Project Controls and Processes for Real Estate Developers

 

A well-designed and effectively managed accounting system is key.

 

Real estate development projects should have clear policies and control processes in place to avoid omissions and miscommunications.
Effective cost control is more than a project accounting system; it’s fundamental to the real estate development process.
All real estate development projects have the same management elements with differing degrees of complexity.
EisnerAmper's Real Estate Development & Construction group specializes in accounting, tax, and management consulting services for real estate and construction companies.
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Project Controls and Processes for Real Estate Developers

September 28, 2010

by Edward Opall, CPA, Real Estate Development & Construction Group 

Real estate developers manage a significant amount of risk throughout their projects. Conceiving of a plan, locking in the variables, making the deals, and managing stakeholders are an “art” in this business. Managing the day-to-day aspects of a development project and realizing a profit are a different matter. Successful project execution requires effective controls and processes.

No matter the size of the organization, a strong control environment and an effective project management process is necessary. Multiple layers of staff and management increase the complexity and require more rigid policies with formal approvals. Smaller organizations should follow the same principles, taking into account their circumstances.

A well-designed and effectively managed accounting system is key. Accounting must be integrated with all important management elements of a project. Reporting should give sufficient historical results, but also should provide an overall future-oriented view.

Most project management processes revolve around these categories:

Business Plan and Financial Projections
A well-crafted business plan is the first essential element of a project. The format can be simple or fancy, using PowerPoint or a combination of narratives and spreadsheets. It’s important that the elements are consistent from project to project, providing a baseline for performance evaluation.

Design Development
This is the “art” of real estate development, but it can be “organized chaos.” Successful developers establish a method with required steps and a communication process so all staff members work within the same parameters and understand the current conditions.

Clear policies and control processes should be in place to avoid omissions and miscommunications. Also, approval authority for critical project decisions must be clearly established. Major elements include:

  • Establishing the project requirements
  • Selection of the development team
  • Establish the schedule
  • Establish cost estimates
  • Drawing review and value-engineering

Determining Customer and Tenant Requirements
Incorporate a thorough review of tenant requirements in proposed leases or potential agreements of sale with customers into the design and construction plan. The construction team must provide feedback on schedule and constructability prior to contract execution. This will avoid unnecessary liquidated damages for failure to meet milestones, as well as unexpected changes in project scope to comply with lease terms.

Procurement
A well-orchestrated procurement and buyout process can reduce the cost of the project and set the stage for controlling cost claims throughout construction. The developer must evaluate bids from qualified contractors and vendors, then aggressively negotiate the lowest responsible price, ensuring that the complete scope, detailed milestone dates, and manpower requirements are included in the purchase.

Contracts
Once the scope, schedule, and pricing terms of the contract are set, a formal contract agreement can be issued. Standard contract language for construction contracts, design agreements, and consulting contracts, drafted by knowledgeable construction attorneys, is recommended to save time and legal fees on the negotiation of each and every contract for multiple projects.

Managing the Project Schedule
The schedule communicates the overall project strategy, and should incorporate the work requirements and activities of each team member from inception through turnover. Schedules should be updated regularly (at least monthly). Minutes of meetings should note key events and dates from the schedule.

Cost Control
Effective cost control is more than a project accounting system; it’s fundamental to the development process. Managing costs throughout each phase requires anticipation, proactive communication, expertise, accurate reporting, and reliable cost accounting systems. Procedures should be developed for detailed recording and forecasting of costs, as well as for the evaluation, approval, and processing of company commitments and invoices.

Project Communications
Establishing regular meetings creates discipline and accountability, promoting effective action toward goals. Weekly team project meetings with contractors and consultants delve into details and promote quick resolution. Development staff should meet to review and update each other on each project’s global issues.

Project Closeout
Project closeout is where final costs are determined and profitability is assured. Turning over space to tenants or customers on time, with all approvals, without penalties, and collecting rent on schedule is the ultimate goal. For effective results, a proactive closeout process should include:

  • Obtaining certificates of occupancy and acceptance by local officials
  • Satisfying all lease or sales contract requirements for acceptance of the space
  • Obtaining necessary written acknowledgement of turn over
  • Completion of all punch-list work
  • Obtaining all required documentation and settling all contracts
  • Providing required documentation to construction lender for final draw requests.

Conclusion
All real estate development projects have the same management elements with differing degrees of complexity. Proper planning and evaluation from the outset will set the stage for success. Effective processes and controls, combined with rigorous analysis and strong communication enable developers to realize project goals. 

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