The development management agreement (DMA) clarifies what constitutes development costs and assigns responsibility for incurring them. Total development costs, which are borne by the developer, include construction costs and other development/project costs.
Broadly, construction costs are those costs incurred through the actual construction of a built asset, including building design and construction fees. The costs are often determined by the value established in the construction contract.
Other development/project costs are those costs not directly associated with constructing but that form part of the total development cost. They include costs incurred for land acquisition, marketing, and planning permits.
The calculation of the development management fee is one of the most important DMA provisions. The fee can be calculated in various ways, including:
- Percentage of development costs – A percentage of the actual costs incurred in the development project, as is common for design-build construction delivery;
- Fixed fee – A lump sum fee payable on key dates or upon completion of construction milestones, typically used for construction manager at risk (CMAR) delivery;
- Percentage of development income – A proportion of the proceeds of sale and/or other sums of the capital or income received by the developer from the project; or
- Success fee – An amount of construction KPIs, usually only when a certain hurdle amount (threshold) has been achieved, to which the development manager is entitled.
Development managers may undertake the construction themselves or appoint contractors to carry out the works. When also acting as contractor, the development manager earns the respective fee.
Profit sharing programs may be used to incentivize the development managers and the developer's management team, including the CEO, CFO and chief estimator. External project managers and contractor’s would only profit from the process of carrying out the works, not from the project itself.
To achieve the maximum sustainability of development projects, knowledgeable and experienced development managers must be engaged and paid a commensurate development management fee. Their managerial skills greatly influence the success of sustainable development projects.