2022: Huge Changes Coming for Building Projects
by Nathan Artt, on January 2022
In 2022, we will likely witness the biggest change in building projects that we have seen in the last 15 years.
Last month we posted the article Preparing for Change in 2022, in which we began to break down several aspects of this change and how it will impact the church going forward. From our article, we received many questions and have had multiple conversations around this topic. In response, we are sending a more detailed article with defined next steps on how to approach building projects this year, and in the years to come.
So what is changing?
In 2021, we saw the largest increase in material and labor costs in history (inflation factored in). The average cost of Type IIA Assembly (most common type of church construction) rose from $233 per SF at the end of 2020 to $281 per SF by October of 2021. That is a 20% increase in construction costs in ten months, which is unprecedented. The largest increase in cost prior to that was during the major inflation of the 1970’s and the economic boom prior to the S&L crisis in the early 90’s.
The major contributing factor to this is the labor shortage. This not only affects the construction labor market, which could increase from a job shortage of 150,000 jobs to 300,000 jobs in 2022, but the sourcing and manufacturing industries (supply chain). Due to this, the cost of labor and materials could increase at an even faster rate than in 2021.
Along with the rise in construction costs, the cost of money will likely slowly move up. Short term interest rates are expected to begin to rise almost immediately, with long term interest rates expected to increase slowly over 2022.
Additionally, and maybe even more importantly, the role of buildings is changing in the church more than ever before as our model continues to rapidly shift towards a both/and of digital and in-person engagement.
With all of that being said, here are some things we feel will help you this year as you navigate the biggest year of change in building projects in our history.
Financial Strategy is Everything
In my years working in commercial real estate development, financial strategy always drove design. We built proformas, debated and analyzed the appropriate gross leasable square footage, looked at cost versus return, risk, lease up costs, developed a land-use plan, etc. well before we ever hired an architect to draw up a building. Otherwise, how would you know what to build??? It was only when I started working with churches that I was introduced to the idea of designing a building and then figuring out how to pay for it afterwards. The result has been millions of ministry dollars wasted and years of trust and progress lost for too many church leaders across America.
For churches looking to maximize their ministry dollars and accelerate their vision for their local church, our past funding challenges will get exacerbated more than ever before. More than ever, it will be important to answer the questions of:
- What can we build? (affordability)
- What should we build? (what’s the highest and best use of our dollars to maximize impact and maintain financial health?)
- How will it impact us long term?
- What are the sources of funds (cash, fundraising, and debt) needed to accomplish our objectives, and how will we procure those funds?
- How will we deal with pricing and cost changes going forward?
Process is also Everything
Building projects are already challenging for churches, not because any one aspect of the project is difficult (design, contractors, engineering, AVL, soft costs, MEP, etc.), but because so many different aspects of the project have to be coordinated within one cohesive action plan in order for the project to be successful. If you add on a very fluid pricing environment, things will be even more complex this year. Success in pulling off a building project will certainly involve a strong financial strategy, experienced and committed leadership over the project, and a smarter approach, but it will also require a huge focus on the team you put together and the process you put in place. Without those two things, planning and executing a project this year and next will prove near impossible, or at the very least, incredibly expensive. Here are a few things we recommend as you put a team and process in place:
- Be sure everyone knows the budget, timelines, and objectives up front
- Anyone who is involved in construction and delivery should be involved in design
- Integrate the design and pricing process, and DO NOT go through a design-bid-build process
- A lot of churches have developers in or around the church, who typically incorporate what is called a core and shell design (designed and constructed without the end user’s finishes in mind), and this process works for them. It does NOT work, however, in church projects because of how much of the budget is related to the end user’s “special purpose” functionality finishes, and soft costs
- You have to know what things cost as you design, not after they are designed
- Having to go back and redesign will be expensive and time consuming
- Hard bidding with General Contractors doesn’t work anymore. Because GC’s are now broker/managers more than self-performers, and because of the labor shortage, they all work from the same pool of subcontractors.
- Stay away from out of town general contractors or design build firms
- Because of the labor shortage over the past 5-10 years in construction, subcontractors have far more demand from GC’s than they have availability. As a result, they pick the jobs with the people who represent ongoing work, which are their local or regional GC’s.
- If a subcontractor receives a bid invitation from an out of town contractor or someone they don’t know, they will either not respond, or they will put a price tag on it that makes it worth their time, resulting in a higher price and a lack of priority during construction
- Out of town GC’s and design build firms often want to utilize their subcontractor friends from out of town which can cause challenges with scheduling. More importantly, when warranty issues arise once the building is complete, how likely are you to receive quality service when the contractor and subcontractor are several hours or even a plane ride away?
- Managing sub’s is the most important role of a general contractor in today’s environment. Therefore, a GC’s relationship with its sub base is one of the most important aspects of selecting a GC
Forget what you think you know about contingency
If you’ve been through a building project, you know what contingency is. Contingency is simply a fund that is set aside for unexpected expenses resulting from change, whether that is in the form of design contingency (scope changes and price creep during design) and a construction contingency (costs related to field changes resulting from unforeseen conditions). Typically, a good design contingency during planning is 5-10%, which reduces over time to 0% at the point of a GMP contract, and then a construction contingency (depending on building condition, project type, and soil conditions) typically between 5-10% through construction.
While we still believe that carrying a design and construction contingency is wise, it is also possible that this old method will not cover all of the changes happening this year. Design contingency, especially for churches, is hard enough to maintain in a static cost environment just simply due to churches having more vision and need than resources.
This year, we believe that alternate planning (additive and deductive) will be a necessary part of project planning. Meaning, projects will have to be planned with a scope variation that can be executed or removed based on cost and funding sources.
This is not easy. Because of the structural, MEP, and civil requirements for the master planned scope, it is not always as simple as adding and subtracting building square footage. This will take intentional and strategic design planning with a solid project team who works together well during design in order to coordinate this, as well as the subsequent contracts that outline those alternates.
Your pre-pandemic design should be re-evaluated
This hopefully goes without saying, but models have shifted during this pandemic. The building design from before might not only be more expensive than it was, but it also may need to be re-evaluated, not just on the current change in the model, but also within the context of what your church will look like over the next 5-10 years.
We are already seeing churches execute more and more the concept of “hubs”, something that we introduced and discussed in our resource Target Corp and the Flexible Church. This is partly due to the change in the in-person model that is happening now, where our building can and should do more than create experiences for people for one or two days of the week. It also stems from the idea of having buildings that are as “relevant as they are reverent” in our communities, and even the possibility of a model where buildings fund ministry, versus just having a ministry that funds buildings.
Lock in interest rates now
Believe it or not, you do not have to wait until you have a permit to lock in funds. In fact, you shouldn’t. With rates going up this year, it is still possible to refinance long term rates (7-10 years) below 3.5%, and also have banks make rates and terms for future projects available to you before you actually get to construction. We know the cost of money is going up, so locking in interest rates before that happens is something that any church with existing or future debt should consider.
Church building projects have historically been some of the hardest projects to design and construct even during “normal” circumstances. With all that we have endured over the last year, it appears that church projects will be even tougher this year and in the foreseeable future. This doesn’t mean that churches shouldn’t develop real estate relevant to their models, however. Church building projects can and will be done in 2022, but it will require a smarter approach. First, leaders must formulate a workable strategy, starting with finances and moving towards efficiency in scope, which will include alternate plans in place should costs necessitate a shift in execution. Leaders must also surround themselves with a team of competent, trustworthy professionals during this time of change. Gaining a clear understanding of what you can reasonably afford before any drawings are completed and matching your budget with a space program that is in alignment will be critical to your success.
If you are in the midst of planning a project, re-designing, re-evaluating, looking to better understand financing options, or just need someone to bounce some questions off of, we would love to help! Just take a minute to give us your contact information by clicking on the link below, and we will be in touch with you right away!