UNDERSTAND A CONSTRUCTION CONTRACT

By
Real Estate Agent with R.B.Eeal Estate

Constructing a house is a cumbersome process. Many people prefer to construct a house rather than purchase a built house. A plot is purchased and the house is constructed according to one's requirements and lifestyle.

There are two ways to get the house constructed. One option is construction on a turn key basis. In this case, the owner and the builder enter into a contract wherein the contractor completes the entire construction along with fixtures and fittings, and hands over the key to the owner on completion. The owner has no other role to play, except to make the payment and to enter the house on completion of the construction.

The other option is to enter into a labour contract. In this case, the owner enters into a labour contract with the contractor. The material is purchased and arranged by the owner himself. Only the labour is supplied by the contractor. This is more suitable for people who want to maintain strict standards.

Whatever mode is chosen, as a first step, it is essential to formalise the arrangement. It is important to enter into a contract with the contractor. The mutually-agreed terms should be penned in black and white. The terms and conditions should be written down and signed by both the parties.

In case of construction contracts, it is better to have a two part contract. The first part of the contract relates to the structure to be built. The second part of the contract relates to the fixtures, fittings and furnishings in the house.

In order to prevent disputes, ambiguities and confusion, the contract should specifically cover the terms. These include, among others, the parties involved, terms related to quality of material to be used, timeframe for completion of various phases of the house, payment terms according to which the payment needs to be made, escalation clauses, penalty terms, liability of respective parties, authority to appoint or subcontract work, who will provide the material, specifications of fittings to be used, timelines for inspection etc.

Usually, construction costs are quoted on a per square foot basis. You may have the structure built on a per square foot basis. The contractor would quote on the basis of the structural and working drawings prepared by the architect.

For the part related to fittings, fixtures and furnishings, you should get a quote on an item rate basis. The contractor gives a quote after going through the specifications and quantities needed. All specifications regarding the make, brand and size should be mentioned specifically. It should be ensured that the base rates for the tiles used, granite, marble, glass, lights, tubes, pipes, windows, grills, basins etc are mentioned separately.

This gives flexibility to the owner to build as per his budget, resources, requirements and tastes. Further, the owner can safeguard his interests. The advantage of having this kind of clarity is the owner has the freedom to choose. He may buy any quality of flooring -

He can choose whatever quality of marble he wants and at whatever price. He can deduct an amount of Rs 90,000 from the payment to be made to the contractor towards the material supplied by himself (Rs 150 x 600 sqft). The same logic applies to other items of furnishings, fixtures and fittings. The contract should be drafted with as many details as possible and should be specific. A careful drafting of the contract will prevent disputes and confusion at a later stage.

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                                                      ET Realty, May, 30,2008

Comments (4)

Greg Hampton
Re/Max Around The Mountains - Blue Ridge, GA
North Georgia Mountain Property,Blue Rid

The one type of construction pricing you did not mention was the cost plus approach. This approach has become more widley used due to spikes in building materials and does away with change order problems. I have built 50 homes in the last 5 years and thishas worked well for my company and my customers. I feel it the most fair to construct a home.

Jun 06, 2008 10:16 PM
Lori Lincoln And Associates
Top Agent Serving Dighton Taunton, Rehoboth and more! - Taunton, MA
Top Agent Taunton,Dighton Rehoboth &more

New Construction can indeed be a "bear".  Thank you for imparting your knowledge

Jun 06, 2008 10:17 PM
Greg Steffens
Mountain Country Realty - Lake Arrowhead, CA

Welcome to Active Rain and congrats on your first post.  Be sure to spend some time looking around at what and how others are blogging here.  It is a great education and lot s of fun.  Looks like you're off to a great start...keep it up!

Jun 07, 2008 04:44 AM
Ted Mackel
Keller Williams Realty Simi Valley - Simi Valley, CA
Simi Valley Real Estate Agent

Welcome to ActiveRain. Congratulations on your first post. Get around and check out the community, you'll quickly figure out how to supercharge your blogging skills

Jun 07, 2008 03:44 PM