Construction Payment RemediesAssociation of Construction and Development
February 18, 2013 — 1,815 views
Most of the builders today provide different payment remedies like the EMI sharing plan, flexi-payment plan, and the construction-linked plan. There are different benefits that the builder as well as the buyer gets. The builders must know the costs and penalties to levy if the payments are not made on time.
Flats or buildings under such options are booked before the start of the construction. It happens to be a win-win situation for the buyers as well as builders, since buyers can block the prices much before buying it, and builders receive funds to construct.
The construction professionals have introduced something called EMI sharing options. Under full sharing EMI option, the interest of each of buyer's EMI is paid by the builder while under partial EMI sharing method, a proportion of the buyer's EMI interest is paid by the builder. This sharing option is applicable only for a specified time, with the remaining EMI to be paid by the buyer thereafter. Some construction professionals have introduced an additional clause to pay at a fixed ROI (rate of interest), which may be challenging for borrowers on a floating rate.
Pros and cons of EMI sharing
The advantage is that the buyer will not be financially strained by EMI payments, as he may already be paying rent on his current accommodation. The EMI sharing option however does not provide the buyers with any additional concession on the price of the property, so a builder must think of alternatives like providing add-ons with the package.
Under a CLP (construction-linked plan), you will ask your buyer to pay a booking amount of around 10%-12% of the total cost of the property upfront while the remaining is linked with your construction milestones, for example 20% with the construction of every floor.
Pros and Cons of Construction-Linked Plans
The plus point is that you will be attracting prospective buyers by providing your under-construction property at cheaper rates compared to ready-for-occupancy properties. The primary disadvantage may be that you won’t be providing the property immediately for your customers for occupancy. The buyer may sometimes end up thinking that his money is locked on a non-performing asset.
This option, on the other hand, is a blend of the above options, where the buyer will be paying about one-third of the cost at the time of booking and one-third is linked to milestones, while the rest of the amount will have to be paid by the buyer at the time of possession.
If you compare the above three, the most suitable option for the buyer is the construction-linked payment plan since the risk you give to the buyer is least in this case. The payment is not completely dependent on the construction time. Moreover, you as the builder would want to complete the construction as fast as possible in a bid to get your cash flowing in; otherwise, it may end up in mechanics liens (liens filed on your property by the people involved in your construction activities, in the event of failing to pay for their services utilized by you). You need to maintain a good track record as a builder to attract prospective buyers.
Pros and Cons of Flexi-Payment Option
Flexi-plan option is considered to be less expensive than CLP. In case of a Flexi-plan, an interest on almost 50% amount is charged to your customers, which will begin from the 1st year itself. With respect to CLP, interest is charged only on 35% of the amount.