Construction is where development risk meets reality. Carefully designed plans, optimistic budgets, and tight schedules confront the messiness of building physical structures. Cost overruns, schedule slips, change orders, weather delays, and quality issues can destroy returns on otherwise viable projects. Successful developers understand construction contracting, select contractors carefully, manage the construction phase actively, and protect themselves with the right contract structure.

This lesson covers construction contracting, delivery methods, and how to manage the build phase effectively.

Construction delivery methods

How you organize the design and construction process affects cost, schedule, risk, and quality. Several delivery methods are common — quick comparison:

| Method | Process | Pros | Cons | Best for | |---|---|---|---|---| | Design-Bid-Build (DBB) | Sequential: design → bid → build | Lowest cost potential, owner controls design | Longest schedule, adversarial, change orders | Simple/public projects, complete documents | | Design-Build (DB) | Single entity does both, phases overlap | Fastest, single accountability, constructibility input | Less owner design control, less competitive cost | Speed-critical, owner-builder relationships | | CM at Risk (CMAR/CM-GC) | CM joins early, GMP shifts risk to CM | Cost certainty via GMP, faster, less adversarial | More expensive than DBB, complex contract | Mid-sized commercial — most common active developer choice | | CM as Agent | CM is owner's agent, no construction risk | Max owner control, lower cost (no GC markup) | Owner takes construction risk | Sophisticated owners with construction expertise | | IPD | Owner/designer/contractor share risk in single contract | Strong collaboration, aligned incentives | Complex contracts, few experienced firms | Large, complex projects |

Design-Bid-Build (DBB)

The traditional approach:

Owner hires architect/engineer to design
Design is completed
Owner bids the project to multiple contractors
Owner selects contractor (usually low bid)
Contractor builds per the documents

Pros:

Lowest cost potential (competitive bidding)
Clear separation of design and construction
Owner controls design

Cons:

Longest schedule (sequential)
Adversarial relationships during construction
Change orders if documents are incomplete
Limited contractor input during design

Best for: Simple projects, public projects, projects with complete documents.

Design-Build (DB)

A single entity provides both design and construction:

Owner hires design-builder
Design and construction overlap
Single contract for entire project

Pros:

Faster (overlapping phases)
Single point of accountability
Contractor input during design (constructibility)
Reduced disputes

Cons:

Less owner control over design
Less competitive cost
Quality dependent on builder

Best for: Projects where speed matters, owner-builder relationships exist.

Construction Manager at Risk (CMAR or CM/GC)

A construction manager joins the team early:

Owner hires architect
Owner hires CM during design
CM provides preconstruction services (cost estimating, constructibility, scheduling)
CM takes on construction risk via Guaranteed Maximum Price (GMP)
CM manages construction

Pros:

Constructibility input during design
Cost certainty via GMP
Faster than DBB
Less adversarial than DBB
Owner retains design control

Cons:

More expensive than DBB
Requires capable CM
More complex contract structure

Best for: Mid-sized commercial projects, where speed and cost certainty matter.

This is the most common approach for active developer commercial projects.

Construction Manager as Agent

CM acts as owner's agent without taking risk:

CM provides services for fee
Owner contracts directly with subcontractors
CM coordinates and manages

Pros:

Maximum owner control
Lower cost (no GC markup)
Transparency

Cons:

Owner takes construction risk
Requires sophisticated owner
Complex coordination

Best for: Sophisticated owners with construction expertise.

Integrated Project Delivery (IPD)

Owner, designer, and contractor share risk and reward:

Single contract among multiple parties
Shared profit pool
Collaborative decision-making
Risk shared

Pros:

Strong collaboration
Aligned incentives
Best for complex projects

Cons:

Complex contracts
Few firms experienced
Less common

Best for: Large, complex projects.

Contract types

The contract type determines how the contractor is paid.

Lump sum / fixed price

Contractor agrees to complete the work for a fixed price:

Risk on contractor for cost overruns
Owner has cost certainty
Best for complete documents and well-defined scope
Most common for commercial development

Variations:

Lump sum with allowances for items not yet defined
Lump sum with unit prices for items measured in field

Cost-plus

Contractor is reimbursed for actual costs plus a fee:

Cost plus fixed fee — fee is a fixed dollar amount
Cost plus percentage fee — fee is a percentage of costs
Cost plus with GMP — costs reimbursed up to a guaranteed maximum

Pros:

Faster start (don't need complete documents)
Open book (transparent)
Owner sees true costs

Cons:

Owner takes cost risk (without GMP)
Less incentive to control costs
Requires trust

GMP variant is most common — combines cost transparency with owner protection against overruns.

Unit price

Contractor is paid based on quantities of work performed at unit prices:

Site work — cubic yards of dirt moved
Concrete — cubic yards placed
Excavation — linear feet of trench

Best for: Site work and infrastructure where quantities are uncertain.

Time and materials

Contractor is paid for time spent and materials used:

Hourly labor rates
Material costs plus markup
Best for: Small or undefined work

Contractor selection

Selecting the right contractor is critical to success.

Selection criteria

Experience:

Similar project types
Similar size and complexity
Local market experience
Track record of completed projects

Financial strength:

Bonding capacity
Banking relationships
Working capital
History of completed projects

Team:

Project manager experience
Superintendent experience
Subcontractor relationships
Available staff

References:

Past owners
Past architects
Past lenders
Subcontractors

Approach:

Cost estimating quality
Schedule realism
Communication style
Problem-solving approach

Pricing:

Competitive but not lowest
Includes appropriate contingency
Realistic schedule

Selection process

Long list (5-10 contractors):

Initial qualification
Reference checks
Project list review

Short list (3-4 contractors):

Detailed proposal request
Interviews
Site visits to current projects
Financial review

Selection:

Best value (not just low bid)
Owner-contractor fit
Negotiate contract

Bidding process

For competitive bidding:

Bid package preparation — complete documents, instructions, specifications
Bid invitation — to qualified contractors
Pre-bid meeting — site visit, questions
Q&A period — written questions and answers
Bid submission — sealed bids on a deadline
Bid analysis — apples-to-apples comparison
Negotiations — clarifications and refinements
Award — selection and contract

Avoiding bid mistakes

Common bidding mistakes:

Incomplete documents — bids include too much contingency
Too few bidders — uncompetitive
Low bidder selection — often the worst choice
Inadequate scoping — surprises during construction
Schedule pressure — hurried bids miss issues

Contract terms

A construction contract should address:

Scope

Detailed description of what's being built
Reference to drawings and specifications
Inclusions and exclusions

Price

Total contract price (lump sum or GMP)
Allowances for undefined items
Unit prices for variable quantities
Payment terms (typically monthly progress)
Retainage (typically 10% held until substantial completion)

Schedule

Start date
Substantial completion date
Final completion date
Milestones
Liquidated damages for late completion (typically $500-$5,000/day)
Bonus for early completion (sometimes)

Changes

Change order procedures
Pricing for changes (cost-plus markup or unit prices)
Time extensions with changes
Owner approval requirements

Delays

Excusable delays (weather, force majeure, owner-caused)
Inexcusable delays
Extension of time procedures
Compensable vs non-compensable delays

Quality

Standards of workmanship
Code compliance
Inspection requirements
Warranty period (typically 1 year minimum)
Warranty repair obligations

Insurance and bonding

General liability insurance ($1M-$5M minimum)
Workers comp
Builders risk insurance (often owner-provided)
Performance bond (often 100% of contract value)
Payment bond (protects subcontractors)

Risk allocation

Indemnification
Limitation of liability
Hazardous materials
Differing site conditions
Subsurface conditions

Dispute resolution

Direct negotiation first
Mediation
Arbitration or litigation
Venue

Termination

Termination for cause
Termination for convenience
Notice requirements
Wrap-up procedures

Standard contract forms

Most commercial construction uses standard contract forms with modifications:

AIA contracts

A101 — Owner-Contractor Agreement (lump sum)
A102 — Owner-Contractor Agreement (cost plus with GMP)
A201 — General Conditions (referenced in agreements)
A102 is most common for commercial development

ConsensusDocs

Alternative to AIA
Developed by multi-stakeholder group
More balanced between owner and contractor

Custom contracts

Drafted by owner's attorney
Tailored to specific project
More negotiated terms

Construction phase management

Once construction starts, active management is essential.

Pre-construction tasks

Before construction begins:

Pre-construction meeting with all key parties
Permit verification
Insurance verification
Bond verification
Submittal schedule establishment
Site logistics plan
Communication protocols
Schedule baseline

Daily / weekly management

Progress monitoring against schedule
Quality monitoring
Safety monitoring
Issue identification and resolution
Subcontractor coordination
Inspection coordination
Documentation of progress, issues, decisions

Owner participation

The owner should:

Attend weekly meetings
Walk the site weekly
Review progress photos
Approve change orders promptly
Make decisions quickly when needed
Maintain relationships with key contractor staff

Communication

Weekly OAC meetings (Owner-Architect-Contractor)
Daily contact between PM and superintendent
Written communication of decisions
Document everything

Schedule management

The schedule is one of the most important tools:

Baseline schedule at contract
Updates at least monthly
Critical path identification
Look-ahead schedules (3-week typical)
Recovery plans for slippage

Cost management

Budget vs actual tracking
Forecast at completion
Change order log
Contingency tracking
Cash flow projection

Change orders

Change orders are the biggest cost risk:

Sources of changes:

Owner-directed changes (scope additions)
Design changes (errors, omissions)
Field conditions (unforeseen issues)
Code interpretation changes
Material substitutions

Managing changes:

Authorize promptly to avoid delays
Negotiate fairly but firmly
Maintain change log
Track impact on budget and schedule
Use contingency wisely

A typical project will have 5-15% of construction cost in change orders. Your contingency should accommodate this.

Quality control

Inspections by owner's rep, architect, third party
Testing (concrete, soils, materials)
Punch list generation
Punch list completion
Final inspections

Safety

Contractor responsibility primarily
Owner oversight
OSHA compliance
Safety incidents reporting
Insurance compliance

Construction phases

Construction proceeds in phases:

Phase 2: Foundation (weeks 6-12)

Excavation
Footings
Foundation walls
Slab on grade
Underground plumbing rough-in

Phase 3: Vertical construction (weeks 10-30)

Structural framing (steel, concrete, wood)
Roof framing
Roofing
Exterior walls
Windows and doors
Exterior closure

Phase 4: MEP rough-in (weeks 18-32)

HVAC ductwork
Plumbing rough-in
Electrical rough-in
Fire sprinkler rough-in
Inspections

Phase 5: Interior finishes (weeks 24-40)

Drywall
Painting
Flooring
Ceilings
MEP trim out
Doors and hardware
Casework
Fixtures

Phase 6: Site finishes (weeks 28-44)

Paving (parking, drives)
Curbs and sidewalks
Striping
Landscape installation
Irrigation
Site lighting
Signage installation

Phase 7: Final completion (weeks 38-46)

Final inspections
Punch list completion
Certificate of occupancy
Owner training
Closeout documents

Total construction duration for a typical 10,000 SF commercial building: 8-12 months.

Worked example: managing construction of a Lakeland retail center

You're managing construction of a 7,500 SF retail center plus 2 outparcels. Total construction budget: $4.2M. Schedule: 11 months.

Pre-construction

Selected GC via competitive bid (3 bidders)
AIA A102 contract with GMP of $4.2M
100% performance and payment bond
11-month schedule with $1,500/day liquidated damages
Owner's project manager assigned

Month 1-2: Site work

Mobilization and erosion control
Demo of existing improvements
Mass grading
Underground utilities
Stormwater pond construction

Month 3-4: Foundation

Building pad preparation
Footings and foundation walls
Slab on grade
Underground plumbing

Month 4-7: Vertical construction

Steel structure
CMU walls
Roof
Exterior closure

Month 6-9: MEP rough-in

HVAC ductwork
Plumbing
Electrical
Fire sprinklers

Month 8-10: Interior finishes

Tenant build-outs (per individual lease specs)
Painting and flooring
Ceilings and finishes

Month 9-11: Site finishes

Paving
Striping
Landscape
Lighting
Signage

Month 11: Closeout

Final inspections
Certificate of occupancy
Tenant move-ins begin

Issues during construction

14 change orders totaling $185K (4.4% of original budget)
3-week weather delay
2-week supply chain delay (steel)
Modest quality issues addressed via punch list

Outcome

Substantial completion within 1 month of original schedule
Total cost $4.39M (4.5% over original GMP, within contingency)
All tenants moved in within 60 days of CO
Owner satisfied with quality

This is what successful construction looks like: active management, controlled changes, on-time delivery, acceptable cost variance.

Common construction mistakes

Selecting GC by low bid — best value beats lowest cost
Inadequate documents at bid time — leads to changes
Insufficient contingency — 5% is too low; use 10-15%
Poor change management — undocumented or unapproved changes
Inadequate owner involvement — issues missed
Communication failures — assumptions not verified
Weather and supply chain not accommodated in schedule
Inadequate insurance and bonding
Unfair contract terms that breed disputes
Inadequate closeout — punch list lingering for months

What to take away

Construction delivery methods: DBB, DB, CMAR, CM-Agent, IPD
Contract types: lump sum, cost-plus, GMP, unit price, T&M
CMAR with GMP is most common for active developer commercial projects
Contractor selection: experience, financial strength, team, references, approach, price
Best value beats lowest bid
Contract terms: scope, price, schedule, changes, delays, quality, insurance, risk, disputes
Pre-construction setup is critical
Active owner management is essential
Change orders typically 5-15% of contract; budget accordingly
Schedule management includes baseline, updates, look-aheads, recovery
Construction phases: site work, foundation, vertical, MEP rough-in, finishes, site finishes, closeout
Common mistakes: low-bid selection, weak documents, inadequate contingency, poor management

Next lesson: development pro forma and feasibility math — the financial analysis that drives go/no-go decisions throughout development.

Get Market Insights Delivered