Project Management: The Cost of Oversight

Teri Rogers knows a thing or two about New York City real estate. She’s a shareholder in a 32-unit co-op on the Upper West Side, and she’s the founder of the popular real estate website Brick Underground. But when her building’s property manager resigned and the board tapped her to help find a new management company, Rogers was in for a shock.

“Even given what I do,” she says, “I didn’t realize management companies charge fees for overseeing capital improvements. I thought there was just a flat annual fee.”

Not quite. Among the 10 smallish to mid-sized management companies she investigated on behalf of her co-op, Rogers found a wide range in fee structures for overseeing capital projects. “Some charged nothing, the old-fashioned way,” she says, “while some charged 1 to 2 percent [of the project budget], and one charged 10 percent. Another said they also offer an hourly project-management fee option. Some start charging at projects above $10,000, others over $100,000. The fees were all over the map.”

Rogers’ board is now in the process of hiring a management company that charges fees only on large, complicated projects, such as window replacement. “I was surprised by the fees,” Rogers says, “yet it didn’t seem unreasonable.”

Behind the Scenes

From where he sits, Steve Greenbaum sees such fees as the most reasonable thing in the world. Greenbaum, the director of property management for Charles H. Greenthal Management, is currently overseeing a $1 million window replacement job at one of its Queens buildings. Even before the first window is installed, the management company will devote hundreds of hours to the project.

First, Greenbaum explains, there are meetings with the board, window companies, and contractors. The manager sits through presentations, sends out requests for proposals, secures bids, analyzes them, then assembles all that information for a follow-up with the board. Once the vendors are chosen, it’s time to negotiate the contracts. That’s followed by a town hall meeting with the unit-owners or shareholders to ensure that everyone understands the full scope of the project. Finally, the agent must schedule when the window crews can enter each unit and do the job.

“Even before the job kicks off, we’ve spent hundreds and hundreds of hours preparing for it,” says Greenbaum. “People don’t realize how much work goes into a capital project. But a lot more is done behind the scenes than any board member would ever notice.”

Aligning Interests

Whether it’s installing a green roof or restoring the facade, big capital projects must be properly coordinated and supervised. Most boards turn to their managing agent for help, and, like Rogers, many are surprised to learn that there is an extra charge for the extra help.

“Anytime people get involved overseeing a project,” says Ellen Kornfeld, vice president and partner at the Lovett Group of Companies, “depending on the size of a project or how much time you spend at the building having to coordinate and interface with various professionals, you have to make a determination. If the time exceeds what is realistic, then you may have to charge.”

The size of that charge depends on numerous factors, and it differs from one management company to another. But the first place to look is the board’s contract with its management company.

“You disclose in your schedule of additional fees what your criteria are with regard to capital projects,” says Kornfeld. “[It] might say, ‘Any project over X number of dollars, there will be a percentage put toward the managing agent.’” Some companies prefer to charge a flat fee rather than a percentage, because this is New York City and every capital project comes with unpleasant surprises. “God forbid that job goes over schedule, or there’s hidden things, or you have extras,” says Greenbaum, who noted that Greenthal’s flat fee for the $1 million window replacement project in Queens is $25,000. For capital projects costing $250,000 or less, the company charges no fee. Nor does it charge for a specialized project, such as an elevator overhaul. Although it may be a long job and the agent must attend site meetings and handle all the administrative tasks, the manager is not involved on a daily basis, Greenbaum explains. “We’re more involved peripherally,” he says.

Tal Eyal, president of FS Project Management, a division of FirstService Residential, says his company takes a flexible approach to fee arrangements: “When I’m meeting with a new client, I say, ‘What is the structure that you feel most comfortable with?’ ” Eyal has found that some boards opt for a percentage, while others prefer a flat fee. In some situations, a monthly fee – or a hybrid of a monthly charge and a percentage – might be the preferred way to go. “My goal,” says Eyal, “is to align our interests with the owners of the building.”

Inserting Incentives

When capital projects arise, management companies often use their in-house staff of experts to provide support so the building’s managing agent can stay focused on the day-to-day running of the building. FS Project Management uses dedicated construction managers to steer projects. The cost for that service primarily depends on the level of work and how many project managers get involved. “It’s difficult to say,” says Eyal, “but rule of thumb it’s around 6 to 7 percent [of the project budget].” If it’s a huge project, however, that percentage would be lower. Regardless, Eyal believe that construction managers save buildings money by preparing extensive bid-analysis spreadsheets to determine the best construction options, and by closely monitoring projects to prevent unnecessary delays.

Big capital projects don’t always trigger a fee. “There are capital projects that don’t require additional services,” says Doug Weinstein, the vice president of the Project Management Group (PMG), which is part of AKAM Living Services. “For instance, if you are replacing a single component in the building.” Another factor that might obviate a management fee is when other professionals have been retained for a big project, requiring minimal involvement by the property manager. Where PMG’s services tend to come into play is whenever the residents in a building are going to be heavily affected by a project. “Entry into apartments is always a good one,” says Weinstein, noting that it’s called for when the board decides it’s time to replace all the plumbing risers or heating systems within the units. PMG coordinates with residents when the work crew can enter. The company posts notifications so that residents know what to expect and what is expected of them. For instance, furniture may need to be covered or moved out of the way.

With proper planning, a management team can minimize the disruption and discomfort of these situations. “The better the pre-construction lineup is, the better the project goes,” says Weinstein, describing a three-pronged job PMG recently completed for a complex in Windsor Park, Queens, with more than 1,800 units. A project manager was installed on the site full-time to oversee the logistics of having three crews working each day to replace windows, air-conditioners, and the intercom system. Instead of crews going in and out of apartments on separate days to complete each upgrade, “we had all three aspects of the production being done simultaneously within an apartment each day,” he says.

For that 18-month job, PMG established a monthly fee based on having full-time staff involved. “Because if we were to charge on a percentage of the job,” Weinstein says, “there is no incentive for us to save money or look out for the client’s expense on the project. So what we do is, we determine how much time we are going to spend on the project, and then we establish a flat monthly fee for that. And if it goes over our estimated time frame, that’s our issue.”