Welcome to Episode Three of the “The Constructive Finance Podcast”.
Today, Dan spoke with Darryl Bird of Mitchell Brandtman about his market views, opportunities and challenges he has faced and some advice/lessons learned thus far in his career.
The podcast will be released every fortnight on Tuesday and will feature an elite developer discussing these same topics.
The podcast will be available to stream from iTunes and via the HoldenCAPITAL website.
For more information about the podcast or getting involved please email paige@holdencapital.com.au
Read full transcript below:
Daniel Holden: Welcome to the third edition of the Constructive Finance Podcast. Today, very excited to be joined by a QS guru, Darryl Bird of Mitchell Brandtman. Thanks for joining us, Darryl.
Darryl Bird: Thank you for having me.
Daniel Holden: So Darryl, by way of introduction, can you give us an overview of Mitchell Brandtman?
Darryl Bird: Yeah, sure. Mitchell Brandtman is a quantity surveying firm, a traditional quantity surveying firm. We have our 46th birthday this year, which is pretty exciting. I guess the business is a merge of two businesses originally, John Mitchell & Associates in Brisbane, and a company by the name of Nelson Brandtman in Sydney. We came together about 15 years ago.
We have offices in Brisbane, Sydney and Melbourne. Some original top offices in Cairns, Oakey, and Canberra and Bangalow, so we've got some good coverage. We use some regional guys in some areas like [McCoy 00:01:27] and Gladstone, those kind of places as well. So pretty good coverage regionally.
We are a traditional quantity surveying firm, but we do have areas of specialty. In particular, the financing QS role is one of those areas of specialty, which is really my bread and butter stuff.
Daniel Holden: How long have you been with the company?
Darryl Bird: Twenty-three years this year. So quite an amount of time. I was lucky to join the business on the tail end of that recession that we had to have in the early '90s, so I guess that's really given me a good grounding of where I am today. We're a business that had to reduce a lot through that period. When I started we were kind of in that rebuilding phase, and kind of a real exciting time for the business and really helped me learn a lot very quickly through that period.
Daniel Holden: Excellent. And prior to that what made you, I guess, a good fit for that role?
Darryl Bird: I guess I do count the times that I spent through the '90s as a really good founding for where I am today. The business was very different. We were very much a traditional QS. It was very much immersed in development projects at that time. We got to see the full gamut of a construction project in a great deal of detail. I guess what changed beyond that or in about 10 to 15 years ago, actually probably 15 years ago, financiers really became more engaged with QSs and getting them involved in that finance scenario, development finance scenario.
It opened my eyes then at that time that QSing can be more than just counting bricks.
Daniel Holden: Okay.
Darryl Bird: And gave us an exposure more to the greater development process, which was quite exciting for me at that time. Something that drove me to follow this role through.
Daniel Holden: To get an understanding of the types of clients that you generally work with in terms of developer and size. We get developers in all shapes and sizes, from [Manar Park Cattle 00:03:22] doing a split of block, right up to the listed corporate developer. What would represent most of your current client base?
Darryl Bird: Yeah, sure. We are a bit lucky, we do, in the roles that we play and the business we get a very good broad spread, I guess, of client base but when I talk about bread and butter type stuff, it really is probably in that 2 to 20 million dollar bill price kind of phase, so whether it's six, eight, 10 units up to hundreds of units, I guess is where our bread and butter type stuff is and there's a lot of cranes or [inaudible 00:03:58] at the moment and there's a lot of activity in that space but I don't think, there's a lot of other activity going on. There's a lot of what's happening in the city that is really keeping us going.
Daniel Holden: So, mainly, the more entrepreneurial career developer up to the listed guys as well.
Darryl Bird: Yeah. Yeah, absolutely.
Daniel Holden: So, it's not necessarily extensions on houses and sticks and bricks of houses, it's more substantial projects where a developer has multiple projects, they're doing reasonable volumes and a reasonable sized project.
Darryl Bird: Yeah, that's right.
Daniel Holden: Yeah. Correct. For the process itself, can you walk us through the actual day-to-day of progress draws and how you guys access clients and maybe some things for developers to understand.
Darryl Bird: Yeah, in regard to the Financiers' QS role, I guess it's a two-step role and there's an initial process upfront that it involves an initial report, which is kind of like a project due diligence type report, covering off on a number of aspects of the project, whether it be the contracts, the authority approvals, the capability of the builder, and all those kinds of things. Of course, the budget.
Beyond that, once the funding is approved and we're into that progress draw phase, I guess we'll set up a regular process of undertaking site inspections, meeting with the contractor to talk through the progress claim and the dissection that he's provided us in support of his claim. Really getting a feel for the basis of the claim, understanding what justifications are available, undertaking assessment. In addition to that, part of the progress draw involves following up standard information, things like insurances, getting hold of statements like statutes of declarations to make sure he's paying his subcontractors, suppliers.
Beyond that, once we've agreed on what we believe is a reasonable value for works done on site, we prepare a report for the financier that summarises that.
Daniel Holden: Yep.
Darryl Bird: Providing a recommendation as to what should be paid and that goes through the bank for their review and payment following that.
Daniel Holden: Okay. In your role, do you guys attend the monthly PCG or you're met in addition to your site of inspection and addition to the PCG?
Darryl Bird: It's usually in addition to the PCG.
Daniel Holden: Okay.
Darryl Bird: The PCGs are the things we don't attend on all projects. We do attend them on, what's fair to say, bigger projects.
Daniel Holden: Yep.
Darryl Bird: Maybe a benchmark might be around a hundred units and above, it's kind of where we typically step into the PCG role.
Daniel Holden: Okay.
Darryl Bird: Bearing in mind things are changing a little bit with the financiers' requirements but that's traditionally where we've been attending PCGs. They would typically be maybe in the middle of the month, whereas a progress draw typically be at the end of the month. So, it's good to catch up in the month, you're getting two touches if you like on that project, in that role, so you're getting a more up-to-date feel for where the project's headed at that time.
Daniel Holden: Okay. From your perspective, what would you see as the purpose of the PCG meeting and I guess maybe other participants who would attend?
Darryl Bird: PCG meetings are really about that snapshot of where the project's at at that point in time, so we're talking there not only about costs but we're talking about programme, we're talking about where authority approvals are at and on certain projects we're talking through where sales are at as well.
It's about as much as bringing up to speed the key players in the development process as it is to get some good rigorous discussion with those key guys all together in one room at one time.
Daniel Holden: Yeah.
Darryl Bird: Typically, they'll be run by a contractor who will prepare a report for that, which includes cost information where he's at, programme information, authority information, and then he'll bring information too that he's challenged by. He's got a programme challenge, how we're going to address it, what implications that gonna have down the track.
So, the key people that are at that meeting are going to be people like the developer and the project manager, the key consultants involved in the project. The financier plays a big part of that as well and, I guess, as a QS on most projects we attend as well.
Daniel Holden: Yeah.
Darryl Bird: Beyond that, I guess people come along to those meetings that are really relevant to the meeting and the topics that we might discuss at that time. But the core is those four people.
Daniel Holden: Okay. And so in the project life cycle, when would a developer be best to engage a specialist like yourself?
Darryl Bird: I guess the easy answer is as early as possible. I'll give you an example, I guess, in the traditional QS space, we get engaged a lot almost too late on a project. Our skill is about providing cost advice based on limited information, we feel that we can have the biggest impact earlier on a project, before your designs run too far, before things are ingrained in the project too deeply -
Daniel Holden: Yeah.
Darryl Bird: When it's almost quite difficult to call things back. So, from a traditional QS sense, absolutely as early as possible to try and make the design process as efficient and economical as it can be upfront.
And that applies in other services, you know, the Financiers' QS role is I think quite often we get engaged on a project too late, well before, well after I should say some of the issues that we need to raise as issues to be addressed. If they're addressed earlier, they can be foreseen and addressed better than what they may be once the bill's run.
Daniel Holden: Okay.
Darryl Bird: So, yeah, the easy answer is as early as possible.
Daniel Holden: On bigger scale projects, they often have a big value management session to help get everyone around the table and kind of work out any issues. I was involved in some of them, back when I was a development manager, there were kind of interesting things -
Darryl Bird: Yes.
Daniel Holden: ... go about and getting all those people around the table, how much it cost you per hour, if we ought to make you cups of tea but, beyond that it was kind of I guess looking at the structure of the building and delivery and critical path and all those kinds of things. So you guys were involved in that process at the start as well?
Darryl Bird: Yeah, absolutely. I guess the cost input is quite key at that value management process and so, it is important that those things are discussed as early as possible. As I say, we do get engaged a lot in these things when there's a full design in place and all of a sudden they go to tend it they realise the project's over budget, "panic, panic!", what's going to happen?
It actually costs a lot to implement change at that time. Implementing change early on in a project is where real savings can be made and so, value management is a lot easier early you can implement that process.
Daniel Holden: Okay. Great. What qualities do you look for in both a property developer client and also a property development project that give you the comfort to get involved and put your name to that?
Darryl Bird: I guess, experience is a big thing in development but even more than that, a good developer will have a dynamic type personality. I think it's a little bit naïve to think that just because you developed a project in one way in the past, that it's going to be the same way you'll deliver a successful project going forward.
Daniel Holden: Yep.
Darryl Bird: So I think the characteristics of a good developer who's going to be a long-term developer and successful is someone that is a bit dynamic and forward-looking. It's all well to say I achieved this on the past once but market conditions change, construction materials change, methodologies change, finance conditions change, all those things, and the guys that really spend the time to look forward to those challenges and look forward to address them before they come up, are the ones that are really showing, you know?
Daniel Holden: Yep. And is there any projects that you might try and avoid? There's been a lot of talk in the last five to six years about offsite manufacturing and precast and those types of things. Is that something that you shy away from or you're happy to be involved with those outside-the-box style projects?
Darryl Bird: I actually enjoy those outside-the-box projects. I enjoy challenge and things are always changing and innovation is a big part of the development industry. Construction is probably one of those things where depends who you talk to, someone will say to you that construction is quite dynamic, others will say that it's not. In different aspects, I think construction and development is quite inhibitive but you really need take a step and find what it's going on out there.
Things like prefab type scenarios, there's a lot of people investigating it. A lot of people are trying to do it for the wrong reasons, so I think it's worth looking into why people are investigating those alternate avenues. And again, looking at people who are actually spending the time to investigate those alternate avenues is where the proof's in the pudding, I suppose.
Daniel Holden: Just on prefab and whether it's ... I guess, prefab modules like I'm seeing bathroom units made in [inaudible 00:12:42] and then dropped in. Talking to the developer builder who did that, he actually knew there wasn't going to be a substantial cost saving in the actual cost of producing that but the time setting was significant.
Darryl Bird: Yes.
Daniel Holden: So when you say they're in it for the wrong reasons, I'm guessing you're probably leaning towards the fact they think it's going to ...
Darryl Bird: Save them money.
Daniel Holden: Yeah.
Darryl Bird: Yeah. It's really that depth of understanding and investigation to really understand what they're getting themselves into and what they're trying to achieve those things before you can, get some belief around why certain avenue is being pursued. And you're right on the money with that, that prefab stuff.
Ultimately, prefab if it's made locally will possibly cost more than built it on the site. You get a better quality out of it but you do get the time saving, so really as long as they're doing it for the right reasons, those are the guys that will be successful.
Daniel Holden: Okay. What problems do you see developers getting themselves into and maybe how they can possibly avoid them?
Darryl Bird: I think, I'm probably a little bit sensitive to what we're experiencing at the moment and I describe the development industry at the moment as very rushed. I think everyone is trying to build their project before they're actually building it on site, if that makes sense.
We're spending a lot of time at the moment, trying to, wind back is the right word, but asking developers to provide some explanation as to why certain course of action was taken or revisit some documentation. That's about being diligent. It's good to be rushed, and it's good to be proactive and all those things but you need to make sure you're dotting your i's and crossing the t's behind you, because that can come to bite you later.
There's a number of things, whether it be contract documentation or clarity of scope in their documents, whatever it might be, that we tend to find tripping up people on the way. In a market at the moment where margins aren't particularly generous, you need to be pretty diligent.
It's good to be proactive but also be good to be diligent all the way through.
Daniel Holden: Okay. Your role is working between three parties, being developer, bank, and builder. And often the numbers of money, quantum money involved is quite substantial. There must be a bit of emotion and, I guess, ego at times. How do you manage that and avoid the conflict and try to keep the peace?
Darryl Bird: It's almost like secret sauce. Yeah, it is absolutely one of the parts of the role that probably is underestimated the most. Everybody in the three parties they are coming from different avenues. I think, in general, everyone is there for the right reasons. They're all looking to develop a project and get the income. And that's what we want to try and foster, I suppose.
It's quite a delicate balance, I think it's about being very open about what the role's about, trying to convey a message that in a Financiers' QS role we're quite often seen as a policeman or a stop-and-go type of traffic person. We're not that person. Our role is there to try and facilitate the project happening but, in that process, there are things that we have to address. In most cases, those things are apply some diligence that needs to be applied for a successful project anyway. It's just being clear and open about discussing why we are undertaking the role and where we're coming from and trying to be open about that so that all parties understand. Not the easiest thing to do.
Daniel Holden: Oh, yeah. One of the jobs in the industry that we thank you for doing. We hear anecdotally between the differences of a unionised site versus a non-union site. Without prophesizing the merits or otherwise of unions, because that's a topic for another day. Can you give us some insight into the differences between the two, from your perspective? Whether it's contractual, costs or risk, even. From your perspective.
Darryl Bird: Unionised projects that are tracking union attention are probably projects that are kind of eight, 10-stories and above. Traditionally, in Brisbane, it's been around the city Newstead and New Farm type areas but they are now focusing their attention on some of the other suburbs, because we are building projects in that space out there, I suppose.
The differences from a cost perspective, they do incur additional costs and it's quite an interesting exercise to understand. From a cost perspective, the obvious one is associated with the labour cost. EBA sites or unionised sites attract EBA labour and those guys are signed up on an EBA agreement, which they agree to pay an additional five percent type arrangement year on year. So, labour costs are known, they do escalate along the way.
In addition to that, though, is that there is kind of additional costs that come along with that kind of construction project. And one of them is time. An EBA unionised type site is subject to a number of RDOs and those RDOs have, well, there's almost additional days to those RDOs, times like Christmas and Easter ...
Daniel Holden: Yep.
Darryl Bird: There's a great periods where the site shuts down and so, as a result of that you end up reducing the actual effective working days per year on a union site versus a non-unionized site. The difference is quite different. Not only does it take longer to build that project, it costs you more to build that project because of time. There's a kind of number of factors to understand in that space.
And then of course, I mean, there's workplace health and safety, which is important in all construction sites. But it's a bigger factor on unionised sites, it's policed quite rigidly.
Daniel Holden: Yep.
Darryl Bird: It adds a level of almost administration to a project that's subject to unionised labour.
Daniel Holden: Okay. An interesting thing that you said a while back, probably a year or two ago, having a chat with you and I found it quite interesting and funny. Can you explain to listeners the [White U 00:18:28] test.
Darryl Bird: Yeah, sure. The White U test it's a very basic measure, almost like the Crane Index if you like around a place. You get cranes to get an indication of how much activity is out there. Well, in regard with the White U test, very simply, a happy site is typically one where the guys who are working on the site have been paid. If you're paying your guys, they'll show up the next day. If you've got a site where there's typically a lot of white [inaudible 00:18:53] parked outside, they're the ones where there's a lot of activity happening because they're getting paid, they're showing up every day. Conversely, if your not paying your guys and there's not a lot of white [inaudible 00:19:01] at the front, they're not getting paid and probably not the best, happiest site.
So yeah, it's a very basic measure. And when we need to pay attention to particular projects whether they'll be developer-builder issues, whatever it might be, one of the things that we simply do is drive past the site and have a look if the [inaudible 00:19:16] are out front.
Daniel Holden: I found it interesting and I've always paid attention now when I go on sites. I see how many white [inaudible 00:19:23] there are.
Darryl Bird: It's typical in the Newstead areas and the likes, where there's a lot of activity so there's uts everywhere. But certainly, you gotta apply some common sense there but yeah, it is simple but an effective tool, I reckon.
Daniel Holden: Excellent. So, your firm has been proactive in, and I'll probably get this wrong but, BIM 5D modelling.
Darryl Bird: Yep.
Daniel Holden: Can you explain in simple terms, what and I guess why someone would want that used in their project?
Darryl Bird: Sure. B-I-M or BIM is Building Information Modelling and it's more so a concept rather than an actual process. In very, very simple terms it's about designing a project in 3D, rather than designing a process in a 2D kind of drawing space and from that 2D space creating a model from it. So it's almost flipping on its head.
Daniel Holden: Okay.
Darryl Bird: Again, it's a bit of a cliché saying but it's effectively building a project in a computer before you build it on site.
Daniel Holden: Okay.
Darryl Bird: What does that bring? Well, at the end of the day there's a number of advantages and the advantage is flown at to a number of the key people involved through the development process. But, you know, some simple examples are things like, if you've got your structure you can quickly overlay your services and find clashes in structural elements versus pipe work or duct work.
From a quantity surveyor's perspective, we are now able to do what is called 5D cost planning, and this is a scenario where we can link, cost plans live to the model. The advantages there again fly on from a developer's perspective, he can then look at the model, click on the model and very quickly understand what a certain element of a project is going to cost him, because it is live linked to our estimate.
Flying on to a financier, for instance, though, it provides a higher level of certainty of their costs. So whilst there's not a lot of, not as much as we'd like to see the BIM technology used in the 5D cost planning use out there at the moment, where it's heading is to a place where we're going to be able to demonstrate on a project real certainty in project costs, because you've got a design that's already coordinated and built effectively in the computer.
So, things like costs become a lot more certain. Which means contingencies don't need to be as higher, and things like that, which obviously has a big impact on people like financiers.
It's certainly something ... It's quite big [inaudible 00:21:41], it's got advantages right through the development space, there's massive advantages to end users of projects with the facilities' management side of things.
Daniel Holden: Yep.
Darryl Bird: But yeah, it's a concept that's gonna be around for a while, in its infancy still.
Daniel Holden: So I would have thought on-site time would have been one of the biggest things in terms of you're out there on site and then you realise the services cross each other or intersect at the same point and then you can actually cover that rather than ... I know some of the bigger projects I've worked on, they've got like two or three on-site architects just dealing with things going wrong on site.
Darryl Bird: Yeah.
Daniel Holden: And you go, "Well, didn't you think about that before?" And it's obviously a [inaudible 00:22:16] person's thing to say, didn't think of it before.
Darryl Bird: Yeah.
Daniel Holden: I guess, maybe they did and maybe they didn't and maybe they weren't using it.
Darryl Bird: Yeah. When you think about it, the design process is quite okay in that you have an architect in one office designing his architectural drawings, you have your engineers in another office doing their drawings and they're really not operating in a collaborative space. BIM is about collaboration.
Daniel Holden: Okay.
Darryl Bird: Working on a model that you can see, you can identify and you can design almost at the same time as your architect. And so, these clashes get deal with pretty easily. So yes, absolutely time-saving on site. It's a concept where you're effectively building knowledge into the software or into the design very early on. And that knowledge continues to grow.
One of the biggest hurdles in construction over time has been your designer starts through the development process right up to ten to time, they build a whole knowledge about the design, when it comes to tend to that knowledge it's almost stopped. And you get a builder involved and he's got to start from scratch and learn that project right from the get-go. By the time he builds it, he's very knowledgeable about the project and the project is handed over to the end user and he's got to start from scratch and learn.
Under the BIM concept, you're effectively building up a design that hands over all that knowledge very effectively, very early on. So you're kind of avoiding all that up and down process of knowledge about the project as you move through.
Daniel Holden: The learning curve.
Darryl Bird: Yeah. That's right.
Daniel Holden: Does that technology affect your day-to-day approach to projects now versus five years ago?
Darryl Bird: Yeah, absolutely. From a process perspective, a very good example is we did some work with Lendlease on the Sunny Coast Community Hospital, and in that project we were working with Lendlease on measuring the various quantities for the project and different trades ... I can talk for a while about it but in different trades, it might have taken two, three, four weeks to measure, were done in two or three days.
So from a time-saving perspective, and a consulting level, it's amazing. Yeah, and then also it's about certainty as well. So, for us previously measuring a project, we'd need to do a lot of box checks to make sure things were measured. We can now click on the model to make sure we measured everything. Straight up. So, there's a number of process things that save us time and give us certainty on what we're delivering. Yeah, it's really changed the way we've operated, we can deliver things a lot quickly.
From a fee perspective, it doesn't change, really. I mean, there's opportunity to save time. Fee structure is a bit different, in a way that we spend a lot more time upfront than we would traditionally, because actually having a BIM model provides us with a lot more information, so we can spend a lot more time in getting certainty around a project. But that brings fees forward rather than anything else.
Yeah, there's a number of ways it changes. Absolutely.
Daniel Holden: Cool. What do you foresee as the next big game changer or tech disrupter coming in the future, potentially for your sector? In how do you think property developers and builders need to be preparing to deal with it?
Darryl Bird: It still is being ... I attended to the construction technology conference last week in Melbourne and whilst there was technology like drones and software and those kinds of things, and measurement of land areas and [inaudible 00:25:14] quantities, all those kinds of things, that's all cool stuff and that will happen. But I think in the space that we operate mainly, BIM is going to be the magic game changer.
It's been drew maybe around the higher end of ten, at present, guys who can afford to ... Or more easily afford to implement the software changes and the training changes and all those kinds of things that come along with the mindset change that BIM brings. Guys that really are more active in that space.
Daniel Holden: Okay.
Darryl Bird: And it's being used at the housing level, you know, there's guys out there at the moment that are designing houses in a BIM space. So it's really filling that gap.
Daniel Holden: Okay. Cool. As of June 2016, today where do you see the market currently in terms of, I guess, cyclical ebb and flow of demand on construction and supply of trades and materials? As up today, what's your view?
Darryl Bird: Yeah, we do a lot of research on this stuff to try and get a bit of a heads-up on where things are gonna go. Particularly, supply and demand is what really drives construction costs, particularly supply and demand in the residential space. It's a space that really draws the most amount of labour out of our workforce, I suppose.
So, where are we now? I believe, despite the amount of cranes that are still on the sky, that we've kind of peaked in activity levels, there's some big projects that are just starting, there's some big projects still proposed, whether they'll get up or not is still a question. But with the amount of projects that are reasonably large in Brisbane, we still have a bit of fly-off to come, if I can describe it that way. So there's a still a bit of activity to happen. And the projects that are starting, the larger ones are going to be around for another 18 months or so.
I see it drawn onboard demand, if you like, still on the labour force for a while to come. Whilst we plateaued in activity, I think that that demand we still be there. So, construction costs, I think will still be under pressure for a little while, probably not as much as they were towards the end of last year but, at this stage, I think it would be a little bit early to forecast any dropping off of construction costs ...
Daniel Holden: Yes.
Darryl Bird: Still the risk of maybe a slight rise, I think subbies, who really are the guys that are driving construction costs at the moment still feel busy. They still feel they've got a full walk of work. The pricing that comes out of a subcontractor, when they feel busy is fairly reactive. They still price at those high levels until they start to feel threatened. That their workbooks are starting to drop off.
I guess, I still think these conditions that we're in for the moment, we'll be in for around 12, 18 months maybe.
Daniel Holden: So I guess they got to get hungry before they get -
Darryl Bird: Yeah.
Daniel Holden: ... their pencils sharpened, so to speak.
Darryl Bird: Yeah, that's right. Yeah.
Daniel Holden: Alright. We've seen a bulge in projects in 2015 and '16 a bit. And as you say, that pipeline will probably continue in the construction space throughout '16 and maybe even '17. And we've seen some high prices last year and early this year in terms of [inaudible 00:28:06] that have come across my desk that the prices are definitely escalating quickly, from two years ago.
Darryl Bird: Yes.
Daniel Holden: But I guess the question is, do you see them coming back to where they were two years ago? Was it the rollercoaster, it got up to here and now it will come back to there or do you think overall we'll see it kind of not get as cost competitive as they were back in 2013-14?
Darryl Bird: It's a good question. I think there will be a little bit of a levelling, how much I'm not exactly sure. I think when you talk about construction costs, you need to be a bit careful about what you pay attention to in the marketplace. Some articles that I've been reading at the moment and in preparing some stuff that we'll be publishing ourselves, there's a lot of talk about construction costs rising 20% in the last 18 months or so.
Daniel Holden: Yeah.
Darryl Bird: Now, that might be true in a certain person's space and probably referring mainly to it, apartment projects. And the costs that give rise to a 20% rise are more about cost per apartment, not cost per square metre, if that makes sense.
The reason that construction prices appeared to have risen by 20% in that space is because ... Is not because construction costs are just going, it's also because the type of product is being delivered is different. The projects, units are a bit larger, they're more targeted toward an owner, more of an owner-occupy type product.
Also, things like rooftop pools and public spaces, they are the norm in our apartment projects, and they weren't two or three years ago. So, all those things have a cost. That's one of those things you need to be aware of when you're talking about what construction costs are done.
To summarise all that, construction costs have been rising, fairly steadily, really, over the last couple of years, peaking in certain areas. Things got a bit volatile by the end of last year when there was a lot of projects put out to tender, at a time when builders already felt busy.
Daniel Holden: Yep.
Darryl Bird: So I feel, like, construction costs will level out. Whether they'll come off too much, [inaudible 00:29:54] for me.
Daniel Holden: Cool. Interesting point, the talk about the shift in product mix and today, I guess, the projects that are across my desk and yours as well, do have a bigger apartment size to differentiate themselves from the project that's been built on the corner down the street.
Darryl Bird: Yep.
Daniel Holden: So, in terms of the insight into that extra cost of making a two-bed, two-bath apartment with the same kitchen, the same width areas, the same everything but just putting an extra 10 to 15 square metres on it. Can you give us some insight into the cost of that extra 10 or 15 square metres when you've still paid the same amenity in the rest of the apartment?
Darryl Bird: Yeah. Well, I guess the very simple answer is it depends where that 10 or 15 square metre goes. In an apartment project, cheap space in an apartment is like a living space where it's a simple faux finish and open space, it doesn't have a lot of built-in fitting in it. So if that area is going into that space, it will have a lower cost to what it was if you decided to make your bathrooms bigger or your kitchens bigger.
Daniel Holden: Yep.
Darryl Bird: They're very dense, high-cost type square metres of area, so it really depends where that's going and where you put the attention. Balconies are another thing to consider in that factor, I guess, because they are things that do change with the amenities as well.
I think, if you're looking for a figure on that, I guess an apartment project could well change by 20 to 25 thousand dollars, for a 10 to 15 square metre change. But it could be slightly cheaper if it's an efficient area, could be slightly higher if it's [crosstalk 00:31:26]
Daniel Holden: So if you put 10 square metres extra of living area and you said that was two and a half grand a metre. You put another four square metres in the balcony, it's 600 bucks a metre. And then you said, "Well, I'm not increasing my width area, I'm not increasing my ... Not putting an extra bathroom, not putting an extra expensive area. I'm putting in the cheap area, which is this two and half and 600. And therefore I've got a better value proposition for my product." That's probably why they intend to increasing the size ...
Darryl Bird: Yeah, absolutely. Yeah, yeah. Being smart about it, mate. Yeah. And other areas I think people need to focus a bit more on is things like circulation space. Being efficient in your circulation space, that are basements and all those kinds of things, that don't necessarily add value to your end price and unit but they impact your construction costs.
Daniel Holden: Yeah.
Darryl Bird: Those are the areas, I think, where we've spent a lot of time in the last 12 months trying to help projects be more efficient so you can focus on the units but those things should be forgotten, I suppose.
Daniel Holden: It's, sometimes I guess, a [inaudible 00:32:25] from a frustrated developer that your industry or discipline takes its orders from the banks. So, you have a few developers, would you like to set the record straight?
Darryl Bird: Definitely in the Financiers' QS role, I think we can be very much seen as a hurdle to the whole process. I, being involved and immersed in it, I see that quite often but, I guess turning it on its head a little bit, financiers are a big part of a development project, they are a key element to the project and I think it's something that needs to be seen as a part of the process rather than a hurdle.
As a Financiers' QS, what we're doing is basically applying another level of diligence to the project and you can see that as unnecessary or you can see it as a second set of eyes looking at your project and giving you the confidence to progress with your project.
Daniel Holden: Yeah.
Darryl Bird: As I said, financiers are a key element of your project, they're a partner in the project and I really think a teamwork approach to that is the way to consider it. I see it as a value [aid 00:33:20] to be honest. It's one of those things where confirming for you what a budget ... That the budget is sufficient, that there's a huge [inaudible 00:33:27] and really emphasises for me how important it is to get a QS involved early for that process so that we're almost, we're flipping on their head rather than being a hurdle, we're seen to be assisting in getting finance for your project. Setting the project up in a way, that will go through to a financier in a way that will be seen more beneficial rather than as a hurdle.
Daniel Holden: And I guess from a developer's point of view, if they've got multiple projects on and they're not on-site doing ... Intricately involved in that particular project every day, for being, like you said, [inaudible 00:34:00] of accountability -
Darryl Bird: That's right.
Daniel Holden: ... that the builder is doing what he's meant to be doing and also, finally being paid for what he's done rather than, anything fictitious heaven forbid, but they've got that accountability, that's good.
Darryl Bird: Yep.
Daniel Holden: As well as the Financiers' QS role, I understand you guys sometimes take on a superintendent role within the project. Can you explain how that interacts with the QS role but also how that benefits the developer and also how it compares to a project manager development role.
Darryl Bird: The superintendent role, I have to be upfront, is sometimes we get seen as having a conflict of interests in the Financiers' QS role. So that's one thing that we need to address very early on. But as a Financiers' QS, we're quite often limited to the immersion we get in a project, if that's a good way to describing it.
So we do this due diligence report upfront where we get quite a good detailed amount of information, a good understanding of the project. Beyond that, as the project gets constructed, our involvement is almost limited to once a month, a scenario where we're only doing progress claims once a month. And so we're looking to learn what's happened over the last 30 days in preparing our reports for the financier. And a lot can happen, a lot of issues can be raised and can be solved in that time and we don't really know about those issues.
In the superintendent role, you're much more immersed in the project and so, it enables you to be more proactive and provide a higher level of assistance on that project. Not only to try head off projects, a project issues along the way but also help manage issues as they come up and how they might be deal with by the financier.
I'm an advocate for being a project superintendent as well as Financiers' QS. We have to be very clear about our duty of care in those roles but a superintendent, if you look at the way they're written in a contract, they are meant to be independent party, regardless of who engages you. And so that role should be carried out in that way.
Daniel Holden: Apart from the independence and also ... I'm not adjudicated but making those decisions, what level of decisions would a superintendent make day-to-day?
Darryl Bird: Mainly, the superintendent is basically a contracted administrator. So it's really related to contracted issues.
Daniel Holden: So, are they making decisions or they're referring decisions for someone else to make the decision?
Darryl Bird: Okay. Well, in terms of ... We'll make an assessment or a certification under the contract. So in accordance with the contract conditions, we'll make ... The contracting parties have the opportunity to dispute those if they choose to do so.
Daniel Holden: Yep.
Darryl Bird: But as an independent party, the role of the superintendent is to make an adjudication or a decision or a certification under the contract as it is deemed within those conditions.
Daniel Holden: Okay.
Darryl Bird: So, yeah, it's really limited to the scope of the contract. Rather than a project manager or a development manager who's really looking at the development outside of that.
Daniel Holden: So how do you manage that in terms of ... In one role, you're obtained by the financier to make observations on their behalf and monitor. And on the other one, you're meant to be independent. So, how do you manage that?
Darryl Bird: Well, in those projects that we are engaged for both roles we usually set up a situation, we have two teams in the office. So, I mentioned at the start that we are a traditional QS business, we have a team, if you like for a better description, of guys that operate in that traditional cost planning right through the contract administration role, they're the guys that do the superintendent roles.
Daniel Holden: Yep.
Darryl Bird: My team's a Financiers' QS team, we'll operate on that space. And that's about providing some Chinese walls, to be able to demonstrate to the parties that there is some independence involved there and also, that the right people are focused on those jobs that really understand those roles. 'Cause they are two distinct roles with distinct duties of care, though it does pay to have the guys that are experienced in doing that on the job on those roles.
Daniel Holden: It's obviously working, you guys are credited with all the major banks and a lot of non-bank lenders around the country. It's obviously being done and done correctly, which is great.
Darryl Bird: Awesome.
Daniel Holden: So, hats off to you. So, from your perspective and I guess, whether it's from a Mitchell Brandtman hat or a Darryl Bird hat, where do you see the marketplace in 12 months and three years from now.
Darryl Bird: It's a very interesting good question, because I guess with the onset with what's happening on the Gold Coast, adds another element to the discussion and there's a lot of publicity focused on what's happening in Brisbane city and Newstead and West End and South Brisbane, all those places we're building a lot of apartments but not necessarily as much on the areas outside of that.
I think, activity-wise, whilst we're heading for a bit of a reduction in activity in Brisbane, Gold Coast is getting some significant activity and not only Gold Coast. Talking about Springfield and those kinds of areas, the area of [inaudible 00:38:39], all those places out there. There's a lot of action going on there.
I really think it's more about a spreading of base of the labour force, I think we'll be in for some significant activity for the next 12, 18 months. Three years is a fair way up but I think, you know, the economy is fairly strong here, we have a lot to grow in Brisbane, we're pretty young city relatively and there's a lot of positives that we've got to look forward to. And perhaps the biggest change, I think will happen is more about less activity in the city and more activity in the outskirts, in the growth areas of those areas that I've just mentioned.
Daniel Holden: So I guess, some years back, six, seven years back we lost a lot of labour to the mining industry and now, that sector seems to have come off somewhat. And now they're back in SAQ and doing build jobs and helping out with this current wave of increased activity.
So, potentially, in three years unless we see another mass draw of labour, potentially we'll get some cost reductions, I don't know ... If there is a whole bunch of subbies sitting around with not much to do and they're hungry.
Darryl Bird: Yep.
Daniel Holden: Are we gonna see ... Is there a renovation wave of homes that we're gonna see, is it a drop in labour costs that will drive more development in three years' time?
Darryl Bird: That's absolutely a factor to consider. Yeah, absolutely. When the mining sector boomed, it sucked an amazing amount of labour out of the Queensland market, of the South Queensland market. And so, our capacity in Southeast Queensland has grown dramatically since that stuff has drawn out. And the best example I can give is probably the amount of apartments we've built in the last couple of years.
The last period before the GFC, I think the maximum amount of apartments under construction in Brisbane was around, about nine thousand.
Daniel Holden: Okay.
Darryl Bird: Roughly. We got to a peak of around 19 thousand this time around. So, capacity to deliver in Southeast Queensland has grown dramatically and so, if those types of projects do drop, that can only help us from a supply and demand scenario and one would hope that would result in some changes in costs.
As I say, it's a little bit difficult to predict. When we went through this cycle last time, in the lead up to the GFC and we saw all the price rises off the back of residential boom. A lot of that was actually because the period prior to that, construction costs hadn't moved much. And I remember pricing concrete at the same rate for about six or seven years.
Daniel Holden: Yep.
Darryl Bird: So, there's almost a bit of a catch-up involved in that process. We haven't seen that this time around.
Daniel Holden: Yep.
Darryl Bird: Construction costs have risen fairly consistently in the last little while so, it's a little bit of a different scenario to the last time. But I do think, yeah, I do think there's a bit of rationalisation. It's just a bit difficult to kind of put your finger on what that might be.
Daniel Holden: Yeah, that's right.
So, looking at the last 15, 18 months with ... Like you were talking about, we've seen a few examples where it's been rush, rush, rush and people trying to get things done before they're ready.
Can you maybe give an example of a project where you did get involved too late but were able to save some, whether it's time or money efficiency or whatever, to rescue a project or help a project get back on track? Is there a case study you can think of, you can kind of talk through what the constraint was and how being involved you were able to overcome that?
Darryl Bird: I guess the most recent examples, I think, of turning projects around have been scenarios where builders have been over committed or have failed. So, whilst they might haven't been a rescue scenario and more about limiting the distraction, if that makes sense.
Daniel Holden: Yeah.
Darryl Bird: There's been a number of cases where we've been involved in projects where the builder has fallen over and what's really the key in those scenarios is to get in very quickly, take stock of what's happened on the project and then formulate the best plan of action to go forward.
Talking about history, I've been involved in project scenarios like that where quite messy, poorly managed jobs have ended up costing 40, 50% more at the end of the day when the builder's gone broke. We've had scenarios of very recent times where that's been much less and to put a percentage on it, maybe half that, maybe less half that, I haven't got exact numbers -
Daniel Holden: I know, we financed three projects of recent times and it's still happening right now where we're going through the process of appointing a new builder with a group who were Brisbane-based to the construction company that unfortunately went under but, that cost was in the realms of 14 to 20% to reset that construction contract with a new contractor -
Darryl Bird: Yes.
Daniel Holden: ... and get them on site.
Darryl Bird: Yep.
Daniel Holden: And the time delay was anywhere from two to five months, depending how progressed the project was.
Darryl Bird: Yes. Yep.
Daniel Holden: I guess it was a timely reminder to me that even in a rising market where everyone's a hero, that things can still go wrong.
Darryl Bird: Yes.
Daniel Holden: And even as a developer, which the developers that we've funded into these projects were very smart, commercial operators, been around a long time, it can still happen.
Darryl Bird: Yes. Yep.
Daniel Holden: And I guess it's a bit of a shock but you probably see that more so than me in terms of your day-to-day involvement in the projects.
Darryl Bird: Yeah, it's a shame in that we see some projects go that maybe shouldn't go. They're the ones that almost feel like they're the ones that got away. It's like I would like to try a demo off earlier before what happens but I think, I really do enjoy getting involved, you know, it's not particularly fun for the developer those deals, but working through those challenges and getting the result as best you can at the end of the day is kind of a fulfilling thing and they're the ones you learn a lot from, you never stop learning in this industry and they're the ones absolutely that you learn the most from. And you look back on, after you've been through the experience, thankfully you went through them.
That's probably the most topical thing at the moment. We've seen a few builders go over and it's been some challenges getting those finished. We finished a couple recently, which have actually resulted pretty well and everyone's been happy. We've not lost any pre-sales or any of that kind of stuff, it's been a good result.
Daniel Holden: Good to hear. Good segue then, from your last comments into the next question, which is what would you say to a younger you about navigating through the game of property development?
Darryl Bird: I've been very fortunate, I have to admit. The guys that I've had around me as I've developed and learnt, have been very experienced guys. So, I feel quite fortunate. I think a message to anyone coming through the industry is to surround yourself with people who have been there before, with experience. But also don't be closed to innovation.
One of the things that I really enjoy in our industry is being part of innovation and that's why I went to that conference last week. Because we come up with challenges, you know, we're in a market at the moment where margins are tight, we have to think differently, we're forced to do so even though we do it kind of day-to-day in the industry, we're quite often forced to come up with new ways of doing things. And so, as a younger person, I think, yeah, be open to new things, look and seek ways to do things better, but surround yourself with guys that have been there before and learn from those lessons and those are the things that I'm very fortunate to be blessed with as I came through.
Daniel Holden: Great. Good insight there. So, most important question, what's the best bottle of wine you've had recently?
Darryl Bird: I'm probably not the best to comment on that actually, 'cause I'm not a wine drinker.
Daniel Holden: Okay.
Darryl Bird: But I do drink a lot of better and a lot of rum. I will drink a bottle of wine, but I probably don't remember too many memorable ones. From a beer perspective, I always fall back to 150 Lashes or a [Steiner Wood 00:46:12] type scenario.
Daniel Holden: ... getting into the home brew any kind of beer?
Darryl Bird: I did that when I was younger and now with kids I don't really have the time to do that sort of stuff.
Daniel Holden: Okay.
Darryl Bird: I enjoy beer, then progressing later on to whatever rum I can get my hands on. But I do like exploring as well, so I don't tend to stick to the one either.
Daniel Holden: Adventurous. I like it.
Darryl Bird: Yeah.
Daniel Holden: Alright, well, thanks very much, Darryl, for joining us. I appreciated your time.
Darryl Bird: Thank you for the opportunity.
Daniel Holden: Appreciate your insight into your industry and I guess [inaudible 00:46:41]
Darryl Bird: Yeah, thanks very much, mate. Cheers.
Speaker 1: You have been listening to the Constructive Finance Podcast, hosted by Dan Holden, the founder of Holden Capital, Australia's number one Commercial Finance firm. If you'd like to get constructive with your finance, you can contact one of their Finance experts on 07-3171-4200.
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