Business & Management
Construction 101

At a recent seminar called "Best Practices for Owning & Operating a Winery," held Mar. 1 and 2 in San Francisco, Calif., three winery design and construction professionals offered tips to help vintners get a handle on the basics of building a new winery. Session speakers included real estate development attorney James Zehren, of Portland, Ore.-based Stoel Rives, LLP; Dave Kincaid, vice president of Santa Rosa, Calif.-based construction services firm Facility Development Corp., and Scott Bartley of Hall & Bartley Architects, Santa Rosa, Calif.
Contract Smarts
According to Zehren, of Stoel Rives, the contract process between the winery owner and the design and construction firms is one of the most important stages of the winery construction process. Among the considerations is the designated method of payment for the design and construction services: lump sum, hourly rate or percentage of total construction cost.

Attorney James Zehren advises owners to carefully weigh payment options when planning new winery construction.
"In terms of the pluses and minuses, the advantages of the lump-sum approach are easy to understand," Zehren said, referring to lack of surprise fees. "The potential disadvantage from the owner's perspective is how do you know for sure if that's a good price, or if you're paying more than you should?" Zehren advised getting proposals from more than one firm to be sure the price is fair.
"You need to be fairly precise in your contract with the architect or engineer on what's included in basic services, and what will be included in what are called 'additional services,' for which you have to pay extra. That way you don't end up arguing all the time over whether what you've asked them to do is inside or outside the scope of basic services."
For the hourly rate approach, Zehren said, the potential disadvantage there is that there's no pressure on the service provider to keep costs down. "The way to deal with that is to set a maximum amount, so you're working with some sort of cap or notice provision," he said. The advantage is that you don't need to be precise in defining what basic services are vs. additional services, since you're paying only by the hour.
When paying by percentage of construction costs, Zehren recommended talking to others who have had similar work done to get an idea of what your total cost should be. A disadvantage, he said, is that construction costs are sometimes unrelated to the amount or degree of work required of the architect. "The owner sometimes can decide to make changes in how the building will be constructed--for example, you might go to a more expensive exterior cladding on the building--and that might significantly increase the cost of the project," he said. In that case, the owner could end up paying the architect substantially more, despite the fact that little or no additional work was required on his part.
Payment options for construction work are similar to those for architects and engineers: lump sum and cost-plus-fee. In the cost-plus-fee approach, the owner pays the contractor for a designated list of items that are defined as being part of the cost of the work, plus a second amount that's usually called the contractor's fee. As with the hourly approach, it's important to set a guaranteed maximum price (GMP), to keep the project costs under control.
"The lump-sum approach usually makes the most sense if you have a very straightforward project with few uncertainties," Zehren said. "On the other hand, if you've got a complicated site, a difficult schedule or a building that uses unusual materials, a rational contractor will build in a large (financial) cushion to cover those uncertainties."
Knowing how the various payment options work can help save winery owners money--and headaches--along the way. "The reality is that a lot of owners don't think about these things," he said. "They're often just given a price by their architect, engineer or contractor, and they often don't even ask questions. There really are options, and it's the owner's project and the owner's money, so the owner really should consider the options and figure out what makes the most sense for him on this particular project."
Another thing to watch out for in contracts, Zehren said, is a "limitation of liability" clause, which has become fairly common in owner-architect or owner-engineer contracts. A limitation of liability clause puts a cap on the amount of compensation the owner is entitled to in the event of a mistake on the service provider's part. "Understand that the owner has the ability to say 'no,' or has the ability to negotiate some reasonable limitation on damages. Owners just have to think through what they're being asked to agree to."
In architect Scott Bartley's experience, one of the biggest mistakes that winery owners make is to rush the preliminary design stage. "People frequently think of any construction as if it's a tract house," he said. "They don't think that every building has unique requirements."
However, starting with a clear idea of what you want can make the entire process--from design to permitting to construction--go more smoothly.
"There's a lot involved in the design process," Bartley said. "You start with a preliminary design, which is basically the first interaction between the architect and the client, where you go over the fundamental questions: How big is it, how much do you want to spend, what is it going to look like?" Based on that information, the architect creates a basic design that can be used to help the owner obtain a conditional use permit. "The conditional use permit says, 'yes, you have the right to build this type of building here,' but it doesn't give you a permit to build the building," he explained. "That's the actual building permit."

Santa Rosa architecture firm Hall & Bartley just completed the design development phase for the new Trione Winery in Sonoma County, shown here in a computer rendering.
Before the owner can apply for a building permit, the architect must create detailed construction drawings--including structural engineering calculations--for the county building department to review. "They'll review it for handicapped accessibility, they'll review it for state energy requirements and code safety issues. That set of detailed documents takes between six and nine months to develop," Bartley said.
Owners frequently try to rush through the early part of the design process, he said, which can have costly consequences. "You end up with a protracted construction period and less control over costs," he said. "Somewhere along the line you have to put the effort in, and it's much easier and much more cost effective to plan carefully to begin with, so that once you start construction, the process goes as smoothly as possible."
The design stage is the time to modify the project to fit your budget, he added. Once a building permit is issued, making design changes can slow, or even stop, the process. "Your project must match what your approval says."
It's also helpful to get the construction team involved early on in the design process, once the preliminary drawings are finished. "If you get the contractor involved, he can be monitoring costs and can give you a heads up when, for example, the price of steel doubles," Bartley said. "The architect doesn't deal with the purchasing of materials on a day-to-day basis, like a contractor does."
The architect will typically remain involved with the project throughout the construction process, he added. "Architects are wonderful, talented people, but no set of drawings is perfect, and since we take legal responsibility for those documents all the way through, if any changes occur during construction the architect has to be involved." This involvement accounts for approximately 20% of the architect's fee.
Though some owners try to save money by working directly with the contractor during construction, it can end up costing them more down the road. "We recommend against that because the owner--especially if he's not experienced in construction--doesn't have anybody to advocate for him and has no way of evaluating what the contractor is saying."
Understanding Costs
According to Dave Kincaid, of construction firm Facility Development Corp., 30% of the project proposals he has seen during his 25 years in the business were never built because the owners didn't understand the costs involved. "If you're not capitalized, you're out of your mind," he said. "You can't just cobble together funds from friends and family--you're competing against international corporations with more money and experience than you have."
Production volume and winemaking style are key factors in estimating facility costs, Kincaid said. "Many projects start with a budget level desired by the owner and then evolve to satisfy the production needs. This style of design is expensive. The short-cut method is to look at volume with the desired winemaking equipment and develop a rough site/floor plan that will support it. Given the space required, a cost per square foot can be assigned using the owner's desired level of finish. The process can then evolve to develop a design that the brand's business plan can support."
It's also essential to establish a clear processing model for the entire winemaking process. "Processing 10,000 tons for bulk wine sales in an open tank farm has a profoundly smaller facility cost compared to that same volume processed over a four-year period for high-end estate wines," Kincaid said. "The owner's processing equipment purchase costs also play a large part in the budget evolution process. The owner's business plan and projected return given the price-point of the product, along with financing costs, will establish a facility cost level available to support the brand. It may also lead to outsourcing of some of the processing to another facility."
Creating infrastructure to facilitate access to roadways, power, water, sewer and process waste systems should be taken into account, Kincaid said, since they can be quite costly.
"Get yourself ready to go, and know where you're headed," he advised. "It's a very competitive environment out there.
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