At-Cost Construction (Obra por Administração): How It Works, Advantages and Risks

Anyone researching new launches in Rio will occasionally come across a development advertised as "obra a preço de custo" (construction at cost) or "obra por administração" (construction under management). The price tends to stand out because it is below that of neighboring buildings. Before comparing prices, it is worth understanding that this is not a discount: it is a different type of contract, with a different split of risks between whoever builds and whoever buys.

What at-cost construction is

It is a construction regime in which the buyers of the fractions of the land hire a builder to put up the building and jointly take on payment of the entire cost of the works: materials, labor, design, fees and the builder's remuneration. Law 4,591/1964 calls this regime construction "under management" (por administração) or "at cost" (a preço de custo).

In practice, the buyer stops being merely a company's customer and becomes a co-owner (condômino) of a construction project. The buyer purchases an ideal fraction of the land (fração ideal) and, in parallel, signs a construction contract. The building belongs to that buyer and the other co-owners from the start; the builder provides a service.

How at-cost construction works

• An estimated budget, not a fixed price. The contract must state the amount of the budget for the cost of the works. That figure is an estimate, and the law provides for it to be reviewed periodically, at least every six months, by mutual agreement between the builder and the buyers' committee (comissão de representantes).
• Cost split among the co-owners. Each buyer pays their share of the cost, proportional to the unit, normally in monthly installments throughout construction. If the cost goes up, the installments go up; if it falls, the gain belongs to the co-owners.
• Money and invoices in the condominium's name. The law requires that invoices, trade bills and receipts for the works be issued in the name of the condominium of the contracting parties, and that contributions be deposited in accounts opened in that condominium's name.
• Management fee. The builder is paid a fee agreed in the contract, usually a percentage of the cost of the works.

What the builder's role is

The builder manages: it hires suppliers and crews, buys materials, coordinates the design work, carries out the construction and renders accounts. It is responsible for technical quality and for sound management of the funds, but it does not guarantee a final price. The risk of cost variation, which in a traditional real estate development (incorporação imobiliária) stays with the company, here stays with the co-owners.

Transparency and control: the buyers' committee

The counterweight to that risk is access to the accounts. The buyers elect a buyers' committee, which follows the works on everyone's behalf. Among other duties, it examines the periodic statements of income and expenses, oversees the bidding for materials and services, monitors the collection of contributions and takes part in the budget reviews.

A good at-cost construction group has regular, documented rendering of accounts. If the builder is reluctant to show invoices and bank statements, that is the first warning sign.

At-cost construction vs. development: what changes

Item	At-cost construction	Fixed-price development
Price	Actual cost of the works, estimated and reviewed	Price set in the contract, adjusted by an index
Who bears the cost variation	The co-owners	The developer
Company's remuneration	Management fee	Margin built into the sale price
Access to the accounts	Periodic statements and invoices in the condominium's name	The developer's own accounts; the buyer follows the progress of the works
Bank financing during construction	Generally none; it is paid with the buyers' own funds	Financing the balance at handover of the keys is common

To understand the other side of the comparison, see the article Real estate development (incorporação imobiliária): what it is and how it works.

Main advantages

• Potentially lower cost. Without the developer's profit margin and without built-in sales and marketing expenses, the final amount may end up below that of an equivalent property sold at a fixed price. It is a possibility, not a guarantee.
• No financing interest during construction. Because payments track the cost of construction, there is no outstanding balance financed by the builder during that period.
• ITBI (municipal property transfer tax) on a smaller base, as a rule. The transfer tax is levied on what is actually transferred. When the buyer acquires the fraction of the land and pays for the construction on their own account, the settled understanding in Precedents (Súmulas) 110 and 470 of Brazil's Federal Supreme Court (Supremo Tribunal Federal, STF) is that the tax does not reach the construction carried out by the buyer. Its application depends on how the deal was structured and on the municipality, so it must be confirmed case by case.
• A say in decisions. Through the committee and the general meetings, the co-owners influence choices about design, finishes and the pace of the works.

Risks and points to watch

• Uncertain final cost. Rising material prices, design changes or unforeseen construction events turn into higher installments or an extra capital call.
• Timeline. The pace of the works depends on the money collected. If cash gets tight, construction slows down.
• Default by other co-owners. Whoever falls behind compromises everyone's cash flow. The law provides that, after three installments are overdue and the debtor has been notified, the debtor's fraction may be put up for auction so that another buyer takes over the payments.
• Need for your own funds. With no bank financing during the construction phase, you need the financial stamina for the installments and for any top-ups.
• Resale before delivery. It tends to be harder to sell your position during construction than to resell a fixed-price contract.

How the purchase process works

1. You get to know the project, the estimated budget and the management fee.
2. You acquire the ideal fraction of the land corresponding to your unit, by purchase or by assignment of rights, depending on how the group is structured.
3. You sign the at-cost construction contract and adhere to the condominium bylaws (convenção do condomínio).
4. You start paying the installments of your share of the cost and receiving the periodic statements.
5. You take part in the general meetings and follow the work of the buyers' committee.
6. Once the works are finished and the certificate of occupancy (habite-se) has been issued, the construction is recorded and the units are individualized at the registry office.

Documents to request before signing

• Up-to-date property record (matrícula) of the land at the Real Estate Registry Office (Cartório de Registro de Imóveis)
• Instrument for acquiring the ideal fraction of the land: deed, purchase and sale commitment or assignment of rights
• At-cost construction contract, with the budget, the management fee and the adjustment method
• Approved plans and the descriptive specification (memorial descritivo) with the finish specifications
• Draft of the condominium bylaws
• Minutes of the election of the buyers' committee, when the group has already been formed
• Most recent periodic statements, if construction has already started

Who this model makes sense for

For those who have their own funds, tolerate variation in cost and timeline and want to follow the works closely. For those who depend on bank financing, need a predictable installment or want to stay away from the management, buying a unit in a fixed-price development tends to be more suitable.

This article is for general information only and is not a substitute for individual legal advice. The rules cited are a summary of the legislation in force and each contract has its own clauses — before signing, consult a lawyer specialized in real estate law.

Frequently asked questions

Is at-cost construction the same thing as real estate development?
No. In a fixed-price development, the developer sells the unit for an amount set in the contract and bears the risk of the construction cost. In at-cost construction, the buyers pay the actual cost and the builder receives a fee for managing the works.

Is there a fixed price in at-cost construction?
No. The contract contains an estimated budget, which the law requires to be reviewed periodically. The final amount is only known when construction ends.

Is at-cost construction legal?
Yes. The regime is set out in articles 58 to 62 of Law 4,591/1964, which deal with construction under management or at cost.

Can at-cost construction be financed by a bank?
Generally not during construction: payments are made with the buyers' own funds. After completion and the individualization of the units, the property can be pledged as collateral like any other.

What happens if a co-owner stops paying?
The law provides that, after three overdue installments and notice to the debtor, the debtor's fraction may be auctioned so that another buyer takes over the position and the payments.