Special costs: Office fit-out

Market overview

Office fit-out clients tend to be end-users and are not necessarily experienced construction clients. Consequently, this market calls for experienced teams that can deliver to fixed time, cost and quality criteria with minimum direction or management from the client. Both contractors and consultants who can sell their experience as a specialism can successfully exploit the sector.

Diverse organisations such as legal practices, banking institutions, government agencies and media consultancies all operate in different ways. Consequently, they have differing requirements for space usage, density of operation, technological capability, levels of building servicing, quality of finishes, speed of completion, capital cost and costs-in-use.

The nature of any fit-out project will be broadly governed by five key considerations:

• Who does the client organisation serve and what are its corporate objectives?
• How does the organisation function and how is it structured?
• What is the condition of the base building?
• What is the client prepared to spend?
• When is the space required for occupation?

The economy of the office fit-out sector, like most of the construction industry, is cyclical. In the late 1990s there was a shortage of readily available office space in central London, principally from changing IT requirements and the desire of blue-chip companies to relocate to large, high-specification and flexible buildings. Since 2000, both office fit-out sector and commercial development activity has declined in London. However, recent research undertaken by property management company Savills indicates the start of a recovery in terms of take-up of office space, reduction in vacant space and an increase in development.

Types of fit-out

Shell and core
Shell-and-core developments include fully finished landlord areas comprising main entrance and reception, lift and stair cores, lobbies and toilets. These areas are not part of the space rented to the tenant. The office floor areas are left as a shell ready for category A fit-out.

Category A fit-out
There is no standard definition for category A fit-out – it can vary between the different developers. Typically, category A is what the developer provides as part of the rentable office space and usually comprises the following:

• raised floors
• suspended ceilings
• extension of the mechanical and electrical services above the ceiling from the riser across the lettable space
• finishes to the internal face of the external and core walls
• blinds

It is also common for the developer to make a contribution to the tenant for the carpets, floor boxes and grommets, which are then installed as part of the tenant’s category B fit-out, rather than installing them during the category A works, as they are subject to damage and may not complement the tenant’s colour scheme. Typical levels of contribution that tenants can expect are:

carpet tiles £25/m²
floor boxes (1 per 20 m²⁾ £75/unit
grometts (1 per 20 m²⁾ £10/unit
category A fit-out £344-£377/m²

It should be noted that, typically, the landlord does not physically make the contribution until the tenant has installed the item.

Shell-and-core completion
This can occur when a large tenant moves into a new building and installs a complex kitchen, for example, which would need a very specialist category A fit-out. Often a tenant will take a financial contribution for the landlord’s entire category A fit-out on the affected floors to offset against their own fit-out costs.

Category B fit-out
Category B completes the fit-out to the occupier’s specific requirements. It can typically comprise the following:

• installation of cellular offices
• enhanced finishes
• conference/meeting room facilities
• reception area
• enhanced services / specialist lighting
• IT and AV installations
• tea point/kitchen fit-out
• furniture

Turnkey
With a turnkey office fit-out, the developer/tenant fits out the building to a standard ready for occupation – it can include the furniture. Often a developer or tenant undertakes a turnkey fit-out to sublet to occupiers who do not want the time and cost of their own fit-out.

Fit-out specialist Q&A

ISG InteriorExterior has been fit-out contractor on a wide range of projects for a variety of clients throughout UK and Europe since 1989. Chris Bock is a board director responsible for fit out operations.

In what sectors does ISG InteriorExterior’s fit-out arm work?
Last year about 75% of our work was in the corporate office market. Although this is the largest sector we work in, we also work retail, leisure, education, residential and government. At the moment we are fitting out a new grandstand at Ascot Racecourse and a cinema at Wandsworth shopping centre.

How much of your work is in London?
We have two offices in London – one in the City and one in the West End. Also we have regional offices in Manchester and Birmingham. I would say that about 60% of our fit-out work is within central London. However, cities such as Manchester and Birmingham certainly have a significant amount of work available.

How healthy is the London market?
There has been a decline in volume and take-up of space within London over the past 18 months – however, there are signs of larger opportunities starting to come through. Our fit-out order book for the next financial year is looking very healthy, with 80% coming from the corporate office sector.

Who would be a typical client?
A typical end user client would obviously be a tenant, rather than a developer or owner of the building. A large amount of our work is for repeat clients. We see our role as a facilitator of refurbishment activities from design and procurement to implementation and handover. As such, we plan and drive the programme at every stage and we communicate with the stakeholders to co-ordinate their input and advise them on the best way to avoid exposure to risk. We also offer additional services including: design, construction advice, value engineering, and also local authority liaison.

What are the main pressures on the fit-out business at the moment?
The biggest pressure is to maintain client satisfaction. The clients and professionals we work with require a certainty that we are going to deliver, whether that be on time, to the right quality, safely and within the budget. We have to co-ordinate our activities to achieve this.

What are the current trends?
Over the last couple of years we have seen a trend for more open-plan offices. With our clients’ desire to maximise efficiencies from the space they have, this trend will continue with flexible working becoming more prominent. Some sectors will require more certainty on the stability of their infrastructure, such as M&E services, to maintain the continuity of their business; disaster recovery and back up facilities will also become more prominent.

Does ISG InteriorExterior get involved in interior design or office layout?
We do not employ designers. However, we work with the professional team to assist in design co-ordination. We will sometimes take on a project on a design-and-build basis where designers will be generally novated to us, but we do not have that skill in-house.

Are there key differences between a fit-out project and other types of construction projects?
I think the main difference is that when we deliver a fit-out project we are generally working for a tenant that has an imperative to move their staff into that facility by a given date, usually with their lease arrangement for vacating another building – usually to maintain a continuity of business. That means the project team has to become highly involved with the client’s facilities team to ensure that at practical completion everything aligns with their move requirements. Supply chain management is also critical to any fit out organisation and their performance reflects on the ability of a fit out contractor to deliver within expectations.

Does ISG do fit-out to category A as well as category B?
Yes we do; on a number of our larger projects we will deliver a fit-out from a shell and core to cat B. We also will, if the opportunity arises, take a building from shell and core to cat A. Sometimes we put offices back to a cat A format for disposal.

Design considerations

Efficiency/space planning The office fit-out can contribute significantly to corporate efficiency and operational effectiveness. Consultants can play a key role in initiating debate with the client on space planning to maximise floor plate efficiency. This process may encompass the following: minimising secondary circulation; maximising the use of open-plan space; rationalising space standards; and managing on-floor storage. Good design can also contribute to reducing churn costs by building in flexibility using demountable partitions, acoustic ceilings and services that can be utilised in both open plan and cellular scenarios. The benefits derived from added flexibility should be balanced against the capital cost premium associated with these measures.

Acoustics The acoustic requirement of office fit-out projects has become a key priority in recent years following recommendations from the British Council for Offices and client requirements for privacy and reduced noise transfer between offices. Often a specialist consultant is appointed to advise the project team on acoustics. It is important that the client’s expectations regarding noise are defined at an early stage as the level of noise reduction required, particularly in relation to cellular office space and flexibility of the floor plates, can have a significant impact on the cost and programme of the project. For example, partitions may need additional layers of plasterboard or staggered studs and may need to be constructed from slab to slab rather than raised floor to suspended ceiling. Ceiling tiles may also need to have acoustic backing panels, which will increase the cost and weight of the tile. Cross-talk ductwork-attenuators may be required between cellular spaces and acoustic shrouds may be required to stop sound transmission through the light fittings where these puncture the acoustic panels.

Lighting levels Lighting and visual display terminals are important design factors in offices. The Chartered Institution of Building Services Engineers (CIBSE) has published a good practice guide, Lighting Guide 3, which provides guidance notes on light distribution in the working environment where VDTs are used. This is not legislation, but most clients aspire to best practice, so the lighting installation in most high-quality offices will adhere to LG3. Accommodating LG3 will affect the cost of the lighting scheme.

Cooling levels and localised control of fresh air provision It is important to determine the client’s requirements for localised control of the cooling system to cellular offices as this could have an impact on the number of fan-coil units required, as well as the cost of the control points themselves.

Audio visual AV installations now have a significant impact on most office fit-out projects; it impacts on both the services installation and the architectural elements. The AV installation is often integral to the joinery installation and therefore needs to be located and sized in advance of the design and manufacture of the joinery. Areas with AV installations often require specialist black-out blinds and lighting schemes.

Catering Catering requirements need to be defined early. Requirements can vary significantly between clients and the specification of the kitchen fit-out will affect the services installation. The team will also need to determine if the building can accommodate dedicated extract ducts and the electrical loads imposed by the kitchen, particularly in multi-tenanted buildings.

Security Security installation technology moves quickly so it is advisable to undertake some market research and determine the client’s individual requirements when preparing the early estimates and cost plans. Security budgets can vary significantly – for some clients the security installation is one of the key priorities of the project. It is important to establish a realistic budget for the security early in the design as it is often one of the last packages to be designed and procured and is difficult to reduce in scope if the tenders are in excess of the budget.

Other issues

Reinstatement
It is common for lease agreements between landlord and tenant to require that on vacation of the space the tenant be responsible for the reinstatement of the floor to its original standard. This is an important consideration during the early design of the category B installation as most clients wish to keep the reinstatement costs to a minimum. Therefore, alterations to the base build and category A installation to accommodate the category B fit-out should be kept to a minimum.

An example of this on a recent project involved penetrating atrium glazing to accommodate a sprinkler installation thereby allowing heavy-duty usage of some atrium balcony space. The project team rejected the option because the cost of reinstating the glazing panels and the risk of sourcing the glazing panels following a long lease was too high.

Base build remedial works
Often tenant fit-out of lettable office space follows on quickly after practical completion of the base building. A conditions survey is undertaken once the tenant takes occupation of the floor and the landlord is notified of any defects.

It is a common problem that base build defects do not get rectified by the base build contractors within the timescale required to complete the fit-out. Often the tenant’s contractors need to make good the defects then put forward a claim for the cost of the works. It is a good idea to warn clients of this issue and include a contingency budget against which to draw during the works. Any expenditure by the tenant against this type of work is recorded and notified to the landlord.

Square feet and square metres
The commercial office sector still generally works in footage. Therefore, consultants need to be familiar with working in both imperial and metric when providing cost advice. This also applies to clients from overseas, particularly the US, who will expect the cost reporting to be in imperial as well as metric.

Procurement

The key procurement criteria for office end-users are cost, programme and quality certainty. Programme is often the most critical as completion dates are set by business needs and/or lease dates.

When selecting an appropriate procurement strategy, the need for design flexibility to accommodate the changes driven by business requirements that cannot be defined at the start of the project needs to be taken into account. Both lump-sum and package-based procurement routes can be successfully implemented for fit-out works.

In the current market, in which medium-sized projects are in the majority and a high degree of competition exists, lump-sum projects offer a straightforward solution that can be adapted to meet the constraints of the programme and design development. Traditional contracts can be undertaken on a two-stage basis, and can have sectional completion supplements incorporated and contract-designed portion supplements.

Programme

The key programme factors for office fit-out works generally follow similar principles in terms of critical path items, size and complexity of the project. The following graph identifies 10 City and West End developments projects that have been undertaken recently, their size and the duration they took to fit out from shell-and-core standard.

The data above excludes the design and procurement period, which could take between six and 12 months. However, the design and procurement stages can be overlapped with the construction phase depending on the procurement route that is implemented.

Taxation issues

Capital allowances
The fitting out of office buildings provides excellent opportunities to benefit from the availability of capital allowances and the associated tax relief. It is important to note that capital allowances only benefit organisations that have a UK tax liability and that the property in question must either be held as an investment or used for owner occupation.

Qualifying items
The value of capital allowances is based on the actual expenditure incurred on “machinery and plant” and “energy-saving machinery and plant”. The main qualifying items encountered when undertaking an office fit-out will commonly include:

• heating, ventilation and air-conditioning
• lighting and luminaries designed to specific business requirements
• emergency lighting
• lighting control
• firefighting equipment
• sanitary fittings
• data wiring, CCTV and security systems including wireways
• plenum ceilings
• raised access floors (if used as an AC plenum)
• demountable partitions
• carpets
• window blinds
• furniture and equipment
• alteration works ancillary to the installation of machinery and plant.

In addition, associated expenditure on builders’ work, preliminaries and professional fees would also qualify. Claiming expenditure on alterations ancillary to the installation of machinery and plant, known as Section 25 expenditure, can produce a significant uplift to the allowances available – for example, the construction of a dedicated computer room.

Where a landlord makes a contribution towards the cost of the tenant’s fit-out, the landlord should be able to claim allowances on his contribution to qualifying items. However, the allowances available to a tenant who is in receipt of such a contribution may be restricted.

Amount of allowances
Typically, between 50 and 65% of the cost associated with fitting out high-quality office buildings from shell and core will qualify for capital allowances. Machinery and plant allowances are available at 25% per annum on a reducing balance basis. Additionally, there may be scope to claim enhanced capital allowances on energy-efficient machinery and plant, where 100% of the benefit is received in the first year.

Repairs and maintenance
In addition to capital allowances, revenue expenditure deductions may be available in respect of expenditure incurred on maintenance and repairs. Such expenditure is written off in full against the tax liability of a business and should, therefore, be optimised wherever possible. Repairs to a newly acquired property will not qualify for such deduction. This may be relevant if fitting out is taking place as part of a refurbishment of an older building.

Further Information
The rules about capital allowances are given in the Capital Allowances Act 2001 and subsequent finance acts. Further information about energy-saving machinery and plant can be found at www.eca.gov.uk.

Case study

Fitting out of a headquarters office building

Construction £5,840,000
Professional fees £710,000
Total expenditure £6,550,000

A detailed analysis of the expenditure resulted in the following benefit:

Capital allowances achieved (63.51%) £4,160,000
Associated total tax saving (at a corporation tax rate of 30%) £1,248,000
Recovery of approximately 19% of total expenditure