Wise Council-Before its to late....

Infrastructure Building programs-Boom or Bust?

Many people believe they are positioned to initiate major building projects as part of either a Private Placement program or some kind of public exchange of foreign currency. There are indeed a lot of great ideas floating around various sources, but most of the people involved have never worked with an architect, selected a contractor or ever been involved in the decision making required with such efforts. This lack of experience all but guarantees difficulties on multiple levels. 

To begin with keep in mind that what ever you build you have to maintain, staff and pay all the operational bills including utility costs. That means that you have to “endow” its operations or be saddled with fund raising efforts for ever. As much as 75% of your money needs to be set aside for investments that yield 5-10% safely. You need to have a handle on this before you ever attempt to build anything. Other wise you find yourself in bankruptcy even if you successfully run the design/construction gauntlet. You have to develop your endowment plans as you design your infrastructure project. Otherwise it simply will not work. 



You will also have to decide on which organizational structure best serves your intended use.  Is it a private cooperation, LLC, 501C3 or other structure?  Keep in mind that each kind of organization carries with it IRS tax requirements.  Not for Profit Organizations have a lot of restrictions you need to carefully weigh.  Within the 501C3 category only one form of not for profit can process the proceeds of an endowment without tax liabilities.  This fact may bear heavily on which organizational structure you may use.

You will need a lawyer who has real experience with the design/construction business.  I have seen a lot of lawyers try and bluff their way through the process only to leave owners in the dark struggling through years of litigation that only the lawyer truly win.  

Find a CPA who specializes in setting up the kind of organization you choose to use.  You have to start out on the right foot with the right team.  Rogue's are your worst enemy.  People with control issues need to be sent packing as they can create more trouble than they are worth. 

You need to have a personal relationship with your bank.  There will be need for various escrow tools set up for your disbursement of funds.  What is not needed immediatley should be invested short term to generate revenue with your unused money until it is time for use.  Your construction team can project cash flow for your use once your team is on board.  

Unless you have personal experience with large scale interfaces with design professionals, your about to find yourself in a world unto itself. Hiring an architect is a very challenging process. Often times it’s based on personalities or politics. Many people make multimillion dollar decisions based on a hour long interview. They have no idea what kind of questions to ask, have little insight to see through the glitter of a high tech presentation nor have any idea who will manage their work beyond the “hand shakers,” of a “partner in charge.” Partners often have nothing more to do with your program other than offer a smiling reassuring face most of the time. Managing partners are generally the front for the golf game, the nice dinner, or trip to Hawaii to “negotiate,” a contract.  In most cases lower level personnel perform the work. 

Architectural firms are like any other business. They are given a profit loose analysis based on a fee structure so that they know how much time to spend on any one task. Bonuses are generally geared toward those who work fast and meet internal dead lines. Having been sold on the idea unaware owners sign percentage contracts with designers. This inevitably leads to a lack of objective decision making as the more they sell you the more they make. Why keep your program under budget when it cost them money?

Standard American Institute of Architects contracts leave you as owner at full risk for cost overruns, concealed conditions and change orders. In some cases you will actually pay the Architect for cleaning up his mistakes. It is highly likely that without experience in making decisions as a project owner, you will inevitably end up in either litigation or arbitration with your design team over some issue. As important as the Architect are the various sub disciplines involved in everything from the Civil Engineering to the Plumbing design. Just as there is a KYC with a bank, you had better know the backgrounds of every decision maker on your team. They all have to be experienced, licensed, and insured.

Selecting a contractor is often based solely on cost. In many cases the contractor is forced to work with people he/she has little knowledge or experience with to arrive at the “low bid.” Opening up your construction program to this kind of project delivery is a disaster waiting to happen. Never, ever, ever sign a cost plus contract without a guaranteed maximum construction cost. Bond the entire program no matter what any one says. Pre-approve all bonding agencies to make sure they have the financial backing to finish your program should anyone involved default. Keep in mind that at any time during the process you as the owner change your mind or delay the contractor in any way, you are generally libel for the increase in the contractors extended overhead. 


Building anything in the US is very complex.  There are sometimes city, county and state building officials that can either help or simply make your life miserable.  Model building codes like the International Building Code (IBC) will be enforced.  Sometimes different agencies are enforcing diffrent editions of the same code.  Ad to this the complexity of civil rights issues associated with the American's with Disabilities Act and you have the recipe for disaster.  Hire the wrong professionals and your in trouble before you get started.
 
Once you start down the road to construct anything you can’t stop. If you stop the construction program for any reason you are potentially libel for the consequences. Indecisiveness can cost you millions of dollars and jeopardize your ability to finish what you start.   If you cancel a contractors contract you can still be libel for his overhead and profit. If your funding source changes or someone puts a hold on your funds for what ever reason, you are liable. Holding retain-age during construction of 10/5% is a must. State laws govern the escrow account. Know how this works before you get started.

Contractors have an entire industry geared toward change orders. They in some cases attend seminars on how to lever the construction cost by finding holes in the specifications and drawings. Its all about the blame game form day one with a low bid award process.

If your not trembling at the thought of all this you should be. Funding release is the ‘minor,’ part of your battle. The real challenge begins once you try and do something with it. I suspect the failure rate of unprepared owners trying to bit off more then they have experience to initiate may be as high at 80%. There will be wreckage all across the world as “lottery winners,” dream big and loose it all. 

The only Hope for success-Team Build 

The team build approach is by far your best hope of success. First you hire someone who is on a fixed fee to be your objective councilor. This firm is responsible to take your thoughts and put them to paper on a “schematic,” level. Once you have signed off (in blood!) that you have what you want to build, he or she develops a full set of specifications and design criteria for the various systems in the building. If your goal is LEED certification, this is where that component comes into play. 

Once the drawings, specifications and certifications are signed off, then these preliminary drawings are given to three teams of designers/contractors who flesh out the schematic plans while developing a cost plus contract with a guaranteed maximum construction along with split savings. Each team should be paid for this process.  On a 20M project each team should be paid 100K each.   If the contractor comes in under budget then they benefit from savings he/she has earned along the way. This approach is a win/win for both of you. Your owner’s representative will help you in pre-qualifying each team and evaluating their proposal. They will also sign off on compliance certifications to the original documents. Interview each team before pricing and afterword. Know who your site superintendent and project manager will be.  Fell free to negotiate if it is appropriate.

The team build process, guarantees no change orders, on time delivery, and full responsibility of the construction team for concealed or hidden conditions. You know from the outset the maximum cost of your program. If it cost more than you can afford, cut back before the construction begins. During construction your representative is present on site, during construction meeting, updates to the CPM schedule, and approves each monthly draw based on his/her independent observations. Periodic audits occur of the pricing process to assure that each purchase with the contractor is occurring competitively. Incentives can be built into the contract for local labor and local material purchases. If the contractor fails to perform, the bonding company finished the job on your behalf. Extended warranties of up to five years can be included in the specifications. Performance criteria can be bonded for the utility costs of the various components of the building. If the systems fail to meet expectations they are replaced at no cost to you as owner.

Your need to have a very healthy respect for the process you are about to be involved with. You can not only loose your money for the project but find yourself libel with everything you own. Its great to dream but there is a cold shower awaiting many people who try to do things they are ill equipped to handle. The money for the infrastructure is a once in a life time occurrence. Squander this resource and it’s gone forever. 

 If your ego can’t bow a knee to common sense and restraint, better for you to invest in something other than a building program. Be sober of mind to count the cost and have realistic expectations of yourself and the time you are prepared to devote to your program. If you are confused with all this, good! Know what your about to become involved with before you get started. Otherwise you’re potentially heading for a massive disaster......