Thinking About A New Building Project? Here Are A Few Things To Consider.
Are you thinking about building a new facility for your company, or expanding or renovating an existing facility? Besides engaging a skilled, experienced contractor to handle the work, there are a multitude of issues you should consider to insure you get the results you want. A few of those issues are discussed briefly below.
Acquiring the Site. You will need to thoroughly investigate the site of your new project and consider related issues, including:
- Site Investigation. Obtain and review standard “due diligence” on the site: a title commitment and survey, Phase I environmental assessment, geotechnical investigation (to determine composition and suitability of the soils), zoning certifications (Is your project permitted by current zoning? Will variances be required?). These reports will help you understand existing site conditions. Review the title commitment and survey to determine if any recorded covenants require third-party design approval, and the impact of recorded easements and setback lines on your proposed improvements.
- Economic Incentives. Tax abatements may be available for certain projects. For example, if you are relocating to an Enterprise Zone or a reclaimed “brownfield” industrial site, there may be tax abatements available for investment in new plant and equipment. These generally must be secured prior to closing on the land.
- Tax and Capital Planning. You may be able to defer capital gain from the sale of your existing facility by structuring a “like-kind exchange” under the Internal Revenue Code. Will it be more advantageous for your company to own the project, or lease it from a contractor/developer under a build-to-suit or “turnkey” lease?
- Financing. Obtain a financing commitment and determine early on what your lender will require in terms of due diligence.
Project Representative. You may have limited experience dealing with real estate and construction issues. Consider hiring an architect, construction manager or construction consultant to act as your project representative. The project representative can help you select the right “project delivery system” (see below), provide advice on construction methods and alternatives, help you develop an overall budget for the project, assist in the development of bid documents, review and analyze contractor proposals, and monitor the progress of the work.
Project Delivery System. You will also need to select a “project delivery system”. In a “design-bid-build” project model, the owner engages an architect to prepare construction-ready plans and then the plans are bid on by contractors. In a “design-build” project, the contractor serves as both designer and constructor. A construction manager (“CM”) can be engaged in a “project representative” role as an agent for the owner (in which case the owner, with the CM’s assistance, hires separate trade contractors), or the CM can serve as general contractor and provide pre-construction services. There are numerous payment structures, with advantages and disadvantages to each. Will the project be constructed for a “stipulated sum” or on a “cost-plus a fee” basis? Will there be a “guaranteed maximum price”? An experienced project representative can help you match your needs to the most appropriate delivery system and payment structure.
Project Agreements. Finally, you will need to negotiate the project agreements: architect’s contract, construction contract, design-build agreement and construction management agreement, as applicable. This often means reviewing a draft agreement proposed by the contractor. There are a variety of pre-printed industry forms, such as forms published by the American Institute of Architects (“AIA”) and Associated General Contractors (“AGC”). These forms are widely used and generally accepted. However, they may need to be tailored to the specific needs of your project, and the requirements of your lender. Sometimes the proposed form does not work well with the intended project delivery system, and no industry form is perfect. Make sure these issues are addressed:
- Is the scope of services adequately defined?
- Are deadlines established for project commencement, completion, and interim milestones? Is timely completion critical? If so, are there incentives for early delivery? Liquidated damages for late delivery?
- Should the contractor be required to furnish payment and performance bonds to insure timely completion and guard against lien claims?
- Will there be “retainage” on contractor’s draws? Your lender may not be willing to disburse 100% of the contractor’s monthly draws. You need to be sure that the retainage requirements in your construction loan and the general contract match up.
- What is the proposed payment schedule? Does the contract adequately identify the costs and expenses that the contractor is permitted to charge the owner?
- Is there a mechanism for identifying and correcting punchlist items? What is the scope and duration of the contractor’s warranty? Is the contractor obligated to correct defective or non-conforming work?
- Does the contractor have adequate liability insurance? Does the architect carry sufficient professional liability insurance?
- Are there adequate remedies and dispute resolution mechanisms if the contractor fails to perform properly?
- Is the contractor obligated to provide lien waivers from all parties with each draw? Your lender may require them. Collecting lien waivers is a useful tool for tracking the parties on the job, and minimizing surprises and delays caused by mechanic’s liens.
Thoughtful attention to these issues, in consultation with your project representative and attorney, will help insure a successful project.