Construction developers can be just project owners -- or both the owner and contractor of a development project. In either capacity, a developer has certain obligations that need to be spelled out clearly in the contract documents. If this is done, the probability of a successful completion of the project is enhanced. If the initial step is omitted, the chances of delay and conflict are increased.
A Developer's Responsibility on a Project
In the construction industry, a developer is usually considered to be a person who develops land through construction and who, to this end, becomes an owner of the developed land. The developer seeks a profit from development of the land, either by selling a development, such as a tract of residential homes, a shopping mall, or an office building, or by holding the developed property to reap a return on the investment.
Developers can operate in many different economic arrangements. Some developers form construction companies to do their own work, and to pick up any other work they can obtain at a good price. Some are simply brokers, without much staff, who subcontract all or most of the work they undertake, often with only one criterion: the lowest responsible price. Others attempt to operate as contractors; some succeed, become established, and do good construction work in the market place.
Some developers have found advantages to having their own construction company, such as ensuring themselves a consistently high standard of construction work without having to pay for full-time inspection. Having their own construction company gives those developers a measure of flexibility in contracting, not usually attainable with other contractors, through competitive bidding and it gives them maximum control over development projects and costs.
Developers, Contractors, and Construction Contracts
Experience shows, however, that a prevailing risk for developers, doing their own construction work, lies in the temptation for them not to operate at arm's length. That is, the parent company may not be treated by the subsidiary in the same way as any other customer (at arm's length), so that the construction work is often not done at actual cost and for a reasonable profit. Because costs are constantly changing, it is difficult to estimate or determine some of the costs of construction work. Without the constraint of competition in the open marketplace, construction costs tend to become amorphous. In all instances of owners as contractors, separate companies should exist for the different functions and proper construction contracts between such companies should be made in writing.
Whether a developer is just an owner or both owner and contractor, there are two major types of contracts that usually govern construction projects:
The first type of contract is the stipulated sum contract, also called the lump-sum, or fixed-price, contract. In a stipulated sum contract, a bidder stipulates the amount for which he or she will do the work. This is probably the most familiar type of contract, as it has been the most common form of construction contract for the last 100 years or more. While it is still the most common form of contract, many of the larger construction contracts today are not done on a stipulated sum basis.
The contractor's primary duty in a lump-sum contract is to do the work as defined and as required by the contract documents within the contract time stated in the agreement. The contractor's primary right is to be paid the contract amount in the agreed upon manner, usually in installments, at the proper times. Obligations include both duties and rights, and one party's right is the other party's duty.
The lump-sum contract requires a contractor to provide and install work that "is reasonably inferable ... [form the contract documents] as being necessary to produce the intended results." It is necessary to grasp this fundamental nature of the stipulated sum contract. In the absence of anything to the contrary in a lump-sum contact, the contractor is required to provide and do everything necessary to complete the work for the general purpose for which it was designed and intended. Works that are indispensably necessary to complete the whole work are included by implication, if not specifically, in the lump sum of the contract.
Another important characteristic of the lump-sum contract, which affects a contractor's duties, is the fixed nature of the contract as it was first agreed and executed. It is significant that most forms of lump-sum contracts contain a condition that changes in the work can be made by the owner without invalidating the contract. With such a condition, the contractor must carry out all valid changes properly ordered, as long as the changes are within the general scope of the contract.
Under a lump-sum contract, the developer as owner has the responsibility to:
Almost everything else is done by the designer on the owner's behalf, and an owner is generally required to issue all instructions to the contractor through the designer. There are certain actions that only the owner can take, such as terminating the contract for cause, but usually he or she cannot act unilaterally and must have the designer's approval. The owner has few duties because the standard forms of contract give most of the duties to the designer.
The other common type of construction contract is the cost-plus-fee contract. In this type of contract, the owner pays the contractor all the costs of the work, plus a fee to cover the contractor's operating overhead and profit. This kind of contract, in its simplest form, is the antithesis of the lump-sum contract, because in a simple cost-plus-fee contract the owner takes the greater portion of the risk and the contractor take very little, whereas in the lump-sum contract the reverse is true.
The contractor's duty in a cost-plus-fee contract is to do the work according to the agreement and conditions of the contract, and his primary right is to be paid in like manner. One problem with this type of contract is in the variety of possible terms and conditions, resulting from the varying amount of information that may be available at the time of bidding. Because of the wide scope of possible variation in the terms and conditions of cost-plus-fee contracts, a bidder should read them very carefully.
It is the contractor's duty in a cost-plus-fee contract to do the work as efficiently and economically as possible, as if it were a lump-sum contract. However, a contractor will not always be able to achieve this ideal because of the nature of the work and the conditions of this kind of contract.
The owner's obligations in this kind of contract are similar to those of an owner in a lump-sum contract: a duty to pay for the work according to the terms of the contract; to provide information; and usually a duty to appoint another designer, should the employment of the original designer be terminated. As in a lump-sum contract, most of the other duties are in the hands of the owner's representative, the designer.
A developer can wear one or two hats in a construction project. A successful construction contract strives to clearly set out the rights and responsibilities of the parties at the onset. In this way, a project can be efficiently and successfully carried out and needless conflict avoided. An experienced construction law attorney will be able to insure that the developer's rights and responsibilities are clearly set out and understood in any given project.
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No one's perfect when it comes to the difficult task of designing, planning, and building a housing project. But everyone involved has a responsibility to act in good faith and take responsibility for any wrongdoing or negligence. If you have any questions about this, you may want to speak with a real estate attorney. Get a free attorney match today and get started.