A recent study evaluated three overlooked steps that developers can take that will often result in surprising savings in development costs. The study focused on the development of wind energy generation facilities, but the lessons offered seem equally applicable to any major real estate development endeavor.
The study began with the premise that developers often focus on hard costs easily susceptible to mathematical computation, and tend to disregard the “softer” costs of human interaction. Using the wind farm example, hard costs are typically calculated based on mathematical inputs like costs of materials, labor and land, energy prices, wind flow data, and turbine design. Plug these numbers into a formula and presto! – out pops an answer as to how much energy the project should produce and the revenue that energy will generate.
Existing mathematical formulas do not work so well to calculate softer costs. For example, the individual decisions of landowners, land use planners, and government officials contribute mightily to project costs, but are not easily quantified in advance. Nor is it easy for developers to evaluate where to focus their time – for example, is there more bang for the buck in investing in landowner relations, or buying more efficient turbines?
The preliminary results of the study identified three major areas where investment upfront in soft costs is most likely to pay big dividends – community engagement meetings, preliminary environmental studies, and involving landowners in the site layout process. These actions have two major factors in common: (1) they must be started early in the development process, and (2) they require the developer to accept that third party input in project design can be crucial. Stated differently, these conclusions tell us something developers perhaps already know but don’t like to admit – early and regular collaboration with interested stakeholders may cost money upfront but in the long run can result in a smoother development process and significant cost savings.
The study’s authors acknowledge that the costs of human interaction are harder to quantify, but they remain hopeful that with further research and data gathering, these costs too will be conducive to a mathematical formula. If that can be achieved, then developers of all stripes will have more robust tools at their disposal to truly understand and evaluate all the cost inputs that go into the decision as to whether or not to pursue a proposed project.