.”
While many developers, including Yoo Capital and Tritax Symmetry, sign a fixed-price contract with contractors and then have responsibility for managing price increases, they still face inflation risks. At Earl’s Court, the fixed contract has been complicated by changes made to the scheme, such as the addition of a conference centre in the main office building and changing a planned office to a performing arts school. This has given the contractor a chance to come back with new pricing.
“Last year our contractor saw a £10M rise in the cost of steel, which is their risk, but they will want to recover costs in some way,” Palgrave said. “When negotiating the contract, we try to split elements of price increases to understand what is an actual price increase and what is the contractor trying to recover costs.”
“Price increases and shortages have also been exacerbated in the last few years by large infrastructure projects such as HS2,” said Cook, “Which uses significant resources and labour. All these factors add capex risk to a project that will impact final financial performance.
“Everything needs to be joined up,” Cook continued. “Budgeting and forecasting needs to be linked to financial ledgers in real-time to connect with how a building will perform when complete. A developer needs to know as far in advance as possible how potential rent balances with capex and the cost of running the space. If you have a list of prospective tenants, you want to feed capex into assessing which is the right fit, as each will have different needs and costs associated with fit-out.”
Solutions, such as Yardi’s, that are designed for development and construction give the visibility and real-time information a developer needs to understand exactly how a project is progressing, Cook said. Irish business, Bartra, has been using Yardi’s solutions since it was founded. Different elements of the business access the system for their own needs, such as the development team to create a monthly cashflow.
“It’s a strange period in the market with huge volatility in pricing and we need systems to keep on top of that,” said Aidan Durkin, finance director for Bartra Group. “Yardi’s tools give great visibility into reporting and cost control. We can see the risks and opportunities for each project, which helps us mitigate risks.”
Durkin said that the ability to see both the project management view and financial management view in Construction Manager is particularly helpful. The information doesn’t need to be inputted separately. Bartra uses the software to look at every job from the beginning through to completion.
“Right from the early stages we use it to make assumptions about how each project will perform financially,” Durkin said. “We can forecast what cashflow will look like at every stage.”
Yoo Capital uses the tool similarly. Palgrave highlighted how it can create reports to communicate project performance with investors, as well as allowing internal teams to check that costs align with the baseline budget. The team also uses Yardi tools, such as Procure to Pay with Yardi PayScan to liaise with cost consultants.
“I use PayScan for viewing, commenting on or approving invoices,” Palgrave said. “I sign off about 80 invoices a month and our cost consultants make recommendations, for example, if there’s a variation to the budget. Using an app to manage that quantity of invoices is quite useful.”
Tritax uses Yardi’s Construction Manager as another dimension of the team’s general ledger to record historical costs.
“We pay many invoices each month and we use the tool to slice these costs into the right category,” Oliver said. “We couldn’t run our business without slicing the data in this way.” The feedback Cook receives from clients is that Yardi’s solutions give developers the auditable control they need over capex in an environment that is unlikely to become less volatile in the short term. “Even when inflation does stabilise,” he said, “The benefit of live reporting and data versus a static spreadsheet will continue to give developers peace of mind that projects are progressing as planned, or that risks are highlighted as far in advance as possible.”
This article was first published on Bisnow, produced in collaboration between Yardi and Studio B.