Real-world Development with propertyCEO – Part 8
Small-scale property development projects that use permitted development rights can be done in your spare time, boast six-figure returns, and have a lower cost of entry than buy-to-lets. It all sounds great on paper, but what’s it REALLY like to convert a property?
Join Ritchie Clapson CEng MIStructE, veteran developer, author, commentator, and co-founder of development training company propertyCEO, as he guides us through a real-life commercial conversion project from start to finish. Witness the highs and the lows, and learn the critical takeaways in this eye-opening, warts-and-all look at what REALLY happens where property development theory stops and the practice begins
You can watch a video of Ritchie walking around the project. Click HERE for exclusive video content.
The story so far…
Ritchie had secured from commercial lenders the £300k funding he needed to develop his five-flat commercial conversion project, so the next step was to get his design team cracking on moving the project forward. This was the ‘detailed design’ stage, where the architect, structural engineer, and mechanical and electrical (M&E) consultant contributed their expertise to create a viable design that fulfilled Ritchie’s brief and allowed the contractor to price accurately and then start building.
The RIBA design stages are an (optional) series of gateways that a project must pass through on its journey to completion, and I knew from experience that following them on this project would be the best way to go. They give a solid framework that everyone can work to, ensuring nothing is missed. Too often, I’ve seen developers skip RIBA and reap the consequences through massive cost overruns. The idea is that the project pauses at the end of each stage to make sure all parties involved are ready to proceed to the next stage. Without this, your professionals will each be running at their own pace, which can be a nightmare. I once worked on a scheme where the architect and structural engineer raced ahead, leaving the M&E consultant behind. When the latter caught up, the architect had to redesign some structural features that had already been installed, all at a significant cost. This could have been avoided if they’d proceeded at the same pace.
* Top Tip: Always follow the RIBA design stages (or similar) to ensure that every consultant signs off on each stage before they move on to the next one. This ensures that no one gets left behind, which can easily lead to increased costs or design compromises.
When we completed the tender design stage, our contractor gave us a price. Now we were at the detailed design stage, I had a problem. My contractor needed an estimated £268k to do the work, but the budget was just £220k if I were to hit the commercial lender’s required 20% profit margin. In short, we needed to make a £48k saving, so I called a meeting of my architect, contractor, structural engineer, mechanical and electrical consultant, project manager and cost consultant, got them all in a room and tasked them with finding the money WITHOUT affecting the end value of the five flats.
* Top Tip: Value engineering is a great way to reduce costs. Before the meeting, tell everyone the required cost target so that they come prepared and make it clear that finding the savings isn’t optional. If you manage the meeting well, they should all rise to the challenge.
At the start of the meeting, I made a point of flattering their egos a bit but made it clear that the project couldn’t proceed until the savings were found. I needed them to think creatively, and before long, they’d started to compete with each other to come up with the best idea. After a few hours of creative thinking, we managed to get there.
We would change the kitchen supplier to a cheaper one, and delete some non-essential Velux windows. The biggest saving came from demising the proposed communal courtyard to just one of the flats, thereby increasing its value and avoiding the construction of a new bathroom at the same time. I also had my estate agent on hand to ensure that the changes wouldn’t affect the selling prices of the flats, as that would undermine the entire exercise.
* Top Tip: Having a residential estate agent involved in your value engineering exercise means you’ll know when you’re cutting too deep, and your proposed cost savings are impacting the selling price of your units.
As we now had an agreed-upon list of the savings, we were able to get the entire team to go through the first RIBA gateway together. The architect produced a complete set of construction drawings, which meant that the project manager could agree a fixed-price lump sum JCT contract with the contractor.
* Top Tip: Always use an industry-standard template contract, like a JCT agreement, with contractors, as they’re proven, and your team will be familiar with them.
In any development project, you have your lead roles, such as architect and contractor, but you also have minor roles that are more specialised but still essential. We needed to bring these third-party consultants on board now that we’d passed through the first gateway.
* Top Tip: Get your project manager to coordinate the procurement of your third-party consultants. Don’t underestimate the work involved in this!
First up was a health and safety consultant. Health and safety are big issues in construction, and as the developer, it’s your project and so you’re legally responsible for them. An H&S consultant would be my eyes and ears on the ground and ensure that all necessary regulations are followed.
* Top Tip: Always appoint an independent H&S consultant. Your contractor may offer their own, but you don’t want someone whose boss is in charge of the place where most accidents are likely to happen! They need to be independent, so you need to be their boss.
The contractor has H&S responsibilities, too, but I always like to set the tone. I’ll always call it out if I see anything unsafe on my sites. Was I asked to sign in, was everyone wearing PPE gear, and was access to the site secure so kids couldn’t simply walk in? Also, is the site an obstacle course of trip hazards or is it nice and tidy? And did the contractor have an F10 form displayed in the site office (this is the official notice stating who the developer and contractor are). The Health & Safety Executive (HSE) have carte blanche to visit any building site without warning and can simply close you down if they find anything untoward. When they turned up on our site unannounced one day to inspect, I happened to be there showing someone around. Fortunately, everything was squeaky clean, but it’s always a sobering experience and a reminder that, as the developer, health and safety should always be at the front of your mind.
* Top Tip: Always set the tone with health and safety. If you go on-site and see anything that’s not right, make a big deal of it with the contractor. It’s all too easy for corners to be cut, and you want them to know they’re dealing with a stickler for the rules. If they screw up, you could be in the dock – and prevention is much better than cure. Make a point of demonstrating to the contractor that you know a bit about H&S, and you’ll get an added dose of respect.
Our H&S consultant also oversaw the design team’s risk assessment for buildability (is it dangerous to build) and in-service use (is it dangerous to the eventual homeowner).
Our next consultant was a homebuilder’s warranty provider (HWP) who would be issuing a ten-year warranty on our flats. HWPs employ a regular inspection process during the construction phase, just like Building Control, so I needed to get my project manager to coordinate their visits with the contractor.
* Top Tip: Get your HWP on board early, as this will ensure you get the best price. I’d get them in place even if you’re planning to keep the units to rent out, as you never know whether you may need to sell them after a few years, and purchasing warranties retrospectively can be prohibitively expensive.
The final consultant we hired was building control, who would sign off on our development plans and ensure the build was in accordance with Building Regulations. Building Regulations apply to all construction work undertaken in the UK, so this wasn’t optional. You can either appoint the council’s building control team or employ an independent building control expert.
* Top Tip: An independent building control team can be preferential where your proposed plans are controversial or complex, albeit they will typically cost more.
In the end, we decided to use the council’s own team. Not only were they cheaper, but I didn’t feel our scheme was particularly controversial, and the council’s team had a good reputation. As soon as they were appointed, we sent them our detailed design drawings for them to comment on.
* Top Tip: Get your building control application in early. If Building Control decide they want you to change anything, you want to know as soon as possible. Otherwise, you could have to ‘undo’ work to accommodate their requirements.
With our key third-party consultants duly appointed and the detailed design fully nailed and costed, I now had all the cogs in place to get firmed-up costings from the contractor, after which we could start work on site.
Next month, Ritchie walks through the tendering process to ensure that the construction costs are nailed, before physically starting the build – at last!