The ₹4.2 Lakh Contract With 10% Retention
You run a two-year-old plumbing contracting firm in a Haryana town. A builder offers a repair contract covering 24 flats: replace leaking concealed risers, overhaul 48 flush valves and redo the tank-to-flat connections. Your estimate is: materials ₹2,35,000; three workers for 26 days at ₹750 per person per day; transport and scaffolding ₹18,000; site overheads 8% of direct cost. Payment terms are 30 days after completion, with 10% retention released six months later. Your bank overdraft costs 14% per annum. The builder's budget is a firm ₹4,20,000 including 18% GST, take it or leave it, and he wants work to start in four days. You have ₹40,000 cash and an unutilised overdraft limit of ₹1,50,000.
1. Work out the true margin on the builder's ₹4,20,000, including the cost of financing, and say whether the job is worth taking on these terms.
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1. Direct cost
- Materials ₹2,35,000
- Labour 3 × 26 × ₹750 = ₹58,500
- Transport and scaffolding ₹18,000
- Direct cost = ₹3,11,500
2. Overheads 8% of direct = ₹24,920 → total cost ₹3,36,420
3. Revenue net of GST = 4,20,000 ÷ 1.18 = ₹3,55,932
4. Margin before financing = 3,55,932 − 3,36,420 = ₹19,512 (5.5% of net revenue)
5. Financing cost of the terms
- 30-day delay on about ₹3.36 lakh: 3,36,420 × 0.14 × 30/365 = ₹3,870
- Retention 10% of ₹3,55,932 = ₹35,593 held six months: 35,593 × 0.14 × 0.5 = ₹2,492
- Total ≈ ₹6,362
6. Net margin ≈ 19,512 − 6,362 = ₹13,150, about 3.7%
Verdict: a 3.7% net margin on a repair job with unknown existing pipework is not worth the risk; a single concealed leak call-back wipes it out. Working capital is the bigger problem: peak outlay of ₹3.36 lakh against ₹40,000 cash plus a ₹1.50 lakh limit leaves a ₹1.46 lakh gap before the first receipt. On these terms, decline or renegotiate.
2. Draft the counter-offer terms you would put to the builder, with numbers.
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Anchor on the cash-flow gap, not on price alone.
Ask for:
- Mobilisation advance of 20% = ₹84,000 against a signed work order and a simple receipt; this alone closes more than half the funding gap.
- Running bills every 10 days instead of a single payment 30 days after completion, so materials are recovered while work is in progress.
- Retention reduced to 5%, or 10% against a bank guarantee; retention is the builder's security, not a discount.
- Price revision to ₹4,60,000 including GST (net ₹3,89,831, margin before financing ≈ ₹53,400, about 13.7%), justified by the survey findings: state the assumed condition of the existing risers and that any additional leaking riser found is a variation at a fixed per-flat rate.
- Scope clarification in writing: number of risers assumed per flat, the make of flush valve, whether tiling and making good are included, working hours and lift availability.
- GST invoices in your firm's name, so input credit on materials is available to you if you are registered; if not registered, price the GST on materials as a cost.
If the builder will not move on advance and retention, offer to drop to ₹4,20,000 but with 30% advance and 5% retention. Getting paid earlier is worth more than the headline price.
3. Set out the operational risks in this job and how you would control them during the 26 days.
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1. Unknown existing condition (highest risk). The scope assumes a number of leaking risers that nobody has verified. Control: open up and survey two flats before signing, record the condition in photographs, and price extra risers as a variation at a stated rate per flat.
2. Water shutdown in occupied flats. Replacing risers and flush valves means isolation. Control: agree a written shutdown window with the builder (for example 9 a.m.–1 p.m. per block), give residents 24 hours' notice, and keep a tanker or stored water available.
3. Manpower and cash discipline. Three workers for 26 days with no advance means wages must be paid before receipts arrive. Control: sequence work in two blocks so the first bill is raised by day 10, and keep a materials delivery schedule tied to the bill cycle rather than buying everything up front.
4. Testing and call-backs. Control: pressure-test each riser at 1.5 × working pressure before closing, record the test, and get the builder's signature on the handover per flat; keep a retention fund and a one-year workmanship warranty in the contract.
5. Safety and site conduct. Working at height on scaffolding, hot work on risers, and occupied buildings: harnesses, barricades, permits where needed, and no work in a flat without the resident's presence.
6. Relationship risk. A take-it-or-leave-it client usually repeats the behaviour on the next bill. Control: one written variation procedure, one point of contact, and no verbal instructions.