The cornerstone for successful construction projects
Cranes flocking back to the skyline are bringing life back to West Michigan.
Increasingly, opportunities are available for businesses to own or lease newly constructed buildings and renovated commercial spaces, or create custom spaces to build out “white box” spaces.
Whether building out leased space, constructing new buildings, or renovating historic structures, many good choices are available for high-quality local lenders, design firms and contractors. Owner and lessee choices for the glue that binds the lending, design and construction stakeholders together — formally known as the project contracting structure — are less understood.
In its most basic form, a property owner or lessee enters into three legal agreements: (1) a construction loan agreement with the lender for real estate acquisition and project funding; (2) an architectural services agreement; and (3) a construction contract.
These traditional agreements separate roles and responsibilities for lending, design and construction. The lender provides the project funding, often including soft costs for design and legal work. The architect authors the drawings and specifications and certifies that the construction complies with the design intent. The contractor controls the methods and means of construction.
With today’s vast array of contracting options, however, the traditional lending, design and construction roles and responsibilities have become blurred. For example, different project contracting structures include:
- Design-build arrangements
- Construction manager/constructor arrangements
- Construction manager/advisor arrangements
- Design-bid-build arrangements
- Integrated project delivery arrangements
- Single-asset limited partnership and limited liability company owners
- Mixed owner/contractor ownership and funding
- Joint venture projects
Industry associations try to keep up with the changes. The American Institute of Architects, Associated General Contractors and Design Build Institute of America each produce multiple sets of different types and versions of “standard form” contracts.
But owners and lessees rarely sign so-called “standard” form agreements “as-is” because they are inherently biased in favor of constituent sources, do not accommodate important project-specific requirements, may not address important ownership and funding issues, and do not address Michigan construction law.
To simplify the process, lenders, owners and lessees should start by asking basic questions. When the lending, design and construction roles and responsibilities become mixed, who is obligated to advance the true owner’s interests in the project? What is the risk of “value-engineering,” how does it affect the quality of construction and who benefits from the cost savings?
Common pitfalls to avoid include a patchwork of uncoordinated lending, design, construction and supplier contracts; unclear roles and responsibilities for design and construction; and failure to follow industry-recognized procedures. When these mistakes allow critical items to fall through the gaps, costs escalate, progress is delayed and lien claims are filed.
Good project contracting structures promote communication and coordination by anticipating the key issues that connect the owner, architect and contractor as the project’s prime stakeholders.
Great project contracting structures anticipate the needs of the prime business partners, including engineering sub-consultants, material suppliers and sub-contractors; incorporate the construction lender’s funding requirements; adapt to changes in state and federal laws; and provide an ongoing resource for coordinating efforts for all of the design and construction phases throughout the project.
A solid legal cornerstone — when placed before the design work begins and the first shovel moves — establishes the foundation that aligns interests, increases coordination and facilitates collaboration among major stakeholders so construction projects are completed on schedule and within budget.
Steven K. Stawski, J.D., owner of Stawski Law in Grand Rapids, specializes in real estate, business and construction law, and chairs the education committee of the Commercial Alliance of Realtors West Michigan.