Senior housing construction costs surged in 2015 and are expected to increase further this year. While some of these costs are unavoidable, caused by factors such as labor shortages, senior housing companies embarking on projects can help keep their budgets in check by taking a few steps.
In particular, senior living companies should focus on deciding as many construction-related questions before work actually starts, and should be wary of trying to cut costs by skimping in the wrong areas, according to Henry Hill, founder of Lenox Hill Construction. The Chicago-based company has several high-profile senior housing projects in its portfolio, including the Reserve of Geneva, a 60-unit independent living community in Geneva, Illinois.
Those tips may sound basic, but putting them in practice is not necessarily a simple matter, Hill explained in a recent conversation with Senior Housing News.
Make decisions up front
Careful, detailed planning before starting a multi-million dollar construction project may sound like a no-brainer, but many senior living companies—and other types of clients—aren’t as thorough as they could be before shovels go into the ground, Hill said.
“They don’t make a lot of the decisions up front with their interior designers and packages, or even the structure itself,” he said. “It’s not just seniors housing, but in almost every market, and in constrution that’s very costly.”
By putting together a strong design team and then completing detailed design and construction documents prior to soliciting bids, the senior housing company will be able to shop around for builders more effectively, Hill said. And then once the project gets underway, there should be fewer instances of having to change designs or finishes.
“I see many clients get in trouble with that,” Hill said.
The issue may be particularly acute in senior housing, given that the trend Hill has been seeing is toward more high-end building materials and premium fixtures and finishes.
Not every senior living project is being undertaken by seasoned real estate developers, so senior living companies need to be honest about what their level of expertise is and hire the right general contractor (GC) or building consultant, Hill emphasized.
While acknowledging that he has a horse in this particular race—“Just hire Lenox Hill construction,” he joked—Hill also broke down why senior housing leaders appear to be resistant to hiring a general contractor, and offered tips on what to look for and expect to pay a good GC.
A senior living company might think that hiring someone to oversee the building process by managing subcontractors is simply an unnecessary expense, Hill says. They balk at the proposed budgets that GCs put together for what they believe it will take to get the project completed, and believe that they can handle the contracting on their own—and that’s actually a difficult idea to argue against in some instances.
“You don’t want to offend them, because how hard is it to put tile down or put a doorknob on?” Hill said, of trying to persuade people that they should rely on an expert to oversee these aspects of the building. “But when you have 1,500 doorknobs you have to put on, or 500 doors to replace, it’s a pretty big project.”
The pitfall—which Hill has seen senior housing companies fall into—is that the client will hire a cheaper contractor and then the job will not be done well; the budget then takes a big hit when, say, the floors have to be done twice.
So, what is a reasonable fee for a general contractor?
Industry standard is that there are two fees involved, according to Hill. There’s a profit fee line and a general requirement line item, which covers costs for such necessities as Dumpsters that are directly involved in construction. The profit fee line shouldn’t range more than the 5% to 6% range, Hill said, while good fees in the 3% to 4% range are possible to find. The general requirement fees should be roughly between 7% and 12%.
Pick the right partners
To find a reputable GC, word-of-mouth is one tried-and-true method, Hill noted. But there are other resources as well, such as industry listings including Real Estate Journal and the Construction Blue Book.
Licensing also can be a helpful indicator. Lenox Hill Construction maintains an Unlimited General Contractors license, which Hill described as “a difficult license to get.” But checking local licensing practices is needed, because this will vary in different places, he said.
Also, for a new project requiring financing, performance and payment bonding could be requested, and only credible contractors will be able to get bonded, said Hill.
“I notice a lot of the [senior housing] owners are highly intelligent, but construction is a very difficult industry, not something you can dive into and excel at, and the only way people can learn is that there’s a factor of failure and bad things occurring,” he said.
Written by Tim Mullaney