The Ten Million Dollar Question
Imagine for a moment, if you would, that you had a rather large cheque coming your way (if you’re of an age where and haven’t ever had to deal with the quaint but rather odd concept of using small pieces of signed paper to authorise payments, then let’s go with a bank transfer). And, for the sake of argument, let’s hypothesise that, in terms of quantum, I’d decided to give you £10 million to spend on whatever you wanted. I know the title says dollars, but regrettably there’s not a lot of difference these days, so please excuse my poetic licence. I can tell what you’re thinking; my hypothetical generosity knows no bounds, but hey, I happen to think you’re worth it. So, once this imaginary money was in your account, what would you spend it on?
This is the knotty but not unpleasant dilemma that I find myself regularly posing to a subset of my students who ask me one particular question. And while it hasn’t cost me a bean, over the years, I reckon I’ve collectively saved them millions of pounds and lengthened their lives by a fair few years apiece. Which, when you think about it, isn’t too bad for what was, after all, a purely hypothetical investment on my part.
But before we get to the £10m, let me rewind a bit. When most people think about getting into property development, they’re usually swayed by the significant upside, namely that substantial profits can be made. Most of our students take on what we term ‘small-scale’ developments. These typically involve converting an existing commercial building or shop into flats and would be projected to make a profit of between £100k and £500k, depending on the project’s size and location. In property development terms, this is relatively small beer, well below the level many established developers would target. But for many people, including most first-time developers, these amounts are significant, often life-changing, particularly when you consider that these smaller projects typically have timescales of 18-24 months from acquiring the property to banking the profits and can be done working in one’s spare time.
So, while the financial upside is highly attractive, we then come on to the downsides. And for most people, this will likely include a couple of key issues. Firstly, isn’t property development rather complicated and risky? And secondly, the thought of trying to manage a whole bunch of contractors, architects, structural engineers, and the like doesn’t exactly fill most people with joy. They imagine walking on-site for the first time with their L-plates firmly glued to their back and feeling every inch the newbie. And yet they’re surrounded by a team of battle-hardened professionals who have all been around the block a few times. How intimidating must that be? Surely they’d be like lambs to the slaughter, their wool being pulled very frequently over their eyes.
This is where I often encounter a widespread misconception about small-scale property development. When you convert an existing building into several flats, you may not think it’s a massive leap from doing a house flip or refurb. And in many respects, you’d be right; many of the basics are very similar. You’ll still be finding a project, getting the financing in place, appointing a team of professionals to do the work, and then selling the end product at a profit. And because most people who do flips and refurbs manage the project themselves (and sometimes get their hands dirty on-site, too), you could be excused for assuming that a conversion project will be exactly the same, just more so. It’s similar but more complicated because you’re creating multiple units rather than sprucing up a single property.
But one of the significant differences will be your construction budget. Buy a £300k refurb project, and you might spend £50k doing the work. And of that £350k investment, I’d guess that £125k of it might be your own cash. But buy a £300k conversion project, and your development budget will likely be closer to £300k – a big difference. Yet surprisingly, only £10k of that £600k total might be your own money (I know, it’s pretty great leverage, financially speaking).
This development budget increase creates two massive benefits. Firstly, you can afford to hire a main contractor rather than a jobbing builder. They will be responsible for pulling all the trades together, so you won’t have to. And by having all the construction work delivered by a single, larger provider, you’ve only got one entity to manage, and it’s less likely to go bust, go on holiday, or leave you in the lurch. Or eat all your bourbons. The second benefit is that you’ll be able to afford to hire a professional construction project manager. Remember when you imagined rocking up on site with the ‘L’ plates on? Well, you can forget that because that’s your project manager’s job. They will be your eyes and ears, keeping everyone honest and ensuring everything goes according to plan. Remember when you thought you’d get the wool pulled over your eyes at every turn? Well, your project manager has been there, done it, and got the tee shirt. They’ll have seen every trick in the book, and their job is to root out all known evils and keep you, the developer, safe from such shenanigans. It’ll be their job to ask the tough questions, have the awkward conversations, and metaphorically beat up the contractor when needed (try to avoid hiring a PM who’s less into metaphorical when it comes to contractor management).
So, what exactly do you do while all this project management is going on? A spot of golf? Take the boat out? Well, frankly, yes, if you want to. You’ll be having a weekly catch-up with your project manager to find out how things are progressing, and presumably, you’ll also be looking for your next project. The point is that you’re not working at the coalface – you’re working in the boardroom. You’re the CEO of the project. Yes, you will have to show your face occasionally, but you’ve effectively outsourced all of the ‘doing’ jobs to other people. How great is that? And the profits you’ll receive are likely to be many times more than had you done a flip, yet you do a lot less work personally.
Which brings me to the thorny issue of my £10m question. You see, despite what I consider to be the overwhelming upside of hiring a professional project manager, some people don’t think it’s a shoo-in appointment. They’ve got an inkling that there could be someone waiting in the wings who’s even better placed to do the project manager’s job. Yes, you’ve guessed it, the person in question was staring back at them when they brushed their teeth this morning. So, let me explain why this might not be such a good idea.
The question that often kicks things off is innocuous enough; “Should I project manage my own development projects?”.
When I ask them why on earth they’d want to do that, they usually tell me that they already have some experience in project management. It might be in property, or more likely, it’s in something like IT. They figure that by project managing their own projects, they’ll not only be leveraging an existing skillset but also saving a few bob in project management fees too. Plus, they quite enjoy getting stuck into a good project, so it should be a bit of fun. In short, what’s not to like?
Now, I’ve met countless professional construction project managers over the forty or so years I’ve worked in the development industry, and intriguingly, I’ve yet to find one that has used the word ‘fun’ to describe what they do. Managing a project is a lot of things, and frankly, for most PMs, ‘fun’ is not close to making it anywhere near the top of the list. ‘Stressful’ would probably be up there, along with ‘a massive ball-ache’. I suspect ‘ultimately satisfying’ would be the best that could be hoped for once they’ve dragged a project kicking and screaming across the finishing line.
Not surprisingly, then, my advice to people who suggest that they want to be their own project manager is DON’T DO IT! One of the first things I point out is that if you think that managing a construction project is going to be just like managing an IT project (or any other type of business project), then you’re in for a massive shock. Most PMs in construction are professionally qualified, and many have undergone long apprenticeships. A business project manager will have no idea of the tricks of the trade and wheezes used by contractors and other professionals working on-site. Yes, they may know their way around a GANTT chart, but that’s little consolation when their trousers are being metaphorically taken down on a regular basis by their contractor (again, try and avoid contractors who are less metaphorical on this point). A professional construction PM will already have the street smarts to see what’s going on, and more importantly, your team will know it and will be less likely to even try pulling the wool. Even if you’ve project managed a flip or refurb before, dealing with a construction budget many times the size puts things in a different league, one where you can easily find yourself out of your depth. You’ll also be stressed out and running around like a blue-arsed fly instead of practicing your golf swing or pulling into the harbour at St Mawes.
The other reason for not being your own project manager is a financial one. Let’s take a scenario where a developer has a modest project with, say, a GDV of £1m from which they expect to make a profit of £200k. It’s undoubtedly true that were they to take the role of project manager, they could probably save themselves somewhere between £10k and £20k. But they’ll have to invest their own time and energy into the PM role. Their £200k development profit is made – not earned, unlike their £20k max project management fees, where they’ve simply exchanged their time for money. Plus, they’ve taken on a whole load of stress that goes with the PM role. In my opinion, it’s far better to play that Chief Executive Officer, where you allow other people to get on and do all the work. The time you save by not being the PM can then be spent on finding your next £200k deal, a much better return on your time investment.
I know what you’re thinking; when do I offer them the magic £10 million? Well, it’s when they give me that doubtful look that suggests that, despite the overwhelming evidence, they’re still not entirely convinced that they want to hire a professional project manager. Plus, in many cases, they probably have a secret yearning to get their hands dirty. So I ask them, ‘If I were to give you £10m with no strings attached, what would you spend it on?’. And I get a whole load of different answers. Let’s face it, £10m is enough to allow most people to retire and do whatever floats their boat. In fact, you could buy a boat, and probably quite a big one at that. As a result, many responses focus on how they’d spend all their free time now that they’d be able to ditch the day job. There will be nice holidays and almost certainly the odd Ferrari or Aston in the mix. A second home and houses for the kids and grandchildren regularly crop up, as do charitable donations to a favourite charity. Attending sporting events, playing golf, indulging in a favourite hobby or pastime – I’ve heard it all. But the one thing they never, ever mention is that, if they had £10m, they’d like to do a little bit of construction project management on the side. It has simply never made it onto anyone’s bucket list (ever), and for the majority, I think it’s usually enough to persuade them that the DIY approach to managing a small-scale development project is not the way they should go.
Of course, it’s a sliding doors moment; neither they nor I will ever know the path not travelled. Without my advice, they may have gone on to create a stressful, time-consuming job for themselves that would have taken years off them and prevented them from focusing on winning more projects and making more money. If so, I’d have saved them boatloads of cash and added years to their life by simply avoiding all the stress. Neither of us will ever know if that would have been the case, but I’m allowed to think it might be.
The trick is to recognise that being a CEO is not about deploying skills you already have on the coalface. You might well be a dab-hand with a mitre saw and paintbrush, but do you really want to effectively earn the same money as a chippy or decorator by saving yourself their wages? Far better to command the wages of the CEO, appoint a team of talented professionals to do the work for you, and make sure you avoid that tricky left-hand bunker when coming up the dogleg 16th.