Construction Services Agreements by Stanley K. Barth

A developer may add significant value to his client's real estate holdings by providing design, construction and development services, without taking title to the real estate.  From the developer's perspective, the owner of the real estate takes the risk of ownership, including financing.  A further benefit for the developer is the relationship formed with a corporate user.  From the owner's perspective, the developer's experience is critical and most often lacking "in house."  It is this needed experience that helps assure an asset is built efficiently, within budget and within the timeframe needed by the user.  Typically, the owner is either the manufacturer of a product and in need of manufacturing, warehouse or distribution facilities or is in need of a facility for use by the owner's tenant. 

In negotiating a Construction Services Agreement, you will want to consider the following:

Scope of Developer's Duties

The developer's duties may begin with and include site selection in accordance with a matrix of criteria to be produced by the owner or perhaps the owner and developer working together. The developer may offer assistance in negotiating the acquisition contract and in providing due diligence oversight.  In the "pre-development" or "design" stage, which most likely will occur during the site selection and acquisition process, the developer may assist in developing site plans, building elevations, outline design criteria and other preliminary plans.  From the preliminary plans, the developer's assistance will extend to development of a construction bid package and selection of a general contractor.  Of course, all of these functions are subject to owner's approval at some level.  From the construction bids, the owner and developer produce a budget based upon preliminary construction estimates.  Thereafter, more detailed construction drawings and final plans and specifications are developed.  During the construction phase, the developer oversees the general contractor; advises the owner of defective work; administers progress payments and loan applications and, in general, is the owner's "eyes and ears" on site.

Developer's Exposure

The owner has hired the developer with the expectation that the developer will cause the project to be substantially completed within a specified time (subject to extensions as may be negotiated or allowed for events of force majeure) and within the agreed upon budget.  The owner is generally responsible for the payment of all project costs (both hard and soft costs, but excluding the developer's overhead and administrative costs), and quite often the developer is required to guarantee any cost overruns (other than those arising from change orders).  The Construction Services Agreement should address the manner in which any "savings" is calculated and divided between the owner and the developer.  Wisdom and logic suggest that the owner will benefit by sharing a portion of any savings (that is, "value added" savings not resulting from scope of work changes), thereby providing an incentive to the developer to make the most of every dollar.

Compensation to Developer

The compensation to be paid to the developer may take many forms.  The basic fee is generally expressed as a percentage of "hard costs."  As noted above, the developer may share in savings.  Additional fees are generally addressed for change orders and "allowance" items which may be included in the budget.  Incentive fees may be awarded for early completion, while deductions can be assessed for late completion. Certainly, the Construction Services Agreement should clearly list the fees, costs and expenses for which the developer should be reimbursed.

Termination

Careful thought needs to be employed when reviewing and negotiating provisions for termination or suspension by either the owner or the developer, particularly if termination is permitted "without cause."  In most instances, the developer may have added far more in value to the project at a particular point in time than the percentage of the aggregate of fees and incentives payable through that date.  Consideration should be given to the obligations the developer may have as to any contracts or subcontracts entered into by the developer and the extent to which those obligations may survive the termination of the Construction Services Agreement.  It may be a good idea to require assumption of those contracts by the owner should the Construction Services Agreement be terminated.