INVESTORS VADE MECUM - 4 METHODS IN CONSTRUCTION EXECUTION

Throughout many issues bothering every investor at the stage of planning the construction project such as raising the funds, finding a plot, gaining a tenant, there also arises a question: which method of investment realization should be chosen. There are many ways how to get through the whole process – starting from those, which are very demanding for the financier, through those, where participation of the investor on different steps of the project is rarely needed. You should decide what kind of agreement you prefer and finally what suits you best: safety or saving more money. That is why it is worth knowing, which method would be the best for you. Here are your options:

        

General Contractor / Developer Scheme – it is the most popular structure. You pick the General Contractor through a tender. Usually it's the lump-sum contract or, what's better for both sides, it can be a guaranteed maximum price contract (also known as GMP, GMAX), in which the General Contractor sets a ceiling price - the maximum cost of the contract. Among the project delivery systems, you can choose Design-build, where the GC is responsible for the building permit design or just a Build method, but here you need to have a complete building permit design and take care about execution design on your own before announcing a tender and if it comes to any changes - you are dependent on the GC company, which has to agree on those changes or negotiate a new price for additional works. That's why you'll need a claim manager. On the other hand, GC firm has to manage the whole construction scheme and is fully responsible for the agreements with subcontractors. This gives you one warranty on the whole works from the General Contractor, so it's easier to exact the help in case anything happens. You should also remember, that it requires higher soft costs (usually it's 16-22% Polish Market standard for GC + 1,5% for Inspectors and Cost Managers - depending on the importance, difficulty and size of the construction site).

Construction Management – in this method, an investment is being managed and executed by the Construction Management company. CM is so-called right-hand of an Investor. Advising, assessing, managing and negotiating - those are the basic skills that a good Construction Management Company should possess. Trusted and experienced CM Company will have an excellent knowledge of a builder's market. The project works will be divided logically on different parts and all the subcontractors will be chosen for you. Downside is that you are the one responsible for the contract agreements. It results in having not just one warranty, as it was in the case of General Contracting, but many of them - for usual commercial office building, it ranges from 10 to 20 or even more packages. On the other hand, this is a good solution if you want to lower the soft costs, which in this case are on the level of 7-10%. In this method, there is no need to have a building permit design before choosing a Construction Manager, so that you are starting the whole investment process with his help. Moreover, later if you would like to implement any changes to the building permit design, you can do it just by coordinating your ideas with him. Consequently, you don't need Claim Manager at all. CM will advise you whether it should be a lamp-sum, a measurement contract or both.

Project Management – this method is based on taking the substitute role of an Investor by the Project Management company. PM is coordinating works from the very beginning to the very end of the building process. Nevertheless, you will be obliged to sign the agreements with Architects, Consultants and General Contractor, who is signing contracts with Subcontractors. In conclusion, you will be given one warranty from the GC. Again, this is very comfortable for you but requires higher soft costs due to GC overhead and profit (usually it's 16-22% Polish Market standard for GC + 2-3% for PM - depending on the importance, difficulty and size of the construction site). PM is responsible for conducting the project starting from Scheme Design, finishing on the Occupancy Permit and Deficiency Management. As it was in the case of General Contractor scheme - there are two ways of project delivery - Design-build or Build method. Both Design-build and Build require hiring a claim manager, who will be responsible for change management or claims from GC.  Another similarity to the GC method is that usually it's a lump-sum contract or a guaranteed maximum price contract.

Management Contracting – this is the easiest method for Investor to manage. It is based on taking the role of an Investor by the Management Contractor, who is planning, coordinating and controlling the project from beginning to completion. The Management Contracting company signs the agreements with Advisor companies and Subcontractors. An Investor should demand progress protocols to be constantly informed. Nonetheless, he usually isn't able to have control over the details. All the project risk is taken by the managing contractor, who is responsible for the warranty. That is why this method requires a management contracting company which is very experienced in building market and credible. The most common type of contract is a lump sum contract. This method is rarely practiced in Poland.

To sum up all the possibilities, we designed a table where we have gathered all the essential information.

METHOD IN CONSTRUCTION EXECUTION	AGREEMENTS WITH INVESTOR	WHO GIVES THE WARRANTY	PROS	CONS
General Contractor	General Contractor, Architect, Other Consultants (Inspectors, Cost Managers)	one warranty from General Contractor	- one warranty from a trusted company	- higher soft costs - demanding from the Investor - in case of Design-build system before a tender, the Investor needs to have a building design, and any changes are dependent on the General Contractor - claim management required
Construction Management	Construction Manager, Subcontractors, Architect, Other Consultants (Inspectors, Cost Managers)	every Subcontractor	- lower soft costs - no need to have a building permit design before starting an Investment - possible changes in building design - less demanding from the Investor, because an exterior company manages everything	- many warranties - many agreements with the Investor
Project Management	Project Manager, General Contractor, Architect, Other Consultants (Inspectors, Cost Managers)	one warranty from General Contractor	- less demanding from the Investor, because an exterior company manages everything - one warranty from trusted company	- higher soft costs - claim management required
Management Contracting	Management Contractor	one warranty from Management Contractor	- lower soft costs - one agreement with the Investor - less demanding - one warranty from a trusted company - no need to have a building permit design before starting an Investment - possible changes in building design	- minimal control over the details of the project

Author: Klaudia Pilszak

We hope this article helped You pick the best method of planning the construction realization. If you have any question or still something is still unclear, feel free to email us at biuro@trebbipoland.com. We are happy to help any time!