Before constructing a house, one must need to understand the different types of construction contracts for house in Pakistan one might come across. In this blog, we will be discussing the various types of contracts and we will also tell you pros and cons of each type of contract. This blog is a detailed explanation on different types of construction contracts. You need to know these before you start your house construction. You will not only learn about the different types of contracts but also that when you should opt for that specific contract, what are their pros and cons and how to implement them.
The types of contrasts that have discussed are:
Lump sum contracts or Turnkey
Cost- plus contracts
Item rate contract
Grey structure contract
Labor contract
1.Lump sum contract
This is the contract where we say that we will get the keys of completed house from the contractor and contractor will quote us the price. Payment is decided before implementing this contract and then advance is deposited. Advance is normally more as compared to other contracts.
Pros and cons of this type of contract are that construction price remains fixed. If contractor makes lots of delays, penalties are applied. Contractor has opportunity to earn more as this is a high-risk return project. You have to stick with the contractor even if you are not getting quality from him or her. More advance goes to contactor which increases his or her bargaining power and negotiation power. Normally these contracts are front loaded by the contractors, so they tend not only to get higher advances in the beginning. More detailing is required.80% of the people who don’t have that knowledge about detailing, this type of contract is inappropriate for them.
The kind of people who should do Lump Sum Contract are the ones who focus more on detailing meaning they have all the drawings done, have BOQs with them and do have schedule of payment and schedule of work. They should also hire a consultant who checks that all the things are rightly done. Those who can understand that inflation is a factor in Pakistan and India, and they should incorporate it when deciding the contract. So, if you are making your first house, you should not do this type of contract.
2.Cost Plus contract
This is a hassle-free contract. The costs are borne by the client and the contractor is paid a fixed percentage on the scope of work and costs in this type of contract. Positives of this contract is that normally the work is done at the right pace and there is no haste in this type of projects. So, if you don’t find a bit lesser reliable vendor, still you will get the project delivered. The profit of contractor gets fixed Negatives of this contract is that no risk for the contractor. A dishonest contractor will make money in supplies as well and double his or her profits. Normally the costs of cost-plus contracts are higher, but quality is better. Even contractor’s mistakes will cost you. So, you get better quality of construction in cost plus contracts, but the costs are generally higher.
3.Item rate contract
You are not sure of the costs of the projects in the beginning. The contract is done on the price of each item. Positives and negatives of this contract are that you get more flexibility, and you can change the material or material quantities anytime. Cost, quality and time are both pros and cons of this type of contract. So, this type of contract is generally suitable for those who don’t have clarity of what is to be done. Whether you have less items or more it suits but for lesser items it is better because otherwise you will not find direct manufacturers and middlemen will quote you the rates.
4.Grey structure contract
It is a similar contract as that of a lump sum contract, but, in houses, what we do is that we split it into 2 contracts. One for grey structure and one for finishing. On the other hand, you get much more flexibility as compared to lump sum contract as you have to make lesser payments and you can check the quality of the contractor. Positives and negatives of this contract are that contractors have attraction that if they deliver well, they will get contract of finishing as well. Detailing is required in this type of contract but not that much as you require in lump sum contract. Cash outflows are lesser Any variation order can be instantly discussed with the contractor. You may find an expert grey structure contractor which you might not find if you are choosing a contractor for grey and finishing. Extra works are bid independently so apple to apple comparison of contractors becomes difficult. So, it is generally a safe contract and one of the best options of doing a contract.
5.Labor contract
Material purchase is responsibility of client and labor is provided by the contractor. Often this type of contract is not preferred by anyone who is directly taking charge of their house construction. The main problem the owner faces is material. Since the availability of material is variable, timely reaching of material on the site is huge a problem. Due to these reasons, this type of contract is not preferred.
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