Becoming the Total Cost of Occupancy (TCO) for Growing Companies

All eyes are on rent. Rent is the number that shows in property listings, dominates the discussions in early meetings with agents and seems to be mentioned at meetings as the definitive indicator. "We can get office space here for only X per square foot" can sound appealing, especially when compared with another building that costs a little more.

But rent is not the only price for an office.

A business that is experiencing rapid growth faces a number of decisions that define its total cost of occupancy in many ways: the volume of space, duration of a contract, the amount of investments made before moving in, handling of broadband, dealing with air-conditioning breakdowns in August and the price of leaving the office when it ceases to serve the business needs.

Not to mention that, in case the wrong decision is made, the cost could become absolutely unmanageable.

An office is not a fixed overhead to be tolerated. An office is a strategic decision that impacts the company's cash flow, ability to hire new staff, productivity and flexibility. When it comes to businesses that are growing, getting the total cost of occupancy right is much more important than paying a slightly higher rent.

The cheapest office is not necessarily the easiest to maintain. And it is always the most difficult one to vacate.

The essence of "total cost of occupancy"

Total cost of occupancy (TCO) is the full picture of expenses related to the use of office space within the term of a contract.

It encompasses not only such evident elements as rent, business rates, service charge and utility bills, but also such things as legal costs, deposits, insurance, information technology infrastructure, furniture, fit-out costs, maintenance, cleaning, repairs, compliance check-up, move-in costs and management costs associated with handling the office.

Dilapidations, for example, often occur at the end of a lease term. The business might be required to dismantle certain partitions, repair alterations and restore the office space to the agreed condition. It could hurt because this cost tends to be incurred at the time when the company needs to invest in its next move.

The purpose is not to say that traditional office leases are always traps. Many businesses make perfect long-term decisions about their office space. The purpose is to stress the fact that the headline rent is only a part of the total price of the office space.

And the distinction is important for any CFO, COO or business owner.

Rent is transparent and easy to compare. The rest of the cost base is usually distributed across various departments, remains hidden in separate budgets or emerges at the moment when the problem occurs. Sometimes the office looks as a neat line item in the budget. Other times, the Internet connection needs to be upgraded, service charge increases, some contractor or additional office is needed.

The question that needs to be asked is not "How much does this office cost each month?"

It is "How much will it cost us to occupy, manage and finally vacate this office properly?"

The real pain starts even before anyone moves in

Traditionally, office leases require significant pre-move-in capital investment.

Most direct office leases usually start with the Cat A space. In simple words, it usually means that there are some basic elements of an office: ceilings, floors, lighting, ventilation and basic building services. It is fully functional, as an empty kitchen is functional. Technically, a business could work in this space. It would not be very comfortable.

To be able to use it, most businesses require Cat B fit-out. Fit-out is a process that transforms an empty space into the workplace. At this stage, meeting rooms, kitchen, furniture, wiring, storage facilities, signage, acoustic treatment, desks, IT equipment, and other elements of the office space are installed.

It does not mean anything wrong per se. A business that has a clearly defined long-term plan might need to equip its office with precisely such elements that it would need in order to run successfully. Such a business may require certain layout, client suite, special IT equipment, or branded interior.

However, fit-out costs need to be evaluated realistically.

They do not represent a mere "office decoration" cost. These are capital expenditures in a building that does not belong to the business. This money cannot be invested in hiring, inventory, development of new products or services or whatever else a business requires.

There are also other costs related to fit-out: legal services, surveyor services, negotiating a lease, deposits, IT equipment, furniture procurement, contractor management and move management.

This is where many businesses get into trouble. Monthly rent can be affordable enough. The cost of transforming an empty floorplate into the office can be much higher than expected.

Traditional lease agreement does not only reflect a decision about where a company would run its business. It also represents a decision about where a company will tie its money for the next several years.

Desks left unused are not a growth strategy

There is always a particular type of optimism that accompanies office space search process.

A company with twenty employees starts dreaming about an office for fifty people. Its forecasts look good. It has some promising contracts in pipeline. The hiring plans are ambitious. The next office needs to be big enough not only for the existing, but for the future business as well.

Such approach is quite understandable. It is also costly.

Too much office space means extra expenses on unused desks, meeting rooms and an office kitchen that looks oversized for the current business. Too little office means that a company needs to start looking for a new office when it already settles in its old one.

The reality is that rapidly growing businesses are not always predictable enough to allow for such simple calculations.

Headcount changes. Funding rounds happen. The market situation shifts. New departments emerge, departments merge, remote work changes, customer requirements evolve. A business might need to get more space due to winning a major account. Six months later, a company might realise that it has hired more people than it needs according to its revenues.

It does not mean that companies should not make long-term plans. It means that a company should not be careless when signing a five- or ten-year property commitment thinking that it is a harmless guess.

An office space should be a support for the business, but not an obstacle on its way.

The cost of excess space is not only monetary. It can influence decision-making. Managers can delay hiring due to concerns about occupancy costs. Employees can be forced to share the office space due to the mistakes made earlier. Growth can become a property management problem.

It is not a desirable situation.

The hidden costs of operating an office

There is always a dream of an ideal office when everything is organised, the coffee machine works properly, meeting room displays connect instantly and nobody needs to contact a broadband provider.

Then there is the reality of operating an office.

Someone needs to organise cleaning. Someone needs to keep track of utilities usage. Someone needs to handle maintenance. Someone needs to ensure that fire safety checks are performed, that visitors can access the office, that the printer stops acting strangely and that air-conditioning does not break down at the hottest day of the year.

In a bigger company, these tasks are performed by a dedicated facilities or workplace management team. In a smaller company, someone usually picks up the task.

It can be an office manager. It can be a COO. Or the founder, which usually indicates some kind of a problem.

Of course, these are not impossible tasks. But they have a cost.

There is a financial cost of having service contracts, repairs, equipment, insurance and compliance requirements to budget. But there is also a time cost.

Every hour spent on contractor chasing or solving supplier issues is an hour not spent on hiring, sales, operations or whatever a company needs.

Office expenses should never be evaluated from the property perspective alone.

Lower-rent office might not be a good deal if it produces a continuous stream of operational issues. On the other hand, a more expensive option might be a better choice because it reduces management burden and creates a more predictable environment.

The question is not just "Are we able to afford this office?"

It is "Whose responsibility will be to manage the office, and what else could this person do?"

Why predictable costs are worth paying for

Rapidly growing businesses appreciate certainty, especially when they have uncertainty in other areas.

Sales forecasts change. Demand for products/services changes. Hiring plans change. The budget is re-evaluated. What the business does not need is an unpredictable cost base.

With a traditional lease, office costs can be hard to forecast. Service charge might increase. Utility prices can fluctuate. Repairs happen. Building works might affect costs. A fit-out project can take more time than expected and delay other activities.

Managed office spaces change the picture.

Instead of multiple suppliers, fit-out project and the responsibility for managing the office, a business pays a clear monthly cost. The monthly cost usually includes workspace itself, furniture, utilities, cleaning, maintenance and building management, with the provider being responsible for the rest behind the scene.

For the businesses that require control of the office environment, but not all the complications of a traditional lease, serviced or london managed offices space might be a good alternative. These solutions provide a business with a private and customised space.

It does not automatically mean that managed offices are cheaper than a traditional lease. There might be cases when traditional lease agreement offers better long-term value, especially when it comes to well-established business with stable needs and resources to manage its property.

However, predictability has its own value.

Businesses that know what will the office cost each month can plan their activities better. They will be able to make decisions based on their cash flow instead of hoping that nothing unusual happens with their office space.

The exit costs that nobody likes to talk about

Commercial leases are exciting in the beginning.

Viewings, floorplanning, discussion of future prospects and perhaps a Pinterest board with overly optimistic office furniture ideas. Everybody is focusing on move-in.

Far fewer people think about move-out.

But the terms of exit from a lease agreement are as important as the terms of entering. According to the agreement, a tenant might be responsible for repairing damage, reinstating alterations, dismantling fit-out elements and return of the office in a certain state.

This is when dilapidations come.

A business might spend years using a space that it has decorated with glass meeting rooms, customised lighting, kitchen, storage, branding and other elements. However, at the end of a lease, it might be required to dismantle some of those changes or to compensate the landlord for the cost of their dismantling.

It sounds absurd. You paid for making the office space work. Then, after years of working in this office, you need to pay for undoing those changes.

The specifics of the procedure depends on a lease, the Schedule of Condition and the agreement between the landlord and the tenant. However, it is a cost that needs to be considered from the very beginning of the negotiation process.

Serviced and managed offices mitigate this risk because the occupier does not assume building maintenance responsibilities and fit-out in the same way as the tenant in a traditional lease.

It does not mean that every exit obligation is eliminated. Businesses should always read the agreements. However, it means that the end of a relationship with a landlord will not become an expensive breakup.

Controlling your brand does not mean handling property management

One reason for a business to go for traditional office space is quite understandable: it needs an office space that would reflect its brand.

It does not want to negotiate with customers in a generic shared reception. It wants its own meeting rooms, visual identity and branded workplace.

For some companies, it is important.

Creative business might consider office space as a part of its portfolio. A law firm might need a professional environment with private meeting rooms. A company with strong culture might want to show it to the new employees.

The misunderstanding is that the only solution is a traditional lease with a large fit-out cost.

Managed office space could offer a more flexible solution to this problem. Businesses might be able to shape the layout, choose furniture, add visual identity, configure meeting rooms and design a workplace for their team. The difference is that the business does not need to tie its capital or manage facilities itself.

The result might still be a true corporate headquarters, not just a bunch of desks in a lounge.

It is possible to create an office space with personality without becoming familiar with the building maintenance contract.

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