If you’re interested in developing or renovating multifamily housing, choosing a general contractor (GC)is one of the most critical 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, decide on a qualified, professional contractor that will get the job done correctly.
The Role of a General Contractor in Multifamily Construction
As general contractors for single-family homes, multifamily contractors are accountable 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 modifications and improvements that can conserve 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 to settle on the company with the best mixture of price and quality.
Purchasing supplies: While certain subcontractors may buy their supplies and bill the GC, in general, most building materials will be purchased directly by the general contractor.
Zoning/building codes: While a building’s architectural plans must follow zoning ordinances and building codes, it’s also a contractor’s responsibility to ensure these codes are followed and fulfilled during the building and construction process.
GCs 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, paying the general contractor, or making payments directly to the general contractor.
When choosing a GC for your development project, it’s essential 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 and a sizable surety bond to lessen 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 capacity to refinance their initial construction loan, fully paying back the construction lender. Takeout commitments regularly 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 finishes the project on 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 even wish to find local properties 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 overheated 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 nine months or more to receive the proper approvals from a municipality. Choosing a quality general contractor early in the process can often speed this up, as they usually 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 offers, but this depends on the number of available firms in the area. Typically, more bids encourage more competition, bringing down prices.
Investigate 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 could 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) to get a 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 offer them, you may want to look elsewhere.
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. Typically, costs are categorized as either hard costs, including materials and physical labor, or soft costs, which involve design consultations and the permitting process. In addition, pre-construction costs must also be accounted for, which can include the soft costs mentioned above and other contractor costs, like budgeting, due diligence, meetings, and conducting a feasibility analysis.
Flat fees vs. Percentage fees: There are two common GC fee structures: flat fee pricing, pricing based on a percentage of total costs, and a smaller flat fee. By choosing a flat price, a client can expect greater certainty concerning overall expenses, but contractors may be somewhat less transparent about how and when they spend their money.
In contrast, cost-based pricing can lead to more significant uncertainty, but a client can generally expect a greater degree of transparency from their GC.
Still, unforeseen change orders do exist. A change order is a document used to modify the original agreement on a construction project. It details the changes in the scope of work, cost, and schedule that are required. In many instances, the construction contract dictates the change order process. Beyond that, change orders can be a significant profit center for a contractor.
Choosing subcontractors: It’s always crucial for contractors to get multiple bids from subcontractors, but this is especially true 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 to increase their percentage-based fee. While cost-based agreements generally permit owners to have a hand in selecting subcontractors, many clients will often defer to a contractor, especially if they don’t have significant construction experience.
Financial strength: Make sure that any contractor 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 more extensive projects), as well as a sufficient degree of liquidity. A contractor should also be fully licensed, bonded, and insured – something we touch on below. With all this in mind, it’s essential to appreciate that clients will generally pay a general contractor in a series of predetermined disbursements, be issued monthly or on an incremental basis, as the various stages of the project are completed.
Always Hire a Bonded, Licensed, and Insured GC
If you want to make sure that your multifamily construction project goes smoothly, it’s imperative 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 because you will typically not have the insurance or ability to 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 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.
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 shoddy work without putting the GC (and the project) in financial jeopardy.
The Takeaway: Do Your Homework on GCs Before Selection
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 regularly. 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.