Pros & Cons of Hiring Contractor on Labour Contract!

Whenever someone wants to construct a house, there is always a confusion in mind that whether the house should be constructed by giving a labour contract or a material contract?

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3 Major Points to Decide on Why Labour Contract?

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:

01. 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.

02. 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.

03. 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.

Though these are the popular reasons in support of labour contract, one really needs a judicious and holistic view, keeping in mind various facts which are discussed here. One need to take a cautious approach and make a right choice after review of all the factors.

Following are few points which help you in making the right decision.

Definition of Labour Contract:

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.

Types of Labour Contracts:

It can again be either of the following

• Item Rate Labour Contract
• LumpSum Labour Contract
• Area Based Labour Contract
• Percentage (%) Based Labour Contract
• Cost + Fixed Percentage (%)
Pros of Labour Contract:

01. 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.

02. 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.

Cons of Labour Contract:

01. 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.

02. 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 you 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.

03. Quantity Might be Out of Your Control:

As an owner even if you 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.

04. 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.

05. 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 you particularly when there is a competition.

The price variation in materials as per market fluctuation affects the owner.

07. Wastage:

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.

Whereas, 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.

08. 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.

09. 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.

10. Project Cost:

The owner can know final project cost only after completing the scope of work by adding all material cost and labour cost.

Conclusion:

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.

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