3 Tips for Construction of Independent Home/Residence – Recommended Type of Construction Contract

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

Cons:

• Contractors mark up materials with profit

Remarks: You should specify basic prices of expensive materials such as cement and reinforcement steel, and contractors should reimburse any variations during the contract. You should also fix the basic cost of finishing materials.

Material Supply Contract OR Labor Contract

Pros:

• You eliminate profit margins contractors mark up on materials

Cons:

• 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

Most house owners commonly adopt the ‘cost/sft’ contract.

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

You will observe that, regardless of the house shape, for the same area of 16 square feet, the square house has a perimeter (wall) 25% less than the rectangular house. This means the square house requires less wall area construction compared to a rectangular house. In the rectangular house, the walls extend 25% longer, so quantities of all connected works such as plaster, paint etc., increase by 25%.

Consequently, for the same construction area of 16 sft, the rectangular house costs more than the square house for identical specifications.

You will also observe that the ‘cost per square foot’ contract concept never mentions floor-to-floor height. Obviously, a house with 9.5 feet roof height costs less than a house with 10 feet roof height.

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?

Without clarity in the scope of work and clear understanding of payment measurement methods for various vendors, your project costs will likely spiral out of control.

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?

Modern construction projects can benefit from smart reinforcement techniques that offer both quality and cost savings.

• What thickness floor tiles do they use?
• Do they use vitrified or glazed tiles?
• What glass thickness do they use in windows?

This list continues. You need a Bill of Quantities that lists ALL work items contractors propose for the house, including plumbing, electrical works etc. Modern construction also requires integrating safety and MEP design considerations into your contract specifications.

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?

In conclusion, you would make a huge mistake entering into a cost per square foot contract because of its ambiguities and potential for litigation and disputes.

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:

1. 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
2. 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
3. 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)
4. Rate Quotation: The contractor quotes ‘unit rates’ for various work items according to described specifications
5. 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
6. 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.

Additional Elements:

• 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:

1. Understand all contract types available and their implications
2. Avoid cost per square foot contracts due to their inherent ambiguities
3. Choose item rate contracts for transparency, control, and professional execution

By making informed decisions about your construction contract, you’ll have better cost control, quality assurance, and peace of mind throughout your home-building journey.

Happy house building!