As too many affordable housing developers learned during the Pandemic, things can go very wrong during construction. Over the past two years, many of us have confronted price hikes, labor shortages, material delays and design problems. They all contribute to increased construction costs, construction delays, increased soft and financing costs, and downward tax credit adjusters. It can feel like everything is going in the wrong direction at the same time.
As we looked towards the future, members of our development, finance and construction teams convened to discuss these issues, learn from our experiences and prepare for the next stumble during construction. Here are some important takeaways to mitigate construction mishaps.
Build in contingencies
It may be easier said than done, but it’s critical to build timing and financial contingencies into your project’s schedule and budget. A project that is strung too tight may not be worth doing. If you have limited ways of managing construction cost overruns and delays, you may regret closing the project’s financing and signing those construction completion guarantees.
For affordable housing, this is as much about timing contingencies as financing contingencies. If you make commitments to equity investors to deliver LIHTCs by a specific date but are delayed, the downward adjusters can be catastrophic. This is especially true for tenant-in place Acquisition-Rehabs that assume early placed in service dates. Complicated renovations need timing cushions.
After a project’s initial closing, a developer can easily make the mistake of assuming their work is largely done. One might assume that it’s up to the contractor, architect, and construction manager to get the job done. The developer just has to coordinate with investors and lenders, and make sure the bills are paid on time.
But if things start going south, the developer must lean in and get to work. They must tighten their cash flows, diligently track potential change orders and contingency funds, push the contractor to maintain schedule, and refresh everybody’s memories about construction and financing milestones and deadlines.
Many heads are better than one
The typical developer may feel like they are expected to know everything all the time and be in command all the time. The truth is, however, no one individual knows everything about affordable housing development.
We are all constantly learning and applying lessons to new situations. No one developer has confronted every situation and has all the answers. The odds of finding the best solution improve when one brings other developers and thoughts to help solve problems.
Maybe somebody in your organization previously confronted a similar situation, heard about something another developer is doing, or learned of a recent funding opportunity. Developers can bring their attorneys, accountants, investors, and lenders to help solve financing problems.
Good developers are like conductors of an orchestra. They understand their value is bringing the best out of the team to ensure sound coordination and integration of the individual specialties, and to maintain the right tempo.
One developer noted that it’s important to uncover and present as much of the bad news as soon as possible. Only once you understand the issues and “lay them on the table” can you begin to solve them. Developers shouldn’t let their egos be an impediment to asking questions.
Identify responsibilities and build trust
Developers should work with their team to confirm whether the contractor is responsible for delays and cost overruns, the architect is responsible for design errors, or the owner is responsible for unforeseen conditions and problems. The conversations can be long and hard.
To have productive and honest conversations, it’s important to create an atmosphere of trust. This is easiest to do with team members with whom you have longstanding relationships. It can take work when it’s one of your first projects working together.
Building trust can begin with the developer recognizing that it will “own” and take responsibility for its errors and a project’s unforeseen problems. For example, if the construction contract clearly excludes a cost, the developer should step up and own it, rather than push back on the contractor, even if the project is having financial problems.
Another seemingly simple step a developer can take to build trust between its contractor and architect is to pay invoices on time. And if you can’t for some reason, it’s important to be clear when you will be able to pay their bills so your contractor and architect can be prepared, talk with their venders and subcontractors, and make alternative arrangements if necessary.
One tactic that some of our teams found helpful was to hire an outside consultant to help create an atmosphere of trust. A good consultant can help start honest discussions, identify areas of weaknesses, and understand issues from other peoples’ perspectives. They found that a consultant can help most if they start their team building work early in the construction process before debates and often tempers are hot.
This probably seems obvious, but the developer must keep looking for new funding opportunities. Look again in the proverbial couch for some extra nickels. Look for new funding opportunities from public and private sources. Maybe new opportunities have sprung up since you closed the financing or there have been some changes in rules and regulations that create new opportunities. Maybe a regional Federal Home Loan Bank or private philanthropy could be a source. Maybe there are new operating resources that will provide new leveraging opportunities.
In short, when things don’t go well during construction, the developer must be at their best to solve problems.
Scott Barkan, senior vice president, The NHP Foundation.