This happens all the time: A senior living community wants to build a new facility or wing. The decision-makers hire a design firm to create their vision. Everyone loves the plans right up until the cost estimate comes in … millions of dollars over what the community can afford.
Oops.
Start with the money
Problems like this arise when owners go at the capital planning process backwards, hiring the architect to design a building before undergoing the steps needed to develop a reasonable project budget that the architect or engineer can uphold. As our owner’s representatives always say, you have to start with the money.
Before you make the decision to proceed with a construction project or engage an architect to begin designs, conduct a debt capacity analysis or financial feasibility study to understand how much you can afford to spend on the project you’re considering. This preliminary project budget will allow you to give the architect clear limitations as you enter the design phase.
In fact, checking your financial realities at every stage of the construction planning process is ideal. You’ll avoid designing more than you can spend and have time to factor in enough funds for any problems that arise during construction.
Keeping it real with a realistic project budget
A realistic budget should be based on programming and schematic design, not architectural or construction drawings. Be sure to account for costs above and beyond the hard costs of construction, and always look for value engineering opportunities (that is, ways to maximize value and minimize costs within this budget).
Inputs for a realistic construction project budget start with the land acquisition, site development, and hard construction costs. Then factor in the following:
Additional construction costs above hard costs
- Construction contingency
- Loose furniture, fixtures, and equipment (FF&E)
- Technology
- Architect and engineering (A/E) fees
- Development fees
- Building permits and inspection fees
Often-missed soft costs of construction
- Working capital (fill-up)
- Pre-opening marketing and sales
- Capitalized interest
- Debt service reserve funds (if required)
- Financing and underwriting fees
- Project contingency
Accounting for these costs will give you a realistic budget, but keep in mind that you’ll be paying throughout the amortization period for these expenses.
Cutting out the cost creep
It’s harder than you think to say no to upgrades and stick to only those features that your seniors will actually use or need. Even when you can afford them, many times those upgrades leave you in a fix when unforeseen issues down the road force you to reevaluate the project budget.
To avoid this kind of cost creep, we recommend creating two lists: one for the “must-haves” that are imperative for the intended function and feeling of your space, and another for the “would-likes” that can be factored in if the budget allows. If you have these lists at the beginning of your planning, you’ll lessen the temptation to upgrade because every decision will be tied to clearly defined programming.
Planning the work and working the plan
Budget planning is only one piece of the pre-development planning process that can trip up senior living communities who are considering a renovation or new build. To learn about other common highest-risk, highest-cost mistakes made during the construction planning process, download our e-book, “7 pitfalls to avoid when planning a senior living project.”
