How to value engineer and reduce construction costs on your development project (Pt 3)

PART 3 OF 4: THE FUNDAMENTALS OF VALUE ENGINEERING YOUR PROJECT’S FINISHES.

In our previous blog, we outlined the fundamentals of good value engineering.
In this blog, we’ll be discussing:

• What Value Engineering finishes means
• When you should VE your development’s finish spec
• How Value Engineering your finishes feeds into your sales and exit strategy
• How to VE your property development’s finishes spec

But first a recap of the 3Fs of Value engineering.

Good VE focuses on the 3Fs:

• Fabric: This is the shell and core of the building. Everything from the superstructure to the façade, windows, landscaping and foundations can be redesigned or respecified to reduce prelim costs, construction costs and programme length. The ideal time to consider these specifications is before planning. This prevents you from securing consent for a scheme you simply can’t afford to build. Your last opportunity is before tender submission. Read about how to VE your project fabric, here.
• Finishes: This is self-explanatory. It’s the finishes of the scheme. It’s your floors, ceilings, and worktops. The ideal time to consider these specifications is just before/after planning submission. Your last chance is before tender.
• Fixtures: This refers to items such as lights, door handles and taps. We also include appliances such as washing machines and key mechanical, electrical and plumbing( MEP) such as Mechanical Ventilation and Heat Recovery units (MVHR). It’s best to consider MEP fixtures before planning submission because they will form part of your sustainability strategy. All other fixtures should be considered before tender but can be adjusted onsite. Read about how to VE your project fixtures, here.

WHEN SHOULD I VALUE ENGINEER THE PROJECT’S FINISHES?

As we outlined in the intro, the best time to VE your development’s finishes spec is just before planning.

There are 2 reasons why you’d develop a finishes strategy before planning.

• To check commercial viability. Commercial viability is checked through the commission of a Stage 2 cost plan. The value of this document is outlined in part 2 of this series, here.
• Ensure all your specifications are enabling sale and exit optimisation.

Most developers start to look at value engineering their finishes before or after tender. This is (often) a mistake because it may require a fundamental change of finishes that changes or compromises the product in a way that cheapens it or makes it less attractive to their target market.

Starting the process early significantly reduces sales risk.

HOW DOES VALUE ENGINEERING FINISHES WORK WITH SALES OPTIMISATION AND EXIT?

In simple terms, a good exit depends on a successful sales process.
A successful sales process depends on having a good product.
A good product is a product that matches (or exceeds) the needs and expectations of its target market.

In property development, this chain of events can only be achieved through sales/exit optimisation and project viability.

If either of these fail, your commercial exit will be severely jeopardised.

HOW DO YOU ENSURE YOUR FINISHES SUPPORT YOUR SALE + EXIT PROCESS?

We’ve explained how to check project viability via cost plans and appraisal management.

Sales (and exit optimisation) is more complex.

The best way to ensure that your finishes strategy supports your sales and exit process is to be clear on:

• Who you’re developing for.
• How you’re commercially ‘exiting’.

How do you know who you’re developing for?

You should already know this. If you’re not sure there is a good chance that your residential development is serving one of three groups.

• Couple/First-time buyers (Apartments and small houses)
• Established Family (Medium sized houses, large houses, duplex apartments, large apartments)
• Retired couples (Bungalows, apartments served by lifts)

Each one will have finish preferences.

The best way to learn about these is:

• By establishing a relationship with a local agent
• Using your own personal experience
• Speaking to friends and family at similar life stages
• Arranging viewings of competing developments

Each of these methods will provide your finishes strategy with a commercially focussed logic. As opposed to choosing finishes that only you think are ‘nice’.

What is my commercial exit?

For residential development, there are 2 main forms of ‘exit’.

• The first is sale via private treaty to an individual or family.
• The second is leasing/renting to an individual or family.

The latter isn’t an exit but it represents a commercial conclusion to the property development process.

How your exit strategy affects your finishes strategy can be encapsulated in one simple question.

‘Do I need this to be robust enough to survive multiple renters?’

If you’re selling, material robustness is not as critical (but the quality is).
If you’re leasing then investing in good finishes and details upfront will save you a great deal of time later and will add value to the project if you choose to sell it.

HOW TO VALUE ENGINEER YOUR PROJECT’S FINISHES

The specifics of how to VE finishes depends on when you’re engaging in the process.

Pre/Post Planning: This has been explained earlier in this post.

The last chance you have to VE your property development’s finishes spec is during the tender process. There are a few ways you can do this.

• If you’re clear on your finishes but are open-minded about suppliers. You can ask your tenderers to propose cheaper alternatives. You can reserve the right to deviate from the original specification by ensuring the building contract and all contract documents state that the final specification will be as per the contract/tender documentation. Any deviation will be via mutual agreement. This method provides you with commercial flexibility that you can use later in the construction process. Because finishes are installed later in the construction process you have the ability to decide specifics later. For example, you may be undecided on whether you want to have tiled backsplashes in the kitchen. Most contractors are comfortable with this. What is essential is that there is an allowance for this in the contract. These are referred to as defined provisional sums. And they allow both parties to agree on a sum which will be set aside for the construction of a particular element up to the maximum value agreed. Like a budget. Using the backsplash example. Both parties may agree that £5000 should be set aside for tile backsplashes. If you opt to have the backsplashes installed the cost of the materials and labour must not exceed the agreed £5000. Alternatively, the project may be running late therefore you, as the client, can decide to omit the backsplashes and save the project £5000.
• Once tenders are returned you have the option of comparing and interrogating each one. If the returns are not in the same format, you have to go through the painful process of standardising the information and comparing the returns. This can become quite painful and expensive and may end up feeling like comparing apples and oranges. If you use a procurement platform like C-Link, the platform will automatically standardise your tender requests and stack rank all of your tender returns. It can order the returns using price and proposed programme length. Being able to compare what the market believes is achievable provides clarity on which parts of your project are too expensive and need to be value engineered.
• The very last opportunity you have is before you sign the building contract. Every building contract should have a Contract Sum Analysis (CSA) or a Schedule of Works (SoW) / Bill of Quantities (BoQ). This document will be what your chosen contractor or sub-contractors will be working to. Agreeing on this and any subsequent penalties are essential to achieving your commercial aims.

VE TIP 1: Floors and underlays

Floors are often the largest surface area in any development so are perfect candidates for VE.
The key to value engineering floors is balancing acoustic (and sometimes thermal) performance with visual impact, material cost, robustness and installation time.
The best way to balance these priorities depends on whether your development is for sale or for rent.

If it’s for sale robustness is less of a concern.
If it’s for rent, robustness becomes a top priority. To the point that it might be worth spending more than budgeted upfront.

For this guide, we’ll be assuming a sale development.
When value engineering houses that are for sale, speed of installation and the communication of quality are key.

In our experience, residential floors can be broken down into a few areas.

Living/Lounge: The most popular choice for living spaces is carpet (on a roll as opposed to tile). Traditionally the underlay and carpet are purchased and installed separately. It would be worth considering a felt-backed carpet. The felt backing may remove the need for a separate underlay thereby saving on material costs, installation costs and installation time.
The same principle applies to click Luxury Vinyl Tile (LVT) floor finishes. Specifying click LVT with an integrated underlay saves time and cost.

You’re probably wondering where ‘wood effect’ laminate flooring fits in.

The truth is that it should be kept as a very last resort. It’s also worth noting that laminate floors often need a separate underlay which could create a false economy.

Hallway/Stairs: In a house, the optimum specification is a hard floor finish in the ground floor hallway with carpet on the stairs and all other hallways above. This approach is effective because it secures a good first impression, provides a hardwearing finish in a high-traffic area (not easily damaged by builders) and reduces the need for an expensive aesthetic staircase (because it will be covered in carpet).

Kitchen: Kitchen spaces are a little more complicated because of the presence of water and spills. In this area, the optimal specification is click LVT with integrated underlay (LVT is resistant to water).
Laminate doesn’t do as well in kitchens because the chipboard core can swell and distort when exposed to too much water.
As mentioned above laminate is the nuclear option.

Bathroom: Unless you’ve installed a separate swimming pool the bathroom is the ultimate wet space.
It’s common to see tiled floors in tiled bathrooms but they can make for cold and potentially dangerous places without careful design(slip hazards). The optimum floor finish in this space is click LVT with a decent slip rating and a textured surface. The lower-cost option would be regular vinyl with underlay. When installed well vinyl can look impressive and inviting. But be warned, buyers tend to see them as cheap.

Bedrooms: Carpets in bedrooms are expected by most of the British market. There’s no need to reinvent the wheel.

Ancillary (storage): There will be a strong temptation to leave the floors of these spaces bare. We would recommend resisting and opting for a simple dark or neutral vinyl. The choice is cheap and the areas are small but the message you’ll be communicating to buyers is that you haven’t cut corners. This is an important message to send during a recession.

VE TIP 2: Selective tiling
Pinterest and Instagram have raised the stakes on bathroom wall tiling.
The quantity (and quality) of bathroom tiling correlates strongly with our collective ideas of quality.
Wall-to-wall hexagonal marble mosaics make bathrooms seem luxurious. Very large format white gloss tiles around wet areas and above the sink, with painted walls can look cheap.
In our experience, we’ve found the most effective way to reduce cost and maintain the feeling of quality in a tiled bathroom is to balance tile size, shape, colour, texture, availability, grout colour, bond, distribution and mirrors.

SIZE: Tile Size is important because if the tile is too small it will take too long to lay and if it’s too big it will be too heavy and will be installed slowly. Stone tiles can be particularly heavy and require a stronger surface/substrate. The optimum tile size ranges from 100mmx100mm to 600×300.

SHAPE: The shape of a tile affects how expensive it is to manufacture (and buy) and how quickly it can be installed. For example, hexagonal tiles are the most expensive because they are actually square tiles with the corners removed. This means that you’re paying a premium for the waste incurred by the manufacturer. In our experience square or ‘square-ish’ tiles strike the right balance. Their manufacturing process is the cheapest and they facilitate very fast installation. Cutting and waste are minimised while speed and progress is maximised. Their square shape means that horizontal and vertical progress is balanced.

COLOUR: Colour is not as subjective as many think. If you’re developing to sell or rent your goal will be to maximise appeal and minimise offence. The best way to do that is with white tiles.
The ‘grey phase’ in interior design is still active but grey tiles detract from your bottom line in 3 ways. Firstly, they cost more. Secondly, they’re divisive and will lose many buyers or renters. Lastly, and most unusually, they will make your bathroom look and feel dark. Not dirty, dark. They do this because the light that comes in through (often small and obscured) bathroom windows will not bounce around the space. This makes the bathroom feel darker. The light that does bounce around the space is tinged with grey. White tiles avoid all of these problems because they are generally associated with cleanliness, light and space.

TEXTURE: Just like colour, texture can be divisive. Simple gloss tiles are very popular for a reason. And because of their popularity, they are produced in large quantities and are sold at competitive prices. Matte tiles can look high end but their lack of light reflectance and shine can make them look dull. Especially in sales photographs.

AVAILABILITY: If you’ve adhered to the last few points you will be looking for a highly available tile. This is important because availability drives competition between suppliers which reduces the average cost of the tile. It also increases the chances that the tile will be on sale. Discounted tiles may not be an option for large-scale projects but they can make a difference on smaller residential developments.

GROUT: Grout colour is a relatively cheap way of introducing character and impact. Variations between coloured grout costs are minimal.
White grout should be avoided in bathrooms. In sale developments, it can look clean when first installed but will quickly discolour. In rental schemes, it can make an incredibly clean bathrooms look dirty. This will be a big turn-off for prospective tenants.
We have found that black or dark grey grout creates the most visual impact, especially when paired with white tiles.

For sale developments, this visual impact is a result of the dark grout making the white or light tile look brighter, whiter and cleaner. This effect is eye-catching and translates well into sales brochures and photographs.
For rental developments, the dark grout keeps bathrooms looking newer for longer because it hides stains and wear and tear.

BOND: Tile bond choice is a critical decision because it directly impacts labour costs, time frames and overall attractiveness. If the bond pattern is too simple (like a stacked or grid bond) it could make one of your key spaces look like a hospital or cheap hotel. These bonds also tend to extenuate wall irregularities.
A complex bond like herringbone is very attractive, very slow, and very expensive. The Herringbone bond takes longer to install and causes more waste because of the very careful cutting required at the edges.

So what’s the solution? In our experience, the ‘stretcher’ bond offers the greatest amount of interest and can be installed the most quickly with minimal waste.

DISTRIBUTION: Strategic distribution of tiling is essential to visual impact and cost saving. Naturally, every bathroom is different but broadly speaking full height tiling around shower/bath areas with half height around the sink offers the best value for money.

MIRRORS: Large frameless mirrors are a relatively easy, relatively cheap way of covering a large wall area and adding value. Custom mirrors are more expensive per square metre than tiles but can be installed in an hour and look great. The ideal location is above a sink or within a niche. Just make sure that the mirror can fit through your bathroom door and pivot and that you allow a healthy tolerance (because walls aren’t always straight).

VE TIP 3: Wall Finishes
Unless you’ve specified timber panelling, value engineering wall finishes are a matter of paint choice and distribution.

There are a number of cost-effective matt vinyl paints on the market. In our experience, the paint with the best coverage is a better choice than the cheapest because you’ll need 1 or 2 coats, not 3 or 4.

We’ve also found that utilising good quality, coloured clay-based paints in the living room and entrance hallway helps secure the best first impression and provides you with compelling images for the sales brochure. The high-end paint brands are generous with their can sizes so it’s feasible that you could spread the cost of one can between 2 or 3 properties.

WHERE CAN I READ MORE DETAILED PRACTICAL ADVICE ON VALUE ENGINEERING?

Our team is made up of seasoned construction and property professionals so we know how hard it is becoming to manage projects successfully.

That’s why we have created a blog series that focuses on value engineering, cost reduction and provides proven practical advice.

Click here to learn the fundamentals of good value engineering.
Click here to learn how to value engineer your project’s fabric.
Click here to learn how to value engineer your project’s fixtures.

And click here to learn more about C-Link or just say hello.

Photo by Henry & Co. on Unsplash

About Paul Heming

Paul was a Quantity Surveyor who gained 10 years experience of managing £200 million worth of flagship UK projects, including 20 Fenchurch Street and Battersea Power Station. In 2015, Paul founded C-Link with the intention of sharing his expertise of managing major projects with the SME market.