The Role of a General Contractor in Apartment Construction

Apartment contractors, like their residential counterparts, are responsible for nearly all stages of the building process. This includes:

• Design: A general contractor will typically be involved in working with a project’s architect. Besides gaining a deep understanding of the project's design, they also help suggest alterations and improvements that can save time and money while reducing risks and potential safety hazards.
• Permitting: A good quality GC will typically be responsible for obtaining all relevant city and county permits for a construction or rehabilitation project.
• Hiring subcontractors: A GC will generally solicit bids from several subcontractors, from plumbers and electricians to flooring specialists and security installation firms, in order to determine the company with the best combination of price and quality.
• Purchasing supplies: Aside from subcontractors who may purchase their own supplies and bill back the GC, in general, most building materials will be purchased directly by the general contractor.
• Zoning/building codes: It is the contractor’s responsibility to make sure that a building’s architectural plans follow zoning ordinances and building codes and that these codes are followed and implemented during the building and construction process. 

How to Choose a Quality General Contractor for an Apartment Property

Research should always be the first step in selecting a general contractor for a multifamily development project. A great starting point for any investor or borrower would be to search online, ask other developers for recommendations, or even finding local properties that they like, and then looking at city or county records to determine which contractors worked on them. If construction financing is being utilized, then investors may also wish to ask their lender which general contractors they recommend. 

• Start early: Choosing a quality general contractor early on can often speed the whole process up, as they often know how to navigate the permit approval process. For large multifamily development projects, it can often take 9 months or more to receive the proper approvals from a municipality.
• Create a detailed project description: Providing a GC with a detailed, comprehensive project description is the best way to get an accurate cost estimate and work timeline.
• Get bids from several contractors: For smaller projects, investors and developers should strive to get at least three competing bids from contractors. For larger projects, it may be more prudent to get 5-6 bids, but this all generally depends on the number of available firms in the area. Typically, more bids encourage more competition, bringing down prices.
• Investigating references: Checking references is a crucial part of 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 a GC's work ethic and process. Be sure to ask plenty of specific questions-- including how long it took a contractor to return calls, and whether the contractor was able to complete the project on time and on (or under) budget. Wise investors may even want to call past clients that a GC did not provide as references (or even past employees) in order to get a more 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 provide them, you may want to look elsewhere.
• Avoid potential pitfalls: Several red flags could pop up during the GC bidding and due diligence process. Some noteworthy signs of potential trouble include a GC that only accepts cash, is not willing to obtain permits, or does not have a history of successfully completed projects.
• Prioritize communication: Communication is one of the most important aspects of a quality general contractor-- and choosing a contractor that fits with your communication style is key. While some clients may want an update every day, others may be content with checking in once every few weeks, so you’ll want to ensure that a contractor is sufficiently flexible when it comes to communication. This is especially important in the planning stages of a project, when a GC may need to attend zoning board and city council meetings in order to obtain the proper permits for a project.

Why a General Contractor Should Be Bonded, Licensed, and Insured

If you want to make sure that your apartment construction project goes smoothly, it’s incredibly important to ensure that you choose a contractor who is licensed, bonded, and insured. In regards to licensing, contractors should be licensed by a state board or agency. Working with an unlicensed contractor is extremely risky, due to the fact that you will generally not be able to get insurance or 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, which is similar to a traditional insurance policy, with a few caveats. Surety bonds help protect investors in the case that a contractor is not able to complete the project on their own. For example, if the contractor has financial issues, the surety company may lend them cash, while if they abandon the project entirely (or do not provide quality work in conjunction with what they were contracted to do), 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 poor work without putting the GC (and the project) in financial jeopardy.

General Contractors and Apartment Construction Loans

As to be expected, most apartment construction projects are funded with apartment construction loans, which can be structured with either the lender making payments to the borrower, who will then pay the general contractor, or making payments directly to the general contractor. When choosing a GC for a development project, it’s imperative to consider the construction financing process. In most cases, to reduce the lender’s risk if the contractor cannot complete the project, a construction loan lender will want to approve a general contractor before they fund a loan-- one with significant experience, as well as a sizable surety bond.

In most cases, lenders will require a borrower to have a takeout commitment from a permanent lender. This ensures that the borrower will have the ability to refinance their initial construction loan, and be able to fully pay back the construction lender. Takeout commitments usually have a set timeline, after which the commitment expires, so it is in both lender’s interests as well as the borrower's that the general contractor completes the project within the set time period. Additionally, the lender offering the takeout commitment may also want a say in a borrower’s choice of a general contractor. 

Related Questions

What are the most important factors to consider when choosing a general contractor for a commercial real estate project?

When choosing a general contractor for a commercial real estate project, there are several important factors to consider. Research should always be the first step in selecting a general contractor for a multifamily development project. A great starting point for any investor or borrower would be to search online, ask other developers for recommendations, or even finding local properties that they like, and then looking at city or county records to determine which contractors worked on them. If construction financing is being utilized, then investors may also wish to ask their lender which general contractors they recommend.

Other important factors to consider include:

• Start early: Choosing a quality general contractor early on can often speed the whole process up, as they often know how to navigate the permit approval process. For large multifamily development projects, it can often take 9 months or more to receive the proper approvals from a municipality.
• Create a detailed project description: Providing a GC with a detailed, comprehensive project description is the best way to get an accurate cost estimate and work timeline.
• Get bids from several contractors: For smaller projects, investors and developers should strive to get at least three competing bids from contractors. For larger projects, it may be more prudent to get 5-6 bids, but this all generally depends on the number of available firms in the area. Typically, more bids encourage more competition, bringing down prices.
• Investigating references: Checking references is a crucial part of 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 a GC's work ethic and process. Be sure to ask plenty of specific questions-- including how long it took a contractor to return calls, and whether the contractor was able to complete the project on time and on (or under) budget. Wise investors may even want to call past clients that a GC did not provide as references (or even past employees) in order to get a more 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 provide them, you may want to look elsewhere.
• Avoid potential pitfalls: Several red flags could pop up during the GC bidding and due diligence process. Some noteworthy signs of potential trouble include a GC that only accepts cash, is not willing to obtain permits, or does not have a history of successfully completed projects.
• Prioritize communication: Communication is one of the most important aspects of a quality general contractor-- and choosing a contractor that fits with your communication style is key. While some clients may want an update every day, others may be content with checking in once every few weeks, so you’ll want to ensure that a contractor is sufficiently flexible when it comes to communication. This is especially important in the planning stages of a project, when a GC may need to attend zoning board and city council meetings in order to obtain the necessary permits.
• Cost and budget analysis: Knowing how much the cost will be for your general contractor is essential to the selection process. Generally speaking, costs can be split into two main varieties; hard costs, which directly involve materials and physical labor, and soft costs, which involve things such as design consultations and the permitting process. In addition to the soft costs mentioned above, pre-construction costs must also be accounted for, which can include other contractor costs, like budgeting, due diligence, meetings, and conducting a feasibility analysis.
• Flat fees vs. percentage fees: There are two standard contractor fee structures; flat-fee pricing, or pricing based on a percentage of total costs, plus a smaller flat fee. With a flat fee structure, a client can expect greater certainty in regards to overall costs, however, contractors may be somewhat less transparent about how and when they spend their money. In contrast, cost-based pricing can lead to greater uncertainty, but a client can generally expect a greater degree of transparency from their GC.
• Choosing subcontractors: It’s important for contractors to get multiple bids from subcontractors, but this is particularly important in the case of cost-based agreements, as the client will be expected to pay 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 in order to increase their percentage-based fee. While cost-based

What qualifications should I look for in a general contractor for a commercial real estate project?

When selecting a general contractor for a commercial real estate project, there are several qualifications to consider. First, research should always be the first step in selecting a general contractor. A great starting point for any investor or borrower would be to search online, ask other developers for recommendations, or even finding local properties that they like, and then looking at city or county records to determine which contractors worked on them. If construction financing is being utilized, then investors may also wish to ask their lender which general contractors they recommend.

In addition, investors and developers should strive to get at least three competing bids from contractors for smaller projects, and 5-6 bids for larger projects. It is also important to investigate references, and to avoid potential pitfalls such as a GC that only accepts cash, is not willing to obtain permits, or does not have a history of successfully completed projects. Communication is also key, so investors should choose a contractor that fits with their communication style.

Finally, 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.

What are the benefits of using a general contractor for a commercial real estate project?

Using a general contractor for a commercial real estate project can provide a number of benefits, including:

• Design: A general contractor will typically be involved in working with a project’s architect. Besides gaining a deep understanding of the project's design, they also help suggest alterations and improvements that can save time and money while reducing risks and potential safety hazards. Source
• Permitting: A good quality GC will typically be responsible for obtaining all relevant city and county permits for a construction or rehabilitation project. Source
• Hiring subcontractors: A GC will generally solicit bids from several subcontractors, from plumbers and electricians to flooring specialists and security installation firms, in order to determine the company with the best combination of price and quality. Source
• Purchasing supplies: Aside from subcontractors who may purchase their own supplies and bill back the GC, in general, most building materials will be purchased directly by the general contractor. Source
• Zoning/building codes: It is the contractor’s responsibility to make sure that a building’s architectural plans follow zoning ordinances and building codes and that these codes are followed and implemented during the building and construction process. Source
• Start early: Choosing a quality general contractor early on can often speed the whole process up, as they often know how to navigate the permit approval process. For large multifamily development projects, it can often take 9 months or more to receive the proper approvals from a municipality. Source
• Create a detailed project description: Providing a GC with a detailed, comprehensive project description is the best way to get an accurate cost estimate and work timeline. Source
• Get bids from several contractors: For smaller projects, investors and developers should strive to get at least three competing bids from contractors. For larger projects, it may be more prudent to get 5-6 bids, but this all generally depends on the number of available firms in the area. Typically, more bids encourage more competition, bringing down prices. Source
• Investigating references: Checking references is a crucial part of 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 a GC's work ethic and process. Be sure to ask plenty of specific questions-- including how long it took a contractor to return calls, and whether the contractor was able to complete the project on time and on (or under) budget. Wise investors may even want to call past clients that a GC did not provide as references (or even past employees) in order to get a more 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 provide them, you may want to look elsewhere. Source
• Avoid potential

What are the risks associated with using a general contractor for a commercial real estate project?

The risks associated with using a general contractor for a commercial real estate project include:

• The contractor may not complete the project on time and on (or under) budget.
• The contractor may not have the necessary insurance and bond information.
• The contractor may not be able to navigate the permit approval process.
• The contractor may not have a history of successfully completed projects.
• The contractor may not be able to provide references.
• The contractor may not be able to communicate effectively.
• The contractor may not be willing to obtain permits.
• The contractor may only accept cash.

It is important to do thorough research and due diligence when selecting a general contractor for a commercial real estate project. This includes getting bids from several contractors, investigating references, and creating a detailed project description. Additionally, an experienced real estate lawyer should draft and review a client/GC contract before it’s signed.

Source 1 Source 2 Source 3

What are the best ways to find a reliable general contractor for a commercial real estate project?

Research is the best way to find a reliable general contractor for a commercial real estate project. A great starting point for any investor or borrower would be to search online, ask other developers for recommendations, or even finding local properties that they like, and then looking at city or county records to determine which contractors worked on them. If construction financing is being utilized, then investors may also wish to ask their lender which general contractors they recommend. In today’s hot construction market, quality builders typically have their hands full, so developers may want to be wary of GCs that directly advertise to potential clients.

When selecting a general contractor, it is important to start early, create a detailed project description, get bids from several contractors, investigate references, avoid potential pitfalls, and prioritize communication. Checking references is an essential part of 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 was able to 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) in order to get a more 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 provide them, you may want to look elsewhere.

Sources:

• Apartment.loans: Choosing a General Contractor
• Multifamily.loans: Selecting a General Contractor for a Multifamily Construction Project

In this article:

1. What Makes a Good General Contractor for an Apartment Construction Project?
2. The Role of a General Contractor in Apartment Construction
3. How to Choose a Quality General Contractor for an Apartment Property
4. Why a General Contractor Should Be Bonded, Licensed, and Insured
5. General Contractors and Apartment Construction Loans
6. Related Questions
7. Get Financing

Tags

• multifamily construction
• multifamily construction loans
• construction loans
• Fannie Mae Apartment Loans
• Freddie Mac Multifamily Loans
• Apartment Construction Loans
• Multifamily developers
• Blog