Construction Law: The Developer's Responsibilities

I. Introduction

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. Advance planning and work with the project team and designers can alleviate many potential problems down the road. The contract preparation process is also a time when project finances can be carefully scrutinized and modified if necessary.

II 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.

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 fixed-price sum contract, a bidder sets 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 or fixed price 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 infer able . . . [form the contract documents] as being necessary to produce the intended results." It is necessary to grasp this fundamental nature of the fixed price contract. In the absence of anything to the contrary in a fixed price 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. Work that is indispensably necessary to complete the whole work is included by implication, if not specifically, in the fixed price of the contract.

Another important characteristic of the fixed-price 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 fixed price 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 fixed price contract, the developer as owner has the responsibility to (1) provide access to the site; and (2) pay the contractor according to the agreement and conditions of the contract. 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 fixed price 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 fixed-price 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 fixed-price 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 fixed-price contract, most of the other duties are in the hands of the owner's representative, the designer.

Construction law issues often arise in the contracting phase of a project. Care must be taken to draft contract documents that are both enforceable and that meet the needs of the project. Consideration should be given to scheduling, penalties for delays, short and long term dispute resolution procedures and termination provisions. These and many more issues will likely arise. Consultation with counsel and careful drafting by the lawyer can satisfactorily address each of these issues.

III Conclusion

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.

IV Preeo Silverman Green & Egle Construction Law Experience

Preeo Silverman Green & Egle have many years of experience with construction issues. The firm represents many developers, general contractors and subcontractor and has written or revised contracts for jobs ranging from several thousand dollars to multimillion dollar commercial developments. Our experience with developers and contractors, together with our in depth knowledge of real estate issue make this a dynamic combination for a successful construction project. Firm attorneys who work with these issues on a daily basis are listed below.

Robert L. Preeo - Email Me
Eldon E. Silverman - Email Me
Gilbert R. Egle - Email Me
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