Are you ready to start a new Tenant Improvement (TI) project but feeling overwhelmed just thinking about the complex expenses you’ll be facing? Over the past 13 years at Letter Four, we have successfully guided our clients through their TI projects by ensuring efficient cost management that’s tailored to our clients’ business goals…  And we’re ready to help you too! This article will explain why it’s important to understand the difference between hard and soft costs to avoid underestimating your all-in project budget.

What Are The Typical Construction Costs for a TI Project?

Construction isn’t cheap and it’s not getting any cheaper. With construction costs on the rise it’s important to know that your expenses generally fall into two main categories: hard costs and soft costs. A Tenant Improvement project entails tailoring your rental space to fit your specific needs as a tenant and grasping the different expense categories is essential for efficient planning and cost control. Hard costs cover the tangible aspects of construction, such as materials, labor, equipment, and subcontractor fees. Soft costs, on the other hand, include expenses such as architectural and engineering fees, permits, legal fees, and project management. In contrast, So, what’s the real difference? Let’s break things down a bit further.

What Are Hard Costs?

Hard costs are direct expenses related to the physical construction of your project. Most business owners meet with a contractor or look at a basic cost per square foot for budgeting purposes early on in the process. These costs include:

Materials: Costs for purchasing construction materials like steel, concrete, and lumber, which may fluctuate based on global market trends.

Labor: Expenses for hiring construction workers, varying with local demand for skilled labor to complete the various types of work, including but not limited to:

  • Demolition and site preparation
  • Framing and drywall
  • Ceilings
  • Flooring
  • Millwork and carpentry
  • Finishes, Fixtures and Equipment (FF&E)

Equipment: Costs for renting or purchasing equipment necessary for construction activities can start to add up when you take into account the daily rental fees for heavy machinery such as:

  • Scaffolding and ladders
  • Lifts and hoists
  • Concrete mixers
  • Demolition equipment

Hard Costs Specifics

Structural Expenses

Structural expenses are a crucial part of any construction or renovation project, as they ensure the stability and durability of the building. It's important to carefully plan and budget for these costs to avoid any unexpected financial burdens during the construction process. You’ll need your architect and contractor to coordinate with the landlord’s team to ensure that the work done for your project does not compromise the structural integrity of the building.

Finishes, Fixtures, and Equipment 

Evaluate the expenses associated with purchasing and installing essential furniture, fixtures, and equipment for a new gym, retail store, or restaurant:

  • Casework in your commercial space refers to display fixtures, custom built-ins, and sales floor storage. Consider how products will be displayed and whether those displays will guide customers or clients toward specific items. 
  • Determine the quantity of equipment and clearance necessary for a cycling studio, for example. You may want to include plans for additional amenities such as a juice bar or locker room. 
  • Assess if specialized lighting is required for certain areas of your store and whether specific decor themes necessitate custom furniture or artwork. For example, ambient lighting can create a welcoming atmosphere, while accent lighting can highlight featured products.
  • For a restaurant, identify the kitchen equipment needed to support your menu. This includes everything from commercial ovens and refrigerators to smaller essentials like mixers and blenders, ensuring each item meets health and safety regulations. This equipment will likely represent a large portion of your budget.
  • Soundproofing requirements for private meeting rooms in a busy office. Consider materials that reduce noise and enhance acoustics, making conversations clearer and more confidential.

Technological Needs

Beyond FF&E, it’s important not to overlook your technological needs:

  • Interactive Screens: Self-service kiosks in retail stores or digital menus in restaurants can streamline operations and enhance customer engagement.
  • Security Systems: Cameras, alarm systems, and smart locks are crucial for protecting both assets and personnel.
  • Point-of-Sale (POS) Systems: Integrated POS systems help manage sales efficiently while providing valuable insights into customer behaviors.

Thoroughly evaluating these aspects ensures that the space is both functional and inviting, setting a solid foundation for success.

Managing Your Project’s Budget

Effective budget management should begin at the earliest opportunity, ideally during your lease negotiation phase. Establishing a proposal that outlines the mutual benefits of your planned tenant improvements can serve as an effective negotiation tool. A well-negotiated lease can incorporate tenant improvement allowances from your landlord, reducing some of your expenses. While most business owners focus on the hard costs listed above, it’s key not to neglect soft costs as they can account for a large portion of your total budget. Let’s dive into those next!

What Are Soft Costs?

Soft costs typically amount to a certain percentage, roughly 15-30%, of the construction cost. While not necessarily a part of the physical construction, these costs are vital for your project's success. It happens all too often that businesses don’t consider these costs when embarking on a commercial TI, resulting in major budget overruns.

Soft Costs Specifics

In your commercial tenant improvement projects, consultants are particularly handy in dealing with complicated legal requirements and compliance issues like building codes, zoning rules, and environmental concerns.

There are several types of consultants who play a crucial role in your construction project and these include architects, engineers, and designers who help with the planning and design phase. Their fees can vary based on the complexity of the project. 

Let’s take a second to dissect these roles:

  • Architects: They focus on the overall design and functionality of the space, ensuring it meets your specific needs while adhering to building codes and regulations. Depending on the scope of your project, it’s highly likely that a licensed architect will need to stamp your permitted plans. They should be the first person you reach out to!
  • Engineers: They specialize in structural, electrical, mechanical, or plumbing systems, providing expertise to ensure these elements are safe, to code, and efficient.
  • Designers: They bring creative input to the project, helping you choose materials, colors, and furnishings that align with your brand or vision.

Here are some examples to illustrate the importance of these roles:

  • MEP Consultants: You will find MEP consultants invaluable as they design the mechanical, electrical, and plumbing systems. They ensure that your building's HVAC (heating, ventilation, and air conditioning), electrical wiring, and plumbing systems are efficient, code-compliant, and seamlessly integrated into the overall design. If you're working on a tenant improvement project in Los Angeles, their work will be required if you are making changes to the existing building systems, like installing or reconfiguring lighting and power supplies.
  • Lighting Designers: Lighting designers will help you plan the layout and selection of lighting fixtures. They determine the types and placements of lights to enhance both functionality and aesthetics. Working with them ensures that your space is well-lit for various activities while complementing the interior design. In an office renovation, they might recommend energy-efficient LED solutions that also reduce operational costs.
  • Acoustical Engineers: Acoustical engineers focus on noise control and optimizing sound quality in your space. They analyze how sound travels through an area and recommend materials or designs to minimize unwanted noise. This can be particularly important in bustling urban environments. For instance, they could suggest soundproofing materials to ensure client meetings aren't disrupted by city noise.
  • Signage and Wayfinding Consultants: Specializing in designing effective signage solutions, these experts improve navigation within any space. Clear, intuitive signs efficiently guide individuals through buildings or complexes, enhancing the user experience by reducing confusion and significantly boosting visitor satisfaction.
  • Structural Engineers: Structural engineers are crucial for examining the integrity and safety of your proposed structure. They ensure that your building can withstand forces such as gravity, wind, and seismic activity particularly important in the earthquake-prone cities along the West Coast.
  • Fire Protection Engineers: Fire protection engineers specialize in designing systems to detect and suppress fires while ensuring safe evacuation during emergencies. They assess fire risks and develop strategies including fire alarms, sprinkler systems, and smoke control measures—all essential for protecting lives and your property.
  • Energy Code (Title 24) Compliance: This ensures that your space is efficient and determines things like fixtures and timers in daylight zones, occupancy sensors, SEER ratings for HVAC equipment, and more.
  • Sustainability Consultants: Sustainability consultants help you design buildings with minimal ecological impact. They assess energy usage, water consumption, waste management, and other factors to identify opportunities for reducing resource consumption. By incorporating sustainable design principles, they help create environmentally responsible buildings that minimize their carbon footprint—an increasingly important factor in a progressive city like Los Angeles.
  • Disabled Access Consultants: For more complex projects these consultants make sure that your space meets egress requirements and that entries, paths of travel and rooms like restrooms and sales floors are accessible to those with disabilities, as well as code compliant. Oftentimes this is synonymous with ADA Compliance Consultants.

Permitting Fees and Other Costs

Comprehending the full scope of your permit costs is crucial, as these fees must be paid to secure approvals and permits to build. Let’s delve into some examples to provide clarity on the potential costs involved:

  • Plan Check Fees: Plan check fees cover the examination of a project's plans by relevant authorities. This process ensures that plans comply with local building codes and regulations, safeguarding against future legal issues and construction delays.
  • Clearance Fees: Clearance fees are charges imposed for the review and approval of by agencies other than Building & Safety, and are required before you can secure a building permit. For example, you'll need to get approvals from local government agencies such as the Environmental Protection Agency for environmental impact assessments, the Bureau of Engineering for technical review and compliance with engineering standards, and possibly the Department of Transportation if your project affects public roads or transport systems. These approvals ensure that the project meets all necessary legal and regulatory requirements, preventing potential conflicts or violations during the construction phase.
  • Building Permits: Once all plan check comments have been picked up and your architect has addressed all of the agency approvals, your building permits can be issued. If your scope is small, you may be able to avoid submitting complex plans for review and instead apply for Express Permits. Not sure if you qualify, reach out to Letter Four or check with your local jurisdiction, for Los Angeles Express Permits go to ladbs.org. 
  • Electrical Permits: Electrical permits are required for installing or upgrading electrical systems. These permits ensure that all electrical work complies with safety codes, and meets California’s strict energy efficiency requirements.
  • Plumbing Permits: Plumbing permits are needed for any significant changes to plumbing layouts, supplies, and fixture counts. They guarantee that all plumbing work meets health and safety standards, preventing issues like leaks, water contamination, and inefficient water usage.
  • Mechanical Permits: Mechanical permits cover heating, ventilation, and air conditioning (HVAC) installations. These permits ensure that HVAC systems are installed correctly and operate efficiently, providing a safe and comfortable environment within the building.

Other project expenses to consider will vary depending on the type of business you have, but the bottom line remains consistent: time is money. Let’s explore how these factors might apply to your Tenant Improvement project:

  • Insurance: Insurance expenses are fundamental for protecting both you and your business against unforeseen events or accidents during construction. For instance, if you're opening a new retail store within a mall location your landlord may require that you name them in your insurance policy to cover any damage related to your construction that is outside of your space.
  • Training Costs: Training staff to operate new equipment, use updated point-of-sale (POS) software, or following new safety procedures is essential. Proper training ensures efficiency and minimizes downtime, allowing your business to run smoothly and avoid costly errors or accidents. Investing in training upfront can save significant time and money in the long run by enhancing productivity and reducing operational risks. For example, in a restaurant setting, hiring costs may include not only the recruitment of skilled chefs and waitstaff but also the training necessary for them to learn a new menu and understand your restaurant's service standards.
  • Productivity Adjustment Period: It is critical to account for the period of adjustment as your new staff become familiar with their work environment, which might temporarily affect productivity. For example, when opening an office space, there is an initial phase where new employees need to get acquainted with the office layout, workstations, and any proprietary software or systems before full operations can commence. 
  • Rent Costs Prior to Occupancy: If you haven’t negotiated with your landlord to ensure that you’re not paying rent until you're operational, every month that you’re in construction could cost you significantly!

What Is an All-In Budget?

A comprehensive budget plan that includes both your hard and soft costs is crucial for your construction project's success. This ensures all potential expenses are accounted for. Additionally, we highly recommended including a contingency of 10%-15% to cover unexpected costs.

Expert assistance during the planning phase can ensure your project aligns with business goals and maximizes the value of your investment. Solid research and planning are essential before investing in a new build or TI. Letter Four’s Complete Action Plan helps evaluate and prepare for your project by setting clear cost estimates, establishing contingency funds, and continuously monitoring expenses throughout your project’s lifecycle.

These packages offer the initial stages of service implemented in every project, allowing you to assess costs, design options, and the realities of pursuing your build. Investing extra effort in this prep work provides a detailed plan that accounts for all eventualities, preventing budget overruns and costly delays.

Hiring The Right Team

Selecting the right team is crucial to the success of your project and ultimately your business. Take a look at the Design-Build approach—where one entity handles both design and construction— which often leads to better cost management and shorter timelines compared to the Design-Bid-Build approach where design and construction are managed separately.

Design-Build vs. Design-Bid-Build

Design-Build: This collaborative approach not only streamlines communication and cost savings but also fosters a cohesive project team, ensuring a smoother workflow from the conception to completion of your TI project. By bringing designers and builders together under one contract, Design-Build encourages innovation, accountability, and a shared commitment to delivering high-quality results on time and within your budget.

Design-Bid-Build: This approach requires separate contracts for design and construction, potentially leading to extended timelines and increased expenses. While initial lowball quotes may seem appealing, they often come with compromises in quality materials and shortcuts that can later manifest as costly errors, necessitating additional spending for repairs or redoing work.

Conclusion

Effective cost management in commercial TI projects hinges on your understanding of and ability to account for both hard and soft costs throughout your project, so you can keep your budget on track and ensure the success of your business.

At Letter Four, we are committed to helping you optimize construction costs and achieve project success. Book a meeting to discuss how we can help elevate your upcoming TI project with us today!