How To Build A House In Costa Rica – Most Common Building Contracts

Building a house in Costa Rica is complex. It implies buying property, performing due diligence, designing and applying for permits and retaining consultants and builders that will deliver the project and not rip you off. If you are a property buyer or property owner from another country, you will have to deal with all of that, but also deciding what is the right type of construction contract for you to undertake building your dreams.

In this blog I am going to address the most common construction contracts used in Costa Rica to build houses or develop projects. Remember our rule of thumb: it is hard to find a good builder with a bad contract and bad builder with a good one.

1. Cost Plus or Administration: The Cost Plus or Administration Contract is a building contract where the property owner agrees to pay the builder for all related expenses, such as materials, labor, transportation, equipment, insurance, medical coverage, and on top of it, add the fees for the services rendered.

The Cost Plus contract is recommended in the cases when the scope of the work or extent of the project is not fully defined or when the build or project involves a high level of personalization or customization. It is a contract that provides flexibility to bot parties to accommodate changes, escarcity of materials and the fluctuation in costs during construction.

The downside of the Cost Plus contract is that it does not set a fixed price for the build or project which creates a financial risk to the owner. Also, the contractor faces no financial risk or burden which implies that additional care and supervision most be undertaken by the owner.

In a Cost Plus construction contract, there are different options to pay and compensate the Contractor. For example, the Contractor can receive a percentage calculated over the cost of the project, a fixed amount or any form of compensation acceptable. According to the Colegio Federado de Ingenieros y Arquitectos the percentage shall be around 12%.

2. Lump Sum – Turn Key: The Lump Sum or Turn Key Contract is perhaps the most common contract of all as it provides simplicity to the owner as it does not imply the need to monitor expenses and construction costs. The parties will agree on a fixed price according to the type of construction, a term to finalize the construction, and a payment schedule according to milestones.

For a Lump Sum contract to be sucessful it is essential to have clear construction blueprints with all building specifications including a dossier of fixtures, finishings and furniture included. The success of this type of contract shall depend on the availibility and thoroughness of the information to set the Owner’s and Contractor’s expectations and make sure they are met as per the agreed upon timelines and costs.

Change orders shall be avoided as it throws a wrench on the fluidity of the process since it generates the need to revisit costs, budgets, materials, specifications, and may require to execute amendments to the contract, the schedule, the milestones, etc. If price adjustments are required, the rules should be clear. Another big problem, with Lump Sum or Turn Key contracts is inflation. To fight inflation, objective readjustment methods should be determined in advanced. In Costa Rica, most common formulas are established by the Construction Chamber and INEC which is the National Institute for Statistics and Census. Clauses pertaining price adjustments should be properly described and drafted in Lump Sum contracts.

A good Lump Sum Contract should base itself on a good construction contract but also on a clear construction schedule, clear and properly defined milestones which trigger payment of advancements and a solid inspection process to confirm milestones execution.

Make sure that at no point, the construction process falls behind and if this happens safeguards are in place to level the work advancement. Please make sure you don’t fall to the point of no return where the remaining budget is not sufficient to complete the construction project.

3. Labor: The Labor Construction Contract is another traditional option to build in Costa Rica. However, it is more frequent on small projects where the Owner has the time and knowledge to make the purchases and supply the materials to the Contractor who in turn only performs the service. It is important to note that it may or may not imply for the Contractor to supply the working crews, technicians and personnel. Therefore, it is essential to have a clear agreement and understanding on this matter to avoid the construction process to derail or delay and for the projected budget to get out of hand.

The Labor Construction Contract contract implies agreeing on the price for the construction, the schedule to deliver it and the payment method and schedule. It relies on having fully detailed construction blueprints but also on the Owner’s ability to read and understand them in sufficient manner that allows the proper quantity and quality of the materials to be acquired.

4. Design and Construction: The Design and Construction Contract is a type of building contract in which the Owner requests from Contractors quotes for services, materials and expenses according to a set of specifications and/or blueprints previously provided to them. The Contractors present bids directed to accommodate the Owner’s budget for the performance of the project. This type of construction is common for owners that are as well developers and look to outsource a vendor to tailor the project to their specifications and budgets.

If you need advisory on construction contracts, don’t be shy and reach out to us. We will be glad to assist you! GONZALO ROJAS – grb@quatro.legal