NBOA President and CEO
Inflation touches everything in the world of independent school business. In my last two columns, I wrote about the impact of rising prices on compensation and budget- and tuition-setting. Now, as schools enter their “summer slammer” season of building and renovation, it’s a good time to take a closer look at inflation’s effect on capital projects.
We all know the backstory elements involved in the current inflation drama: the COVID-19 pandemic, global supply chain disruptions, raw material shortages, shipping delays, higher transportation costs and a tight labor market. Add to that the Federal Reserve’s strategy to tame inflation with incremental interest rate hikes — a policy that’s made it more expensive to borrow money for capital projects. All those pressures have forced many schools to re-evaluate their timelines and engineer strategies to keep their building budgets in line.
Early Birds, Many Feathers
After checking in with business officers and building and design executives, some common themes have emerged: Now more than ever, it’s important to plan ahead, and it’s essential to bring all parties to the table from the beginning.
In the “old normal” way of building, independent schools would finalize design plans by winter break, bid out a project in the spring and build in the summer. Then they would show off their shiny new facilities and renovations in the fall — often finishing just days before students and staff return. That compressed schedule is becoming more difficult to achieve in today’s construction environment, where short supplies translate to long lead times for everything from electrical equipment to furnishings to technology.
Today it’s prudent to add at least six months to a major capital project timeline, said Casey Smith, principal and architect at Hord Coplan Macht’s Education Studio, in a recent NBOA webinar. “If your project needs electrical gear, you will have to order that 12 months ahead of when you actually need it on site,” Smith advised.
In our new normal of high prices and lengthy delivery schedules, schools that want to finish construction on time and on budget are bringing in a construction manager early in the process to work alongside the architect and design team. The construction manager has critical knowledge about market conditions, procurement methods and alternatives to materials that might be too costly or in short supply.
I’m inspired by a recent example from The Blake School in Minnesota. A few years ago, they embarked on a project to combine two lower school campuses and add an early learning center. When it came time to sign the contracts in 2021, inflation for labor and materials like steel windows and lumber was up 20% to 30%, CFO/COO Dan Kelley reported. In the past, the school would have built out the design, and then six months later, brought in the general contractor. Instead, the school paid to bring in the general contractor almost from day one. This enabled school leaders to think about the budget as well as the goals for the design. “Without a contractor there at the beginning, it’s easy to get excited about a design element that you find out you can’t afford down the road,” Kelley explained.
In the Materials World
The Blake School also minimized the effects of inflation by authorizing materials purchases early in the design process. That’s a pivot from the more traditional approach of finalizing some subcontracts and materials in the midst of construction. Instead, Kelley said he and his team worked “extremely intensely” in the first half of 2022 to get through the design and details of the construction drawings so that they could sign contracts with subcontractors. Those efforts paid off. In some cases, prices for items the school had locked in went up another 10% to 15%.
That approach aligns with the outlook of industry experts. Don’t expect to see pre-pandemic escalation rates of 4% to 5% this calendar year or anytime in the near future, said Mick Rayburn, vice president of the Whiting-Turner Contracting Company. The firm predicts that building-related inflation will hover between 6% and 8% in 2023. The good news is that this year’s numbers aren’t even close to last year’s peak inflation of 12-14%.
In addition to locking in prices early, measures like a healthy contingency fund for unexpected costs or guaranteed maximum price (GMP) contracts can offer additional layers of protection against inflationary pressures, Rayburn said. GMP contracts limit the amount the school pays to a contractor or subcontractor. And some of those contracts include a shared savings clause, incentivizing contractors to keep an eye on spending.
Value Engineering
We might assume that value engineering means cutting the cost of a capital project by scaling down or using lesser-quality materials or processes. In fact, when done properly, it’s about finding smart ways to manage costs and schedules. Take the Blake School again — when they couldn’t source Norwegian pine as originally planned, they opted for white pine from Wisconsin, which was just as beautiful and less expensive.
Another example is St. George’s School in Vancouver. St. George’s is in the midst of a $115 million-plus project to transform its senior school campus with two new academic buildings and a multipurpose building for dining and events. Value engineering done the right way has saved the boys’ school millions, reported Finance Director Sanjay Chauhan. A committee of school board members and school foundation trustees handpicked for their expertise have provided invaluable — and free — advice on spending choices that will provide cost savings without sacrificing quality.
The school did invest in a project manager, who has worked with architects and with government officials on local building requirements among other matters. As a result, St. George’s saved $3 million by redesigning solar shading and terracotta fins on building exteriors.
Ready to Regroup
I’ve also learned that even the best-laid plans can get derailed in these times of unpredictable deliverables, so contingency plans are a must. Perhaps it’s something small, like using two smaller cabinets if one larger one isn’t available. Delays with larger pieces of the puzzle, like HVAC or roofing, for example, could cause more serious problems and wreak havoc on completion deadlines.
Eric Norman, CFO at Tower Hill School in Delaware, had advice for school leaders if construction deadlines push past school opening. Before that happens, consider how you might use temporary and swing spaces, and be ready to bring in temporary HVAC or other makeshift measures if necessary. Ask yourself, “What do I need to have provisions for if some of these delays occur?”
And let’s not forget the lessons learned from independent schools’ crash course in flexible spaces during the pandemic. The idea of repurposing existing facilities or building new spaces to make them intentionally multipurpose has only gained more acceptance in the face of inflation, according to our cover story for this issue
Long-Term Rewards
Leading a capital project during a time of historic inflation isn’t for the faint of heart. Even Kelley, with a construction background and many projects under his belt since joining the independent school world, said he has his moments while juggling uncertainty about the price of labor and materials and the ups and downs of the supply chain. All that would cause some sleepless nights for any CFO, no matter how experienced. But the worries are worth it when the project is done and the school’s strategic plan for its students is realized, Kelley said. “Five years from now, those price increases will be a bump in the road.”
There’s no doubt that capital projects will continue to play a pivotal role at many of our schools. And in our current environment, there’s no doubt that these endeavors will require creativity and flexible thinking to ensure they positively impact the school’s learning communities and its financial sustainability.
Follow NBOA President and CEO Jeff Shields @shieldsNBOA.
