Development Management Agreement: Make Your Manager Earn When You Do

Who does what under a development management agreement

There are three parties to keep apart in your head.

1. The employer. That is you: the landowner, investor or family office. You fund the scheme, own the land and keep the big decisions.
2. The development manager. Appointed by you to run the scheme. Usually the lead consultant, coordinating everyone else.
3. The project team. Architect, planning consultant, engineers, cost consultant and the contractor. Usually appointed by you, managed by the development manager.

Legal guidance on development management agreements describes this standard set-up. The employer funds and appoints. The development manager leads. The key point for you is simple. You carry the money risk, so the agreement must give you the control that matches it.

The services schedule: what to put in and leave out

The services schedule lists what the manager must do. Everything outside it is extra, and extras cost money. Be specific.

Leave out anything vague. "Such other services as the employer may reasonably require" sounds flexible. In practice, it starts arguments about what is extra. List the services, and agree a rate for anything outside them.

Incentives: how the manager's reward lines up with yours

This section looks at one question only: what does each way of paying the manager make it want? Fee structures themselves are covered in our guide to development management fees.

This is our own reading of the incentives, not a rule. But we see it play out on real schemes.

The last row needs a word. IRR measures how fast money comes back, not only how much. A manager paid above an IRR hurdle may push for an early sale, even when holding would make you more. Pairing the IRR hurdle with a minimum profit figure closes that gap.

For how hurdles and the order of payments work, see our guide to joint venture agreement key terms.

How we usually structure it

On a full-cycle project we build at cost plus 5% and charge from 20% of the development profit, depending on the agreement.

Yes, our 5% rises with the build cost. But we also take a share of the profit. Every pound of extra build cost comes out of that profit, so overspending costs us too.

One client converted a 600m2 office into 8 apartments with us. Their Google review describes the result:

"…which gave us a big upside to exit the project 2 months faster than other competitors’ timelines."

Our guide to cost plus contracts explains the same model with a worked example.

Reporting, approvals and the money you control

The agreement should make clear which decisions are yours alone. These are often called reserved matters. The manager may recommend them, but only you approve them.

1. Budget. The approved budget, and any increase above an agreed limit.
2. Appointments. Hiring or replacing any consultant or contractor.
3. Contracts. Signing the building contract and any major variation.
4. Planning. Submitting or changing a planning application.
5. Funding. Loans, security and anything that binds the land.
6. Sale. Prices, offers and the exit.

Then control the money itself. Payments should go out from an account you control, against invoices the manager has checked. Ask for a monthly report showing spend to date, forecast to finish and every change since the last one.

If a lender is involved, it will usually appoint its own monitoring surveyor. That person works for the lender, not for you. Our guide to the development monitoring surveyor explains the role.

Managing the conflict when the manager also builds

Some firms offer development management and construction together. We do. As development manager, the firm should push the build cost down. As contractor, it earns from the build. The agreement must manage that in the open.

The basics, such as separate pricing, open-book costs and independent checks, are in our guide to development management fees. In the agreement itself, add two clauses:

1. No self-approval. The firm never approves its own variations or payments as contractor. You or your independent adviser do.
2. Full disclosure. The firm declares every source of income from the scheme, including commissions and referral fees.

We run schemes from appraisal to handover and build them, with the construction contract priced separately. Our development management page explains the service.

Termination, break fees and selling the site

Every agreement should explain how it ends. Agree this while everyone is still friendly.

1. For default. If the manager breaches the agreement or becomes insolvent, you should be able to end it quickly.
2. For convenience. The right to end it for any reason, usually with notice and a break fee. Legal guidance on development management agreements notes that break fees are common.
3. On a sale. If you sell the site, what is the manager paid? A break fee, a share of profit to date, or nothing?
4. On assignment. Can you transfer the agreement to a buyer or a funder? Can the manager transfer it to anyone else?

Whatever the route, make sure you keep the scheme. On termination, the manager should hand over every document, drawing, model and report. You also need a licence to use the designs it controls. And you should be able to take over any consultant appointments it holds.

Liability, insurance and payment rules

A development manager gives professional advice, so it should carry professional indemnity insurance. Agree the level, and how long it must be kept after the scheme ends.

1. Standard of care. Usually reasonable skill and care. Beware anything weaker.
2. Liability cap. Many agreements cap the manager's liability. Make sure the cap fits the size of the scheme.
3. Warranties. Lenders and buyers may want collateral warranties from the manager. Agree to give them in advance.

Payment rules may also apply. Legal guidance notes that a development management agreement can count as a construction contract. If so, the Construction Act payment rules and adjudication apply. The Construction Industry Scheme and the VAT domestic reverse charge may also be relevant. Take advice from your solicitor and accountant on your own agreement.

How to run the first 90 days with a development manager

The first three months set the habits for the whole scheme. Use them to build the controls in, not to catch up later.

Choosing the right partner matters as much as the agreement. Our guide on how to choose a development partner sets out the questions to ask. Family offices may also find our guide to family office property development in London useful.

We take development schemes from £3M to £150M GDV. Depending on the stage, we can co-invest, take on all of the risk, or work on a fee or percentage basis. Want to see how your scheme would be run? Book a site visit and we will set it out.