By Sarah Lewis Belcher, Esq.
Property owners have a number of options for structuring a construction project: general contractor, construction manager or design/build. There are differences among the three that are important to understand when deciding which structure best fits.
A general contractor (GC) enters into contracts with and coordinates the work of subcontractors to complete the project. General contractors are not involved in the design of the project and instead become part of the process once the plans and specifications have been completed.
General contractors are often selected by competitive bidding, so are incentivized to keep the bid price low to be more competitive. Once the project is awarded, the GC will endeavor to keep the cost within budget, particularly since the GC will retain any unexpended amounts up to the contract price as profit.
Since GCs are not involved in project design, however, once they start work they may discover that changes are needed. This may result in delays and/or price increases. Also, because the GC’s price isn’t known until the bidding process is finished, determination of the entire project cost must wait until the GC contract is awarded.
A construction manager (CM) manages almost all phases of construction, starting with the design. The CM’s responsibilities generally include evaluating the construction program, providing a project schedule, cost estimates and scopes of work for the various contractors, advising the owner and architect on site use, selections of materials, building systems and equipment, and providing recommendations on labor availability, procurement timing, installation and construction, costs of alternate designs and possible cost savings.
Construction managers are usually chosen based on qualifications and experience rather than through bidding. CM fees are generally flat, percentage or hourly rates.
There are two types of CM agreements, one in which the CM is an advisor and the other in which the CM is a constructor. In the advisor structure, the owner will enter into contracts directly with the various contractors.
As a result, the owner would be responsible for bringing litigation if a contractor failed to perform and also runs the risk of being sued for alleged owner defaults under the contract(s). If the CM is the constructor, the CM enters into the contracts and, similar to the GC arrangement, the CM must then enforce and is the obligor under the contracts.
The compensation and payment arrangement for the constructor structure are generally broken down into pre-construction services, cost of work and construction services.
Although the contract with the CM as constructor separately delineates the responsibilities for the pre-construction and construction phases, work for these phases may occur concurrently to speed the project along.
Due to the nature of the GC arrangement, the interests of a GC aren’t necessarily aligned with those of the owner. A GC must make assumptions and decisions about its margins and risk when it prepares its bid package. To the extent the reality differs from the information used to prepare the bid, changes may be required in the plans and specifications, which could lead to delays and/or increased prices the owner didn’t anticipate.
Also, as noted previously, once a project is awarded it is in the GC’s best interest to complete the project under budget so that its profit is increased. The owner may be adversely impacted to the extent quality could be compromised because of the GC’s efforts to keep costs down, or the project price may increase during construction, necessitating budget and financing revisions.
The CM arrangement has been described as one where the CM and owner are “on the same side.”
They work together starting in the pre-construction phase to design the most cost effective project, budget and schedule to achieve the owner’s objectives. Because the CM is involved in early planning it may be able to provide more realistic schedules and cost estimates than a GC who is reviewing plans and specifications concerning which it had no input.
The CM as constructor arrangement eliminates the risks associated with the owner entering into construction contracts that are inherent in the CM as advisor structure, but the CM’s fees are typically higher in the constructor scenario as a result of the increased risk.
Design/build is another option. With this structure, the GC enters into contracts not only for the construction, but also for the design of the project. As a result, the owner has one contact for the entire project and the GC is responsible for all aspects of the project.
This arrangement can require less of the owner’s time and attention than a GC or CM structure. If the owner wants to be involved in the details of the project and/or have more than one party involved in the project answerable to the owner, either the GC or CM structure may be a better fit.
Belcher is senior counsel with Bond, Schoeneck & King, representing developers, lenders, purchasers, sellers, landlords and tenants in a wide variety of commercial real estate and lending matters.