After completing the house design, you should undertake construction. For construction of an individual house, you must engage the services of professionals (contractors) who translate the design and drawings into physical reality. Effective team management is crucial when coordinating with multiple contractors and specialists.
You must make the most crucial decision while constructing a house: deciding on the model of ‘construction contract’ you should adopt. Understanding the right contract type is essential, much like understanding structural types when planning your home’s foundation. Here are three essential tips to help you navigate this critical decision and ensure successful construction project management of your independent home.
Tip 1: Understand the Different Types of Construction Contracts
Contractors commonly adopt few types of construction contracts, and their pros and cons are:Item Rate Contract
Pros:- Contractors execute work as per specifications and drawings
- The contractor takes responsibility for the quality of workmanship and materials
- Implementing proper safety protocols ensures project success and worker protection
- You have high possibility of hiring reputed and established contractors
- The contractor provides material and labor in their scope
- Contractors mark up materials with profit
Material Supply Contract OR Labor Contract
Pros:- You eliminate profit margins contractors mark up on materials
- You must have the time, infrastructure and patience to procure all materials
- You have limited control over material wastage
Cost Per Square Foot of Construction
Cons:- You lack clarity on the basis of area calculation for measurement
- You need clarity on work items that contractors include and exclude
- You need clarity on price fluctuations during the contract tenancy
Tip 2: Avoid Cost Per Square Foot Contracts – Here’s Why
Why Cost Per Square Foot Contracts Create Problems
‘COST PER SQUARE FOOT’ CONTRACTS CREATE THE MOST AMBIGUOUS SITUATIONS AND YOU SHOULD AVOID THEM. You should not enter into a ‘cost/sft’ contract unless contractors answer the following questions:Area Calculation Ambiguities
- What definition do they use for ‘square foot’ measurement for payment?
- Do they use plinth area (includes wall thickness) or carpet area (excludes wall thickness)?
- Do they include balconies in the plinth area?
- Do they include cutouts in the slab or exclude them?
- Do they include the ‘stair case room’ or ‘lift machine room’ in area calculations?
Understanding the Geometry Problem
I will demonstrate through basic geometry fundamentals the fallacy in awarding a ‘cost per square foot contract’ without knowing the shape and size of your proposed house for construction. Consider a house you build in a square shape of 4 feet sides:- Area of a square of 4×4 feet sides = (4×4) = 16 square feet and its perimeter is (4+4+4+4) = 16 feet
- Area of a rectangle of 8×2 feet sides = (8×2) = 16 square feet and its perimeter is (8+2+8+2) = 20 feet
Scope of Work Issues
Do contractors define the scope of work clearly? Which work items do contractors include in their ‘cost per square foot’ price quote? For example:- Do they include compound walls? If yes, what height?
- Do they include underground sump and overhead tank construction costs? If yes, what capacity?
- Do they include window grills? If yes, what size and pattern?
- Which work items do they NOT include in their Scope of Work?
Specification Clarity Problems
Do you know specifications for ALL work items?- What concrete ‘mix’ do contractors use?
- Do they use ‘site mixed’ or ‘ready mixed’ concrete?
- What quality reinforcement do they use?
- What thickness floor tiles do they use?
- Do they use vitrified or glazed tiles?
- What glass thickness do they use in windows?
Price Fluctuation of Construction Materials
After contractors generate the work items list, they quote their rates for each work item. Contractors base their quoted rates on prevailing market rates of materials they must incorporate plus labor cost, taxes, transportation and their profits. In buildings, major cost components go towards Cement and Reinforcement steel, which approximately constitute 35% of building cost. Major fluctuations in basic prices of these materials can occur during the project life. Understanding value engineering principles helps you manage these cost variations effectively. In that case:- Who bears the cost difference of material price fluctuations during construction?
- How do you monitor price fluctuations of major materials like cement and steel?
- For which materials do you consider price fluctuations and which ones do you exclude?
Tip 3: Choose Item Rate Contract for Best Results
Why Item Rate Contract Works Best
For individual house construction, where you will probably make additions, deletions and alterations to the house and scope, the ‘Item rate contract’ provides the most appropriate contract model. I cannot enumerate everything that goes into forming a watertight ‘item rate’ contract in this article. However, I will briefly explain the concept. Your consultant can elaborate further, and proper knowledge management throughout the project remains essential.Process of Preparing an Item Rate Contract
The item rate contract preparation process briefly consists of:- Comprehensive Work List: The consultant prepares an exhaustive list of all work items they will execute, describing each work item’s specification and specifying measurement units (Bureau of Indian standards 1200 specifies measurement methods for various work items) that determine contractor payment
- Tender Documentation: Consultants prepare a tender document consisting of General contract conditions and the Bill of Quantities (BOQ) and issue it to shortlisted contractors for rate filling
- Quantity Derivation: Consultants derive quantities of each work item from drawings the architect and other engineering consultants prepare. (This represents specialized work of a Quantity surveyor)
- Rate Quotation: The contractor quotes ‘unit rates’ for various work items according to described specifications
- Price Management: The contractor bases their quoted rates on ‘basic rates’ of few materials such as Cement and Reinforcement steel etc., which normally constitute 30% to 35% of contract value. If basic prices of any commodities vary during contract life, contractor risk reduces, therefore, they quote competitive rates
- Progress Monitoring: The contractor maintains records of all executed work items and their measurements progressively; you pay them progressively for completed work according to mutually agreed payment terms. Effective time management practices remain essential during this phase.
- Payment terms to the contractor
- Contractor All Risk insurance policy that the contractor procures, indemnifying you against theft, fire and third party claims etc.
Benefits of Item Rate Contract
The item rate contract provides the best method for building individual houses when you execute it properly and professionally. By adopting this model:- You can determine the total budgetary cost of the project, which consultants prepare based on drawings and finishing materials you propose to use
- You will know the total project cost as soon as you finalize tenders and place work orders
- You may add or delete work items to control costs or requirements in consultation with consultants
- You may change specifications in consultation with your consultants
- You can control costs as work progresses
- You pay only for work items contractors execute at agreed rates
- You gain clarity about what you receive and what you don’t
- You get clarity and control over work quality and materials contractors incorporate
Conclusion
When constructing your independent home or residence, following these three essential tips will help you avoid common pitfalls and ensure a successful project. Additionally, today’s homeowners are increasingly interested in sustainable construction practices when planning their dream homes:- Understand all contract types available and their implications
- Avoid cost per square foot contracts due to their inherent ambiguities
- Choose item rate contracts for transparency, control, and professional execution