How to Stay Within Your Tenant Improvement Budget

A budget tells us what we can’t afford but it doesn’t keep us from buying it.”

William Feather

Building out new office space can be somewhat akin to buying a new car.  We have all walked into a car dealership with a firm budget in mind but then we make the mistake of test driving the upgraded model with all the cool features. Individually, the cost of these upgrades seem fairly innocuous; however, when we sit down with the salesperson to see the final tally, we often end up in a completely different price range than we had intended.

Once you strike your lease deal with your landlord you need to take all prudent measures to avoid falling into the trap of thinking that the hard part is over. There is still much to do and material financial risk if you don’t establish, manage and enforce a comprehensive project budget. The budgeting starts with your designer.

Establish Your Budget Up Front

If you were building a house, you wouldn’t give your architect or contractor a blank check.  You shouldn’t give your space designer one either.  Most companies have financial covenants, profit and loss goals or other constraints on their ability to spend.  Based on how much cash your landlord is providing for your build out, decide what you can afford to spend out of your own pocket.  This will form the basis for your overall project budget.

Remember, the cost of a move goes beyond just construction costs.  In building your budget, you need to factor in decommissioning of the move space, telecommunications/IT and cabling, design fees, project management fees, move costs and furniture, fixtures and equipment.  These costs can represent a material portion of your overall budget.  Make sure that your “all in” budget is clearly established up front with your designer so they know how much money they have to work with.

Designers appreciate when the project parameters are firmly established up front.  A good design is only good if it achieves the desired operational and aesthetic objectives while staying within the client’s budgetary constraints. There are many ways to achieve an aesthetic objective and the budget will often dictate which route the designer will take.

Continue to Monitor the Budget Throughout the Project

Once you establish your budget, it’s important to understand that things can change.  While your budget should include a reasonable contingency to deal with unexpected changes that inevitably occur in a real estate project, you should make sure that your pricing parameters are still being adhered to as you move through the design process.  Insist on preliminary pricing from your project manager or contractor as the design is being developed.  If some areas are coming in at prices that were higher than anticipated, consider taking steps to determine if there are ways to accomplish the desired functionality or aesthetics at a cheaper cost.

 Limit Input into the Design Process

Some companies who value participation and inclusion will seek input from many of their employees before planning their new space. While this is a laudable approach, it can come with a cost. Some employees view a corporate move as an opportunity to fulfill their wish list of office amenities, design features and top of the line equipment.  Not everyone is sensitive to budgetary constraints when asked to identify what they’d like to see in the new space. If price was never an object, people’s purchasing decisions would often turn out very differently.  Another risk of seeking broad input in the design is that once you ask for opinions, you may run the risk of a backlash should you decide not to incorporate all of those suggestions into your design.  The old adage, “It’s better to seek forgiveness than permission” often applies here.

One way to engage employees without losing control of the process is to limit input to certain options or alternatives.  If there are several design features that have the same relative cost impact but you cannot afford all of them, you might put those options to a vote. For example, glass office fronts, individual office thermostats and upgraded lighting might all be features with the same relative cost impact. If the company cannot afford all three, you might seek opinions on which one or two would be most appreciated by your staff.

Scrutinize high cost, specialty spaces

Where things can get really tricky is when you are dealing with highly technical space components such as data rooms or labs and you need to rely on experts to tell you what you need.  One approach here is to have your advisor create a comparison of what you currently have in your space with what is being proposed for the new space including a cost breakdown of any upgrades.  If and to the extent the new requirements being proposed by your lab team or IT professionals are significantly greater than  or different from what you currently have, make sure that all of these changes are justified.  Having all the bells and whistles might make for the ideal lab space; however, that can come with a cost that might not be justified.

Conclusion

The build out of space involves material cost and risk that tenants often do not plan for after their lease is signed.  A great lease deal can turn into a bad real estate deal if the tenant does not establish and enforce a strict project budget.  By following the suggestions above, tenants can ensure that they don’t buy what they can’t afford.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

This entry was posted in Fit Out, Negotiating, Strategies. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *