$$$ COST vs. OPPORTUNITY COST

Anything to do with prices. Raw material prices or prices for finished material (or labor such as well drilling). Project prices (how much will it cost??), etc.

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$$$ COST vs. OPPORTUNITY COST

Postby somdet » Fri Sep 14, 2007 3:58 pm

This forum has been a very entertaining, informative, and eye-opening discovery for me as I embark on building the house I hope to raise my children in, grow old in, and then give to my kids. As the foundation digging ceremony looms I have still not accepted a final offer, of which I have a few. My house will be 181 sq. meters (not 128 or 131 as I have early stated.) in size.
As I have been reading about different prices for things and different strategies for buying and paying, etc. the only cost that seems to be in anyone's mind is the actual money paid. I would like to hear the good people of this forum give their thoughts on the opportunity costs involved in building a house. In case you aren't familiar with the term, opportunity cost refers to "the advantage forgone as the result of the acceptance of an alternative." In other words the benefits you miss out on by choosing an alternative method.

In my situation there are three alternatives.

1. Go with my slightly expensive all-in-one-price by a trustworthy yet thoroughly profit-minded Thai contractor.

2. Get a labor only contract and run to hither and yon pricing, bargaining, buying (in a language I poot mai koy geng tao rai) coordinating the delivery of, and safekeeping several hundred thousand baht worth of materials.

3. Hire a consulting firm where I pay a percentage of the money saved to have a professional do the bargaining, buying, and coordinating from #1 above. Above the % there are also daily costs, gas costs, and perhaps other costs.

1.The first one costs the most money . I truly trust this contractor and have seen his work on former projects and on one ongoing project where friends are spending about 800 000 baht for a 143.5 sq. meter house. There will be no hassles, headaches, or stress involved in anything but watching consturction practices that would be illegal in my country.

2. This one would cost the least but involve the most time, effort, frustration, and possibility of disaster (stolen materials, undelivered goods, etc.) I am a father of two lovely little girls and a 50 hour a week workerbee so this would be a major scheduling headache. How much is this worth?

3. This appears on the surface to be the best option. I have reservations, though, based on a few conversations that left me underwhelmed and unsure of the sincerity and actual savings available.

Thoughts?
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Postby dozer » Sat Sep 15, 2007 7:12 am

Rule #1.) The most important part of any homebuilding experience is the selection of the contractor who will do the project.
Rule #2.) Contractors like to work in one of three ways, all inclusive bids, labor only bids, or day labor. They generally will not change how they like to work for you (in other words a all inclusive will not do a labor only bid).
Rule #3.) Generally, claims of saving money are bogus. One claim is by all inclusive contractors that they can save money out of the material budget of about 20%, because they can buy cheaper than you. Where it is true that they can probably save something, it is minimal due to low margins in most building materials.

If you've vetted a contractor who you know will do a good job for you -- that is a very important part of the equation. Yes, you will save time running around buying materials (opportunity cost). Make sure you spend time up front to do a detailed bill of quantities and choose everything up front, electric plate faces, electric conduit, etc. etc.

You will still need to be on site everyday to check things out. The all inclusive bids have the most incentive to cut corners, because any material savings goes directly to the contractor.
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Postby jazzman » Sat Sep 15, 2007 8:23 am

A very significant saving which is not bogus at all, is the saving you make by not going for a lump sum turn-key solution is that you a re not paying the construction company's profit margin on the labour an materials. Most contractors are reluctant to provide an itemised quotation.

Yu have already calculated the cost of day labour for your house, if you deduct this from the turn-key prices you have been quoted you will easily be able to work out if they are charging reasonable amounts for the materials. The real cost of most materials is quoted somewhere or other on this web site.

Other advantages, not necessarily of cost, of the other options, are that you remain totally in control of how your house gets built, and what materials get used. One electric socket is usually not enough in a room, to be charged 600 baht (14 Sept 2007) per socket extra for the cheap 'Normal' Thai sockets which cost 27 baht each wholesale and cost almost nothing to install if done while the walls are being built, is EXCESSIVE.
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Postby somdet » Sat Sep 15, 2007 11:49 am

Yeah, see that's why I like this contractor. He came up with an itemized list of every single thing he is going to buy and how much the labor to build/install/paint/pour etc it is. Then we went over the list and decided which things I would be in charge of getting myself and which things I thought were too expensive and he came back with an improved bid.

My question is just how much money is it worth to let the contractor make a profit and not have me be responsible for all of the things which I listed as problematic in option #1. That is the question. Sure, monetarily it is more, but what is the true cost?
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Postby jazzman » Sat Sep 15, 2007 5:06 pm

#
The question, "But what is the true cost?" might be better addressed from the angle: "How much profit is a reasonable profit? because the posting is essentially about profit, and profit is part of the cost - whichever project solution is chosen. It looks as if the choice is going to be for the rare contractor that allows his client to take part in so much decision making, and charges the same kind of price one would expect to pay for a ready-built house.

A simple study would be to find time to compare the house design and its cost, with ready-built houses of a similar size AND quality (just deducting the value of the plot). The next exercise, which can be done while out shopping, is to find out the cost of building materials and multiply them by the required quantities. The prices for all these items have also been cited many times on this site, and most of the answers can also be found here: http://coolthaihouse.com/index.php together with instructions for calculating the quantities.
It will become evident without any professional help that what's left after taking those prices, and the 240,000 labour bid away from the quotation, is the gross profit. Net profit is what is left after deducting company overheads, tools, and expendables.

However, on a ready-built house the profit is split 2 or even 3 ways: the building contractor and the develpoer/vendor and including the 3% comission for an real estate agents who make a sale on behalf of the developer. In Somdet's case, the builder is picking up all these cuts.
One does not ask for an itemized quotation for every nut and bolt when buying a new automobile, and it should not be necessary when getting a house built. But the discussion is about houses built with Thai labour, not about cars imported from countries which use modern methodology and have hundreds of years of industrial experience and education.

A reasonable profit is a major contributing element to an end price which a customer is prepared to pay, and for which believes he's getting his money's worth. Most people who cry 'rip-off' are either those that can't really afford the service or product in the first place,or maybe a captive clientele that has no alternative suppliers.

If the builder is good, and his other constructions have passed the potential customer's critical examination, the fine detail of his quotation inspires confidence, and he offers a watertight contract with a guarantee for workmanship for 5 years, and a reasonable payment schedule, then his profit is well deserved and he must be hired.
However, most construction firms try to formulate a payment plan which will keep them financially ahead of the construction schedule. It should of course, be the other way round, with the work being paid in arrear. This is essential if one is to avoid future problems, but often only possible to negotiate when opting for a labour-only contract and where the owner him/herself is in full control of the project.. A second opinion, or even a lawyer should nevertheless be called in to vet the contract (the designing architect will usually do this for an existing client) or to check any 'free' blueprints and materials lists offered by the builder. Unlucky are the customers who happen to be any building company's first farang clients.

Some professional advice
and management is quoted at 60,000 baht per month (how many working days is this?) - to which of course will be added the incidentals. Some is quoted at 2,000 baht per day, a bit cheaper and any days where a visit in not required are not billed. The small incidentals will of course be charged. All mention the savings which can be made. All offer complete project management, procurement, and resolution of legal issues within their stated fee. None will stay on the site all day, and there will be plenty of days (like tying large stretches of rebar, or digging lots of holes) where his presence is not required at all. If the workers are good, maybe one all-day visit at intervals of roughly once a week or for major phases of workmanship (plumbing, electrics, tiling etc) may suffice and often does. The above price breakdown has now shown that professional advice can result in a net saving, whilst also taking care of everything else at the same time. And the fee is well deserved.
QED.

Whilst it is perfectly fatuous to expect a professional to achieve any savings on a building budget of 600,000 some advice, given in good faith, may be occasionally required, if only to check that the builder is respecting the specification, because even on that price, a crafty builder can and often will cut corners. They usually do this on the grade of steel, the number of bags of cement they use, the thickness of the floor slab and on the electrical work. All three of which can later have desasterous consequences. Are they using genuine red oxide primer on the metalwork? or is it just a look-alike orange or grey paint? Are they putting a damp course down? Are they using nam yaa in the boon? - are they using the right boon for the right jobs? - are they using the right nam yaa? Are they using real (rare) tile adhesive , at least in the wet rooms and the swimming pool (even rarer). Are they using conduit in the loft (roofspace), are they tying or fixing the tiles to the roof? Are they using 2,5 cable for the sockets or are they using only 1.5 throughout, or worse, 1.0 or 0.75. There are over 200 items on the checklist - enough to find a flaw somewhere.

The turn-key solution in this case would appear to be the most likey option for an owner who either:
- Does not have time to manage his/her own project.
- Does not have sufficient knowledge of building design and construction.
- Does not know of a professional adviser close enough to avoid the additional travelling expenses which can indeed work out at 10 - 12 baht per km at no extra profit for the adviser.

It seems as if Somdet has already provided his own answers. Nevertheless the two threads are an excellent stimulus for 'thoughts' on a subject which heretofore had been left unbroached, and should be spliced together (moderator?) and it is of course, for Somdet alone, to chose from the three options which he has expertly short listed as being eminently suitable.
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Postby somdet » Sat Sep 15, 2007 5:39 pm

The angle which I am trying to get to is about how to value the time, peace of mind, and stress against a value that is only money. It actually has very little to do with the contractor's profit margin, except in that the profit margin makes up part of the total price of my house. I mean is it worth it to me to spend a Sunday driving to three or four different tile factories in Caonburi, Sakaew, and Rayong to get tiles for 139 Baht per square meter when I know I can buy ones I like at Boontawon for 156 baht or even get the nice Granito ones for 183 baht (on sale now everybody!) or is it worth it to pay somebody to watch over a professional contractor who has been living, working, and building in the community for 30 years to make sure he is using western grade naam yaa in the tile adhesive? IS it worth it to spend every day off scouring the Eastern seaboard to find the cheapest electrical covers instead of trusting my contractor and taking my kids to the beach or the zoo?

I know I could save some money if I dove into this project with all my energy and focus. I don't know if the monetary savings would justify the other costs - time away from my babies, headache, stress, worry- not to mention the other prices- fuel, wear and tear, storage locker.

Jazzman's long and detailed reply is a good read, but it once again doesn't touch what I am trying to gauge. Perhaps because money is at the root of business it is the #1 priority for Jazzman and others. For me, however, it is not. I am not going to go throwing money away or lighting cigars with it, but if I feel like I am getting a fair deal and can do other things while my house is going up, I am willing to pay a bit more. Sort of like going to the corner store. I know going to the supermarket will save me on my gallon of milk, but then I gotta go to the gross glitzy supermarket.

Things that give me hope-
my contract is no money down. pay in four installments.
my contract has a 5 year guarantee.
my contractor lives less than 400 yards from my house.

Well, I guess I have provided my own answers, but I am still curious to hear what others think about the saving money at all costs vs. paying more to avoid personal input of stress, energy, etc.
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Postby jazzman » Sat Sep 15, 2007 8:13 pm

The essential fact is that Somdet's mind is already made up, and nobody will dispute that he has made an excellent decision which best suits his personal situation.

Money and business are no more important to many people than any other occupation which helps to sustain a family at a reasonably tolerable standard of living. Some people are shocked by the notion that doctors, dentists, lawyers, real estate agents, stockbrokers, car salesmen and other service providers earn their money by selling a service. Maybe by the same token we should not under any circumstances send our children to fee paying schools, and all nurses, bus drivers, and teachers should work for free. But money is also at the root of education and health. I have yet to meet a doctor or a teacher with a wife and a couple of kids, and maybe a car and a house who doesn't need to earn money to live.

Jazzman hasn't missed the point at all. He actually confirms, in his previous posting, that measured against the price criteria of similar properties, the price of Somdet's finished house could be considered to correspond to a reasonably correct market value. Maybe the real anxiety is not that the builder may be asking too much, but that he may be making a little too much profit from it.

The analogy of the corner shop and the supermarket is only partly true: the stakes in the building business and the money to be saved by avoiding inflated prices, or by using a solution that cuts out the constructor profit, are on a totally different scale. And the emphasis is on the word saved, rather than spent. And to repeat again, for the benefit of anyone joining this thread here, the proof of the possible savings without any compromise on quality are here:
http://coolthaihouse.com
and here
[url]
http://coolthaihouse.com/cthpics/thumbnails.php?album=6[/url]

Somdet's choice is still the right one because:

- The builder will not tolerate the presence of an outside overseer, and rightly so. No building firm with an exclusive turn-key project will allow an outside manager on the site. project managers and coordinators are needed when there are several contractors or service providers which need to be coordinated.
- The builder does not need watching over, he's aready making enough profit not to need to cut any corners (except on the electrical goods).
- Putting an outside project manager would cost even more money, and in the case of this builder it is certainly not required and was never suggested.
- The owner carried out sufficient due diligence to satisfy himself, that this is one builder that can be trusted. At a cost. But peace of mind guaranteed.
- A set of extraordinarily client friendly and very rare conditions and terms by a bona fide building corporation.
- There are no other options in this location, with the possible exceptions that he could get his family relations to build the house (and we know how that usually ends), or he hires day labour and has a very close friend or colleague who is knowledgeable about constructing houses and will do the daily project management for free.

Foreign consultants for the expat community are very rare in Thailand. Most consultants have work on bigger projects like condos, resorts, hotels, and environmentally friendly solutions. Most people who come to Thailand come with enough money to buy a new house in a moo baan, because they either are retired or working here on their Western salaries for their Western companies or newspapers. or to hire a building contractor like Somdet's. Or they don't bother. Those that do, Join CoolThaiHouse, but mainly because they are inveterate DIYers and want to get the hands-on experience of building their own houses in Thailand and meet all the challenges it presents.

Finally, no one has ever mentioned anywhere on the CoolThaiHouse website that money should be saved at all costs. 'Cutting corners' is precisely what this website and its forum proselytize against.
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Postby somdet » Sat Sep 15, 2007 10:27 pm

Those that do, Join CoolThaiHouse, but mainly because they are inveterate DIYers and want to get the hands-on experience of building their own houses in Thailand and meet all the challenges it presents.


I think this really hits the nail on the head. When I first started looking into building a house I thought I wanted to DIY it, but after getting in and meeting and talking and reading alot, and after meeting Kuhn Mongkol (my contractor) I have decided I would rather not be bothered to the extent that it takes to make significant savings, especially since I already have the money budgeted and the final price will be slightly under budget. 7400 baht per square meter seems competitive enough to me, I guess.



Money and business are no more important to many people than any other occupation which helps to sustain a family at a reasonably tolerable standard of living. Some people are shocked by the notion that doctors, dentists, lawyers, real estate agents, stockbrokers, car salesmen and other service providers earn their money by selling a service. Maybe by the same token we should not under any circumstances send our children to fee paying schools, and all nurses, bus drivers, and teachers should work for free. But money is also at the root of education and health. I have yet to meet a doctor or a teacher with a wife and a couple of kids, and maybe a car and a house who doesn't need to earn money to live.


This I really don't understand at all. Its relevance escapes me. My point was that because your business is dealing with making money by saving people money on house and swimming pool building projects that you weren't quite seeing that part of the "cost" of my project, the part I have been trying to valuate, is not financial but social. I believe that most of us are well aware of and well versed in both working for a living and providing for a family.

The analogy of the corner shop and the supermarket is only partly true: the stakes in the building business and the money to be saved by avoiding inflated prices, or by using a solution that cuts out the constructor profit, are on a totally different scale.


Perhaps here is a better one. I could live in the USA and work as a Groundskeeping Supervisor and earn 60k a year, or I could choose to live in Phanat Nikhom, work as a teacher, and earn 12k a year. The difference is that in the states there are all sorts of social pressures and stimuli that I don't particularly agree with nor want and here I can go home at the end of the day and feel relaxed and not bombarded by a million different things. USA(lots of headache and big financial reward) : Thailand ( far fewer headaches and lower financial reward as DIY house (lots of time and energy and big money saving) : Contractor house (little headache more exopensive house)


Finally, no one has ever mentioned anywhere on the CoolThaiHouse website that money should be saved at all costs. 'Cutting corners' is precisely what this website and its forum proselytize against.


I stand corrected.
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costs

Postby cruzing » Sun Sep 16, 2007 12:30 pm

Hi Somdet,

As Mr. Cruzing has on occasion paid what I think is too much for help or supplies and I'm complaining to him about the cost.... he'll tell me it depends on if the extra cost is worth it to you. So I think if you feel the extra cost is reasonble and you are happy with this contractor it's worth it for you. Doesn't mean you don't have any control as to what happens, after all it is your money.

When we built our house.........and my thai was even more limited........I kept seeing things the workers shouldn't be doing or should be doing a different way, or were just plain being sloppy......I'd have to go get the Mr. and sometimes he hadn't seen the problem yet, but a lot of times he had. He was already under a lot of pressure having to tell them exactly how to build so then we would end up having a fight. (My contractor friend in the states says that is normal, but it's not fun!)

So now he says if he ever builds again and he can find someone he's satisfied with and a price he felt was worth it to him, he'd just let them do it all.

Of course if you are cheapskate charlie that won't work for you, but I don't think you are. :D

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Postby jazzman » Sun Sep 16, 2007 5:15 pm

*
Nicely put Cruzing, you seem to have a far gentler way with words to express the same opinion as mine, than my old fashioned BE. Maybe it's the reason why Americans are so much more successful at business than the Brits 8)

Somdet is certainly not a Cheapskate,
but attempting, and quite successfully, to control his budget objectively and get the best in quality for it, while balancing the socio-economic value of peace of mind while it is being built, with the cause and effect of possible scenarios - a lesson for us all. In this respect, by keeping the construction costs below his permissible budget, he will also have a safety net for the things that will go pear-shaped, without negative impact on his peace of mind or on his assets - another lesson for us all.

A discussion
on where a better quality of life can be obtained, and at what price, or at what impact on the standard of living, is however IMHO, not a topic for the CTH forums. Like differing board games, these socio-economic questions all have their own rules, roles, styles of play, traditions, cultures, and rates of change and rates of exchange. Change the country and the job and you change the style of thinking, the language, motivations, activities, alliances, and identities of the players.
It is for these reasons that sociologists, rather than people concerned with building houses, are more likely to examine how individuals' perceptions, belief systems, moralities, identities, and behaviors are determined by their positions in social space, which in Southeast Asia has a very different pecking order.
They are the ones who are able to search for the criteria to put a 'worth' tag on a worry-free day on the beach with the family, while a house is being expertly built 30 miles away inland for the next five months. Such questions are more likely to be answered on this forum: http://www.sociopranos.com.
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Postby somdet » Sun Sep 16, 2007 7:30 pm

An excellent point. This is perhaps not the right forum. However, I have found in my life that experts do not always have the most open minds, their opinions being hedged by years of studying problems from an often times narrow perspective. Like when Nasa spent millions and millions of dollars to design an ink pen capable of writing in 0 gravity while the russians just used a pencil. I will most certainly peruse the minds of those over at sociopranos.com. Thanks for the tip!
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