Cost Overruns and Expansion Problems

Editor's note: The January-February issue of Cooperative Grocer presented an in-depth analysis of an expansion project at Mississippi Market that nearly sank the co-op. That article prompted the following response from John Corbett, general manager of North Coast Co-op, which just completed a multi-million dollar remodel of its Arcata store.

I really appreciated the article on the near miss at Mississippi Market during their recent expansion. I would like to add additional perspective, although this is without any personal knowledge of the project.

I would guess that any project above two million dollars on an initial sales of four million dollars has to be considered very risky. I say that coming from a co-op that approved a $3.2 million project starting from an existing $12 million of sales. At the time of approval, the board and management were very aware that this was a high risk project because of the large initial construction cost. A board approval of a $4.5 million project for a second store on an existing $4 million of sales is per se very high risk. This is the case with or without subsequent board-management issues.

There was no discussion in the Mississippi Market article of what percent cost overrun figure the board of directors adopted at the time the project was approved. After the project price is approved, this is the most crucial decision a board of directors needs to make. This may not be an easy figure to arrive at.

Our board and management were presented with conflicting views from the experts. Ordinarily, I would caution co-ops to pick the higher side that professionals have presented. Life, however, is not always that easy. The high side would have precluded our project, while the low side made the project look very good. In adopting a middle course per cent of normal cost overrun, the board of directors obviously takes a higher level of project risk. This figure should be somewhere between 5% to 35%, depending on the project and a professional opinion as to what should be included. Often an extra percent needs to be added if the city is known for being difficult to work with. Even here a board often faces conflicting opinions. Contractors and architects often champion their experience and good track record with a particular city in order to get project work.

There was no mention in the article about what soils work had been down prior to commencing construction and drawing the plans. Often these reports will discover underlying old foundations or water conditions. After $30,000 worth of soil studies by our co-op, including drilling through the floor of the existing store, we discovered two subterranean streams and several spots of poor soils. Six figure costs were added to the original project cost prior to board approval. This was essential in determining project costs. However, the many drillings and soils report did miss part of an old foundation and crucial water upwelling in front of the store.

The sales data may well be interpreted in two ways. The article indicated that sales declined at the Randolf store between 1997 and 1999. While I can't say this for sure, the case may well be that the sales decline was a sign the co-op had to have a better selling unit to survive. For example, our co-op had constant sales figures for three years after a large competitor opened. A professional analysis of the sales indicated far more risk in not proceeding than seemed immediately apparent. The conclusion was that the co-op was able to hold the current member shoppers but was not competitive in attracting new shoppers. As members left the area or died, sales would start to decline. In other words, some projects are worth the risk because the alternative is a long, slow market death.

Lastly, when things go wrong it is often unrelated to how involved or uninvolved the board of directors has been. The cost of a missed foundation or bad soils area will have to be run, period. A slow response by the staff might cost the co-op additional six-figure overruns. Often city governments will require something in the middle of construction. The cost of delay or other problems in cash and financing may well be higher than the considerable cost overrun. These are facts of life with or without close board involvement.

Your conclusions to hire a project manager and to have sufficient provisions for marketing the completed project cannot be emphasized enough. Lastly, good communications with the board is always necessary. In the case of a project, good communication is required for the manager, the board of directors, and the co-op to survive.

See other articles from this issue: #094 May - June - 2001