General investor

Leading commercial real estate developers are now tending to avoid using general contractors – instead they are taking on their role and hiring the subcontractors themselves. The system is sometimes called packaging (since it divides projects into packages to be executed by individual contractors) or is known as the construction management system. This reveals a general truth about development projects: in many cases it is better not to have a general contractor to avoid cooperating with a firm that is so far unproven in your eyes. For example, Skanska Property for its general contractor work has for many years been using Skanska – a public company in the same group, while Ghelamco’s projects are constructed by its Ghelamco Construction SPV company. HB Reavis is another typical example of a company that uses packaging via a separate department in the company responsible for this process and so it consistently avoids employing the services of general contractors. This is also a system used by Echo Investment for its retail and office projects. Only the residential projects carried out by the company are done using a general contractor. So what does the decision to opt for either approach depend upon?

With or without a general contractor

To build with a general contractor or to build without one – that is the question. And the answer, in the end, is always a business decision. The motives and strategies behind the decision may vary. For example, Apsys packages small enterprises only up to PLN 10 mln, such as renovations and redevelopments of shopping centres; but when it comes to a large enterprise, such as the development of the Manufaktura mall in Łódź or the Posnania shopping centre (currently under construction with a retail area of app. 100,000 sqm) in Poznań, it opts for the services of a general contractor. One of the advantages of using this model is that the guarantees are provided by the general contractor. “In the case of a botch-up, we don’t have to worry about whose fault it was – whether it was an electricity, automation, structural or architectural issue – or who to address the letter to. There is only one entity responsible for the guarantees and this is the general contractor,” explains Piotr Karbowy, the technical director of Apsys. Of course, the transfer of risk is one of the main reasons for involving a general contractor. “It is the contractor who takes on the contractual responsibility for the valuation, the budget and the deadlines. Therefore a tender for the construction of the entire project within a set budget is a very common and also a convenient way of carrying out an investment. The investor prepares the project documentation, selects the contractor to whom he hands over the investment, and then receives the completed project in a year or two,” comments Artur Dziubak, the business development manager of Hill International. However, he claims that for the system to work there are a few conditions that need to be fulfilled. First of all, the investor must have thorough project documentation, on the basis of which the contractor will quote the price and propose a deadline. But at this stage the general contractor often does this based only on what is included in the documentation. To put it simply, if, for example, the investor has forgotten about the door handles, the general contractor might only make the investor aware of the need for these during the construction work – when the latter is in a much weaker negotiating position regarding the valuation of additional tasks than prior to the tender. The general contractor can always say that whatever the investor tries to do without his involvement is not covered by the guarantee, which creates a non-free market situation. Any withdrawal of the guarantee would result in difficulties over the insurance and problems in selling the property. “When aggressive tendering occurs, contractors often identify issues that could later be used as an excuse to increase the contract price or extend the construction time during the construction of the project. The lowest price at the beginning may turn out not to be so attractive at the end,” explains Artur Dziubak.

Changing things later on

The second condition for the success of the general contractor model is securing enough time for the tender process, which allows the bidders to carefully analyse the documentation. The shorter the time, the greater the risk for the general contractor of mistakes leading to the under- or overvaluation of the contract price, or of a misjudgement about the time required for construction. Setting the contract value below the market level might seem to be the best approach for the investor, but this will come back to haunt the latter when the general contractor, with its back to the wall, begins (not always fairly) to demand additional payments, thus wrecking the cooperation. Finally, the investor should not introduce too many changes during the implementation of the project, because, yet again, these can provide the contractor with the opportunity to push up the price. Unfortunately, changes are often difficult to avoid. Let’s say that a large fashion retailer wants to lease space in your shopping centre, but sets as a condition having an inner staircase to link the two levels of the store. This requires some changes to the design, which is much more straightforward when the work is split into packages coordinated by a construction manager acting on behalf of the investor. “I would say that the sector least susceptible to changes is residential development, which is a relatively simple type of investment. This is why general contracting is so widespread in this sector,” says Jerzy Binkiewicz, a senior consultant at CMT. He believes, however, that in some other areas, such as mixed-use projects for instance, this model is less effective. “To provide the simplest example: if you have a general contractor for the retail section and the road infrastructure, you will have to employ a road construction company anyway – so it’s better to go to them directly,” insists Jerzy Binkiewicz. Another type of project highly suitable for the construction management model is refurbishment. Some changes to the initial plans might only need to be made during the renovation work, when it could be discovered, for example, that part of the building does not meet the current fire regulations or that some asbestos has to be removed when moving a wall. This then triggers claims from the general contractor to revise the deadline and price of the contract, and can sometimes lead to the work being halted until the documentation is redrafted by the investor. Instead, this could all be easily avoided by using the construction management model. “As opposed to general contractors, I have no interest in making claims against my client. I only provide information about what needs to be done and how we can solve it; but claims do not need to be made and thus the risk of prolonging the construction time is minimised,” comments Ferdinand Baggeroer, the owner of the Construction Management Team (CMT) company, which, among other services, offers construction management and project management.

Freedom without a general contractor

The general contractor model first came to Europe from the United States in the seventies and eighties. It answered the needs of investors who wanted to sell the investment risk onto a competent second party. “It is a fair model, in which professionals who have done the job hundreds of times and know exactly where the problems are, are getting paid for taking the risk off the investor. They also bring with them their performance bond, but originally they also had to have their own technical departments, design departments and structure design departments – almost everything was in-house. Over the years and due to the continuing price pressure, general contractors have started outsourcing these operations. For investors this means that they are no longer buying full in-house construction knowledge, because this has virtually disappeared – there are many general contractors who limit themselves to managing the contracts and subcontracting the full scope of the work. However, this goes against the original philosophy of the model,” says Ferdinand Baggeroer. He believes that expert knowledge and know-how are now only to be found among subcontractors rather than general contractors. “In the past construction companies were focused on specific types of construction project, e.g. bridges, warehouses or residential estates. Nowadays every large construction firm offers to carry out each kind of project. However, it is impossible for every company to have adequate know-how in each of these fields. And people see this as diminishing the engineering value of a company,” claims Mostostal Warszawa’s spokesperson Filip Cewiński. However, he believes that although the knowledge of general contractors is different from that of subcontractors, it would be wrong to regard it as inferior. “As far as the knowledge of what kind of a weld should be used to connect two steel elements, the subcontractor probably knows better; but when it comes to managing the investment process, the general contractor is undoubtedly more expert,” declares Filip Cewiński. However, with a general contractor there is also the issue of the information flow between the subcontractors and the investor. According to Artur Dziubak of Hill International, under this model the flow is much more limited and the knowledge of better technical solutions is often out of the reach of the investor. The situation is very different with construction management. “Secondly, all the solutions suggested by subcontractors are exclusively in hands of the general contractor. It is entirely the contractor’s decision to what extent these are shared with the investor” says Artur Dziubak. Issues related to the risk also have an impact on financing. “Every construction requires a certain reserve of funds in place for unpredictable events that could increase the costs or time of construction. Under the general contractor system the reserve is evaluated by the general contractor and included in the price offered by the latter. Thus the investor pays for it regardless of whether such unforeseen events actually take place or not. Under the construction management system it is the investor and not the general contractor who provides the reserve for unpredictable events – and if such contingencies do not arise, then the money stays in the investor’s pocket,” claims Artur Dziubak.

Direct payer

Leaving out the general contractor also makes it possible to benefit from the more amenable approach of the subcontractors. The latter now have direct contracts with the investor, i.e. the paying party. This removes the risk (usually included in the contract value) of the general contractor not paying them on time. “The contractor likes to sign contracts directly with the investor and can have the money on its account within 30 days. When the money goes through, the general contractor can then decide when to pay and to whom. It sometimes happens that general contractors have overdue payments from earlier projects and then pay previous liabilities with my money,” laments Piotr Karbowy, the technical director of Apsys. But direct contract with subcontractors provides the investor with more benefits than purely financial ones – such as those related to the quality of the work done. The quality of the construction of the project is mainly down to the choice of subcontractors. When the choice is being made by the investor, the offer can be sent to companies who have the appropriate resources and experience. When the general contractor is left to decide, the price is often the main criterion. Furthermore, under the general contractor-free model the investor can terminate cooperation with any company that fails to meet its expectations at any given time – so if a company falls behind schedule, we can replace the weak link while the others keep working,” says Piotr Karbowy. However, with a general contractor such a course of action is beyond the investor. The freedom provided by packaging also has an impact on the duration of the construction. The investor doesn’t have to wait until the project documentation is prepared to the finest detail before the construction begins. “Construction management allows the ground and construction work to take place parallel to the designing stage, according to current needs of the investor and the tenants. When we package the investment, if decisions have yet to be made about detailed solutions for installations or fit-outs, this does not block the progress of the project,” explains Artur Dziubak. As the representative of Hill International claims, under the construction management model the investor can control the quality better, lower the costs and have greater flexibility to respond to any changes necessary after the start of the construction work. Under some circumstances it can also steal a march on the competition by shortening the construction process. Are such views about the system the general consensus among developers? It seems not. Rafał Elżanowski, the investment director of Neinver Poland, Germany and Holland, does not share such enthusiasm for the model. “We have been building projects in cooperation with project managers and general contractors for many years. It is a model that works more smoothly and has a predefined budget,” says Mr Elżanowski. The Spanish developer carried out its first projects in Poland (Factory Warszawa Ursus and Factory Wrocław) under the packaging system. At the time the company believed that there was a shortage of experienced and credible general contractors, but now it has reached a different conclusion. “Companies have gained experience not only in terms of how to build but also how to manage the entire investment process. When choosing a general contractor for large projects we focus on their experience in carrying out such projects. Most often we select one of the top five contractors. For smaller projects we choose firms with a smaller scale of operations, but nonetheless experienced and with a very good reputation on the market,” says Neinver’s investment director. ν