As the current pipeline for development projects in the Intermountain West region continues to expand, so does the associated price tag. Due to high demand for class A multifamily product in downtown markets, there are ample opportunities for urban redevelopment. The trick is making the projects pencil, despite inflated land values and rising construction costs. As costs continue to rise, developers are seeking to save money without diminishing product quality, and many – including PEG Companies – have found that sourcing materials directly from manufacturers is an efficient way to do that. Now, what used to be included in a general contractor’s scope is being pulled into the developer’s scope.
To be clear, we must disclose that sourcing materials directly always comes with added responsibility and stress. For instance, you are now responsible for the timely delivery and install of the product, and you own it if it gets stolen, if it breaks, or if it is the wrong product. This can be a place where the general contractor shifts blame for project delays onto the developer for issues with owner-supplied products. That is why many developers are now creating procurement teams that manage owner-supplied items from purchasing to installation.
Still, we believe the savings of sourcing materials directly outweigh the challenges and find it particularly satisfying to see our investors end up with significantly higher returns as a result. Read on to learn the areas where skipping intermediary suppliers works for us.
- Electrical. Electrical fixtures are a large part of a contractor’s costs. A majority of that can be allocated to lighting fixtures. By avoiding markup from electricians and lighting distributors, you can save significant costs. You also have more control of products to choose from, including energy-efficient and low maintenance products, which also save on operating costs
- Cabinets and Countertops. With tariffs increasingly on the rise, cabinets and countertops can quickly become a hefty expense. Earlier this year, the International Trade Commission (ITC) considered implementing a 200% tariff after suspecting China was selling their cabinets for less than cost. Granite can be directly sourced in place of quartz for kitchen countertops.
- Flooring. Flooring is another item sneaking into the developer’s scope, from carpet to LVT. Rising costs of flooring has encouraged developers to buy flooring direct from the manufacturer. This is a relatively easy scope to procure and coordinate installation outside of the general contractor’s responsibilities.
- Plumbing. Plumbing fixtures are an important, high-cost item that tends to be marked up through suppliers, distributers, and subcontractors. Knowing that, many plumbing fixture manufactures are now marketing directly to developers and trying to make themselves as easy-to-work-with and approachable as possible.