High rates of inflation and supply chain disruptions have caused construction costs to soar.
Written by Jessica Browning, Principal and EVP, Winkler Group
If your academic institution or nonprofit organization is in a campaign or planning one to build new facilities, what can you do to mitigate the challenges associated with rising construction costs?
There are ways to structure your campaign that will ensure its success, even in choppy waters. One of the benefits of working with campaign counsel is their ability to suggest solutions based on experience dealing with similar challenges.
Here are our answers to some of the most common questions we’re hearing from our client partners and others in the nonprofit community.
Question: Should we postpone launching our campaign until costs settle down?
No. Instead of postponing a campaign, we see an urgency to raise money now and build as soon as possible for the following reasons.
Construction costs are not predicted to decline in the next 12 months. On the contrary, the cost of materials will likely continue to rise as will labor costs; waiting is not prudent and may end up costing you even more in the long term.
Giving remains stronger than ever. The Blackbaud Charitable report issued in February indicates giving in 2021 was up 9 percent over already record-high 2020 giving (Blackbaud Institute, 2022).
Despite low earnings for January and February 2022, analysts predict companies in the S&P 500 will report Q1 growth of 4.8 percent thanks to a market that rebounded in March. Because total giving—particularly campaign and major giving—is highly correlated to stock market performance, this uptick is important (Jackson, 2022).
Furthermore, by canceling a campaign—or postponing construction indefinitely—you risk eroding the trust of your donors. Your donors are expecting you to take action—they’ve invested in your project because they see a critical and urgent need. If you postpone construction for a substantial period of time, there is a strong chance they may take their investment elsewhere where it will be put to use immediately.
Question: We’re in the middle of a campaign and the cost to build is now 10 percent higher than our campaign goal. Should we just increase our goal?
Raising your goal simply because construction costs have risen is never a good idea. Respect for the donor should always be paramount; by returning to donors and asking for more, they may feel less like your partner and more like an ATM.
Instead, honor your donors by engaging them in frank discussions about the impact of construction costs on the project. Invite input from them and from your campaign volunteers. Transparency is always key.
Conversations with stakeholders should include alternative ways to address rising construction costs. Look for ways to work within your original budget by value-engineering your project, considering financing options, or even building your new facilities in phases.
Question: Should we mention we are budgeting for a construction contingency in our case prospectus?
Yes. When outlining a building’s cost in the prospectus and case for support, consider including your construction contingency as part of the project cost. Including a contingency increases a donor’s trust in the project and in the leaders who are behind its conception and execution. Donors cite trust in an organization’s leadership as one of the primary reasons for investing in a campaign.
A 10 percent contingency is standard, but in today’s construction landscape, this contingency could be increased to 15 or 20 percent.
Question: What if we can no longer afford to build the project as we originally proposed to donors?
If active fundraising has begun, it’s important to move forward with at least part of the project, otherwise your donors will lose confidence in your commitment towards the cause they have supported. This does not mean, however, that you must move ahead with the project as originally conceived.
Can your project be scaled back? Discuss which attributes are needs and which are wants. Be sure to include your lead donors—or lead prospective donors—in these discussions. If they are part of the discussions, they will respect the tough decisions that have to be made. They may even decide to increase their own investment level to keep their favorite aspects of the project from being scraped or scaled down.
Question: Can we decide to phase our build—even if we’re in our campaign’s quiet phase?
Yes, phasing your build can be a wise approach, but remember that you must involve stakeholders in the decision-making process. As long as progress is shown, donors will respect that you are properly stewarding their resources and making the best decisions for the organization.
Question: Can we skip a campaign study to break ground faster?
Too often, organizations tell us, “Our architects estimate it will cost $25 million to construct our new building, so that’s how much we need to raise.” Or they believe that skipping a campaign study altogether will help speed up their project and lock in lower construction costs.
Foregoing a study is absolutely the wrong way to approach a building project. It is critical that you first determine how much can be raised towards that new building. THEN, engage an architect to build a building that stays within that budget. Otherwise, an organization runs the risk of financing a building it cannot afford and pulling funds away from the operating budget to pay debt.
A study also increases donors’ confidence in your project. Savvy donors recognize the state of today’s construction costs and regard the study as an important part of the due diligence process. Always avoid the temptation to launch right into a campaign without first testing the waters.
There will always be external factors that threaten a campaign: a competing institution could launch a campaign and threatens to cannibalize donations; a natural disaster could shift focus away from an organization; or economic uncertainty could cast doubt over gift levels.
Now is not the time to pause your campaign because of rising construction costs; your mission is too important to delay. The same urgent needs you face today will still be there next year. By pausing—or by asking your donors to increase their gifts—you run the risk of alienating your donors and causing them to lose faith. Instead, engage those donors and together develop a comprehensive strategy for meeting today’s challenges.
About the Author
Jessica Browning, MBA is Principal and Executive Vice President of the Winkler Group, a national capital campaign and strategic planning firm headquartered in Charleston, South Carolina. A former member of the Giving USA Editorial Review Board, Jessica has a B.A. from Duke University and an M.B.A. and M.A. from the College of William & Mary.
References
Blackbaud Institute. (2022, February). 2021 charitable giving report. https://institute.blackbaud.com/charitable-giving-report/
Jackson, A. (2022, April 1). April stock market outlook. Forbes Advisor. https://www.forbes.com/advisor/investing/stock-market-outlook-and-forecast/
