Office fit-out - Cost model, December 1997

Introduction

The office fit-out sector is a highly specialised market where opportunities exist for consultants and contractors with a proven track record.

Generally, clients tend to be end-users with limited experience of the construction industry and therefore need experienced teams to deliver the fit-out to strict cost, time and quality requirements. This means that there is little in the way of repeat business.

A recent study of the London letting market by researcher APR identified a current requirement for office space, either publicly declared or rumoured, of 3.8 million m2 (40.9 million ft2). Of this, 2.85 million m2 (30.7 million ft2) is demand for floor space in excess of 10,000 m2 (108,000 ft2). Of this demand, 68% is from the finance, business services and insurance sectors.

Furthermore, demand is being generated by relocations, mergers and rationalisations rather than by large scale increases in space requirements.

Changing IT requirements and the desire among blue chip companies to relocate to large, high-specification buildings, which are flexible in the way the space is used, has led to a shortage of readily available space in central London. A recent study by Savills Research revealed that, although about 280,000 m2 of speculative and pre-let office space will be completed in London in 1997, there is still an overall shortage. This is leading to an increase in the volume of pre-let developments.

Savills Research also found that the take-up of office space in the South-east remains steady and that developments totalling 350,000 m2 were planned between now and 2000. However, the researchers did suggest that there could be an oversupply of space in some locations within the M3/M4 corridor.

Why the need for a fit-out?

A company’s office building, together with its layout and fit-out, are recognised as influencing its competitiveness.

Recent research by the RICS, contained in the Connaught Report which examined office refurbishment, highlighted the importance of employee considerations and the indoor working environment The report suggested that these issues were not fully appreciated by property owners or property advisers.

Increasingly, the quality of fit-out and the working environment are perceived by employers as vital in maintaining morale, improving productivity and retaining employees.

Fit-out design also contributes to reducing overheads and allowing staff to respond to new ways of working. After salaries, property costs are commonly the second-largest bill faced by businesses and these include rent, rates, energy, maintenance and fit-out costs.

Occupancy costs can be reduced by optimising the fit between the base building and the user’s space requirements. Architect DEGW has proved that savings can be made through efficient space planning that increases the available usable space.

Likewise, efficiency can be improved by introducing shared-space strategies such as hot-desking or by rationalising the hierarchical system so that space is not allocated according to an employee’s job title rather than actual need.

Good space planning is all the more important where an organisation’s business involves complex working patterns such as working in interactive groups. As office work becomes increasingly automated by rr, it is forecast that routine isolated duties will be replaced by more creative, team-based tasks. This will require a new pattern of multiple work seffings that can accommodate meetings and project work as well as catering for quiet, concentrated activities.

Shell-and-core and Category A Fit-out

A Category A fit-out, also known as developer’s finish, usually includes all finishes, suspended ceilings, raised floors, carpets and the extension of the mechanical and electrical services into the office areas. Typically, a CategoryA fit-out adds £270-370/m2 to the overall construction costs.

On shell-and-core schemes, developers include finishes to the landlord areas only and services are capped-off within the risers to each floor. Category B fit-out works are required to complete the fit-out to an occupier’s specific requirements. Category B works include partitioning to cellular offices, enhanced finishes, fittings and services to specialist areas such as meeting and conference rooms, and restaurants and kitchens, together with furniture and fittings for office areas and IT installations.

Category B fit-outs can also incur substantial costs for modifications to the shell-and/or and/or Category A finishes and services installations that may be required to accommodate a client’s operational requirements or space-planning needs.

On shell-and-core schemes, developers will contribute typically £215-350/m2 towards the cost of a tenant’s fit-out This allowance is a component of the overall lease package, which includes items such as rent levels and rent-free periods. As a result, the value of the developer’s contribution is not necessarily linked to the value of the fit-out works.

Overall, the integration of shell-and-core and fit-out works will yield cost savings of 10-15% on the total cost of Category A and Category B fit-outs. Additional benefits include the opportunity to avoid modifications to the base building and a potential 15-20% saving in the overall duration of the project These benefits offset the disadvantages associated with the transfer of fit-out cost, time and quality risks from the developer to the tenant.

The popularity of developments with Category A Fit-outs waned in the late 1980s because of the emergence of shell and core on some fast-track projects. However, they started to reappear in the early to mid-1990s as a way of trying to appeal to the few new tenants that were around.

Nowadays, the increasing demand for pr-let agreements has created a climate that allows far greater integration of the base building and fit-out works. However,, outside central London, Category A fit-outs will still be common because many potential occupiers do not have the resources to manage complex fit-out programmes.

Design issues

The impact of IT and increasingly collaborative methods of working have eliminated many routine individual tasks that previously tied office workers to their “own” desks.

These new ways of working present opportunities to increase the use of space, but require increased flexibility to cater for a range of different work patterns, as shown in table 1 and prepared by architect DEGW.

Eliminating desk ownership is perceived as the key to introducing new work patterns. The most-talked-about approach is hot-desking, which is used by the likes of IBM and BT to accommodate workforces that spend a great deal of their time outside the office.

However, the increasing demand for short term, team-based project work is creating the need for working space that can be readily reconfigured as circumstances change. The strategies adopted to cater for flexible working include:

• simplifying space standards by eliminating the link between hierarchy and space allocation which in turn reduces cellularisation, increases occupational density and reduces “churn” costs
• hot-desking, whereby shared work space is available on a first-come, first-served basis, which requires sophisticated IT communications and mobile storage systems
• hotelling, whereby shared work space is booked in advance, which requires sophisticated IT communications, mobile storage systems, and incurs costs associated with managing the space
• activity settings, which are combinations of shared work settings (workstation, meeting area, quiet area and soon) that support project-based working by groups.

In offices where high levels of hot-desking and out-of-office working have been introduced, occupancy densities of 9-14 m2/person can be achieved. However, where the focus is cent on team-working in shared-activity settings, much lower densities in excess of 19 m2/person should be anticipated.

Scope of fit-out works

As fit-out works are tailored to a client’s requirements, they are less easy to summarise in terms of cost or programme than many other types of construction activity.

Four factors, in particular, determine the nature of fit-out projects, namely:

• the business and organisational structure of the client
• the condition of the base building
• the range of different space categories such as offices, meeting rooms, catering, ITand so on
• the cost implications of the speed of construction required to meet the clients programme.

The nature of an organisation’s business has a profound effect on the type of fit-out The differing requirements of clients such as banks, corporations, professional firms, IT and media companies and so on create submarkets for fit-out works. In turn, different organisations have differing expectations for occupational density, quality of space and finishes, flexibility, servicing requirements and capital and recurrent costs. Table 2 gives indicative costs and occupational densities for a range of business activities.

The range of costs in table 2 provides a broad indication of the variations that can be found in small sectors such as London-based commercial law firms.

The wide range also reflects variations in the quality of the fit-out, the extent of the developer’s finish and the balance between open-plan, cellular offices and other special areas.

Variations in the extent of the fit-out in the base building have a considerable bearing on project costs. As a result, it is difficult to compare projects on a like-for-like basis. Increasingly, office developments are being finished with a single floor brought to Category A standard, for marketing purposes.

Also, the extent of the developer’s finish cannot be defined clearly and there are cost implications if modifications have to be made to accommodate the tenant’s fit-out.

This is particularly apparent for mechanical and electrical services that have to be modified to serve cellular offices or special areas such as catering and IT installations.

On average, the total wasted cost associated with modifying a Category A fit-out is in the range of £6-130/m2. Furthermore, the impact any modifications have on the project’s duration, cost and quality has to be considered.

Another factor that affects overall costs is the content of the office space. Although general office space takes up the bulk of the floor plate, most schemes include varying degrees of cellularisation, and special facilities such as meeting rooms, catering and communications - all of which have different cost profiles. Tables 3-5 summarise the costs of general office space, cellular and open plan, together with the costs for special areas.

Design Criteria

The main elements of a fit-out are partitions, access floors and ceilings, and mechanical and electrical services. Detailed costing of these elements and associated applied finishes are given in the cost breakdown.

The principal decisions taken when specifying fit-out components relate to balancing capital spend against recurrent expenditure on maintenance and, more particularly, on churn. Churn costs are incurred by relocating staff within an office together with reconfiguring IT installations, alterations to fabric and furniture, and non-productive time involved with the move. Typically, churn costs range from £500 to £1500 per head per move, and depend on the inherent flexibility of the original space planning and the capital investment in system components. However, the capital budget for a fit-out scheme is an operational cost that many organisations seek to minimise. Some tenants will not invest in built-in flexibility because of previous experience of under-utilisation of the additional expense. In other situations, such as a short lease, lowest cost solutions may be the only acceptable option. Maximum flexibility is afforded by using demountable partitions and acoustic suspending ceilings which minimise the need for baffles in the ceiling voids.

A metal panel, monobloc, demountable partition system commands a 15-25% cost premium over a good quality, vinyl-covered plasterboard-and-stud system. The premium can be justified to a degree on the basis of the partial recovery of the investment from capital allowances or the reduced cost of redecoration and repair. But there still needs to be a foreseeable requirement for extensive reconfiguration to justify fully the extra investment.

Other areas where sizeable investments can be demanded include IT distribution systems, density of power and IT points, and access to floor and ceiling voids to configure or maintain services. IT costs equal to 5% of the total development cost of an office building. Structured cabling costs range from £125 to £160 per point, with the overall costs of IT wiring ranging from £25-30/m2 for professionals such as lawyers, to £25-35/m2 for out-of-town computer companies, and up to £70-150/m2 for users such as banks.

Power and data sockets are usually provided on the basis of one point per 5-10/ m2. The density of the points will dramatically affect overall costs. Small power distribution costs £50-70/point, structured cable IT distribution costs £125-160/point, and modifications to the raised floor tiles add £10/point for providing cable management fittings.

Integration of base-build and fit-out works

Integrating shell-and-core, base-build and fitout works can bring significant cost and time savings to clients.

As more projects are being let before completion, the opportunity for integrating the works is increasing.

Integrating base build works and the fit-out yields the following benefits for clients:

• completed space can be handed over in 70-75% of the time required for a conventional, sequential approach
• the fit-out can start earlier, thereby allowing longer for the work (15-20% longer is not uncommon), but without compromising the overall base build programme or the gains set out in the preceding bullet point
• savings of 10-15% on fit-out costs can be achieved by eliminating waste and reducing the overall construction programme.

There are, however, some contractual issues that need to be addressed before such a strategy can be adopted. These issues include:

• confirmation that the developer is prepared to extend the shell and core contract to include the fit-out works (if not, it will be necessary to assess the commercial viability of employing a second contractor to carry out the fitout and the problems that might arise in overlapping the work of the two contractors)
• identifying which party carries the risks on price, procurement, time and quality
• establishing what will happen if the fitting outworks delay the shell and core, or vice versa.

Programme

Time and programme considerations play a central role in establishing the procurement route and the cost, and are invariably driven by the client’s requirements.

The need to minimise expenditure on rent during the nonproductive time taken for a fit-out will also increase pressure on reducing the programme. Options exist for reducing time by overlapping design, Project type procurement and construction.

Increased speed is generally achieved at a high capital cost accompanied by less time for decision making and the potential for poorer quality on site. Table 6 illustrates the costs associated with three speeds of fit-out adopted on four different projects.

Sequential construction procured on the basis of a lumpsum tender with full design information would, typically, take 25% longer than a fast programme, where design, procurement and construction overlap. However, there are no significant cost savings to be had using the fast programme. Adopting an accelerated programme with multiple shift working would, typically, reduce the programme by 35% compared with sequential construction, but add 2-25% to the costs

Procurement

The procurement of office fit-outs is an area of innovation, with new approaches being developed to balance the requirements of cost certainty and constraints of the programme. Inmost cases, there is insufficient time to adopt traditional procurement routes based on sequential design, procurement and construction. A traditional lump sum contract can deliver cost certainty but not necessarily at a significantly lower cost The most common procurement routes are those of construction management, management contracting and lumpsum contracts based on a guaranteed maximum price.

Early involvement by contractors and specialists during the procurement and design stages is considered essential if fast construction and value are to be delivered to the client.

Management contracting is well suited to fit-out works, where overlapping of design, procurement and construction is important but where the client might not have the resources to be closely involved in the management of the contract Construction management is also widely adopted, but it requires close client involvement and cannot provide early cost certainty.

Lump sum contracts offer the most straightforward approach and provide a high level of cost certainty if a guaranteed maximum price or an agreed cost plan is induded. Because of constraints on the programme, two-stage tender procedures are generally required, with procurement and design overlapping.

Contractors are usually appointed on the basis of resource costs, preliminaries, overheads and profit. Where a GMP is obtained, an additional risk premium for the GMP will form part of the bid.

Depending on the time available, the GMP can be established on prices from competitively tendered work packages. Obviously, the risk premiums will be higher if work is let alter a GMP has been agreed than for a project where the cost of the works packages is used to set the GMP.

One consequence of tight procurement programmes is that prices cannot always be established by competitive tendering. Where project costs are determined by negotiation, clients can expect to pay a cost premium.

More management-intensive routes, such as management contracting or construction management, also incur higher costs for staff and preliminaries. These additional costs are directly related to the greater effort that is directed towards planning, buying and managing the works. Agood construction manager can cut out unnecessary costs through value engineering and effective buying, which can offset some of the additional oncosts associated with construction management.

Table 7 gives indicative percentage additions on net construction costs for preliminaries and contractor’s fees for a range of common procurement routes.

Cost Breakdown

In contrast to previous cost models, no breakdown of costs for a generic scheme is included.

Instead, the costs of a wide range of fit-out components of differing quality and in-built flexibility are detailed. Costs are at November 1997 levels for an outer London location and are appropriate for fit-outs in excess of 2500 m2.

Rates quoted for specialist finishes, such as stone or vinyl, that are used only in small areas reflect the fact that only small quantities are involved.

In addition to the building works that are typically included in a fit-out contract, there are many sources of direct cost to the client that must be allowed for in the overall relocation budget These include:

• professional fees
• VAT
• statutory fees
• project insurance
• computer and data systems beyond data cabling
• PABX telephone systems and handsets
• office equipment, including
• reprographics, copiers, faxes, task lighting and loose desk accessories
• data links with other buildings, including satellite dishes
• audiovisual installations in meeting rooms
• medical equipment in sick rooms
• vending machines
• non-statutory signage
• internal planting and works of art
• supplies such as crockery and cutlery
• removals, including insurance and security
• personnel costs, including redundancy payments
• cost of new stationery.