Leasehold Improvements: How to Handle Unforeseen Site Conditions

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The challenge with building a tenant leasehold improvement project is that you can run into unforeseen site conditions more frequently due to the fact that the performance of the interior is not only affected by elements of the interior but also the exterior.

The overall building condition and the existing structure are often overlooked. Structural issues or building envelope issues directly compromises the project. For example, we may discover missing structural reinforcements in a concrete slab after demolition or water leakage issues that needs to be addressed from the exterior.

The interior condition of the building is just as important. The project team needs to look beyond the interior finishes at the existing skeleton, hazardous materials presence, and existing tenant fixtures. Hazardous materials such as asbestos and mould might be present in the space that adds to the scope of work. There maybe other unidentified issues with existing conditions that can creep up and throw the construction schedule off track and significantly increase the project budget.

Existing Building Condition Assessment

The project team should thoroughly assess the existing building conditions prior to creating a schedule and budget, taking consideration of both the exterior and interior factors that may affect the leasehold improvement. The constructor is mandated to conduct a Designated Substance Survey (DSS) to determine the presence or absence of Designated Substances or Hazardous Materials such as Asbestos, Lead Paint, or Mould as per the Ontario Regulation 278/05, Section 10(2) of Designated Substance.

Risk Identification

It is equally as important to meet with the landlord and learn about upcoming capital improvement work on both the interior and exterior of the building. Exterior cladding replacements, common element improvements, new technology, and other landlord related work can affect the future performance of your project. For example, the tenant’s project team might want to tie in to the future base building lighting systems if they are aware that the landlord is currently putting such infrastructure in place or install necessary components in place to take advantage of the new technology at a later time.

Risk Mitigation

Expect unforeseen conditions are expected for any construction projects, especially leasehold improvements. Risk mitigation can be split into four strategies.

Avoid

Avoid the risk entirely by eliminating the root cause of the potential problem. The project team can avoid a certain risk by working around the problem. For example, the project team may decide to not involve with structural elements to avoid potential liability with structural issues.

Transfer

Transfer the risk to another party through contractual clauses and insurance. Most tenants have tenant insurances which can protect themselves from certain unforeseen conditions. Be sure to understand what is covered and what is not in the insurance. Look into indemnity as well as insurance.

Mitigate

Mitigate the risk by planning effective action in the cases where the problem manifests. The project team can place a certain percentage of contingency allowance aside during the budgeting process to cover for any unforeseen conditions. You can get a good sense of your financial buffer by referencing past projects in the building that are of similar scope.

Accept

Accept the risk as a last resort. This is about understanding the risk threshold of your stakeholders. Perhaps the risk of unforeseen site conditions is minimal enough that it does not pose major concerns.

Finally, challenge all assumptions. A well rounded project team will identify all potential conditions before beginning the project. Be very careful when establishing contingency allowances.

 

Related Posts:

Introduction to Commercial Interior Fit-Out and Leasehold Improvements

Leasehold Improvements: Start-Up Documentation (Ontario)

Leasehold Improvements: Cutting, Coring, and Drilling (Base Building Structural Work)

Leasehold Improvements: How to Minimize the Impact of Construction on Commercial Tenants

Leasehold Improvements Site Condition: Asbestos

Leasehold Improvements Site Condition: Mould

Leasehold Improvements: How to Handle Unforeseen Site Conditions

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