Which Type Of Contract Is Good For House Construction

Getting a house built is a major event, involving numerous procedures & multiple decisions. As architects we design the project as per the client’s requirements taking in to consideration the local by-laws, site conditions & design opportunities & challenges. Once the design is completed the project moves to construction stage. There are 3 basic factors to be considered before selecting the method of contract for the construction.

Also, any House construction typically has the following activities:

–    Engineering (Architecture, Structure design, Electrical & Plumbing design etc.)

–    Liasoning (Site Plan approval, Electricity & Water connections, etc.,)

–    Procurement (sourcing raw materials, tools and tackles etc.),

–    Construction (hiring labor, quality control on various jobs to ensure that the work is completed as per specification)

Its highly difficult for house owners to build their house on their own in India. So, house owners should hire contractors to execute the project as per their requirements.There are many types of contracts used by house owners, in general, to bind the contractors in executing the project within Cost, Time and Quality standards. You can contract these activities separately to various agencies or combine contract all to one turnkey contractor any of these activities.Different type of contracts have their own advantages and disadvantages, so a careful assessment is required before choosing which type of contract to be awarded.

Turnkey Contract or Lump sum Contract

Labor Contract

Unit Price Contract

Cost Plus Percentage or Fee Contract

 The choice is one of the above type of contract is primarily based on the expectation, budget & time the client can allocate towards the project. We have discussed the definitions, basic differences and the advantages and disadvantages of each type of contract here in detail for your better understanding. These details can help you decide which contract would be suitable for your house construction contract.

Turnkey Contract (Lump sum Contract)

In a Turnkey Contract or a Lump sum Contract, the whole responsibility of Architectural/ Engineering Design, Liasoning, Procurement and Construction is transferred to the contractor. Sometimes, Home owners tend to give construction turnkey contracts only, where architectural/ engineering design is done by a separate agency. Before awarding turnkey contract, the home owners or the architects ( in case the project has a design consultant) usually give a detailed requirement (including materials, specifications, external and internal finishing etc.,) to the contractor. The contractor, in general, quotes a fixed price or quotes price per square foot of built-up area for a given specifications. This rate usually includes all the work till handover. Once the contract is awarded, timely completion to the set quality standards entirely becomes the contractor’s responsibility. Payment terms are mutually agreed between the contractor and home owner. Since all the responsibility lies with the contractor, a lot of time is saved for the home owner.A turnkey project reduces home owner’s effort tremendously. The contractor has to arrange for all the materials, manpower etc., and complete the project in the stipulated timelines agreed. All that you need to do is to pay the money as agreed in the payment plan. In case it is only a construction contract, the architects will have to certify the bills at various stage of the project, there by the client can be rest assured that the quality is being checked by the experienced professional since the client many not be aware of all the parameters that need to be checked before making a final payment to the turnkey contractor. As architects we even prepare a snag list (basically a list to correct any mistakes or incomplete work), on completion of which the final payment would be released to the contractor.

Advantages:

1. Low risk: Low risk to the owner as all the scope (Engineering, Laisoning, Procurement and Construction work is done by contractor)
2. Fixed Construction costs: Variability of cost in this type of contract is very low.
3. Time saving – Since the contractor is responsible for the delivery of the project, you may focus on your profession peacefully & periodically monitor the progress with the assistance of the architects.

Disadvantages:

1. It very difficult to quantify changes in scope of specifications, since the rates of individual items doesn’t exits (can be avoided by agreeing on item rates before hand)
2. The project needs to be designed completely before the commencement of activities.
3. It is expensive that the labor contract since all the co ordination of material delivery & manpower management at site is done by the contractor he would charge a premium. ( If you are a person who cannot spare time – its wise to pay a premium and get the job done)

Labour Contract

A labour contract is one which involves only the labour that is required for construction. In this type of contract, the sourcing of construction materials is undertaken by the owners.

The responsibility of material procurement lies with the home owner in such type of contract. The contractor gives materials requirement on timely basis to the home owner for procurement. Payments in such contracts have to be done on weekly basis & require high involvement from the home owners. You will be involved in every step of the construction process and can decide on the cost and quality of the materials used.The labour contract is a high involvement contract, as you will be required to closely monitor and provide materials for the construction process. You also need to understanding of best practices in construction so as to take care of the building’s quality.

Advantages:

1. Saves money on material purchases
2. Easy to compare quotations
3. Changes in contract documents can be made easily by the owner
4. Lower risk for contractor

Disadvantages:

1. Contractor has no incentive to utilize the materials efficiently (Wastage of materials can be more)
2. In some cases, Contractor will not assume responsibility of the damages or defects and can claim them on faulty materials provided
3. Hard to determine the total cost of construction
4. High Involvement from customers end to procure the materials and monitor its utilization

Unit Price Contract

In Unit price contract, an estimated bill of quantities is prepared. Estimated quantities are surveyed or verified by an Architect/Engineer. The estimated quantities are then shared with contractors for quotation.

Contractors enter unit prices against the estimated quantities of work. The contract is based on estimated quantities of work items and unit price for each of these work items. Payment is made on the basis of units of work actually done and measured in the field multiplied by their unit prices.

Advantages:

1. Easy to compare quotations from multiple contractor since detailed quantities are mentioned
2. Changes in contract documents can be made easily by the owner
3. Lower risk for contractors as any changes in BOQ is paid for.

Disadvantages:

1. The total price of the project is hard to determine unless the detailed estimate is accurate
2. High involvement from home owner is required to calculate the total quantities

Cost Plus Percentage or Fee Contract

 In this type of contract, the owner pays for the actual cost of construction and pays the contractor a fixed percentage or a fixed fee amount on the top of the actual cost of construction. 

Advantages:

1. If the contractor is efficient in the utilization of resources then the cost comes down to the client.
2. Generally this contract should represent a fair price for the work undertaken

Disadvantages:

1. Contractor has no incentive to be efficient in the use of labour, materials or equipment
2. High involvement from home owners to calculate and analyse the total cost of construction
3. Owner must exercise tight cost control, which may be difficult and/or costly
4. Owner has to monitor each and every activity carefully to improve efficiency

Which contract to choose (Turnkey Vs Labour Contractor)

It’s a difficult call to take whether to choose for a Turnkey construction contract vs a Labour contract.

It is advisable to go with a turnkey contractor if you don’t have the time to involve yourself in the construction process. Turnkey contract is the best option you can have as the complete responsibility is taken by the building contractor, who in general is knowledgeable and experienced for the task. It saves your time, energy and money by giving you a single point of contact for meeting all your objectives.

The labour contract, on the other hand is a high involvement contract, as you will be required to closely monitor and provide materials for the construction process. You also need to understanding of best practices in construction so as to take care of the building’s quality. Major Price fluctuations in case of building materials also will lead to an increase in the cost.

Whatever contract you choose, be sure to get the agreement in writing with all the details mentioned so that there are no disputes later. This agreement needs to be signed and acknowledged by you and the contractor. Analyse what type of contract would suit you best, based on the time and effort required. Weigh in the advantages and disadvantages of each type of contract and carefully choose to enrich your house building experience.

In a nut shell 

1. If you have lot of time and knowledge of construction and are willing to take care of the project every single day – choose labour contract.
2. If your business or profession needs all your time and effort – Turnkey Contract.
3. If you want to save time & money but have no knowledge of construction – Hire a Project Manager & go for a Labour contract.

(The project manager would be you extension at the site with the knowledge of construction, who would coordinate between vendors, manage material supply & check quality of construction.)

In addition of seeking advice from Architects it is best to talk to family & friends who have built homes of their own, who may share their personal experiences which would be of most value.