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Ray and Marlon continue their discussion on commercial and residential real estate development delays with Duan van der Merwe, Associate Director in the Contract Solutions Group at Altus Group. In this episode Ray, Marlon and Duan lay out strategies, solutions, and innovations for addressing the increasing number of delays in construction.
Welcome to Altus Insights Podcast Series. This podcast brings together some of our leading brainiacs at Altus Group to discuss, debate, and on occasion complain about the evolving state of Canada's residential and commercial real estate. Join Ray Wong, Marlon Bray, and Avi Zelver for monthly podcasts covering the latest market and construction cost trends across major markets in Canada.
Welcome to Altus insights podcast series with Ray and Marlon hosted by me Avi. This podcast will cover monthly market updates and construction cost impacts across major markets in Canada. So welcome back. This is part two of the scheduling delays podcast. Obviously, last week or the last recording, ray and Duan were a little doom and gloom on things, but down towards the end, warming up towards some solutions that we might look at. And if it was interesting as some of the last comments about change management, whatnot, and in essence you were touching on the fact that part of the solution is being more proactive than reactive. And the fundamental challenge in the construction industry as we face now and say the development industry is a lot of people tend to look about what's happened in the past rather than proactively looking at what can happen in the future. And you are touching on the problems with change orders and how they could lead to significant schedule delays. I would also add maybe even the buy out process often doesn't focus on schedule and conflict ability. So what's the social solutions around that? When you see in that buyout process, in that change management that you can really ask a developer can make their life easier. Now for two years out. So, I mean, there's various things that you can do. And I think that unfortunately scheduling very often isn't given enough attention and it isn't used as a tool to manage or monitor or control of projects. So certainly, as you mentioned, the proactive element of it is very important. So, you know, if you have the expertise to evaluate a construction schedule for construct ability, have you evaluated all the risks? I mean, there are various ways that you can evaluate the different streams of work. You can sort of test the schedule to see if we do anticipate some delays in the permitting or, you know, a potential slower than usual wind to work period when we are doing activities outside various different things or if we know that there is an issue in the market with formwork or with drywall, and these are just common trades that I'm picking out that I know of, had issues. There are ways to test the schedules. You know, if we lose 20% to 30% productivity, what is your schedule look like and what does it look like for other trades? Because one trade can have an impact across various streams of work. So I would say the proactiveness and really understanding your schedule and really putting it to the test to doing like a fidelity check to make sure that the schedule operates in the right way. If things move. The biggest challenge is you'll find a lot of these schedules have missing logic or haven't quite been built to model situations where you have issues in a particular trade that Cascades throughout your project. So you're never really getting a true reflection of your completion date. I would say from a developer perspective, you're even looking at the schedule at a much higher level. So you have a tower development, let's say a residential tower with know. 70 odd, odd floors, but you're only seeing at a high level. Your envelope finishes and tedious or lump lumped into one activity. There's no way for you to really understand of that duration as accurate or not, unless if you're able to figure out how much time you actually need for each trade in order to complete a floor in a certain period of time. So I think it's really important to understand what is being put in front of you, because although it's a contract schedule, it might not be achievable and know as well as getting delay delays from like owner owner changes and things like that. A lot of the time contractors just fail to schedule properly and that also creates delays and that also creates issues with the reliability of your schedule. So I would definitely say being proactive, reviewing that schedule, really understanding it and putting it to the test is important. But then also once you've got an understanding and you've set your baseline schedule and everything is hunky Dory, it's very important to actually stay on top of it, to really understand if the work is being executed in accordance with that schedule and to get an understanding of where things are heading. So if you are seeing schedule slippage rather than waiting until the project is almost beyond saving, that you need to get a claims expert into to fix things or find out what's going on. It's very simple. If if you have scheduling resources that could look at the performance of your work, figure out if there is a weak link. So if there's a trade that's underperforming what that looks like for the entire project. So that you can use that opportunity to try and remedy the issues that you're facing. So as with any project. The longer you wait to remedy or even identify a problem that is on you, that happens on your project, the opportunity to mitigate disappears exponentially. So the closer you get to completion, the more unlikely you are to. To correct or remedy your. Your delays. So being proactive is key. Catching issues from onset or at the early stages of construction is key. And I'm certainly understand your construction contract. You'll be you'll be amazed that there are various contractual avenues to remedy issues that you face on your project, especially from a scheduling perspective, whether it's whether it's issuing notices and things like that. And it often just doesn't happen. People people tend to be optimistic. And listen to what they're being told and what the schedule is showing them. But more often than not, the schedule, because it is flawed and it wasn't reviewed appropriately or enough, that the schedule is only telling you what the schedule wants to tell you. But it's not actually showing you what the real doom and gloom date is at the end of the project. And that's why when you get to your finishes on the higher levels of a tower, you tend to see slippage of one week to two weeks, every month because your schedule is starting to realize that it no longer can tell you a lie and everything starts to push out to where it eventually will be. So Yeah. I think that's the single that's the single best advice I could probably give anyone is really understand your schedule, really understand whether it is actually constructive. And if you're not able to scrutinize it, find somebody who understands boots on the ground, how they would build it from start to finish. And that should give you some level of confidence on whether or not your schedule is achievable or whether it makes sense. I think is probably the best place to start. Isn't that often, though, where it's often quality over quantity? And the problem I often see is clients work on the quantity basis to go the 3,000 lines in the schedule, it must be right. And then you look and you're going, well, there's the heritage facade, there's really iffy shoring and you've got to try and form through that building. And you've got four lines for the heritage facade insuring combined and then 3,000 lines for the rest of the building. Is that an indication that that's the bit the person who did the schedule really understood, or is that just an appreciation of them really focusing on what is critical, which is if you lose a year up front, you can never gain that back. I would say that in many instances, schedule schedulers have a tendency to overcomplicate schedules. I mean, it's like anything. So the more detail you give somebody, the more it proves that you understand the work and that you're good at what you do. I actually believe a schedule does not need to be very, very detailed necessarily unless if you are working on a project that allows you to track and progress a monitor work at that level. So if you have a very complex processing facility that needs various things in place before you can do certain activities or you have shut down windows and things like that, you might be looking at a more detailed schedule because it's required. It's very time critical and it's almost like a checkbox that we need to do these things in a short period of time. And that might make sense. But most of the time a schedule can be simplified and a higher level of activity. So you can look at either a level 4 or level three schedule, but that should be sufficient for the purposes of tracking and monitoring your project. As a developer, having a 3,000 activity schedule provides you no benefit because most of the time, the resources are allocated to update and maintain these very complex schedules. Just don't have the time to do it. And it's either done poorly or it's not done at all. And then at the end of the day, you you have a garbage in, garbage out situation. And where do you go from there? You already established a very complex schedule. It's very difficult to go from that to claw back and oversimplify it again. So but having said that, it. Some projects need more detail, some don't. But you have to choose the level of detail that makes sense for the purposes of that schedule. I mean, if you are a developer or an owner, you don't really need to see every single activity and a $5,000 activity schedule. You only care about are the main scopes of work or the main areas or maybe room by room. Does that satisfy your sort of tracking and monitoring of the work so that you have confidence in when you can take delivery of your project? Other than that, there's no need to scrutinize any further. Yeah and then the only thing it's touch on is on the first part that we very gently touched on renovation. So, ray, I know we've left you quiet for a little bit, but you've spoken before about raising the roof on industrial and I in Calgary is a lot of discussion on office conversion to residential. Ray do you see that side continuing then? Dwayne I just wanted to have you touch on first principle approaches for some unique projects, maybe the difference in approach. So ray, if you want to touch on some background to what's happening and then Dwayne can touch on the actual solutions. Yeah mala I feel that over the last few podcasts I'm starting to channel you a little bit more. It's all about the performance and it's all about the cash flow. So we can look at raising the roof on industrial that it was a lot more sort of perhaps common a number of years ago to increase the height of the Industrial building to allow for more storage and more stacking. But when you look at the cost of labor increases over the last little while, it's not as feasible, especially when you're looking at costs on a per square foot basis North about 325 a square foot. Financially, it doesn't make any sense anymore. So you're better off looking at alternative sort of older buildings or if you want to locate in sort of outside of the Metropolitan area as alternatives and from a convergence standpoint, the same thing, especially with the older buildings that actually may cost more based on the space configurations that you need. And as well as how you need to bring in certain services within the building. And more often you're probably better off just tearing down the building and starting from scratch to get the proper layouts that you may need, especially if you're converting anything from office to residential. That's why we haven't really seen that big swing, even though we have with respect to Calgary high office vacancy rates, that it has to make financial sense. So I'm not really sure if that's going to change anytime soon, but we are seeing sort of especially with the increase in resource prices over the last month or so that Alberta is looking better and better from a financial and economic standpoint. So be interesting to see what happens with the continue movement with the cost and as well as whether or not the rents can keep up with the escalations and whether or not we hit some sort of economic recession and what that does to the expectation on pricing. Yeah, so I think me and Ray both agree conversions and major rentals tend to be very complicated, extremely expensive. I'm not sure I have to classify it as crazy to go ahead with it, but the one on your side when you're doing a schedule and a client's looking at schedule and that I find on the rental side, people are even more optimistic. Sometimes from the greenfields side, that's something you see. And then the solution to how you deal with these one off because each conversions unique, it's not it's not like any two are the same. So I mean, you're absolutely right. I think people are a lot more optimistic, a lot more aggressive, because they believe that the structure is there. They always believe that they're going to go in there. It going to be like a blank Canvas on the inside. But in reality, it's not uncommon. As soon as that first article goes down and they realize that there's some services they can relocate, or especially on projects where there's limited to no as built records. So that's when you start seeing the site conditions change, orders coming in and then your schedule slips like for this issue and then for that issue and. And all of them actually all of the projects that we've seen. There was just this level of optimism where it was a lot more aggressive than building a new build. But I almost feel as if it's more complex. So you are dealing with an existing structure with probably with a lot of secrets behind the walls and above the ceilings. And until you've done. And I know that some of these projects, there are some degree of investigation and investigations that take place before the work is even awarded to a contractor to provide a schedule. But I don't think enough enough emphasis is placed on the fact that there are so many unknowns to unknown unknowns that you can't really schedule aggressively. You actually have to have a caveat with every single activity. So, I mean, we have seen recently on a project in Toronto, it was a science building conversion that was a sports hall, a multipurpose Hall that went into laboratories. But I think the schedule overrun by 3 times the amount because there was no assumptions put on any of the duration. So yes, there was a site study done and theoretically, if everything was as good as they thought, they probably could have done the work in the same amount of time. But there were no assumptions provided. So their durations were assumed that they will not run into any issues. But I think that that's flawed. You have to always think, OK, so there is likely some mechanical equipment or something behind you that needs to be relocated. So let's say if it isn't there, it's a three month duration. If we have to relocate it, it's a six month duration. And if you actually build these scenarios into your schedule, that and again, this is how you do risk schedule, risk analysis on any project. So if you look at the optimistic assumption on what the duration looks like for that, and then you look at the worst case scenario, you're going to find all the issues while you're working on this activity, what is the longest possible duration it's going to take? I'm normally for somewhere in the middle. So if you at least understand what your worst case is, then you can give a owner or a developer or somebody a worst case scenario that if everything falls apart or we run into all the issues that we've anticipated, this is your new completion date. And I think that that's on a building where there's so many unknown unknowns, that's probably the best place to start, you know, where you are under promising with the hopes of delivering. So and I think in those instances you might start seeing projects that deliver ahead of schedule because you weren't optimistic at the beginning. Because I in the ideal world, nobody wants to approach an owner and say, well, we think it's going to take three times as long as the next person is going to tell you. But I think if you can put down sound assumptions of why you're saying it will never be completed in this very optimistic duration. I think people might be open to that if you could demonstrate to them that it's. It's very optimistic. Well, I think the private sector's always built a little bit on optimism, because that's the only way we'd ever get anything built. There has to be a little bit of risk taking. But I think we all agree the renovation conversion projects, I mean, if I was a developer, I wouldn't be sleeping very well till the finished. I don't remember the last renovation project that did not go over budget or over schedule, and it's on the private side that's difficult. On the public side, hey, they just keep printing money so they don't seem to care. So we're not going to fix that side of it. They just need a reason. They can explain why they went budget and we'll call it escalation. We'll call it, you know, it rained on Tuesday, therefore we lost for months, that sort of stuff. And that's exactly us being after the fact. So if they were a little pessimistic and they built in some risk in terms of, you know, additional time and potentially additional costs that they might incur, it wouldn't be such a big surprise after the fact. And I think part of the challenge now is we get a lot of projects that are not necessarily renovation, but with the heritage component, the fact that anyone sneezes near a building remotely famous in Toronto, they designate it as famous as heritage. Basically, the ugliest buildings are now getting designated as heritage. I would have thought most people in neighborhood were actually like it torn down. But I suppose that's what happens when you're in this city. But I think that's the challenge from the private side is we get into that quasi space now where there's a little bit of renovation, a little bit of new, and that's when it gets really complicated because those two worlds come together now at the same time. Well, and exactly that. So you also have a building that probably doesn't perform very well in terms of what's required from an environmental standpoint to heat and light and to incorporate that in a old brick facade. But that used to be some kind of a factory in Toronto. There are a lot of challenges with that because you're trying to preserve that facade, but Meanwhile you're trying to build something beautiful, modern on the inside. It certainly comes with a lot of challenges. But, you know, if there was a way that you could potentially knock it all down, if it's not that important and just rebuild it, you're probably a lot better off if you were able to, let's say, preserve that facade by not using the original facade, but rebuilding it in exactly the same spec and aesthetic, you might actually end up with a much nicer building, I think. You know, obviously for me, buildings like stonework that you can't really recreate, it's weathered wood time and all of that. That might be a different story. But I am seeing in Toronto like the preservation of these old brick factories that I don't know, I don't think that they are aging, aging the best, but they certainly give people a big challenge, preserving those and trying to make something beautiful out of them on the inside. Yeah, heritage consultants tend not to like cost consultants. We're oversimplistic, in our view, on what is actually valuable, hence the fact, we need heritage experts because we just tear it all down. So it's a good thing, I think. I think the challenge is it used to be could remove a facade, take it down piece by piece, label each brick, put it in a warehouse, bring it back. That was kind of a schedule in a construction point of view, was much more, I wouldn't say simplistic, but a lot more reasonable to try and a lot less unknown unknowns. Yeah, the challenge we have now is the city of Toronto is worried this one's even going to steal that building while it's in a warehouse, or the developer might lose the six story building somewhere. So they like you to keep it in place and cause mass havoc with traffic and productivity instead. So one of the things that was been discussed in the prep side for this was something about a 360 video diary. And before we then talk on some of what happens once we have these development delays? So we'll do the solutions. Then we'll do a quick thing with read yourself on the impacts. But there was mention of a 360 video diary. What is that? I actually have no idea either. So so it's actually a very cost effective tool that gives owners and developers and anybody, any project stakeholders, the ability to document progress on site in time interval. So so it's very it's actually quite simple technology. It's a relatively affordable 360 camera that you Mount your helmet. The software is basically or you upload your floor plan so you get the site layout and then you do tell the software where you're starting your capture. And it sort of builds together a visual 3D model as you walk through the building. So you could do a visual or a virtual walk through the site at any given time that you have taken a. A or I've done a capture of the site, as I call it. So in my mind, that is the best record of progress that you could have in your pocket. So not only can you allow people to visit your site virtually so you don't need to arrange for people to come to your site, do safety, inductions, all of that. You can take them to the location. They can look in all areas. I mean, it's not actually 360 degrees. It's a sphere. So you can look down, you can look up and you can see everything that's going on site. And what we're using it for is actually claims the fence. So the owners normally have are the underdog if you want in a claim situation because they don't have the site records that a contractor have they haven't been on site daily. So they can't necessarily produce the evidence to defend themselves against these claims. So more often than not, if it's very reasonable, we'll pay the money because we can't say otherwise. But with this site diary that you have in time intervals, you can walk in the areas on site that has been subject to a claim or a delay. And you can walk through that same area across time to see what actually happened. And you might see that there might have been material stored in that area by another trade and therefore work that in progress. And you can start. And even if the claim is legitimate, you could very easily prove that it's fine that yes, the owner might have caused some kind of a disruption on the project. And you can issue the amount owed and there's no further argument. So you're potentially eliminating very expensive litigation fees. And also I think it's just the element of dealing with. But we are now working more remote than ever. So I am seeing I am seeing clients that own organizations that have their staff distributed across various different geographic areas. But now with this technology, they're able to bring expertise on different sides of the organization to visit their site without actually having to fly them there or spend a lot of time in the car just to look at an issue and come up with a solution. And I think we're going to see more and more of this technology because it is becoming completely flawless. It's so easy to use. The technology is fairly simple. It's just a camera on a hard hat. And I think it's only a matter of time until we find a way. I think at the moment, using things like drones to perhaps do that for you might not be the safest thing, especially with materials and people moving around on site. So we definitely need a human element of that right now. But I think that it is a very good record for an owner to have. And even if it doesn't get used in a claims defense situation, you have an as built record of all of the rough ends and services that are behind your walls. You no longer have to tear up a dry wall or partition wall to see what's behind that. You can just flip back on that same wall on the calendar when the captures happen. And you can see where the conduits are put in place, you can see what gas pipes towards the pipes are, what the services and the ceilings look like. And the more interesting thing is it actually integrates to BIM. So if you have a BIM model on your project, it can tie into or semi automatically updating progress so it can recognize various components in BIM but has progressed and you can also use that before the scheduling to update your schedule to. So you really have a holistic sort of plan in your BIM model of how theoretically you should have built it, in what amount of time versus when it was actually built and what you can visually see as the work progresses, then it's very interesting stuff. And I think I could probably talk about that for many hours on end and definitely show a demonstration. But it is very interesting technology and I think it is cost effective. And I don't see a reason why an owner or a developer wouldn't have that on all of their projects. Yeah so I think the conclusion that most of the solutions is you need to be very, very proactive. You need a solutions based consultant and people need to move away from this rear view mirror looking and trying to follow things. And I know I'm changes because my team do quite a lot change, review and whatnot, trying to fight something two years after it happens, like smashing your head against a wall, get recalled. So more proactive the better. So what we'll do is we'll just finish off quickly. Just because we've done this whole session has been way too positive. The second one, let's talk about what happens when these schedules go wrong, because there is a development issue like what happens on an industrial and office project, right? When these things get delayed and you're trying to get a tenant and the tenant can't move in or you can't finish on time. Well, the challenge is interesting. They bring up with industrial because in Toronto alone, the industrial availability rates at 1.2% So it's very difficult for them to have that flexibility. Oh, can I stay in this space for an additional 3 to 6 months? Right and that has to be managed accordingly. So I think there's certain it sort of helps a little bit if you're in existing owner building and you're moving into a new one that they're building and you can arrange it, the challenges when you're going from a sale of a building into a newer building, and then that building is not complete yet. So the whole aspect is, is communication and especially with the delay with materials, you know, industrial is known for the home of the logistical challenges. So they shouldn't be surprised about it. But I think it's a bit of a concern. And same thing with some of the plans with the other commercial products and retail and office, there's a certain expectation. And in being able to either have a fresh start after the pandemic with new space. And those type of delays are also costing in the way of the relocation costs and other plans. So it really Cascades when you have a scheduling issue with a new project or a renovation or even the improvement of the space is really impacting strategy. So what we're starting to see is some of that impact. And again, what we said earlier with that need to be in sort of that more suitable space with the pandemic, allowing for other mandates and so on and so forth, that causes some of those challenges that is starting to sort of stack up and is more concerned with a market such as industrial, where you don't have the flexibility, you can't move into another building for 6 to 9 months, especially based on the size and based on requirements. So when we're seeing these type of delays, it really has an impact on the market on both the tennis side and the ulnar side. Yeah and on the residential side, it leads to cancellations. It's the biggest cause of cancellations, especially in the approval side. And if anyone has seen my market presentations, I touched on that in a lot more detail. How municipal approvals have led to delays in projects and ultimately cause cancellations and are the most likely cause of the cancellation is around schedule delays. And it kind of touches then to the point if all these asset types are impacted, I find as a closing remark schedule isn't dealt with the same level as those I would say cost is, people tend to be obsessed more with the cost than they are the schedule one. If you look at it, they are equal risks if not time actually being the bigger risk because time will ultimately may end up with your project. Councils may end up with bankrupt, it may end up with the trade. And a longer functioning cost is just part of that journey that ties into time. And I find to Duan's point in the last session, a lot of people are not spending enough time actually really looking at the quality of the schedule. They're obsessed with the quantity of line items and its how good the schedule is, not necessarily how many line items you have on it. And one of the funny anecdotes will just put on this as we're at the end is this is actually the third time we've rescheduled this because one hasn't been able to make it to the other three due to scheduling issues. So I don't know if that's a good sign or a bad sign. And in is actually in a coffee shop right now because he miscalculated how long it was going to be to get home. So he's doing well. I know you were stuck down in San Antonio. Was it last week that you mentioned the event scheduling issues, Canada, Canada canceled all of their routes to Dallas at that time, and we were just left high and dry. So I think in that situation, there was no way for us to actually anticipate a complete cancellation. But as you said, delays lead to cancellation. So it makes complete sense even in that line to see part of Texas. So you got a little bit of a tour up anyway. And we know, I mean, race traveled halfway across America this year playing golf or presentations. I'm not sure which one it was he was doing, but so I think on that note, we can probably end and it's all about being proactive. So thank you for joining us today. I think it's been a great couple of sessions. Thank you as always, ray. I think the next episode, we're going to be talking about inclusionary zoning, which should be a very fun subject. So thank you very much, everyone. Have a great day. And that's it. Thank you. Thank you.