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?
Courtesy - Freedigitalphotos
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.
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.
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.
Types of Material Contract:
It can again be either
- Item Rate Material Contract
- Lump sum Material Contract
- Area Based Material Contract
- Percentage (%) based Material Contract
- Cost +Fixed Percentage (%)
Pros of Material Contract:
01. Fund Management:
Initially, the contractor has to invest money for procurement of material and labour, hence the owner gets time to manage the fund for the project saving of interest to some extent.
02. No Delay:
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.
03. 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.
04. 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.
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 minimised.
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.
07. 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.
08. 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.
09. 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.
As the contractor buys all the materials the owner is not supposed to have expertise in purchase or bargaining for materials.
Cons of Material Contract:
01. Increase in Cost:
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.
02. 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.
03. Project 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.
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.