How to Determine the Valuation of a Construction Project

 Starting your first construction project can be both exhilarating and frightening. Most first-time property owners or developers may not know or understand the various methods used to calculate the cost of the job, and from there extrapolate the fair market value of the finished work. This can lead to drastically undervaluing or radically overvaluing the final product, making the project more difficult to sell or attract tenants to. With this in mind, MAI Construction, Inc. offers some helpful tips for determining how to value a construction company’s work and signals which may help or hinder your valuation.

 How much is a construction project worth?

There are two factors which play into this question:

·         Contract value of labor, equipment, materials, supplies, etc., also known as “time and materials”

·         Strength of the economy in the intended area for the project, which determines the potential project profit

The sum of these factors determines the valuation. If you’re dealing with a reputable, experienced general contractor, the construction company’s valuation method will usually be stable within reasonable limits, barring change orders and addenda which significantly alter the project characteristics. This means your first task is to determine the price point the market in the area of the project will bear, as well as the intent of the property such as commercial storefronts, manufacturing, multi-family housing, single homes, etc. 

 How do I find the valuation of the project?  

“Valuation” simply means the total assets of the completed project, i.e. the actual real estate and improvements, minus liabilities, i.e. construction costs, staffing and other expenditures. Once you have the estimated contract value of the actual project, your next step is to work out a price range which the locale can support. Using historical and projected real estate sales data for the location in conjunction with contract value, you can establish the project’s overall valuation and figure out anticipated profit margins. Projects with lots of change orders or revisions could exceed the contract estimate, and those added costs will be reflected by a corresponding dip in profit margin.

 How do I know the general contractor estimated project valuation correctly?

An experienced, reputable construction firm will typically factor in known costs in terms of labor, materials, permits, project duration and so on, including a reasonable threshold for anticipated change orders or alterations to the project based on unexpected site conditions. This will set the baseline budget for the project. Assuming any change orders and resulting project course corrections don’t add project cost exceeding the baseline, the general contractor should be able to complete the project within the scope of the original contract in terms of both time and budget. Before engaging a general contractor for any project, it’s a good idea to do some due diligence. Check the contractor’s reputation for both quality work and work executed within a time and money budget comparable to your own. If the general contractor you are considering has a reputation for slipshod work or routinely overshooting budget and deadline constraints, you may want to reevaluate whether you want to work with that company.

 How can I be sure the project valuation was figured correctly?

A reputable general contractor will be able to clearly and concisely explain the methodology used to determine every figure in the bid documents, including the total project work valuation, based on the construction industry’s best practices. They will also invite you and your team to run the numbers for yourself and check for discrepancies. A less experienced or less scrupulous general contractor may flounder or become hostile or evasive when asked how the project cost was determined.

Whether your project is a private home or a multimillion-dollar medical research facility, it pays to do some research on the general contractors bidding the job. The right general contractor will have a proven track record of delivering accurate estimates and completing their work on time and within budget. They also won’t shy away from questions regarding how their project estimates were figured or the processes used to establish the proposed budget. As the owner, it’s your project, and you have every right to make sure you’re comfortable with the skillset and experience of the general contractor undertaking the work.