Selecting General Contractors for a Multifamily Construction Projects
If you’re interested in developing or renovating multifamily housing, choosing a general contractor is one of the most important decisions you’ll make. Whether you’re a developer yourself, or simply interested in investing in a development project, it’s essential to understand a contractor’s role, and, just as importantly, what you need to know to select a qualified, professional contractor that will get the job done correctly.
The Role of a General Contractor in Multifamily and Commercial Construction
Just like general contractors for single-family homes, multifamily and commercial contractors are responsible for nearly all stages of the building process. This generally includes:
Design: A general contractor will be tasked with working with a project’s architect and helping suggest alterations and improvements that can save time and money while reducing risks and potential safety hazards.
Permitting: A GC will typically be responsible for obtaining all relevant city and county permits for a construction or rehabilitation project.
Hiring subcontractors: From plumbers and electricians to flooring specialists and security installation firms, a GC will generally solicit bids from several subcontractors in order to determine the company with the best combination of price and quality.
Purchasing supplies: While certain subcontractors may purchase their own supplies and bill back the GC, in general, most building materials will be purchased directly by the general contractor.
Zoning/building codes: While it’s important that a building’s architectural plans follow zoning ordinances and building codes, it’s also a contractor’s responsibility to make sure these codes are followed and implemented during the building and construction process.
General Contractors and Multifamily Construction Loans
The vast majority of apartment construction projects are funded with commercial construction loans, which involve the lender either making payments to the borrower, which will then pay the general contractor, or making payments directly to the general contractor. When choosing a GC for your development project, it’s important to consider the construction financing process. In most cases, a construction lender will want to approve a general contractor before they fund a loan-- one with significant experience, as well as a sizable surety bond to reduce the lender’s risk if the contractor cannot complete the project.
Before agreeing to a loan, a lender will typically also want a borrower to have a takeout commitment from a permanent lender. This means that the borrower will have the ability to refinance their initial construction loan, fully paying back the construction lender. Takeout commitments generally have a set timeline, after which the commitment will no longer be valid, so it is in both lender’s interests (as well as the borrowers) that the general contractor completes the project in time. In addition to timing considerations, the lender offering the takeout commitment may also want a say in a borrower’s choice of general contractor. Therefore, investors and developers will always want to consult with lenders before selecting a GC.
How to Select a Quality Multifamily General Contractor
In general, research is the first step in selecting a general contractor for a multifamily development project. A developer or investor may wish to search online, ask other developers for recommendations, or might even wish to find local properties that they like, and then look at city or county records to determine which contractors worked on them. If they are utilizing construction financing, they may also wish to ask their lender which general contractors they recommend. In today’s hot construction market, quality builders typically have their hands full, so developers may want to be wary of GCs that directly advertise to potential clients.
Start early: For large multifamily development projects, it can often take 9 months or more to receive the proper approvals from a municipality. Choosing a quality general contractor early on in the process can often speed this up, as they often know how to navigate the permit approval process.
Create a detailed project description: Providing a comprehensive project description is the best way to get an accurate cost estimate and work timeline from a GC.
Get bids from several contractors: For smaller projects, investors developers should typically get at least three competing bids from contractors. For larger projects, it may be advisable to get 5-6 bids, but this depends on the number of available firms in the area. Typically, more bids encourages more competition, bringing down prices.
Investigating references: Checking references is an essential part of your due diligence as an investor or developer. Beyond ensuring that past clients haven’t had any serious issues with the contractor, you can also determine the style in which they work. Asking specific questions here is key-- including how long it took a contractor to return their calls, and whether the contractor was able to complete the project on time and on (or under) budget. You may even want to call past clients that they did not provide as references (or even past employees) in order to get a more complete idea of their reputation and abilities. If a contractor has not provided references-- make sure to ask-- and, if they aren’t eager to provide them, you may want to look elsewhere.
Avoid potential pitfalls: Being hesitant to provide references is just one of several red flags that could pop up during the GC bidding and due diligence process. Other signs of potential trouble include a GC that only accepts cash, is not willing to obtain permits, or does not have a history of successfully completed projects.
Prioritize communication: Communication is one of the most important aspects of an effective general contractor-- and choosing a contractor that fits with your communication style is key. While some clients may want an update every day, others may be content with checking in once every few weeks, so you’ll want to ensure that a contractor sufficiently flexible when it comes to communication. This is especially important in the planning stages of a project, when a GC may need to attend zoning board and city council meetings in order to obtain the proper permits for a project.
Cost and Budget Analysis When Choosing a General Contractor
As a multifamily investor or developer, knowing how much you’ll pay for your general contractor is essential to the selection process. Below, we’ve listed some of the most important factors to consider In general, costs can can be split into two main varieties; hard costs, which directly involve materials and physical labor, and soft costs, which involve things such as design consultations and the permitting process. In addition, pre-construction costs must also be accounted for, which can include the soft costs mentioned above, as well as other contractor costs, like budgeting, due diligence, meetings, and conducting a feasibility analysis.
Flat fees vs. percentage fees: There are two major contractor fee structures; flat fee pricing, or pricing based on a percentage of total costs, plus a smaller flat fee. By choosing a flat fee, a client can expect greater certainty in regards to overall costs, but contractors may be somewhat less transparent about how and when they spend their money. In contrast, cost-based pricing can lead to greater uncertainty, but a client can generally expect a greater degree of transparency from their GC.
Choosing subcontractors: It’s always important for contractors to get multiple bids from subcontractors, but this is especially in the case of cost-based agreements, as the client will be paying directly for any increase in costs related to overpaid subcontractors. This is where choosing the right contractor is essential; an untrustworthy firm may choose higher priced subcontractors in order to increase their percentage-based fee. While cost-based agreements generally permit owners to have a hand in choosing subcontractors, many clients will often defer to a contractor, especially if they don’t have significant experience with the commercial construction process.
Financial strength: It’s essential to make sure that any contractor a client chooses has the financial capacity to fully finish the project with a reasonable margin for safety. Clients may wish to see a contractor’s financial statements to ensure they have a net worth of at least the cost of construction (this may not apply to larger projects), as well as a sufficient degree of liquidity. A contractor should also be fully licensed, bonded, and insured-- but we’ll cover more about that later in this article.
With all this in mind, it’s important to appreciate that clients will generally pay a general contractor in a series of predetermined disbursements, to be issued on a monthly basis, or on an incremental basis, as the various stages of the project are completed.
Why You Should Hire a Bonded, Licensed, and Insured General Contractor
If you want to make sure that your multifamily construction project goes smoothly, it’s incredibly important to ensure that you choose a contractor who is licensed, bonded, and insured. When it comes to licensing, contractors are licensed by a state board or agency, and, while specific names vary by state, their functions are generally the same. Working with an unlicensed contractor is extremely risky, due to the fact that you will generally not be able get insurance or pursue certain kinds of legal claims against them. In addition to being insured, a contractor should also be bonded.
A bonded contractor has purchased a surety bond, which is similar to, but not the same as a traditional insurance policy. Surety bonds help protect owners in the case that a contractor is not able to complete the project on their own. For instance, if the contractor has financial issues, the surety company may lend them cash, while if they abandon the project entirely (or do not do correct, quality work), the surety company will typically replace them with a new contractor. Most construction lenders require that a general contractor is bonded, and may even be a “dual obligee” under the surety bond contract.
However, despite their necessity, surety bonds are not foolproof. In order to receive a payment, property owners sometimes need to petition the contractor’s board (or other relevant statewide body) in their state. In certain cases, they might also need to try to obtain repayment from the contractor prior to pursuing a claim with their state’s contractor’s board.
In addition to being licensed and bonded, a contractor should also be insured, which, in most cases, indicates that they have general liability (GL) insurance. General liability insurance can help protect both property owners and general contractors in a variety of scenarios, including personal injury lawsuits by subcontractors, as well as provide a way for an owner to sue a general contractor or their subcontractors for poor work without putting the GC (and the project) in financial jeopardy.
The Importance of Contracts When Choosing a General Contractor
Just like any important transaction, closing the deal with a general contractor requires a contract, often referred to as a construction contract agreement. Smart investors and developers will want to make sure that this document covers all relevant aspects of a contractor’s work, as well as contingency clauses that cover unexpected events, such as accidents or potential financial issues. For this reason, an experienced real estate lawyer should generally draft and review a client/GC contract before it’s signed. In general, the contract should include:
Project start and completion dates
Basic budget, payment schedule and materials information
Basic insurance and bond information
How changes and change orders will be dealt with
Liability of each party under various circumstances, including “Acts of God”
Delegation of responsibilities for permits and site clean-up
To get an idea of what a commercial construction contract looks like, one can easily search for free templates, however, since each project is different, an attorney should always be involved in the contract creation and signing process.
In Conclusion: When Choosing a General Contractor, Homework is Key
In some ways, choosing a general contractor is like choosing a spouse-- choose wisely, and things will go well, but chose poorly, and you could be in for serious trouble. Like a spouse, you’ll typically have to communicate and negotiate with your contractor on a regular basis, but, unlike a spouse, this will only occur for a period of between 6-24 months, depending on the size and scope of your specific project. A good GC needs to be reliable, trustworthy, communicative, and financially responsible, since you’ll be trusting them with hundreds of thousands--if not millions of dollars. In addition, a GC should be able to negotiate the complex relationships between city officials, architects, lenders, and subcontractors in a way that makes your project go as smoothly as possible.