Mistake #3 - Signing a Contract Before Understanding Construction Costs

If you sign a Real Estate contract before understanding ALL of your costs, there could be significant consequences.

Consider this horror story:

Just before COVID hit, two business partners found a great location with plenty of parking for their new 6,000 square foot event center. In their excitement, they rushed to sign a contract before understanding their construction costs.

Bear in mind this situation happened before all the supply chain issues following COVID. At that time, we could still build out a space for $70s/f. Even with lower costs, they were quite unprepared to spend well over $400,000 to finish out the property. Unfortunately, they didn't have the finances and weren't able to move forward with their dream. Instead of hosting beautiful parties, they wound up in litigation with the landlord.

Here is another scenario that is all too common:

The Small Business Owner (SBO) finds a great location, signs a lease, finds an architect to draw the plans, and bids the project out.

This SBO has made several mistakes…

The first BIG mistake is drawing plans before having a detailed conversation with a trusted General Contractor about their goals, priorities and costs.  Most architects are great at what they do, drawing plans and giving the client what they want.  However, their role usually does not include understanding and/or conveying how much items cost.

Starting the process with a quality GC can save time and money straight out of the gate.  They can provide valuable “feet on the street” insights into design alternatives to help lower project costs and expedite architectural drawings. We recommend starting here instead of drawing plans with an architect.

The second mistake is putting the project “out for bid” to find the low cost provider.  We’re not saying that getting multiple quotes is a mistake.  However, the manner in which you approach getting quotes can be a significant mistake.

Here is one big reason.

The strategy of “bidding out” a project connotes the idea or notion of a commoditized service. This creates challenges for which most Small Business Owners are not aware.

All of the good general contractors I know are extremely busy.  For an accurate quote, it can literally take hours to review a set of plans to make sure the GC understands the scope of work and is not missing anything.  GCs won’t spend hours “bidding” a project for customers looking for the cheapest price.  Rather, some will simply play the numbers game and estimate the costs, padding the bid for the unknowns.  As a result, the SBO’s costs increase and the GCs are NOT invested in the client’s conceptual idea or success.

Another problem arises when the client's vision doesn’t quite work in the space. For example one of our clients imagined an open office space where his employees could work and play. However, there was a load bearing wall in the middle of the room. Since a load bearing wall is critical for the structural integrity of the building, the cost of removing it and adding a beam is enormous. By helping our client make adjustments to their plans, their open concept was brought to reality while keeping costs in line with their budget. Check out his project video here about a recent I.T. construction in Frisco.

Before sending a Letter of Intent and most definitely before signing a contract, it would be wise to engage a trusted General Contractor who can help you understand the potential costs of opening your new business location.

If you understand your out of pocket expenses up front, it helps you make better, more informed decisions about the location you select. It also gives you the ability to negotiate more favorable terms to help offset some of your costs.

I hope you have found this helpful. Please pass this along to anyone who might benefit and sign up for our emails to be the first to hear about our next blog, Mistake #4.