Construction management fees

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Rank: Chimp | banana points 9

Need your advice: we are raising equity for a multifamily development project where the developer is also the construction manager. Total project cost is $70m. The developer is asking for a developer fee of 4% of total costs. In addition, he is asking for a construction management fee of 5% of total hard costs. The prospective LPs are not very happy. From previous discussions here I realized that the 4% development fee is reasonable if paid in stages over construction. What would be a reasonable CM fee (if any) for a developer who does his own CM?

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Comments (16)

Nov 2, 2017

We charge something closer to 1% of construction costs. This is included mainly to cover the cost of the overhead for that person rather than an actual profit center and our Co-gps and LPs haven't had an issue with that philosophy.

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Nov 2, 2017

Typically 1% of hard costs here too.

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Nov 2, 2017

4% development fee & 2% construction management fee. Typically we 3rd party out the construction management, but have done it internally in the past.

Also watch out for what the fee is calculated off of. Developers will try to calculate it off of the complete project budget (inclusive of taxes, financing fees, insurance, fees on fees, etc.) which IMO you could push back on....

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Nov 2, 2017
Gentleman and Scholar:

4% development fee & 2% construction management fee. Typically we 3rd party out the construction management, but have done it internally in the past.

a total of 6% and you're not the GC? my boss's head would explode out of anger if he saw that in a budget

Nov 2, 2017

To clarify, in our budget, 4% goes to us (development fee) the 2% construction management fee goes to a 3rd party construction manager.

We rarely collect both fees, but in the instance we did, the development fee was front-end weighted, a fee paid out across our re-entitlement period (first 2 years), with the construction management fee paid during construction.

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Nov 2, 2017

Just to clarify, when you say he's doing his own CM, is he overseeing a general contractor's work, or GCing the deal himself? Those are wildly different things.

Nov 2, 2017

The developer is doing the GC himself

Best Response
Nov 3, 2017

Completely acceptable. Here is why....
The General Contractor selected by the Developer (after RFP bid process) has their fee, right? That fee is a representation of all the Sub-contractor's cost of work. That is how they make money. The Developer who is hiring the GC, putting together the architect, mechanical, electrical, structural design team, going through planning commissions. entitlements with the City, mitigating environmental issues, managing the overall budget, value engineering etc. They are charging a fee for their services. That's how they will make money (this is your basic FEE developer if they are not contributing any equity). If you don't use the developer, YOU will have to do all that planning and management, vetting GC's, designing a project to meet your budgeted hard costs etc. That's the developer's add value to you. Since you do not have an expertise in doing that, you hire the fee developer to do it, who in turn charge a fee for that service.

I work for a large nationwide GP with institutional investment and we always charge a 3-4% development management fee of (SOFT + HARD) to the underwriting.

EDIT: I just read that the developer may have an in house GC license so would GC it themselves. If I am a GC, I make my fee on any project, right? Lets say that fee is typically 5% of sub contractor costs. If you then ask me to bid a job and ALSO include development management services, why would I take extra work on for the same gross fee? I am going to charge you more for doing more work, and industry standard for the most part of a % of (hard & soft). How else do you think these fee developers who are run by 2 - 3 guys make millions of dollars with basically no risk.

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Nov 6, 2017

I work for a multi-family developer who also does in-house CM for our projects -- our typical fee structure includes a development fee of 3-5% of total development costs, paid 50% at financial close/lease execution/construction commencement, with the other 50% paid in equal installments each month during construction. Our CM fee is typically 1-2% of hard costs, also paid in equal installments monthly during construction.

Note, we are not the General Contractor, we hire the GC and they have a 3-4% fee of their own -- that being said, I think the fee structure in the OP's scenario is reasonable. Obviously everything is up for negotiation so you could try to work them down a point, but a lot of risk-factors (that we don't have background on for this project) play in to negotiating those fees -- e.g. pre-dev duration and familiarity with architect and drawings, construction schedule and weight of penalties tied to late delivery, sub-contractor availability in the market, developer/GC's reputation and ability to find alternative job with better risk/reward profile, etc.

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Nov 2, 2017

Thanks all for your input - much appreciated

Nov 6, 2017

What is the market for a CM? I would say he is probably worth that.

Nov 7, 2017

5% for just Construction Management (not GC, not Dev fee) is fucking high. If I pulled that fee in on a contract I'd get my balls licked by my CEO. Then I'd quit because with fees like that I would run my own shit.

1.5%-3% max is our usual.

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Nov 3, 2017

I don't know how that is bought off by an investor too. Why would there be both a CM fee and a Dev fee (outside of GC's fee)? To me, your buying out Construction Management with a good GC anyway...CMing is part of the deal with a good GC.

Nov 7, 2017

GC doesn't always have your best interest in mind, therefore 3rd party CM is a good investment, but agree the dev shouldn't be adding as much as 5% on top of his fee for CM services. I would not leave CM solely in the GC's hands, never ever.

Edit: I accidentally wrote"...Developers hands" instead of "GC's hands". Been a long day.

PS One of my current GC's is only getting 4.5% and he's got most of the risk.

Nov 2, 2017
pere797:

I don't know how that is bought off by an investor too. Why would there be both a CM fee and a Dev fee (outside of GC's fee)? To me, your buying out Construction Management with a good GC anyway...CMing is part of the deal with a good GC.

Every deal I've ever worked on has had a dev fee and a CM fee.

As @VanillaGorilla said, the GC doesn't always have your best interest in mind. The GC is a client, not a member of your company, and they have their own interests beyond working for you. The importance of an in-house construction expert cannot be overstated.

Beyond that, I've often seen the CM fee paid out before the Dev fee and a little cash flow before the asset starts cash flowing never hurts.

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Nov 3, 2017