Of the MacLeamy Curve, Efficient Design, and Expensive Money--Or Why Developers are a Breed Apart!

Last week I attended the annual ASHRAE conference in Denver.  There I had the pleasure to meet Bob Springer.  Bob is a Senior Principal at Concurrent Technologies Corporation.  His experience is leading technical and project development teams, financial underwriting, and feasibility analysis of projects.  He holds a B.S. in Civil Engineering from the University of Iowa, is a Registered Professional Engineer (inactive) in Colorado, and holds an MBA in Finance, with Honors, from Vanderbilt University.  He currently works with the Army helping them to deploy their renewable energy programs for army bases around the country.  

Bob Springer has a fresh perspective on the MacLeamy curve.  It's called the "MacLearny curve" in the presentation below, but don't try searching for it under that name:  its MacLeamy.  The MacLeamy curve was introduced in the Construction Users Roundtable in 2004 [“Collaboration, Integrated Information, and the Project Lifecycle in Building Design and Construction and Operation” (WP-1202, August, 2004)]   It seems like it's become a bit of a cliche for illustrating the advantages of Integrated Project Delivery.

Here it is:  

Look familiar?  Well, here is Bob Springer's take on the MacLeamy curve.  Take a look ... but before you do, a quick primer.

The black curve,above, represents the traditional design effort from conceptual stage through construction.  The heavy work effort (and costs) comes at the construction documents (CD) stage.  In IPD the bigger effort (and cost) is moved to earlier in the project (think SD/DD).  The blue descending curve (1) represents the declining ability to impact cost and functional capabilities of a design--i.e. early changes can be implemented cheaply, reduce costs efficiently, and this declines as the design is developed into construction drawings.  The red ascending line illustrates that, as the project proceeds, the cost of making changes goes up and up.

The MacLeamy curve suggests that if we move the design effort to earlier in the project (to the left), this should be more efficient than the traditional design process.  So far this is slides 1- 5 of the presentation below.  Take a brief moment to look through slides 1-5.

Slide 6 gets interesting.  Are you there?  From a developer's standpoint, as a project proceeds from site control, to entitlements, to financial close, to construction and substantial completion, the level of uncertainty goes steadily down.  That's good.  On the other hand, from the gleam-in-the-eye stage to financial close the developer experiences increasing risk because she has more and more funds at risk with no guarantee, yet, that she will get the project financed and actually off the ground.  That's scary.   Lots of design effort and pretty models are nice for the design team working for a fee, but for the developer not so much unless there is financial close.  At financial close the risk profile is reduced to the construction risk and market risk, and by substantial completion the project is left just with the market risk.  It's not for the feint of heart.

Slide 8.  This adds the consideration of the cost of capital.  One way to think of this is "Project Development Risk Capital" (i.e. pre-financial close) is EXPENSIVE CAPITAL.  Construction loan funding is cheaper money from a developer's standpoint, and the take out loan is the cheapest money of all.  These considerations all work in the opposite direction from the IPD benefits illustrated by the MacLeamy curve.

Slide 10.  Graphic illustration of these competing considerations:  efficiency of design dollars spent early in project vs. high cost of capital earlier in project.

From here, it's just Bob Springer and you.  Enjoy!

Ashrae denver business project development and ipd_ springer from Roland_Nikles