Labour vs Material Contract: Choose Wisely while Building your House
Mahadev Desai is the Founder and CEO of gharpedia.com and SDCPL a leading design consultancy firm having strong national presence. He has a degree in Civil Engineering (BE) and Law (LLB) and has rich experience of 45 years. Besides being the Editor in Chief, he also mentors team at GharPedia. He is associated with many professional bodies. He is also co-founder of 1mnt.in the first in Industry software for contractors’ billing. He is a voracious reader, edited 4 books, and pioneer of book reading movement in Gujarat, India.
- A labour contract is an agreement with specific terms & conditions between two or more persons or entities or between the owner & the contractor in which there is a promise to execute or do some work wherein all materials required for the construction are supplied by the owner. The contractor is responsible for providing adequate labours and carrying out and completing the particular scope of work as agreed between them including supplying tools, plants, equipments, shuttering, scaffolding etc. only.
- A Material contract is an agreement with specific terms & conditions between two or more persons or entities or between owner & contractor in which there is a promise to execute or do some work wherein all materials required for the construction are supplied by the contractor. The contractor is also responsible for providing adequate labours for completing the particular scope of work including tools, plants, equipments, shuttering, scaffolding etc.
There is a popular belief particularly among owners of small and medium house that labour contract is always better and preferable on account of following reasons:
- The owner can buy all materials of his choice (i.e. brand, quality & price) while the contractors may or may not do that. The owner has a fear that contractor will use cheap materials of substandard brands and or of poor quality.
- Owner feels that he will always buy materials of good quality and will not try to save cost, while the contractor with a view to cover profit would not buy standard materials as they may be costlier.
- Material cost is almost 60 to 70% cost of the house and when you give a material contract, the contractor will add his profit on all materials’ cost which may be between 7 to 15% of material’s cost. This will increase the cost of the house by almost 5 to 10% of the house. While buying the materials on his own, the owner can save, profit on materials charged by the contractor.
- One who doesn’t have time and energy to run after purchase of materials and also to co-ordinate different labour contractor would always prefer to contract work to a single agency of repute who will do everything for the owner. The owner then has to just control the works i.e. quality of materials as well as workmanship i.e. labour through architect / engineer / PMC or by deploying a site engineer.
- The contractor considers profit on materials as well as labour, so the ultimate cost increases to that extent, which ultimately is the financial cost of the contractor. This is the general nation of a common man but may not be true always.
- Here also there may be more than one agency for different works like civil work, electrical work, plumbing work etc. unless you entrust everything to one party.
03. Types of Contracts
It can again be either of the following:
- Item Rate Labour Contract
- Lump Sum Labour Contract
- Area Based Labour Contract
- Percentage (%) Based Labour Contract
- Cost +Fixed Percentage(%)
- Item Rate Material Contract
- Lump sum Material Contract
- Area Based Material Contract
- Percentage (%) based Material Contract
- It can again be either
- Cost +Fixed percentage(%)
Saving in Cost due to Saving on Profit on Material’s Cost:
- The owner can save on the amount of profit considered by the contractor on all materials’ cost. But this is tricky and not always true and sometimes it may prove costlier also.
No Discount on Bulk Buying:
- The owner on account of lack of knowledge and expertise, will not be able to bargain & further he will never get advantages of bulk buying or bulk discount, which the contractor generally gets and good contractor always pass such benefits to owner particularly when there is a competition.
Escalation to your Account:
- The price variation in materials as per market fluctuation affects the owner.
Saving due to Bulk Buying:
- In most of the cases, the prudent contractor because of genuine long standing relationship with the suppliers and because of bulk buying as well as his capacity on account of technical knowledge to bargain with the suppliers he will always buy at competitive rates than the common man and it will be cheaper to him.
Escalation to Contractor’s Account:
- The price variation in materials cost as per market fluctuation do not affect the owner if escalation clause is not included in the agreement or basic rates are not provided in the contract.
05. Check on Quality
Assurance of Quality of Materials:
- The owner buys all materials by himself so he feels sure of brand and quality of materials used in the construction, which of course may not walsy true.
Assurance of Quality of Materials:
- The materials are supplied by the contractor hence, the owner may remain suspicious about the quality brand of materials used.
Knowledge to Check Quality:
- Though the owner is not supposed to check quality at the time of purchase ultimately it is his house and hence he has to have some knowledge to monitor and assure the quality of all the materials used. This may be done by engaging a professional Architect/Engineer or Project Management Consultant.
06. Time – Efforts
Owner has to Give Time:
- The owner has to manage the timely supply of materials at the site during the progress of work.
- The construction of the house involves more than 100 different materials and owner will have to spend a lot of time towards buying all materials.
- The work may get delayed if materials are not properly managed by the owner on time.
- Buying all materials also involves a lot of stages like the search for the right supplier, right quality, negotiating right price, delivery of the materials at the site, verifying the quantity and quality delivered at the site, checking the bills of materials delivered and ultimately payments and settling accounts. This is time-consuming and demanding and not so easy as one may think.
No Time by Owner:
- As the purchase of materials including a check on its quality and quantity is done by the contractor, there is no botheration for the owner nor he has to spend any time for it.
- Generally, on account of contractor’s technical knowledge and long-term relations with suppliers he can manage the materials timely on site.
- The contractor also supplies the materials timely to save himself from rising prices of material.
Owner has to Keep Fund Ready:
- The owner buys all the materials for the construction hence he has to manage and plan the fund from the beginning i.e. day one. The cash flow has to be strong.
- Initially, the contractor has to invest money for procurement of material and labour, hence the owner gets some time to manage the funds for the project thereby saving of interest to some extent.
08. Check on Quality
Quantity Might be Out of Your Control:
- As an owner even you might have good relations with suppliers and you may be able to buy at competitive rates, however, the quantity of materials you buy also needs to be checked. You yourself will have to stand and count 3000 no. of bricks in each truckload or say during the supply of 5 Cum (cubic meter) of aggregate or sand, you will have to measure it. Many suppliers sometimes are not fair as far as quantity is concerned. The rate may look cheaper, but the supplier will supply less quantity which you will never be able to check and control.
Quality of Works:
- Though the material supplied by the owner are of good quality, the quality of work may suffer if the contractor does not deploy skilled labour or try to engage cheaper or insufficient labour for getting more benefit. The quality of work may therefore suffer.
Quantity – No Check Required:
- As the materials are purchased by the contractor the verification of quantity either in terms of weight or number is done by the contractor. Hence the owner is free from all the hassles. This is very important as the house involves more than 100 items and for all such items, you have to undergo the similar process.
- The quality of materials & workmanship both are the responsibility of the contractor and hence in case of poor workmanship, the owner can reject the work without any loss.
09. Technical know How of Materials
No Knowledge to Check Quality:
- Mostly owner is not aware as to how to check and judge the quality of materials, so he might get cheated. The owner might be cheated even in rates though he purchases materials in bulk.
- You may be buying a good brand but still, you would be in dark regarding its quality for which you don’t have any control/knowledge or expertise.
- The labour contractor is not that resourceful. Sometimes he may not be that skilled also having the expertise and may not have adequate required resources.
- As the contractor buys all the materials the owner is not supposed to have expertise in purchase or bargaining for materials.
10. Wastage of Materials
- If the owner is not properly helped by the contractor, there is a possibility of wastage of materials on site. The contractor is not providing materials hence, he may also use materials carelessly.
- Again when the owner supplies the materials, the contractor always remain negligent for use of materials. He may cut the steel extravagantly or he may not recollect the wastage of cement or mortar or sand for some other use, which he would do it in his own work.
- Further in all the materials, there is considerable wastage during construction. However, when the owner supplies the material you will not know what to do with the wasted materials. Further, you may buy a truck load of sand and 10% sand remains unused. It will be difficult for you to sell it or use it at the other place, while the contractor can use it at other sites. This will increase your cost.
- If the materials are supplied by the contractor, he uses it carefully with minimum wastage.
- The contractor can always reuse waste materials either at your site or on his other sites and hence the burden of wastage will not add to cost or will get it minimized.
11. Project Cost
- The owner can know final project cost only after completing the scope of work by adding all material cost and labour cost.
- The owner can know final project cost on completion of the project. The final project cost depends upon the works carried out to complete the scope of work
- Hence sometimes it may happen that owner may not get expected return/benefit and spend much time for completing the work. The owner may spend much time & effort for saving a small amount on purchase of materials. Therefore it is a value of time which matters the most.
- Thus on the face of it, the owner seems to save on profit on materials by the contractor, in reality, it may or may not happen. Your ultimate cost may even increase due to all above reasons over and above the loss due to the spending of time and energy by the owner.
- If you are able to close the contract at a fair and competitive rate with the help of your architect/engineer, the material contract would always be beneficial. As it would not only save the cost but time, labour and energy of the owner. But please keep in mind the biggest “IF” that you must have a good contractor of integrity and at a fair price with fair and just conditions.