Despite rising inflation, escalating materials and construction costs, supply chain delays, and general market uncertainty, the high-end residential construction market continues to experience record growth. According to recent statistics, the value of new private home construction projects in the United States has reached a record level ($776 billion in 2021). Although we have written extensively about the market factors currently putting pressure on the construction industry, as well as some steps that can be taken to mitigate the impact, this article will discuss additional questions that landlords planning to build high-end housing should ask.
Will allowing issues delay the start of the project?
Premium owners may encounter significant lag problems before the first bucket hits the dirt. For a variety of reasons, the permitting process at many desirable locations is lengthy and frustrating. In an effort to curb what they consider a building out of control, some municipalities have gone so far as to enact freezing permit applications for extended periods of time (Aspen, Colorado for example). Whereas other sites, although they do not have ban periods, have permit procedures that span several months or even more than a year for a variety of reasons, including insufficient staffing and staff turnover.
While there may be little the owner can do to avoid these issues, having a team on the ground who knows the local agency’s rules and procedures, and has good relationships with the licensing authority, will help. If appropriate, the accelerator can be retained. However, at a minimum, the owner should make sure to at least consider permit delays when determining the timing and feasibility of the project.
If I build it, will someone insure it?
Since luxury homes are often built in desirable locations near coastal areas, wooded areas, or mountains, getting completed home insurance can be either incredibly expensive or unavailable. This is partly due to recent weather events that have caused extensive damage to many towns and luxury homes. As a result of these catastrophic losses, the insurance industry has dramatically tightened its standards for underwriting, resulting in higher premiums for owners or, in some cases, a lack of insurance coverage.
To mitigate this issue, it is best to work with a broker or other risk management professional to involve an insurance company prior to construction. Insurance companies may be more willing to cover a home if certain building guidelines regarding materials, design, or construction methods are followed and included in the project. For example, an insurance company may be willing to cover a home in a hurricane-prone area if a more robust structural system is designed for such events, better wind-resistant materials are used or safeguards are put in place for high-water events.
Is my architect up to the challenge?
As we discussed earlier, having the right team in place is fundamental to a successful project. This is particularly the case with the selection of a project architect. Having someone familiar with the local licensing authorities, who has completed similar projects and has a good relationship with local entities in the area, will not only help reduce delays with local authorities eventually approving the design, but also reduce the risk of staffing issues due to the relationships the engineer has established. Your architect over the years with design consultants and other contractors. The owner should also try to make an assessment of the architect’s ability to work with local contractors.
Is my general contractor up to the challenge?
Likewise, having a general contractor with the appropriate experience is equally essential. Consider previous projects completed by your contractor at your project site, the depth and experience of the team members who will actually carry out the work (ie you will be working with their “team”), the contractor’s proposed project management and team building practices, and the number of other projects underway along with your project. In addition, it is important to understand the work that they will perform themselves and what will be done by subcontractors because local relationships with professions can affect how efficiently the work is performed to the extent that it is subcontracted.
Do I need an owner representative?
In a previous article, we outlined several reasons why an owner representative can add value. In short, having a local contact who can act as the “eyes and ears of the owner” can make deals work efficiently together while identifying potential problems early on for owner involvement. Alternatively, if the owner is the person most involved in their construction project, the need for a separate owner representative may not be critical or the scopes can be modified to address owner involvement as the project progresses. It could also be considered that the owner retains a scheduling consultant to review the schedule as it progresses and make suggestions for sticking to existing schedules or even speeding up schedules. These consultants can also help ensure that multiple construction activities take place simultaneously without disrupting the critical path.
Is my contract enough?
Given this unique economic climate and how these changes affect the likelihood of cost changes last but not least, having a strong contract that adequately protects the owner from potential risks and appropriately transfers risk is essential to a successful venture. Owners must understand the different pricing models available in the future (eg fixed amount, labor cost, guaranteed maximum price labor, etc.). In addition, the force majeure provisions and the language of delay should be thoroughly reviewed. Due to recent pandemic restrictions and supply chain disruptions, we have seen very broad provisions providing blanket protection for the general contractor while leaving the owner on hold not only due to the attendant delays but also to the increased costs resulting from those delays. Finally, supply chain issues should be reviewed and, if necessary, appropriate language introduced, covering not only the potential for such delays, but how costs will be shared and whether any initial actions can be taken by the parties early on to address these issues (eg. e.g. pre-ordering specialized materials, stockpiling such materials, covering cost increases on certain materials to a mutually agreed quantity, etc.)
In this new normal, not only must owners strive to provide adequate protection from a contractual standpoint, but permit and insurance considerations must also be discussed early on. In the past, permit and insurance restrictions were not the limiting factors for luxury projects. However, given the recent moratoriums and weather events, we must now take additional precautions to ensure not only that the project can actually start within a reasonable time frame, but that the project, when completed, will be insurable from a risk management perspective. These are just a few of the considerations to review when planning a high-end residential building.