Construction Developer's Responsibilities

On top of serving as a general contractor for a development project, a construction developer can be a project owner. Either way, a developer has certain obligations that need to be spelled out clearly in the contract documents. If this is done, there will be a greater likelihood of successful project completion. Otherwise, the chances of delay and conflict in real estate development are increased.

A Property Developer's Responsibility

In the construction industry, a developer is usually considered to be a person who develops land through construction. Other than being responsible for project management, the developer may become an owner of the developed land. The developer seeks a profit from the development of the land, either by:

• Selling a development, such as a tract of residential homes, a shopping mall, or an office building
• By holding the developed property to reap a return on the investment

Developers can operate in many different economic arrangements during the development process. Some developers form construction companies to do their own work. Throughout the construction process, they may 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.

If developers only act as construction management planners who hire subcontractors, they'll prioritize lowering prices. Others attempt to operate as contractors on new developments. Some succeed as home builders or commercial real estate developers. They become established in residential or commercial building. Ultimately, they do good construction work in the real estate industry.

Some developers have found advantages to having their own in-house construction company. They may benefit from ensuring a 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. Competitive bidding gives them maximum control over development projects and costs.

Developers, Contractors, and Construction Contracts

Because real estate market costs are constantly changing, it is difficult to estimate the expenses of construction work. A developer who is also a project owner might take unfair advantage of this. Without the constraint of competition in the open marketplace, construction costs may become less transparent. When contractors are also owners, separate companies should exist for the different functions. 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 construction project contracts:

• Lump-Sum Contracts
• Cost-Plus-Fee Contracts

Lump-Sum Contracts

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 they 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 century. 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. They must complete the job 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 necessary to produce the intended results. In other words, the contractor is required to provide and do everything necessary to complete the work for the general purpose
for which the contract was designed and intended.

Works that are indispensably necessary to complete the whole work are included by implication. That means if they are not specifically written in the lump sum of the contract, their requirement is still implied.

Another important characteristic of the lump-sum contract is the fixed nature of the contract as it was first agreed and executed. Most lump-sum contracts contain a condition related to change orders. They allow for changes in the work to be made by the owner without invalidating the contract. With such a condition, the contractor must carry out all valid changes properly ordered. This is acceptable as long as the changes are within the general scope of the contract.

Under a lump-sum contract, the land owner has the responsibility to:

• Provide access to the site
• Pay the contractor according to the agreement and conditions of the contract

Almost everything else is done by a designer on the owner's behalf. In general, an owner is 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 an owner usually 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.

Cost-Plus-Fee Contracts

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. 

In a simple cost-plus-fee contract, the owner takes the greater portion of the risk and the contractor risks very little. In the lump-sum contract, the reverse is true because the contractor carries more risk.

The contractor's duty in a cost-plus-fee contract is to do the work according to the agreement and conditions of the contract. The contractor's primary right is to be paid accordingly. One problem with this type of contract is the variety of possible terms and conditions. This can result from the varying amount of information that may be available at the time of bidding. Because of possible variations in the terms 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. To protect itself, the contractor should identify costs in writing as precisely as possible. For example, the contractor should exercise due diligence to itemize expenses relating to:

• Roofing
• Local government zoning and building permits
• Surveyor feasibility studies for proper land use
• Environmental consultants

An owner's obligations in this kind of contract are similar to those of an owner in a lump-sum contract:

• To pay for the work according to the terms of the contract
• To provide information
• 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.

In a nutshell, a developer can wear one or two hats in a construction project. A successful construction contract should clearly set out everyone's rights and responsibilities. In this way, a project can be efficiently and successfully carried out, and needless conflict avoided.

Has Your Construction Developer Shirked Their Responsibilities? Talk to a Lawyer

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. Real estate brokers and real estate agents might offer some help, but they're not legal experts. A construction law attorney with years of experience will be able to ensure that everyone's responsibilities are clear.