Starting a New Project:
Which Comes First, The Chicken or the Egg?
By Al Locker
So you’ve got that great idea, whether it’s a new facility from ground up or just a remodel of your existing place. Then you hit the “now what?” roadblock! How do you move forward? Even though it’s a great idea, you aren’t certain if you can afford it or if it will make economic sense.
If you go to a builder with your idea and try to get a price, the builder most likely has never built anything like what you are asking for and will need plans to bid by. If you haven’t spent any money getting at least some conceptual plans done, the builder may not be very receptive to spend any time giving a conceptual free estimate for something that probably will never happen. If he does give you a bid, the eventual project cost will be totally different after the plan is more developed and the permitting department changes it.
I can assure you that if the builder has been in business very long, he has already chased a few of those rabbits and has nothing to show for it except that he learned he should have used his time bidding on more viable projects. So his enthusiasm may be less than yours. An option would be to pay for the contractor’s time for bidding ballpark pricing. However, unless you or he is knowledgeable of the pet industry, any questions he may have won’t be answered, so the guestimate will still be just that—a guestimate!
Another approach is that you hire an architect and let your imagination and theirs run wild. If they have never designed your type of project, you will be paying for them to learn about it, and the final result will be a naïve one. An architect needs to fully understand the business he is designing for, especially for this industry. If your project is a full–service pet resort like my wife’s, you may have 4 different businesses (boarding, grooming, daycare, training ) under one roof, all with specific needs for staff, cleaning, building finishes, HVAC, etc.
In addition to the architectural plans, some mechanical, electrical, plumbing, and structural engineering is usually needed also. At this point you’ve spent thousands of dollars for bid-ready plans, you’ve found three qualified contractors to bid the project, and now you send them out for bid. As the bids come in, you realize that the cost for the project is much more than it will cash-flow, more than the bank will loan, or more than you have the equity for. So it’s back to the architect to pay him more money to redo the plans to get you in budget if that’s even a possibility. If the architect has no industry–specific knowledge he won’t understand where you can “value engineer” (cut the budget) and where you can’t.
The correct path from idea to completion is a process. The final feasible project may be very different from your original idea. Many times people don’t want to go through a process, they just want to do it now. Ultimately the process usually wins out, so it’s best and more economical to plan the process and not just stumble through it.
The process started with a great idea. From there, you need a team of consultants: lawyer, civil engineer, architect, builder, CPA, banker, etc. as your project scope requires. You should do as much research as possible to observe many different pet care facilities. Then you should move to the proposed business plan. Although not formal at this point, it should have some demographic study to make sure:
- That there is a market available and it’s not overserved,
- Which services you’ll provide,
- That you are properly priced for those services in your market, and
- That the amount of net money it will produce is enough to service the lender’s note, and/or provide ROI you are looking for (based on your profit centers and the quantity of services you’ll provide).
That bit of knowledge determines the total project cost that your idea can support. For example: Using an amortization table, if there is $10,000 per month net after all expenses to pay for the mortgage, and you can obtain a 20-year mortgage at 5.5% interest, the amount of the loan would be $1,454,000. That also means, depending on the bank’s equity requirement, in addition to the loan, you will have contributed $363,500 based on a 20% equity requirement. So the total project cost maximum would be $2,181,000.
Notice I wrote total project cost above. That is because there is more than the land and building included in total project costs. In your business plan you need to plan for the entire total project costs, which will include architectural and engineering fees, permits and impact fees, testing, consulting, banking fees and interim interest, land and closing costs, attorneys, building and site development, furniture and fixtures, equipment, pre-opening employment costs, pre-opening advertising, contingency, and working capital.
However, a big line–item in the total project cost is the construction cost of the building and site; therefore you need a good idea of what that will be. The size of the facility is determined by the profit centers and the capacity of each. For example, if you want to have 50 dogs per day in indoor daycare and they stay on the floor all day, using the Dog Guru’s guidelines formula, we will need approx. 2,750 sf of daycare space. You will need to do the same type area calculations for the rest of the profit centers, using your envisioned form of those. Then if we subtract all of the other above estimated project costs, except for the building and site development, we’ll see how much is left for that portion.
Recent construction costs for a from-ground-up project in the Houston area have run $225/sf. The Design and Construction Resource Square Foot Cost Book—2016 Edition—has similar type construction projects at that pricing also. What you may find at this point is that you need to change your original idea by reducing the project size, finding a less expensive piece of property, changing the quantity of each service provided, or better allocating facility square footage to the most profitable profit centers. To get to this point you may have engaged various consultants, such as an architect, engineer, contractor, industry consultant, business consultants, etc. This can be upsetting to some first–time prospective business owners who have spent time and money only to find the project isn’t feasible. However, remember that this is much less expensive than a failed project.
Once all of your projections are acceptable, then your project has a good foundation to move forward. You have done your best to continue forward with the least amount of wasted time and money. Before the purchase or lease of the property, the attorney needs to verify that the site has an acceptable zoning use. If it’s a new from–ground–up project, the civil engineer needs to do some preliminary investigation to determine any site development special issues, like storm–water detention, parking, utilities, landscaping and easements, which could drastically affect the construction costs.
If you need a bank loan for the project, now is the time to obtain a preliminary commitment from the bank. The bank may need an estimated construction cost for that. You may need a conceptual site plan and floor plan for the builder to give you a preliminary bid for the bank. With a preliminary bank commitment in hand it’s time to engage the architect and engineers to start the plans and specifications with a strong understanding that the project design, and therefore construction cost, has to be in your budget. Most architects do their work in phases and will recheck the project cost as the plans are developed, using their experiences and a local builder’s input.
If you were reading along waiting for the easy answer, you can see there is none. Remember, it’s a process and is changed as the project develops. The process timing as discussed is not set in stone; however, it does have a certain sequence. In recap, plan your process, be patient, be detailed and methodical, rely on your consultant team for areas you are not familiar with, and know that there will be difficulties along the way. So, hang in there…a wise banker once told me “If it was easy, then everyone would do it!”
Turnkey, Inc., celebrating over 55 years in operation, is a commercial design and design/build construction firm specializing in special-use businesses such as pet resorts and veterinary clinics. Turnkey’s design work starts with a full understanding of a project and the owner’s business–plan needs. Turnkey’s president, Al Locker, has designed over 65 pet facilities around the U.S, and built 16 in the Houston, Texas area. He has also consulted and helped with the feasibility and business plans for many more. Al and his wife, Suzanne, have co–owned ABC Pet Resort & Spa in Houston since 1991, which has given him personal insight into the specific needs and costs of operating a pet facility. They have both given numerous seminars for those interested in starting a pet care business or expanding their existing business.