Question Builders And Owners - Cost Plus Vs Per Sq Ft Rate?

Construction & Materials Construction Cost
#1

Scenario 1 (per square foot):

You agree a per square foot rate with the contractor. During the construction, the rupee undergoes massive devaluation. Plus there is inflation. Prices of construction materials goes through the roof.

Do you think the contractor will complete the house at the same per sq ft rate and take the loss himself? Of course not! Either he has already built in a big cushion/margin in the rate or more likely he will use cheaper materials to protect his margin.

Scenario 2 (cost plus):

You agree with the builder a percentage that he will get over the cost of project. So he charges you a percentage on every invoice and every payment for the project. He has to give you copies of all vouchers and receipts for every material he will purchase so you can do comparative price analysis. If he buys higher quality materials to increase his commission, then you also get higher quality house.

Which is the better option? What are the pros and cons of each?

#2

Dear sir,

I am contractor and investor.

1- if you are assuming that on low per square feet basis a contractor will be using good quality material and if the prices go up he will switch to low grade. You are mistaken here. Good quality is mostly avoided in this case.

In per square feet basis the game is about the lowest cost purchase and maximize the profit.

So I would recommend you to go for a percentage basis, but at the same time I must warn you there are very few in market who actually knows how to play on percentage, play in a way that the owner is benefited. Our company works on percentage basis I'll tell in detail how a real percentage thing rolls.

If a contractor is working on percentage basis then he guarantees all his rates to be the lowest. A contractor gets discounts from certain companies that discount should be directly given to the owner not to be kept by the contractor for double profit.

People working on % basis are to work in the interest of the owner only as the owner is already giving him a percentage for that. Basically percentage is for the options and ideas a contractor gives to maintain the quality and keep the prices low at the same time like foe example buying tiles for washrooms, a real percentage contractor would not go straight to the Spanish tiles rack, instead he would do a little mix and match of master and chines and Spanish to minimize the cost but no compromise made on quality.

This formula applies on everything.

All material discount labor rates for all workers (to be directly given to owner for benefit)

I hope I have made some points clear here as to how a percentage basis should flow.

Please feel free to contact me if you have any question.

Regards,

MAPS

midlinke@dsl.net.pk 03005344500

#3

AOA.

I tend to disagree with the above post. Any owner thinking that the contractor would do as he has mentioned than that owner has something wrong with is head.

Here is example:

Expensive tiles @ Rs.100. Percentage agreed lets say 10% = Rs. 10 per tile.

Cheap tile @ Rs.50 Percentage agreed 10% = Rs. 5 per tile.

Now with full honesty the members can decide according to there experience which option would the contractor go for.

Anyone thinking the contractor would go for the second option then I wish them very best of luck.

No offense to Maps!

There are honest people out there but I have not come across any one yet. Fingers crossed.

Best way buy your own material and that's it. No point in discussing different ways. Doesn't matter how many times we discuss the outcome will be the same.

#4

Dear All,

Non offense take H--T, it's a totally professional and healthy discussion man.

If you go though my post I stated clearly that "I MUST WARN YOU AS WELL " that there are very few who actually work on real formula and properties of percentage that is benefiting the owner with the discounted prices received.

I suppose you are in the construction business yourself and you know it very well that the rate and discount that a contractor gets, is impossible for a owner to get.

A person working on percentage SHOULD give benefit to the owner. ALHAMDULLILH I am of the opinion that, as the % method is introduced to benefit the owner by the creativity and experience of the contractor, I fulfill it completely and and I am never short of work.

and I agree with your statement that yes all contractors are not cheats working on per square basis.

regards MAPS

#5

That's not so good man I wrote such a long message in response and it was sent for approval .. funny.

Anyways

H--T , for the offense, non taken, it's totally professional and healthy discussion here. Views are more than welcome.

I wrote it myself that BEWARE; there are very few in market who are actually working with the original laws of how to deal in % basis.

And yes you are right some contractors don't given in their creative and experienced ideas for saving instead they just target a higher prices shelf.

Any contractor working on % should give in for saving as he is already getting percentage so his duty is to save as much as possible.

Regards

MAPs

#6

Gentlemen,

Let us suppose:-

  1. Owner and Contractor agree a per square foot rate with a builder in January;
  2. Pak Rupee suffers major devaluation against Dollar in March;
  3. Price of everything goes up due to rising cost of inputs;

WHAT will happen?

i. Will the Contractor absorb the reduced profit margin on the project? ii. Will the Contractor ask for increase in per square foot rate? iii. Will the Contractor use lower quality items to protect his profit margin?

WHO will GAIN and who will LOSE?

#7

@pk

This has just recently happened i was constructing a house in phase 4 Bahria Town and cement prices went up. The estimate given was according to per cement bag @ Rs. 440 and the price went up to Rs. 480 to 490....In that case I did not ask for more money or increase. I started that project using Bestway cement and till the end I used the same.

I lost about Rs.200,000/- there but still covered my expenses with no profit. The owner realised that and gave me his another house to build.

There are contractors who start complaining but the fact is that they should not ask for more or use low quality material. BUT IT IS HAPPENING EVERY WHERE.

The only thing is that we have very less faith in ALLAH. Have faith and trust me no one can ever be in loss.

#8

Great last line H-T May Allah make us the real believers!

#9

@H--T

"I lost about Rs.200,000/- there but still covered my expenses with no profit. The owner realised that and gave me his another house to build."

Wondering how much was your margin on this project? You lost Rs 200,000 and borken even. Was that thin your margin really?

IMHO nobody in the construction world can survive of margin are like these. If you are sure then can I have your number:)

#10

I take what i charge no fiddling in the material or anything fishy and this construction business is not the only source of income i have + i make money of my own projects…and i am surviving very well :slight_smile: all thanks to GOD

#11

Dear H–T, I am impressed, I might hire ur services for my home. Can I hv ur contact details? Thanks

#12

@ khan Thanks

#13

When we are living in such a volatile environment when inflation drones are hovering over us then you need to cover your bases both from owner and builder perspective. I agree with the poster that % age contract is that secures the owner’s interest while giving builder decent profit. But some plot owners would like to go for lump sump project no matter what then how we do it without exaggerating the construction costs? I think most of the home owners would agree that 18% increase in price of cement, 10% increase in prices of brick, crush and steel ( as happened in last 8-9 months) will put the builder at disadvantage. To cover that up I would tie my estimate with inflation index X, ie if prices of material cross 5% threshold then I will add further Rs 100 per sq foot depending upon the size the lot. I will get that written and sign off between the parties; hence both (builder and owner) work with peace of mind during the construction phase.

#14

@ silkman i agree with you 100% that atleast Rs100 per sqft has jumped in last few months.

#15

There are builders , who have established their goodwill by doing quality work . Builders are offered exclusive discounts, which help them to earn profit .

Don-not be misguided that i will bear the loos and will build your house lolz.

Due to limited knowledge and expertise , you should rely on experts . Using own material was good idea. Their is element of waste involved , which will increase your cost 100 % times.

95 % builders sucks . You need to find remaining 5 %.

2400 to 2500 Sq/feet is good quality construction with peace of mind.

#16

Salam

Just a quick question

When you guys refer to % what is the average% a person should aim to get from a builder? Also when you say % is that on all invoices made by the builder or including any purchases the home owner has made and what the % for this?

Thanks guys much appreciated

#17

What the average % a builder charges?

#18

Dear Mr. Ali % vary from project to project . % is of the cost of construction(not land cost included) irrespective of who have made the purchases .

regard

#19

Yes, % also varies from contractor to contractor -as in material there are A,B and C grade labour, supervisors and contractors(nobody will call himself C grade though :). I would say in small to medium size construction between 6 to 10 million size % would vary from 10 to 15% in Islamabad. I know there are other variable as well and I will defer them to experts-

#20

I agree with silk man again ...also depending on the services he is providing . Is he helping you in getting the stuff cheaper than others ... E.g every one knows on electrical wires there is always a 17 to 20 % discount which can be around 15 to 20,000.... And if he is just tagging allong with you just as a spare tyre in your car than i dont think he deserves any % ..Its you who would have to decide what he is bringing to the table.

Get the Zameen App

Buy and Rent Property faster and better
using our app.
Scan the QR code to
get the app

Get Connected

© 2007– Zameen.com. All rights are reserved.