The Hindu Business Line : Apartment buyers may have to bear increased cost of construction

Builders are likely to insist on an escalation clause to cover for construction costs that are being driven up by the cost of steel, cement, labour, and transport

R. Balaji

Chennai, April 8 Real estate developers are considering introducing an escalation clause in the agreements with apartment buyers to insulate themselves from the increasing cost of construction.

According to representatives of the Confederation of Real Estate Developers Association of India (Credai), builders are likely to insist on an escalation clause to cover for construction costs that are being driven up by the cost of steel, cement, labour, and transport.

Leading builders in Chennai say that a year ago their budget for the cost of construction was about Rs 1,250 a sq ft, six months ago it was Rs 1,400 and now in the last two months it ranges from Rs 1,650 to Rs 1,800. This is apart from the levy of the new fee – infrastructure charge of about Rs 1,000 a sq m, which would add Rs 100 a sq ft – that is being considered by the State Government.

They say the increase is beyond the capacity of most builders and will have to be passed on to the buyer. Just the cost of steel has doubled in the last one year to nearly Rs 60,000 a tonne. Cement prices are continuously on the increase as also sand and blue metal prices.

One developer said that they enter into similar escalation clause with the contractors handling the construction of the residential projects. But the developers do not get any protection on the buyers’ side, which they now hope to put in place. A project can run 2-3 years before it is completed. Especially, with multi-storeyed buildings and large acreages in the form of townships coming up for development, the paper work alone for getting clearances from the Government can take more than a year, they say.

Giving rough estimates, a developer said that in a project in which a buyer pays Rs 3,500 a sq foot for a house, the cost of land would work out to about Rs 800-1,200 a sq foot, cost of construction Rs 1,800 and the builders’ margin around Rs 600. The builders now believe that the cost of construction is bound to increase further and that they cannot afford to let their margins be eroded further.

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