Family office real estate: oversight without a construction department
A family office that owns a portfolio of income properties builds something new every few years: a warehouse, a medical office building, a mixed use project on land the family has held for decades. The office has a chief investment officer, a controller and an asset manager. It does not have a construction department, and it is not going to hire one for a project that happens twice a decade.
The contractor is usually a firm the family has worked with before and trusts. Trust is fine. It is not the same as a record. This post is about how a small office keeps the owner's side of a GMP contract with the people it already has, and what that record needs to hold.
Trust is not a substitute for a baseline
A long relationship with a contractor means fewer arguments and faster decisions. It also means the owner tends to skip the steps a stranger would insist on. The GMP breakdown is accepted without asking the basis of each line. The qualifications list is not read closely. Contingency draws are approved by email. At closeout, the shared savings figure arrives and the office has nothing to check it against.
None of that is the contractor's fault, and a good contractor will welcome a clear baseline because it protects them too. The office should freeze the GMP at signing with each line marked as priced, allowance or assumption, record the contingency and allowances as opening balances, and write down the rules on contingency, change orders and savings in plain sentences. That takes an afternoon and it is the whole foundation of the record.
A routine the controller can run
The controller already reviews the pay application before it is paid. That review can be extended by an hour a month into an owner's review of the GMP position. Compare the G703 to the frozen baseline. Note any contingency draw and record its cause. Note any change order and record its cause. Check whether an allowance was reconciled and record the variance. Update the anticipated final cost.
On a fictional $24 million medical office building, month six might show a $140,000 contingency draw for a mechanical coordination issue, a $60,000 owner scope change for an added tenant suite the family approved, and the reconciliation of the signage allowance at $20,000 over. The controller records three entries, updates the anticipated final cost, and the principal gets a one paragraph note. No construction expertise is required to keep that record. What is required is doing it every month.
What the asset manager adds
The asset manager reads the building, not the ledger. Their job in the routine is to confirm that the percent complete claimed on the G703 matches what is on site, and to flag the allowance decisions that the family has to make. Between the two of them, the controller and the asset manager cover most of what an owner's rep would do on a project of this size.
When to bring in an owner's representative
Some projects are too large or too technical for the in house routine. A fictional $90 million life science building, a project with heavy unforeseen conditions, or one where the contractor relationship is new all argue for hiring an owner's rep. The rep keeps the record, reviews the draws and negotiates the causes.
Even then, the record should be the family office's. The rep maintains it on the office's behalf, in a structure the office can read, and the office keeps it when the engagement ends. An office that has the record from its last three projects is in a better position on the fourth, because it knows how this contractor's contingency draws tend to run and how the shared savings came out last time.
The principal's question
The principal asks one question: are we on budget. The answer is the anticipated final cost against the approved budget, with one sentence on what moved it this month. A second question usually follows: what do we have to decide. The answer is the open allowance decisions and any change order above the office's approval threshold.
Costwitness keeps the family office's ledger on the GMP, with the frozen baseline, the contingency and allowance records, the change orders by cause, and the anticipated final cost. It raises a flag when a draw has no cause or an allowance deadline is near. The controller makes the entries, the asset manager confirms the site, and the principal gets the two answers. The office does not need a construction department to keep the record. It needs the record to be kept.
How to set up the routine this month
- Freeze the GMP breakdown as a baseline with each line marked priced, allowance or assumption, and file the qualifications list beside it.
- Add one hour to the controller's pay application review to record contingency draws, change orders and allowance reconciliations with a cause.
- List the allowance decisions the family owes, with dates, and put them in front of the principal.
- Write down the contingency, change order and shared savings rules from the contract in three plain sentences, and check them with counsel.
Questions on this
Does a family office need an owner's rep on every project?
No. A controller and an asset manager with a monthly routine can keep the record on a straightforward building with a known contractor. A larger, more technical or higher risk project justifies a rep. Either way, the record belongs to the office and should be structured so the office can read it.
How does a family office check the shared savings figure at closeout?
Against its own record of the GMP baseline, the executed change orders, the contingency draws and the allowance reconciliations. Under most AIA A133 based agreements the savings are the difference between the final GMP and the final cost of the work, split by the contract's percentage. Without the record, the office can only accept the contractor's figure.
Is it worth keeping the record for a project that is going well?
Yes, because the office only finds out whether it went well at closeout, and because the next project with the same contractor starts from a better position. A record of how contingency and buyout ran on the last building is the best guide to setting the next GMP.
In the product
GMP baseline, Anticipated final cost, Shared savings. Free tool: Pre-GMP Readiness Score, Shared Savings Calculator.
Keep reading
Earlier: K12 facilities directors: reading the pay application in twenty minutes. Later: The monthly report an owner's rep hands to each client. All articles on by owner type.
See it on a project shaped like yours.
Thirty minutes on a call. A fictional project at your GMP size and your contract form, walked module by module.