UNDERSTAND A CONSTRUCTION CONTRACT
Saturday, May 31st, 2008Constructing 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 - granite, marble or tiles - and then adjust the difference from the payment to be made to the contractor. For example, if the quoted base rate of the marble is Rs 150 per square feet for 600 square feet area, but the owner wants to use a better marble or wood flooring, he may go ahead and purchase it and then debit the amount from the payment to be made to the contractor at the base rate of Rs 150 per square feet for 600 square feet. 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
