Real estate developers have lots of options for structuring their companies, as the laws in the United States promote the ability of multiple smaller companies to be involved in these large scale construction projects.
However, with more and more developers choosing to self-perform as their own architect, engineer, or general contractor, combined with the emergence of design/build firms, and self-performing general contractors the traditional method of development is changing. Here we will explore the new options open to developers when selecting a general contractor for their project.
Real estate development is a massive undertaking, requiring a carefully curated team of experts in a variety of fields. Traditionally, a developer begins a project by assembling a large group of professionals, each specializing in a single component of the project. The main parties involved have their own internal team to execute their tasks, while the General Contractor’s team is also responsible for managing 3rd parties suppliers as well as subcontractors. Historically, the structure looked like:
As you can see, the developer is responsible for directly managing many parties which is difficult, time-consuming, and stressful. In order to decrease the number of people directly reporting to the developer, a new type of general contractor has sprung up:
The Design/Build Company
In this model, the design/build company takes on the role of the General Contractor and more. They also are in charge of the designer/architect as well as the engineering team, thus decreasing the number of entities directly reporting to the developer. The value proposition here is threefold.
First, as a developer, you have two fewer parties to directly manage. Second, you eliminate the disconnect between an architect’s design and what it takes to actually build it. By having these parties all under one umbrella, the architects, engineers, and builders are all working together from the start, ensuring that the design can indeed be built to the budget and timeline specifications.
You save time and money by eliminating the possibility of having to rework an impractical or unfeasible design while (and this is the third value proposition,) simultaneously selecting materials that best meet your project objectives for aesthetics, practicality in construction, functionality of the finished product, project timeline, and budget.
If relinquishing direct control over the designer/architect and engineering teams is not appealing to a developer, a more appealing option might be to select:
A Self-Performing General Contractor
In this model, the general contractor does not hire subcontractors to do the actual work. Instead, the work is done by their own in house team.
The benefit here is also trifold. First, general contractors with direct employees can hold those employees to a higher standard than their subcontractors. They have the expertise and ability to evaluate and train on-site, and having direct control over employees enables them more control over scheduling, labor volatility, and construction site safety. Second, they can adapt to unforeseen circumstances on the fly, shifting resources immediately in order to maximize the productivity of their crews in real-time. Third, they fully understand the skill level of their team, eliminating costly mistakes encountered by unknowingly hiring unqualified subcontractors and they can push their crews to the optimal level that they can maintain.
“As a seasoned and sophisticated company, we are going to save you money at the end of the day because we do this for a living. Our clients are paying for our expertise, our relationships, our leadership, our standards of quality and service, and our in-house team.” – Denis Koval, CEO, Global Construction
Knowing how to build a structure is not the same as knowing how to form and operate a development company, which is why the General Contractor historically has played a critical role as a main component of the team. However, a new model has recently appeared where:
Developers Self-Perform as the General Contractor
The value proposition pitched is that self-performing everything is the most efficient way to decrease project timelines and saves on costs. By having total control over a project, the developer can be directly involved with the procurement of materials, overseeing the construction site, and selecting subcontractors. They can also avoid any messy litigation that could arise should there be a disagreement between themselves and the general contractor. However, this model has hidden costs as well.
