Help required to analyze the contractor's commission

[pomski]

Hello All,

This forum has been immensely useful to me to know various aspects of house construction. We have just started a month ago after several rounds of discussions with Architect and Contractor. We are constructing Basement+FF+SF comprising 3800 sft of built up area on a 30x50 Corner plot.

We adopted the following model:
1. Architect will provide complete drawings - Floor Plans, Structural designs, electrical, plumbing & Carpentry design, periodic site visits at the end of each milestone to verify if the construction work is as per the design. We have engaged this firm about 15 years ago to construct our house way back in 1999 and they are very reliable and trust worthy. For this entire piece of work they are charging a lump sum which we are fine.
2. We engaged a contractor who agreed for a turnkey basis and quoted Rs. 1650 per sft for the entire construction excluding sanitary fittings for First & Second Floor. For basement floor, he quoted a lumpsum of Rs. 10 lakhs.
3. Once the earth work was completed and when he bought the steel for footing, suddenly he realized that he had grossly under quoted and felt he cannot complete the basement within 10 lakhs and also felt upper floors cannot be done in 1650.
4. He has now proposed to go for cost basis + Plus 8% commission. This means he will continue the work without any stoppage but the original fixed price contract will become void. He will keep the bills and give us on a regular basis and we will be making payment to him. In turn he manages the entire project and finally claims a %age on the total cost for having supervised and ensure the completion of the building.

We are analysing the pros and cons of this approach and wanted to know from members if anyone have faced this kind of situation.

Thanks in advance.

Regards,
Praveen

[naveen877]

hi praveen
as you said you engaged an architect, my few suggestion may help you

1. you can ask for them bill of quantities from architect and ask them get some 3 or 4 quotes from reliable contractor just for your reference to know the cost of completion. since you will get each stage break up you can check with your contractor.bills and amount

2. you can go ahead with same contractor since 8% is really a good deal but confirming to genuine bills and expenses, for this matter you can take help of architects and you can also verify through other ways or it will go beyond your budget

3.1650 is good price per SFT if you are no going for italian marble and high end sanitary fixtures
basement floor quote is abnormal but if your contractor professional he cant give 10 lakhs for basement and meanwhile he cant feel under quoted for above floors because it normally more steel required in foundation level it reduces as floor goes, you can ask him for revise the quote and check with your architects.

4.if price drastically raises its up to you choose another contractor to complete in your budget but for normal material specifications
1650 is good price like 2 teak doors,Granite flooring , good elevation , SS railing ,hindware and jaguar fixtures excluding interior etc


keep posting your moves so that it helps to other members who will be in same situation


thanks

[ardesarchitects]

Hi,Praveen
Commission base is also a method of contract .
In general the contractors ask any where between 10-18% of total cost based on complication of design and time frame .In this contract few things you need to keep in mind is to monitor the quantity of materials getting consumed ,its easy to create fake bills or side line the material from site (Not that contractor would do but his lower men will do for sure)
Also you need to fix the responsibilities very clearly, other wise he can always say "since you have not used best quality this crack / undulations / fading / leakage happened so i am not responsible".After construction is done he will no take any responsibility and for all the minimum one year service support will be your headache.Any mistake he does ,you will be bearing cost of it and paying commission on both works
It should be your consultant responsibility to evaluate the contractor when he under quotes .In the current market with all good finishes its costs not less than 1800/- persft
Generally contractors play this trick to gain the work and then start these things since you would be forced to follow his terms unless your have time and patience to bring some other contractor.

Regards
Ar.Praveen.N
Ardes Architects and Interior designers
ardesarchtiects@gmail.com
www.ardesarchitects.com

[pomski]

Thank you Praveen and Naveen for your inputs.

Based on your experiences will there be huge deviation in cost compared to fixed price if we execute the project on actual + %age commission basis? The reason I'm asking this question is we will start making choices in every aspect when we are paying for materials on actuals and might end up spending more than contractor's fixed price inclusions.

Since contractor is not taking full responsibility of cost escalations, what is the scope of work to cover for the huge commission he is asking? 8% on a 50-60 lakh project means around 5 lakhs which is a big amount. So is there any real value addition when owner is making payments on actuals?

Regards,
Praveen

[ardesarchitects]

Hi praveen,
Since you know the % it looks huge.Any contractor will work on a margins of 10-15% on a full contract .There are lot of overheads that need to be considered in contract works .
1.Maintaining good labor is not just about paying money but paying huge advances of more than a lac per mason
2.Maintain and storage of his tools and other supporting equipment
3.Taking risk of labor accidents ,since the safety measures are least bothered in residential projects
4.Balancing the raw material price rise
5.His knowledge and experience of executing with out wasting material creates him more margins
There are lot more other factors to be considered when we do cost analysis of any product /services .Since we are used for easy and experienced labor availability in past the cost of construction was less .

In direct payments owner has to take all risks in terms of cost escalations and paying premium to get work faster.Every thing is transferred to you whether its savings or escalations .So you should be ready for both.
Savings can only be achieved based contractor genuine , knowledge , coordination skills .

All the best ..

Regards
Ar.Praveen.N
Ardes Architects and Interior designers
ardesarchtiects@gmail.com
www.ardesarchitects.com

[meharnath]

Hi,
Some other factors you may consider in determining the %.

1. Contractors can reduce the cost of construction just by being in the business. For example jaquar fittings he can get at 24% discount, where as you may get only 20%. Should he pass on that extra discount that he gets due to he being in business or is the % profit what is referred is on market prices.
2. Accidents during construction. Factor a % for this too.
3. Theft during storage and transportation.
4. 4% VAT
5. 4.944% service tax.
6. Percentage as actuals or on over all cost. This is very tricky. For example if the cost of construction is 80.00 and you pay him 20.00 = 100.00, then 20% is his working % or 80.00 + 20% of 80.00 = 96.00 . Is this what you have perceived as commission.
Based on all these and seeing how MNC's and other companines make a Nett profit upward of 15% of the gross billing and not actuals. You be straight about how you pay the contractor.
Anyway he will take his cut one way or the other either by quality of material or excess billing. It is better you arrive at a percentage of the total cost say for Rs.50.00 lac project, you pay him 8.0 lac or 9 lac or whatever and tell him this is including his passing of the discounts he normally gets being in the business.

Being Human is all that matters in a relationship (contractorship is only for statuotory requirements) of construction.
mehar.

[mcneha]

Hi!

Saying "commission" may not be an appropriate word for these type of works. India's No.1 construction group also undertakes work on this method. It is known as "Actual Cost Plus Works" and charges levied are termed as liasioning charges. I had executed works for even corporates on this method of works and the term "liasioning charges" is provided by their own auditors.

Negative points are always there in anything. If the theft by some ordinary people happens at site, it can happen in any method of working. Even when contractors quote on item rate, always 5% is kept as wastage during quoting. If a contractor does not take responsibility of major cracks like foundation settlement or any other deficiency, he will be out of market within a year or two. A contractor or an engineer gets his job mostly through customer satisfaction.

We all know that the entire construction industry depends on labours who are ordinary workers. They cannot work like programmed machines to perfection. Engineers or contractors should try to justify themselves to their field and try to get the best out of them.

How many people will allow testing of each and every load of sand or steel or bricks or concrete blocks, wait for results and carryout the work only after the test reports. Actually, it is the right way of doing it. But how about the procedures involved in that?

It is simple that the owners will definitely get the benefit of working on actual cost method. Negative points are there. But it is a more owner friendly since owners are benefitted in getting the materials of their choice. Since contractor's investment is not there, most of the taxes are avoided.

I had done a residential building near kengeri upanagara, almost 10 years back. The owner was a very lean chap. And he made me to cast his staircase to a width of 18" only. Can you believe this? Whatever I explained to him about standards, everything went in vain. His explanation was that all his family members are lean and so he does not want a wider staircase.

So, owner-engineer or contractor's understanding is very very important. When analysed, definitely this method of actuals benefits the owner much. To have a check they can have their architect's assistance.

Regards.

CHANDRASEKAR

[pomski]

Thanks a lot for all your valuable inputs.