When embarking on a commercial real estate development project, hiring the right general contractor (GC) is one of the most crucial decisions you'll make. The success of your project, from staying on budget to meeting deadlines and ensuring quality, hinges on this choice. Here’s what you need to consider when selecting a general contractor for your commercial development:
1. Clear Contractual Terms
The contract is the backbone of your relationship with the general contractor. Ensure that the contract clearly outlines the scope of work, payment terms, schedule, and specific exclusions. For instance, in the provided contract, items such as architectural, civil, structural, and MEP engineering are excluded, which means the owner must handle these aspects separately. Understanding what is included and what is excluded helps avoid misunderstandings later on.
2. Project Timeline and Milestones
A well-defined timeline with clear milestones is essential. The contract should specify the commencement date, which in this case, is contingent upon several factors such as the delivery of coordinated architectural and structural drawings. Delays can be costly, so make sure the contract outlines not only the start date but also penalties or adjustments for delays, especially for events not covered under Force Majeure.
3. Budget and Cost Breakdown
Understanding the financial aspects is critical. The contract should include a detailed budget with a breakdown of costs, as seen in the “Schedule of Values” provided in the contract. This section should detail all costs, including allowances for specific items like drainage structures or landscaping, so there are no surprises later. It’s also vital to check for exclusions such as the builder’s risk policy or performance bonds, which can add to your costs if not initially included.
4. Insurance and Risk Management
The contract must address insurance coverage. The provided contract includes general liability, umbrella, auto liability, and workers’ compensation but excludes the builder’s risk policy, which could be provided at an additional cost. Ensure that your contractor has adequate insurance to cover any potential risks during the construction process, and understand what is covered by their policies versus what you need to secure independently.
5. Quality Control and Testing
Exclusions related to quality control, such as testing and dealing with unforeseeable subsurface conditions, are critical considerations. The owner may need to coordinate with a third-party testing company. Ensuring quality throughout the construction process is non-negotiable, so consider who will be responsible for these tasks and what standards will be applied.
6. Flexibility and Change Orders
Commercial projects often require adjustments along the way. The contract should clearly define the process for handling change orders, including how they will be approved and how they will affect the timeline and budget. The contract you provided excludes certain future phases, like the construction of a lounge, which indicates that the project is flexible and changes are anticipated.
7. Termination and Dispute Resolution
In the event of a dispute or if the contractor fails to meet their obligations, it’s essential to know your rights. The contract should include provisions for termination and the steps that will be taken if either party needs to terminate the agreement. For instance, the contract you provided allows for termination at any time, with the contractor recovering costs for work completed up to the termination date.
8. Permits and Regulatory Compliance
Ensure that the contract clearly defines who is responsible for obtaining necessary permits and ensuring compliance with local regulations. The provided contract excludes permit fees and TDLR fees, which means the owner must handle these aspects. Compliance is non-negotiable in commercial projects, so make sure there is a plan in place.
9. Material and Labor Management
The contractor’s ability to manage materials and labor effectively will impact the overall success of the project. The contract mentions the need for a 10% engineering/material deposit and stipulates how payments for materials will be handled. Understanding these logistics is crucial for maintaining cash flow and ensuring that the project stays on track.
10. Communication and Coordination
Finally, effective communication between all parties—owner, contractor, architects, and engineers—is key to a successful project. The contract should specify the frequency and format of progress reports, meetings, and other communications to ensure everyone is aligned throughout the project lifecycle.
By carefully considering these factors and ensuring they are well-documented in your contract, you can mitigate risks and set the foundation for a successful commercial real estate development project. Remember, the devil is in the details, so taking the time to thoroughly review and understand your contract is an investment in the success of your project.
MMCG is a specialized feasibility study company serving the commercial real estate sector. We assist our clients in conducting comprehensive due diligence, including evaluating zoning regulations, analyzing current market conditions, and determining the financial feasibility of any commercial project. Our expertise ensures that our clients have the critical information needed to make informed decisions and successfully navigate the complexities of commercial real estate development.
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