Friday, January 08, 2010

Types of Contracts and Agreements - Build and Make Part 3

Links to my previous posts
Part 1
Part 2

It is very important to know different types of agreements and contracts while building house. You need to have agreements with Architect and builder. And with any other parties if you directly deal. It is preferred to have all the agreements in writing. Few small agreements can also be oral. But with architect and builder I suggest to have a written agreement. Following are the high level items to be taken care in the agreement.
  • Scope of work - What is covered and what is not covered in the work
  • Time - Schedule deliveries
  • Total cost or item rates or estimations etc
  • Payment modes, payment frequency
  • Criteria of completion - When do you consider the work is completed

With builder there are several types agreements

  • Full contract (Turn Key contract) - You tell builder to build your house as per your basic requirement. In this case you have very less options or choice. Builder has all the risk of managing cost, scope, schedule and any type of coordination. But at the same time, builder has highest profit margin. Owner has very less control in this case and as well as very low risk. Usually this kind of agreement is suitable, if owner is not in the town of construction or if owner is not too specific about the way how this are built. Another situation where builder has built similar houses (may be flats or something like that) in prior. In this case builder takes care of all the major areas of construction - Civil, Carpenrty, Flooring, Electrical, Plumbing, Painting, Fabrication etc
  • Labour contract - In this case, builder provides only Labour. It might include all areas of construction as mentioned above but only difference is that, owner has to provide all the raw materials like - Sand, Brick, Cement, Pipes, Wires, Fixtures, Wood and other fittings. In this case owner has medium risk and builder also has medium risk. But the problem would be of coordination. If owner is new in this construction industry, it might be a big challenge in buying raw materials. Negotiating quality/ cost / supply with suppliers will be again a challenge, if owner is newby in this industry. There might be a lot of chances of getting cheated by suppliers, middlemen sometimes also by contractors.
  • Blend of above two : In this case, you give full contrat to the builder but not turn key. Owner keep few areas for choice during the final stages. Major areas of Civil, Carpentry etc would be done completely by builder and he gives options for owners for selecting colors, quality and others for fittings, paint colors, vinear/lamination selections during final stages. Any differencial cost will be adjusted later. Here owner gets benifit of "his-choice" during finishing stages with some "Cost" invovled.
  • Item rate billing: In this case, arhcitect plays a major role. Owner and architect have multiple sittings/ meetings during planning stage and arhictect provides a exhaustive list of specifications of each areas. This is called as SOQ - Statement Of Quantities. He gives a complete list of items and quantities to be used for building. Builder quotes his price and provides estimation for the entire house for the provided specification. Owner can get the quotation from multiple builders and select the best preffered one based on cost, prior experience or any other factors.
    Once the project execution is started, its Architect responsibility to check the quality as per specification and approve the bill provided by Builder. Once approved, the payment would be done to the builder by owner at multiple stages.
    In this case cost would be more. In terms of Architect fees etc. But highest quality levels are achieved, with lowest risk to the owners as well as builder. Builder also can have his profit transparent so that it is a WIN-WIN situation to all.

Mine was Item rate billing. I figured out a new risk of clashes between architect and builder :). I had to smooth them several times. But over all I am very happy with this model, as well as with my arhictect and with my builder.


Phalguni A.V said...

very informative and useful post Karthik!! would love to see some pics of your new home..! Good luck and keep us informed :)

開心果 said...

A bird in hand is worth two in the bush. ....................................................

Vinod said...

Very educative Karthik....which part of bangalore is your house in? Can you share your architect and builder details.... please email... vinodgaa at gmail dot com

siddharameshwara swamy said...

Hi Karthik,

If I am not wrong your House is in Padmanabha Nagar.If possible do send me your mobile no to my mail ID
I have met Mr.Sathya prakash varanashi and planning to engage him for my house construction.Your help is highly apreciated.


siddharameshwara swamy said...

Hi karthik,

Sorry mail ID I mentioned was wrong.It is