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Contract signing

You Should Negotiate Your Own Lease

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You should negotiate your own lease. After all, what could possibly go wrong?

Operating expenses, subordination, rent increases, building repairs, force majeure, and property taxes are all problems for pikers. Not you. You’re the master of market trends. A titan of triple net. The commander of CAM charges. You’ve got significant C-level spending authority, and you’re not afraid to use it.

On the other hand, maybe you should be. Consider the car salesman.

The average person probably buys a new car every five years. Unless they buy it from a private party, they are self-aware enough to know the car salesman has the negotiation-knowledge upper hand. While you may buy a car every 60 months, a steadily employed salesperson may sell 16 cars a month. They know more than you. And you know it.

A botched car purchase could set you back a few thousand dollars. What about the cost of a bungled commercial lease? Let’s test drive some hypothetical numbers to make the math easy. Assume that market-rate rent is two dollars a square foot. Your space is 10,000 SF. The term is five years. Setting aside rent escalations, that’s almost a quarter million dollars a year, right? Or in excess of 1.2 million over the length of the lease.

A few hundred thousand here, a few hundred thousand there, pretty soon we’re talking about real money.

Surprisingly, some C-level folks are more cavalier about a multimillion dollar transaction than a new car purchase.

The truth is that a client without a broker representing them is going to get slaughtered in the market. A real estate transaction (lease or purchase) is likely one of the most complex and costly commitments (aside from marriage) on the planet.

It’s no different than the fool that acts as their own attorney.

Then why do tenants go unrepresented? Maybe it’s because money doesn’t matter. Possibly it’s the arrogance of ignorance. Or someone is lookingNegotiate Your Own Lease? for a little extracurricular OJT on the company’s nickel. The point is this, ignoring what-you-don’t-know-you-don’t-know, will cost you.

If this is true, then why would a tenant hire architects, engineers and contractors without similarly sophisticated representation? They shouldn’t. The average tenant won’t expand or relocate but once in the career of the average employee. This lack of institutionalized knowledge and experience makes tenants as vulnerable as a naïve first-time car buyer.

The average tenant can never rival the negotiating and purchasing savvy of their vendors. Thus, the same logic applies to the design, engineering and construction of major tenant improvements as it does the car buyer. Architects, engineers, contractors all negotiate their services several times a month. These contracts are regularly six figure commitments. Some tenant improvement contracts can easily be in the millions.

The result?  Advantage: architects, engineers and contractors. So what do you do?

Just like I recommend that every tenant be represented by a great broker, anyone seeking to improve their property should get sophisticated help; and not just anyone with “project manager” in their title.

Get an executive project management firm that creates a ROI. Demand that they demonstrate how they can stop change orders.   Require that they prove they can prevent risks of delays and defects. Or resign yourself to just plain getting taken.

Apex Project Consulting, Inc. can provide several tips – for free – that will save your firm enormous amounts of capital and grief.  But you need to get started now. Not after the lease is signed.

Mr. Conzelman is a licensed electrical contractor and general contractor, LEED® AP, CCM, and a California RE Broker License 01128636. Mr. Conzelman graduated from Western State University, College of Law and has taught Contracts-for-Contractors. Tom Conzelman is the author of “Protect Your Project”, the innovator behind the No Change Order Guarantee™ and the creator of the revolutionary Negatively Inferred Scope™ procurement process; Stopping Specification-Driven Change Orders and Rework.

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Scope is more important than terms and conditions

Attorneys Are Overrated

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Thank you, Captain obvious.

In all seriousness, when it comes to drafting contracts, for design, engineering and construction services, the input of attorneys is extremely overrated.

Not too long ago I was catching up over drinks with a friend of mine from law school. The conversation gravitated to various legal topics. At some point in our chat, he mentioned to me that he had recently helped a client with a construction contract. In retrospect, I should’ve simply nodded appreciatively and moved on to a different topic. However, I didn’t.

Instead, I offered, from my years of experience, that he probably didn’t help his client as much as he thought. I assumed, erroneously, that all attorneys would acknowledge that maximizing profits, or more importantly minimizing risks of change orders and other budget busting surprises, was NOT related to legal craftsmanship.

After all, isn’t the point of all business transactions to generate profits and minimize risk? Maybe not, if you’re on the attorney side of it. I started the defense of my position with something I thought we both could agree to.

Money matters. If money matters, then the measuring stick for success or failure of contracts for architectural, engineering and or general construction has to be money — the money saved by avoiding change orders.

It’s all well and good that contracts for design and construction satisfy the necessary legal standards. However, doing so is an expenditure that is essentially overhead. It doesn’t generate the lion share of savings.

The finest and most sophisticated contract will never do more for a client to save money and or prevent risks than a well crafted scope of work. An insufficient, sloppy, incomplete, or worst-case, a vendor-drafted scope of work will result in an almost boundless amount of change orders. It doesn’t matter how much fancy word-smithing you wrap around a crappy deal, it’s still a crappy deal. That’s why the legal part doesn’t mean jack.

It doesn’t matter if you correctly articulate or memorialize the indemnification provision, the waiver of subrogation, choice of law, insurance, and/or arbitration provision, etc. While all of these are swell, clients in this industry don’t lose money necessarily because the parties agreed to arbitration versus litigation. It’s all about the scope.

To paraphrase Bill Murray’s famous line in Meatballs, “IT JUST DOESN’T MATTER” how cleverly you drafted the indemnification clause – or any other provision – if you screw up the scope.

To no one’s surprise but my own, this argument had little affect on my attorney friend’s position. A little anxious that I might be challenging his abilities, I pressed ahead nonetheless.

Change orders are the most expensive “repeat offender” in the real estate improvement process. The uninitiated or unrepresented client or tenant can “bank” on change orders generating hundreds of thousands in additional costs (BTW: your vendors are counting on this, too).

I’m sure that the design and construction industry generates plenty of litigation. However, whether a client is hit with change orders from the architect, engineer or contractor, is almost exclusively a function of the scope. A poorly drafted scope (or worse, use of the vendor’s agreement) guarantees change orders. Change orders equal money. Big money.

Again, if the agreement doesn’t operate to anticipate and mitigate design errors in the construction documents or block (non-owner requested) change orders from the contractor – then none of the legal jargon matters.

They don’t teach scope-writing in law school. Yes, it helps to be able to write and talk like an attorney. I get that. But again, there is no course or class in how to describe the architectural, engineering and construction specifications and requirements for a tenant improvement project. It strictly comes from on-the-job training, YEARS of on-the-job training.

I don’t know if I’ve had more luck convincing you than I did my good friend from law school. But I will offer you this, before you consider laying out millions of dollars on your next project, carefully consider who’s helping you with the scope of work.

If the global Fortune 1000 real estate behemoth and the project management chaperone you’ve engaged to deliver your next project doesn’t demonstrate their ability to save you money through stopping change orders, then you might want to reconsider. Start by using an experienced project management professional with both design and construction contract drafting skills as well as CM experience that will maximize your profits while minimizing your exposure to risks.

Tom Conzelman is President of Apex Project Consulting, Inc., a one-of-a-kind,  full spectrum project design, engineering and construction management consulting firm for commercial, industrial, healthcare and specialized-environment projects; both locally and across the United  States. Mr. Conzelman is a licensed electrical contractor and general contractor, LEED® AP, and a California Real Estate Broker License 01128636 (www.apexpjm.com). Mr. Conzelman graduated from Western State University, College of Law and has taught Contracts-for-Contractors. Tom Conzelman is the innovator behind the No Change Order Guarantee™ and the No-Fee Guarantee. ™

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Smokey bear-prevent forest fires image

Are You a Smokejumper or a Smokey Bear?

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Pre-planning is to a project’s success what Smokey Bear is to wildfires.

A Smokejumper is a well-trained expert who plunges into active wildfires in a remote or inaccessible area. Often times with nothing more than the gear on their back.

Smokey Bear on the other hand is a friendly iconic reminder that prevention is the best (and most cost effective) practice.

One gets the job done by communication, prevention and pre-planning. The other is a crisis manager – and a hero – which in some respects is part of the problem. But why?

The answer is that pre-planning (and crisis prevention) are consistently overlooked. However, pre-planning out-performs crisis management in every respect.  Pre-planning is an absolute necessity for a project’s success.  Why then, is there tension – or at least confusion – between pre-planning and crisis management?

Crisis Management

Part of the problem is that successful crisis managers are celebrated. Firefighters are heroes. But the person that clears brush around their house? Well, that’s just plain boring, right?

Thus our perspective – and the outcome – is backwards. This paradox is directly applicable to business and project management.

Shouldn’t prevention and pre-planning have an equal if not more important status than crisis management? Consider some of the barriers to preplanning:

  • An environment of no accountability
  • Autocratic organizational structure
  • Fear
  • Control
  • It’s boring!
  • Crisis managers are “rewarded”

Accountability Not Wanted Here

Pre-planning creates accountability. Oftentimes initial projections and assumptions lose their luster when contrasted against an empirically derived plan. Moreover, some organizations and individuals just don’t value being held accountable.

Autocratic Organization: The Emperor Has No Clothes

No one wants to be seen as disagreeing with the boss. Nobody wants to tell the emperor that their clothes are less regal and more revealing.  In a shoot-the-messenger environment, accountability causes tension.

Ironically, this environment is especially inviting to Smokejumpers.  Their job is secure.  Nero is running the business so their services will always be in need.  They’re enablers and beneficiaries of the management-by-crisis culture.

Besides, there is often no political capital in being the one to say “iceberg dead ahead”. The first person to highlight the future problem is probably perceived as being the problem.

Fear

Fear is a powerful motivator. What if predicting or pre-planning suggested embarrassment for others? Maybe the executive projections were a bit too rosy?  If pre-planning exposes weaknesses, it’s not going to get a lot of airplay.  Better to bury the issue for the time being and hope the Smokejumpers can mop up after the building is fully in flames.

Control

Pre-planning concedes control. Maybe releasing on control exposes what they should be doing or don’t know how to do?

Sometimes preplanning goes against the grain in a top-down, authoritative culture. A leadership level, accustomed to having their way, is going to bridle at pre-planning efforts that cut against the anonymity of autonomy. It might also expose other weakness.

Pre-Planning is Boring!

Admittedly there’s not much sex appeal with pre-planning. Nobody gets really excited about pro formas, project schedules, risk registers etc. However, benefit is inversely proportional to the “excitement”.  This is where the game is won or lost.

Reverse Incentives

Any Econ 101 student will tell you that if you want more of something, you need to discount it, reward it or pay for it. The same principle applies to crisis managers.

This principal fosters an environment where the attention and behavior of fire fighting versus pre-planning is encouraged. This may also be the most dangerous aspect.

Danger Ahead!

As I mentioned above, crisis management rewards firefighting. Being “rewarded” is often perceived as adding value. The most dangerous type of project team member is the one that perceives value in putting out fires. It sabotages essential pre-planning and satisfies their need to show value.

What Should You Do?

Commit to Change

There are several compelling reason to change this paradigm.  Professional, detailed pre-planning saves money, reduces risk, and makes heroes out of the team that successfully executes a pre-planned project, instead of the crisis manager.

“Every battle is won before it is ever fought.”  Sun Tzu

(Pre) Plan for Success

Pre-planning is positively correlated to success. That seems intuitive, yes?  But either for organizational reasons, autocratic organizational structures or otherwise, it (pre-planning) doesn’t get much traction.

Experts, of any stripe, are successful because they diligently pre-plan. The ability to “see” into the future is really an extension of pre-planning.

Focus on Initial Conditions

Pre-planning is a powerful predictive exercise. Initial conditions are the single biggest determinate of the final outcome.

If no prediction (pre-plan) is created, you can be certain that what can wrong, will go wrong; probably at the worst possible moment.  This axiom is directly related to, and exacerbated by the timing (more on that below).  As an example, consider the approach use by expert professionals.

Experts survive and excel from pre-planning.  I’m reminded of a saying I heard a long time ago: “If you’re losing money or making money, but don’t know why, you’ve got the same problem.”  Experts aren’t in business to lose money. They differentiate themselves by pre-planning. Experts avoid risk. Pre-planning allows experts to focus on what’s going to happen and thus avoid risk.

Surround Yourself with Experts

Hire and or assemble an expert project leader and project team that will professionally speak the truth. As the famous basketball coach was quoted as saying:

“Whatever you do in life, surround yourself with smart people that will argue with you.”

John Wooden

This wise advice does double duty. First get experts. Don’t assume you-know-what-you-don’t-know.  Secondly, give them the freedom to alert you to icebergs.

Depend  on Data

Create an environment where the facts are friendly.  What that means is that the facts do not have an intrinsic value of themselves. They should be viewed as data. Not a personal attack or as exposing a weakness.

Timing is Everything

Pre-planning can only be effective if done early. Time is a powerful asset, and ironically it’s the first thing to go to waste. Seizing on the ability to address problems before they start, by pre-planning is huge. Time can’t be made up or recouped. Once lost, it’s gone.

80 to 90% of any project’s success is dictated by what happens in the first 10 to 20% of the project life-cycle. The initial stages are the most pivotal.  Time wasted is the first causality of failing to pre-plan.

Summary

I’m not suggesting that we stop praising firefighters or successful crisis managers. But after all, it’s cheaper and less stressful to stop the fire in the first place. Besides, there is only so much you can do with a fire extinguisher.

 

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Design plans

Design Firms: How Risky Is Your Next Project?

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There’s an area of business that all too many architectural design firms tend to overlook. In the excitement of chasing that project they’ve just heard about, they sometimes forget to look at the risks involved should they be awarded the job. Yet controlling is one of the most important contributors to the company’s long term profitability.

Well-run design firms follow specific strategies to keep liability claims low and infrequent. Here’s a very helpful article posted in ENR.COM that can guide you as you consider whether that next project is your masterpiece…or your financial downfall:

Project and Client Selection: Develop a Project Evaluation Checklist

Is it a good project for your firm? What do you know about the client? Does he/she have a history of suing their design professional? Is the money there? How’s the schedule? A process to evaluate prospective projects and clients can dramatically decrease the likelihood of a claim. 

Sign Equitable Contracts

If there is a problem or litigation on a project, your contract will become a source of scrutiny. A contract is supposed to lay out who is supposed to do what as well as outline terms and conditions. A well-written contract that accurately describes the intent of both parties will help prevent misunderstandings and simplify the resolution of any disputes that arise.  Well-run firms have developed contract review policies and procedures to make sure their contracts are reasonable. 

Identify Problems Early

While the definition of a claim in a Professional Liability policy is “a demand for money or services,” most Professional Liability policies also allow for and strongly encourage their policy holders to turn in “circumstances” which may give rise to a claim. I cannot emphasize how important this is. It can not only protect your insurability down the road, but the earlier you act on a potential claim, the quicker and less expensively it is generally resolved.  Educate your staff to know the warning signs of a potential claim. More at ENR.COM

The article goes on to discuss dispute resolutions provisions that you’ll want to check for in any contracts you sign. As both a project leader and a J.D. myself, I’ve always found it critical for this aspect of the negotiations to be dealt with throroughly and carefully.

All too often, contracts with design experts are a case of “you don’t know what you don’t know.” So even if you’ve got decades of experience in drafting contracts and contract scopes, it’s always a wise idea to run this past your attorney. And as quoted in the article…make sure you have the right professionals on your side, i.e. a knowledgeable attorney and specialist insurance broker. And I would also recommend a professional with expertise at drafting agreements for design and engineering work that maximize performance and reduce risk. Get this critical process right, and you’ll be on the right path to finding projects and clients with whom you can have an enjoyable, litigation-free experience.

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