Construction Management Arrangement Inquiry - What to do and advice
I’ve been down this road with a construction manager to take me through permits and site plan for a fixed fee. We’re starting to negotiate the CM arrangement for construction. Preparing the required documents for permit process has been slow (5 months +) for simple construction. Additionally, they generally don’t seem on the ball by not knowing what the entire development consists of, including future phases. The explanation for the delay is due to construction starting next year and prioritizing other projects since this one was delayed. The delay to start next year is my fault due to financing which was difficult during COVID but has now come through. Irregardless of financing, permit and site plan does not require financing. On the other hand I hired them for a job (get permit and site plan process done) and delaying the permit document gathering process shouldn’t have occurred. Five months for document prep is long for simple construction. The project value is ~$900k (prior to CM fees) for light industrial construction and the proposed fee is 7% which seems normal. We started working on the CCDC contract and there are some minor things that may be difficult to overcome. 

A few questions for everyone:
1. Should I continue down the road with this CM for construction or evaluate alternative options? (My gut is telling me one thing.)
2. How common is it to have soft costs related to administrative and overhead costs added to the contract? 
3. What does the typical CM fee cover? It seems like it’s pure profit for company plus mark up on labor. 

Any additional feedback, questions or tips outside of the questions above would be greatly appreciated.
[{"id": "gdnwz3p", "text": "Our group just got done a $10MM build and I ran the books so I may be able to help. First, how much do you have invested in this company? If it\u2019s feasible to switch companies at this point in time, I would certainly pursue it. Any CM worth their weight realizes that understanding the project, clear communication and meeting deadlines is their job. Next, we paid for some soft costs, with crystal clear accounting (every receipt was turned over to our group for review).  What specifically are you referring to when you say \u201coverhead\u201d? Finally our CM was comprehensive. Our contract spelled out exactly what they would perform and we were so happy with them that we are absolutely using them again. Daily project oversight, budget management, contract management and administration, accounting, materials pricing, minor engineering, meetings with city county and state officials for permitting purposes...I could go on. Granted, they were fairly compensated for their time but their services were highly valuable to our group.", "replies": [{"id": "gdnzroj", "text": "I have nothing invested except for time. We entered into an agreement for services (site plan and permit completion) for a fee (eg $10k). If a CM contract was entered into after that the amount payable (eg $70k) would be reduced by the services fee already paid ($70-10=60k). \n\nWhen I say overhead I mean their labor costs to arrange permit application, site plan coordination, minor design, etc. Their time to arrange and prepare all documentation. They\u2019re proposing I be charged a full CM fee (7%) on top of their labor rates. Is that normal? I thought it would be half or so since the labor rates are already marked up. \n\nRight now they\u2019re saying they have $20k (for example) invested in the permit and site plan process but the agreed upon price is $10k (eg). If I proceed with CM I end up having to pay the difference plus 7%. Seems crazy to me.\n\nAny additional insight into industry norm would be appreciated. This is my first construction project and my prior experience is all simple BRRR on smaller buildings.", "replies": [{"id": "gdo360s", "text": "&gt; They\u2019re proposing I be charged a full CM fee (7%) on top of their labor rates. Is that normal?\n\nYes, it is normal for a CM contract to charge fee on full cost including labor. There are of course many ways of negotiating CM contracts, and this is one common method. If you believe the labor in the contract is already marked up, you should ask or negotiate that down, or negotiate the fee rate down (if you can).", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gdo41i9", "text": "You could also structure to pay a maximum amount per month for CM services. We do it in a less structured way. There\u2019s \u201cexpectations\u201d rather than deliverables required. We do value add office multi and retail and have been doing about $7m in capex and TI work.  \n\nOn three properties, they bill either 50% or 100% of $3,000 per month depending on the level of work done that month.", "replies": [], "depth": 1}, {"id": "gdpo3f3", "text": "The CM fees seam low IMO, to small of a project to be at that rate.....however not enough info about the project.", "replies": [], "depth": 1}, {"id": "gdqlaxe", "text": "Noticed you mentioned CCDC so I\u2019m assuming you\u2019re from Canada. I work as a Project Manager for a large commercial general contractor in Calgary so I can offer some insight here:\n\n1. Grill them over why it\u2019s taking so long to site plan and get permits. I completely agree with you here, these are relatively simple stages of construction which every contractor should be able to nail down.  \n\n2. Soft costs will be incurred with every contractor. They have to pay for their own internal accountants, safety fees, insurances, software, etc.\n\n3. Typical CM fee is usually 3-5%, and considering the current market right now, contractors will definitely do jobs for 3%, even less. I think you\u2019re overpaying. But yes, they do make money on the fee and the labor markup which is very common.\n\nGranted I don\u2019t know the specifics of your project and the hurdles you and your contractor may be jumping through, but based on what you\u2019re saying I\u2019d start vetting this contractor a bit harder before you sign a contract. CCDC 5B I\u2019m assuming? Feel free to PM with questions!", "replies": [], "depth": 1}, {"id": "geim2e2", "text": "1. It sounds like you already know you should evaluate other options for construction. If you're not thrilled with your relationship with them so far, you don't want to get into bed with them for that kind of commitment.   \n\n\nIn any case, look into requiring performance/payment bonds for the construction if the financing party isn't already requiring it. This will ensure that the work is done on time and to spec. The cost will end up running upstream to you, but it's the the best way to de-risk the construction phase.", "replies": [], "depth": 1}, {"id": "genminn", "text": "I think the bigger issue here is that the group you hired is not on top do the things they need to be. They should be telling you what is going on and should be the expert on the items not the other way around. Not sure who these guys are or what their background would be but I would advise finding someone new. Things tend to get \u201cworse\u201d in construction not better. This should be the easy part of the job and failure now is not a good sign. \n\nThat being said I would also validate the issue and determine the cause. It\u2019s easy to blame the CM but if all they can do is wait for permit review it\u2019s hard to fault them for a slow inspection process.", "replies": [], "depth": 1}]