So you want to be a developer: A primer
for the first timer
There is no doubt that a soft real estate market causes
havoc for many developers and contractors. But, at the same
time, it may offer unparalleled opportunities for those
who have been hankering to be a project owner/ developer.
With the cost of real estate still plummeting, and a ready
supply of good contractors looking for work --this could
be an opportune time for many first-time small project developers
to realize their dream. With that in mind, I would like
to offer the following very basic list of items any first-time
developer should keep in mind when embarking on a new venture.
First, realize that construction is an extremely time consuming,
excruciatingly detailed process. If you are good with that,
then proceed with caution.
The architect- Assuming you have your funding
lined up, the first step is to hire a qualified architect
who will provide the plans for your project. This is not
an area in which you should attempt to save money. A good,
complete design could very well be priceless. At the very
least, a good, complete design will enhance the constructability
of your project and minimize delays and change orders. Select
someone who has experience in the particular type of project
you want to develop. And then, take the time to tour pervious
projects and talk to the architect's reference. Obtain estimates
from a few potential architects.
Take the time to meet with the potential architects in person
to gain insight as to their work ethic and style. A good
architect should also be able to provide you with an estimate
of what your project may cost to build, as well as offer
suggestions of alternate designs and materials to keep within
your budget. Once you find a good architect with whom you
believe you can have a comfortable working relationship,
insist that you enter into a written contract for the design
services.
Make sure the architect's scope includes a complete design
of all components of the project. And, include a list of
extra services that are not included in your architect's
basic services. Decide if you want the architect to stay
involved with the construction and at what cost. Also, make
sure there is a time-line as to when the design will be
completed. As always, it is a good idea to seek qualified
legal counsel to make sure that the contract terms adequately
protect your interests.
The general contractor Avoid the temptation
of being an "owner-builder" even if you have managed
your own small-scale office tenant improvements or home
renovations. Despite the "can-do" attitude of
the entrepreneurial spirit within - including the desire
to save costs by not having to pay a general contractor's
profit or fee - don't do it. I know of no projects where
the owner/developer saved quantifiable amounts by acting
as an owner/builder.
Most of the time, it just results in the separate subcontractors
pointing their fingers at each other -- or at you -- for
problems during construction. That is one thing that is
guaranteed, you will have problems during construction --
it's the nature of the beast.
So, bite the bullet and hire a qualified general contractor
using the same qualification and selection process that
you use with the architect. Your contractor should be able
to provide you with a cost breakdown, or schedule of values,
which shows the total contract price broken down by subcontractor
or trade. It also should include line items for contingency
-- if any, and the contractor's overhead and profit. Most
likely, your construction lender will require you to submit
this and it should be an exhibit to the construction contract.
Another exhibit that should be included with the construction
contract is a construction schedule showing when each major
phase of the project will be complete. The construction
contract itself should include firm start and completion
dates. Because of the potential risks and large sum of money
involved with the construction of the project, it is essential
to seek the assistance of a qualified attorney to help you
negotiate the construction contract. It is a small price
to pay in comparison of the investment in time and money
you are about to take on.
Here are just a few more of the items you need to consider:
Insurance -- make sure the contract requires
adequate insurance by the contractor with you named an additional
insured. Considered obtaining course of construction or
builder's risk insurance yourself.
Fund control -- fund control is a service
that administers the progress payments to the contractor
based on the
percentage completion for each trade. Most construction
lenders have either their own fund control or hire a third
party service to act as fund control. Even if you are funding
the project yourself, deposit the money into a fund control
(such as B>Dixieline Lumber). For a relatively minor
fee, fund control will disburse a payment only when they
receive the proper supporting documents and lien releases
from the contractor. They track the funds disbursed against
the cost breakdown and provide a variety of financial reports.
Retention -- Include in the contract a
hold back 10% of each payment until the project is completed
and you confirm that all subs and suppliers have been paid,
or will be paid from the retention proceeds. Use joint checks
for any sub or supplier who has not yet been paid.
Change orders -- Expect them and have a
procedure in your contract to handle them. Before the work
is performed, always agree in writing exactly what is to
be done, what it will cost and whether there is a time impact.
Plans and permits -- always require that
the permitted plans and inspection card remain on-site.
Mechanics' liens -- To avoid mechanics'
liens get releases from all subs and suppliers and understand
the purpose and importance of these documents:
Conditional and unconditional waivers and releases
upon progress payment.
Conditional and unconditional waivers and releases upon
final payment.
Notice of completion -- record a notice
of completion within 10 days of the completion of the project.
This sets the
time limits for mechanic's liens.
Warranties -- get all manufacturers' warranties
in writing.
O & M manuals -- require that your
contractor obtain operations and maintenance manuals for
equipment (HVAC
systems, appliances, spa and pool equipment, etc.)
As-built documentation -- Include in the
contract a requirement for the contractor to keep a set
of plans showing all "as-built" changes to the
project.
Being a developer can be a rewarding experience, and a key
to keeping it that way is to not skimp on the professional
services. Put together the best team you possibly can, including
a qualified architect, contractor and legal counsel And,
if you've done your homework and selected a good general
contractor -- get out of their way and let them do what
they do best -- which is ... build your project.
Do you have a construction question? Send it to: info@construction-laws.com
General disclaimer: The information in this article is based
upon California law and is for general information only.Any
information or analysis presented here is intended solely
to inform and educate the reader on generalissues. Nothing
presented or referenced to, regarding facts, documents,
or applicable laws, constituteslegal advice. Before acting
or relying on any information, including any information
presented here, consult with a qualified attorney for your
specific situation.
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