Construction budgeting is an art, not a science. Cliché, yes, but in the ever-changing self-storage environment, managing a project from concept through completion is a fluid process. You’ll encounter municipal requirements, challenging site conditions and fluctuating costs, but all these risks can be mitigated with the right approach. If you create a plan, identify your exposure and utilize your contractor resources, you’ll be more successful and drive value for your finished facility.

Stay on Track, Manage Your Risk

Probably the most crucial reason to establish a thorough construction budget is to mitigate risk. Self-storage projects are subject to the same lengthy development process as other asset classes. It begins when you get your land under contract and doesn’t end until you’ve opened the doors and started leasing units. But rarely does a project progress precisely as intended. Formulating a comprehensive plan can help you adapt to challenges that come along and stay on track.

The first step is to establish a conceptual budget as well as a series of milestones. There are key points at which you’ll want to update your numbers, for example, when you receive your initial design drawings and again when you get your permits. Incorporate any details that could impact project cost. There might be a change in the price of materials, or the municipality may impose certain requirements.

Never guess. At this phase, it’s acceptable to use a placeholder for some scope items; however, as soon as the first design iteration is available, start to solicit accurate subcontractor pricing. Shoot for hard costs for significant elements such site work, concrete and metal buildings.

If you aren’t using a general contractor (GC), a good way to start is to establish a relationship with one of the self-storage industry’s major metal-building suppliers, as they can help you determine your initial design and other costs. They’ll provide turnkey pricing that covers the highest ticket items. From there, continue refining your budget, utilizing contingency to offset increases and keep your project moving forward.

One thing to look out for is contractor fatigue. Be conscious of how often you ask a company to reprice your project. Asking them to constantly revise their bid may decrease the accuracy of the numbers you receive and the willingness of subcontractors to sign a contract. It’s also important to stick to that milestone schedule you created.

Watch Inclusions and Exclusions

Most self-storage developers will have experience with, or at least a general knowledge of, hard and soft construction costs. But what’s hiding in that contract section titled “inclusions and exclusions”? Pay attention to it, as this is where most of your cost exposure lies.

Also, seek to determine the high-dollar costs most contractors fail to include, such as utility-tap and permit fees, permanent-power and low-voltage installation, surveys, reports, and inspections. Ensuring you have coverage for excluded scopes of work will reduce the risk of price fluctuations.

Create a Contingency

How much contingency should you include? There are lots of ways to answer this, but at my company, we start high and finish low. It may seem like an easy enough concept to follow, but it’s a fine balancing act that can impact the feasibility of a project.

At the conceptual phase, we recommend carrying 10% to 15% of the total project value. A supplemental approach would be to assign contingency values to individual scope items you know aren’t covered.

As entitlement progresses, your design will solidify and you’ll know your major price points. At this time, you may feel comfortable reducing contingency to below 10%. Once permits are obtained, hard bids are received and allowances are reduced, you might be safe with 5% or lower, but be sure to assess this with the overall project risk in mind.

Here’s the kicker: The developer should also carry a contingency! All the guidance I just laid out applies to your construction budget; however, we always recommend that developers carry a contingency of at least 10% outside of the one for the contract. Having reserves on both sides of the relationship mitigates risk and helps everyone adapt to fluctuating costs.

Lean on the experience of your GC or subcontractors for the building construction but ensure that everything outside of that scope is covered. Maintain a healthy contingency throughout the budgeting process and you’ll be in good shape to adapt to any challenges without impacting your total project cost.

Expect the Unexpected

Every self-storage construction project has its challenges. Concrete, metal-building construction, and mechanical, electrical and plumbing design are relatively predictable in our industry, but external requirements and site conditions can significantly impact your costs. Some critical questions to ask during budget planning are:

The answers could sway your construction budget by hundreds of thousands of dollars. The best way to address constraints is to work with your design team and contractor to find creative strategies. More than likely, there’s a path.

For example, let’s say you have a site with a steep grade change that requires a massive amount of earthwork. A conventional approach would be to cut or fill the site, install retaining walls, and then build on the flattened property. This would cost a massive amount in hauling or importing soil along with the concrete. An alternative method would be to use the grade change to build an over/under design and use the structure walls to retain the soil and save money. It also creates additional gross square footage!

All this said, for your initial conceptual budget, don’t stress out about finding solutions to all potential obstacles. Just track your cost exposure and create a contingency to protect yourself financially.

Reach Substantial Completion

So, what’s the best way to mitigate budget risk, ensure your self-storage project goes up without major overruns, and you get to lease-up as soon as possible? Start with a plan and a good team. Knowing your desired outcome, sticking to that scope and working with a design group and contractor that come with recommendations from within the industry will go a long way toward ensuring your finished facility is a success.

Jack Mutty is vice president of operations for Spartan Construction Management, a division of Spartan Investment Group, a real estate investment company that specializes in self-storage. He has more than 10 years of experience in general contracting and owner’s representation, managing multiple $100 million projects. To reach him, call 866.375.4438; email [email protected].