Building a brick and mortar or mall space is a complex task, but it is a necessity to grow  your business, among other benefits. It gives you the chance to create an environment that’s perfectly attuned to your brand, your operations, and your customer's end use. 

However, challenges can arise when trying to align your tenant improvement (TI) project’s budget with your business objectives. Keeping costs contained is paramount, therefore making accurate price quotes is a necessity.

While quoting project costs based on square footage is a common practice among general contractors, it can actually lead your business into troubled waters. Relying on this method can give you a false impression of what’s achievable within your budget, and even lead to poor design. Therefore, asking the “right” questions is imperative! 

In this article, you’ll learn:

• Why calculating your project budget based on a cost per square foot number will result in an incomplete picture. This leaves you much more likely to estimate a budget that’s too low to build a space that meets your goals. It’s a surefire way to set your project up for cost overruns and ultimate failure.

• Why fixating solely on the cost per square foot may inadvertently result in overlooking unique opportunities to craft an exceptional commercial space. We shed light on the other critical aspects that demand consideration and emphasize those that help achieve a remarkable outcome, such as quality, craftsmanship, design, and functionality.

By exploring these perspectives, we aim to provide invaluable insights to prepare you as you navigate your TI project. Our goal is to guide you through the complexities involved, enabling informed decisions that align with your business's vision, budgetary framework, and long-term goals.

What’s Included in a Cost Per Square Foot Calculation?

In order to allocate the necessary funding and determine what space will work for you, soliciting price quotes will be among the first steps you take for your tenant improvement project. You’ll want to get a sense of what your budget needs to be early on, before committing to a space that may not suit your business finances.

At this point, you’ll find that many general contractors will quote a flat fee per square foot, without even visiting your site or investigating your design requirements. So how can that rate account for all of the variables at play? What might be underestimated, or left out altogether?

Quite a bit, as it turns out!

Typically, general contractors base these numbers on bare average construction costs. But there’s so much more that goes into building a functional and successful commercial space.

Here's a breakdown of what those quick, per-square-foot quotes often miss:

1. Soft Costs: These include fees for designers, architects, engineers, and other required  consultants, as well as permit and city fees, which can be a significant percentage  of your budget. Navigating all of the extra considerations involved with a commercial project takes a lot of time, effort, and expertise. If you do not consider these costs in the early stages of your project planning, you will not have a true understanding of the total budget for your TI project.

2. Furniture, Fixtures, and Equipment (FF&E): This includes all of the furniture, fixtures, and equipment that are not a part of the building’s permanent structure and function, such as  desks, tables, seating, lighting, and more depending upon your business type. If you’re opening a gym, for example, the exercise machines are part of this equipment list. The choice of these items can greatly influence both the cost and the final look of your space. It will also affect how much wear and tear your space can withstand over time. 

3. Site-Specific Factors: The site’s current state vs. the type of space you are planning can greatly affect your project’s scope. Changing its use (such as transitioning a retail location to a restaurant) can require the installation of extra amenities. Your site’s location may also affect what approvals are required, and what restrictions are placed on the scope of your TI. 

4. Comprehensive Square Footage: Beyond the interior space, there’s the cost of external features like parking, signage, facade updates, and outdoor amenities. These are often not included in initial square footage tallies, despite requiring a significant investment. For example, facade updates like a new storefront glazing system can easily cost more than ten thousand dollars. 

5. Technology Integration: In a commercial setting, incorporating audio-visual (A/V), sales systems (POS), security, and other smart solutions can be essential, but often get overlooked in preliminary budgeting.

6. Sustainable Requirements and Extras: Eco-friendly features like HVAC upgrades, smart thermostats, and efficient appliances add upfront costs to your TI project, but offer long-term benefits in terms of utility costs and environmental responsibility. Here in California, many of these upgrades are required by the energy code and result in both additional soft costs for engineering and lighting, controls, and equipment costs.

7. Specialized Equipment: Depending on your business type, the cost of specialized equipment can be a major contributor to your TI project’s total. HVAC systems may need to be tailored to the specific use of the space, or fire suppression systems installed in key locations. If your space is not currently compliant with ADA requirements, you may have to install accessibility equipment such as ramps, handrails, etc. Retail spaces may need storefront and inventory installations, while restaurants may require enhanced ventilation, food storage, and food preparation equipment. 

8. Lease Terms: The stipulations of your lease will largely affect how much you can expect to spend over the course of your TI project. Depending on how much the terms favor your landlord, you may have to pay rent while construction is underway, and/or even pay fines if you don’t finish and open by a specific date. Working with a design team early can help you draft an LOI that secures the best possible terms for your project.  

When planning your commercial project, it’s essential to consider these cost points from the beginning. This approach ensures you set a more realistic budget that anticipates all potential costs. As a result, you’ll be able to align your project with your company’s actual needs and financial capacity. 

At Letter Four, we ensure a holistic approach to budgeting, factoring in all of these elements to provide a comprehensive all-in budget estimate. This thoroughness is key to helping our commercial clients avoid cost overruns and keep projects progressing smoothly.

Accounting for All Costs

Quality and Craftsmanship

In commercial construction, the maxim “You get what you pay for” holds especially true. 

Materials must be able to stand up to intensive use and traffic. A flat rate per square foot often fails to consider the superior finishes and custom installations that a commercial space requires. 

It's essential to understand that the cost per square foot can vary significantly based on the desired level of quality and finish, particularly for luxurious or specialized business environments. By prioritizing top-tier materials and craftsmanship, you ensure not only the aesthetic appeal of your space, but also its durability and functionality.

Personalization and Customization

Customization is a cornerstone of commercial construction. It allows for the creation of spaces that are strategically aligned with specific business needs, and expressive of unique brand identities. 

By moving beyond a basic cost-per-square-foot approach, you can design a space that truly supports your business's objectives and values. You’ll have the flexibility to tailor the environment to serve the specific needs of both your customers and your workers, achieving optimal performance. 

Energy Efficiency and Sustainability

Incorporating environmentally-conscious practices into your commercial construction project is more than a statement. It's a strategic move that can lead to reduced operational costs and an enhanced brand image. 

Sustainable features may require a higher initial investment, but they offer significant long-term benefits. Your business will be able to minimize its carbon footprint, lower energy and resource expenditures, and stay aligned with regulations. As California’s efforts to combat climate change become more pronounced, commercial spaces will be required to meet an increasing number of efficiency and sustainability standards. 

Functionality and Layout

In commercial construction, functionality and layout are paramount. The design must not only be aesthetically pleasing but also practical, facilitating efficient operations and enhancing the user experience. But under rigid per-square-foot pricing, you don’t have the flexibility to fully hit these targets.

Discarding this limiting pricing mode allows for a more adaptable and intelligent design process. You’ll be free to design a space that serves its purpose beautifully, and even evolves with your business needs.

Value and Long-Term Investment

Approaching commercial construction as a long-term investment is crucial. Strategic design and the selection of enduring materials can significantly impact the company’s bottom line. 

Investing in quality now paves the way for a space that not only serves immediate needs, but also contributes to the long-term success and growth of your business. You’ll be able to set your brand apart and focus on the growth of the business, rather than the maintenance of a cheaply constructed space.

Conclusion: Accurate Pricing & Project Payoff Requires More 

In the realm of commercial construction, a simple per-square-foot cost estimation falls short in providing an accurate and realistic project quote. Such an approach might lead to outcomes that neither align with your business objectives nor sustain long-term value. These can be incredibly costly and ultimately ruin your business’ potential for profit, growth, and success.

At Letter Four, we take a more holistic approach through our Clear 4-Step Process. This method focuses on meticulous planning and preliminary pricing at crucial stages, providing full cost transparency from the outset of your project.

To learn more about what to expect from your commercial project, download our free Project Planning Pack. This informative guide will walk you through all of the preparatory work required, and help you get ready for the next steps.