Single Source: Cutting Costs Not Classes
By Lisa Kopochinski (01/06/2011)

The recession has had an immense impact on nearly all segments of the construction industry. But one New Jersey property developer is providing relief with its cost-effective model for schools, hospitals and other institutions.

Based in Gibbsboro, New Jersey, Scarborough Properties developed its single-source model that essentially ensures clients are not responsible for cost overruns.

"The budget set at the beginning is the total amount paid," explains Sean Scarborough, president of Scarborough Properties. "The model works because we understand the risk and create value for the institution by insulating it from cost overruns and unnecessary delays. A construction manager would not be financially liable until several months before construction started, long after decisions about budget and design had been made."

 

Scarborough Properties — formed more than six decades ago — has developed and owned its own residential and commercial properties, working every element of the development process, marshalling design professionals, construction specialists and banks to build a project the company would own. The firm now owns a wide variety of income-producing properties, such as marinas, retail shopping centers, free-standing pad sites, and single-tenant office buildings.

Its single-source model first evolved in 2000 when ChARTer-Tech High School for the Performing Arts was about to lose its home, which was a former grade school. Scarborough Properties stepped in, arranged financing, designed the building and built it. Today, the Somers Point, New Jersey school is one the strongest charter schools in the state.

"By hiring us to oversee the project from start to finish at a pre-determined cost, the faculty was able to focus on what they are trained to do-provide a great education for the students," says Scarborough.

Jerry Klause, co-founder of the ChARTer-Tech School and president of the Board of Trustees, agrees wholeheartedly. A huge an of Scarborough's single-source model, he says, "You know what you're getting into. This allowed us to not worry about anything except what the final number was and that we were basically getting a turnkey situation. I knew what my costs were."

Spanning 40,000 square feet, the $4.3-million school opened in 2000 with 200 students. Today, enrollment is at 240 and there are plans for an addition that will include 2,000 square feet of classroom space and a 500-seat auditorium. The school would then be able to accommodate 400 students. Klause says they are definitely working with Scarborough Properties again.

"We have all the approvals and I am negotiating with the bank right now for financing," says Klause. "We anticipate having the classrooms open for September 2011."

Site work will most likely begin next April. "We want to minimize the amount of construction and noise for the kids so most of the construction will be done in the summer."

Model's Success

To date, the single-source model has proven to be very successful, largely because Scarborough Properties manages its team of professionals from the outset. Global costs remain in the forefront of the decision-making process during approvals, design and construction.

"There are many trained competent professionals involved in delivering a complex real estate development project," says Scarborough. "They all serve a role, but none have global responsibility."

And while some might point to the construction management model as an answer, Scarborough adds that it falls short in terms of managing a global budget.

"For instance, the construction manager is not responsible for the entitlement process or design — often underway for years prior to the ground breaking."

Future of Model

It would appear that with so many positives pointing towards the single-source model, it would soon become commonplace. But Scarborough doesn't see this happening any time soon.

"There are few industry professionals that have the skill-set to replicate the model," he says. "The marketplace — architects, construction managers, attorneys and engineers, to name a few — consider it a disincentive to be controlled in the front end of the process by a professional developer. Too often they want to have control of the owner without financial risk."

In emphasizing this point, he says construction professionals often work on an hourly basis and expect to be paid whether or not the project is a success. Construction managers often operate on a cost-plus model.

And as to why this model has not been thought of before, Scarborough says it is because real estate advisory and development services are often made on a consultancy basis and not a performance-based approach. Scarborough manages the process from the owner's perspective, just as it does for its own developments.

"The single-source model stands this concept on its head because our entire team works for Scarborough Properties, which is paid based upon performance."

Lisa Kopochinski is a freelance writer.

                        

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