1.

UNIT 2:
INTRODUCTION TO
CONTRACTS
1. To Understand Contract & Contract Documents
Contracts:
2. To General Conditions of Contract
3. To Understand the various Special Conditions
of Contract
4. To Understand about Specifications, Bill of
Quantities, Measurement of Works and
Payment to Contractor
5. To Understand Various Advances made to the
Contractor and their Recovery, Also Bonus and
Penalties.
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Unit 2: Syllabus:
Introduction to Contracts - Articles of Agreement and Conditions of Contract (IIA document) Contents
of a Tender - Terms of Reference - Specifications - Bill of Quantities - Billing, Measurement of work
and Payments - Advances and recovery - Bonus and Penalties, etc.

2. 1 Contract:
2.1.1 Definition: A Contract is a written or spoken agreement, especially one concerning
employment, sales, tenancy, or service provision that is intended to be enforceable by law.
A Written Contract is a document that records an agreement between various parties, and is framed
and validated by the Indian Contract Act, 1872. The Contract Act is one of the most central laws that
regulates and oversees all the businesses wherever a deal or an agreement is reached. A written
Contract is enforceable as per the Contract Act and any breach or failure to abide by the agreement
contained within is punishable by the Law.

2.1.2 Contract Document: After the Tendering process the Award is declared in favor of some
Contractor who is first given a Letter of Intent, and then a Work Order often called a Purchase
Order in Corporate circles and then invited to sign a formal legal Contract with the Owner.

The documents that will become a part of the Legal Contract are required to be clearly specified. The
Contract will include the Articles of Agreement, the Letter of Intent and Work Order, the Terms and
Conditions of the Contract, the B.O.Q with the Schedule of Item Specifications and Quantities, the
Mode of Measurement, and all other contents of the Tender, except the preliminary Tender purpose
drawings. The Good-for-Construction (GFC) Working Drawings issued by the Architect from time to
time may be declared as the Contract Drawings unless otherwise stipulated by mutual consent.
2.1.3 Contract Drawings: The preliminary "Tender Purpose" drawings included with the Tenders
issued to Contractors for quotation are generally NOT considered in the Contract as Contract
Drawings because they are only intended to give a the Contractors an overview of the work
before Tendering their Quotation for the work.
The Good-for-Construction (GFC) Working Drawings issued by the Architect from time to time signed
by the Architect are declared as the Contract Drawings, unless otherwise stipulated for any reason.
Working Drawings must be scaled and issued with all dimensions and details as may be required by
the Contractor for clarity of construction. Any work which is not according to the Contract Drawings
is liable to be rejected by the Architect. Adequate copies of Working Drawings must be issued by the
Architect to the Contractor

So how would you define “a construction contract?”

A Construction CONTRACT is a legal document that formally confirms in writing, with a seal and
signature, an agreement that binds two or more parties into a firm commitment or obligation
enforceable by Law, in accordance with mutually accepted terms and conditions of reference, in
respect of the scope, quality, duration and cost of a construction project.

2. 2 Articles of Agreement : ( Refer to IIA Articles of Agreement ) :

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Salient features of a Construction Contract

A Contract is executed on a Stamp Paper ( of minimum Rs.100/- value )

It should state the Date of the Agreement and the Place of execution (signing)

The details of the 1st Signatory should be given with contact details and designation

The details of the 2nd Signatory should be given with contact details and designation

The Purpose of the Contract should be stated with location and salient details

The Method of Execution should be given clearly with details of all involved

The Monetary Agreement should be given with payments & deposits, if any.

The Terms Of Reference should be given as primary 'Articles of Agreement'

The Conditions Of Contract should be annexed to the Contract (TENDER)

The Court Jurisdiction for Redressal of disputes, if any, should be provided.

The Contract should be signed by the 2 parties, along with min 2 Witnesses.

2. 3 Conditions of Contract:
PREAMBLE: When a Contractor is assigned a Construction Contract, the Owner and the Architect
may set specific Terms and Conditions which the Contractor will have to follow during his contract
period.
The purpose of these Terms and Conditions (or 'Terms of Reference") is to ensure that the
Contractor follows specific prescribed procedures of the Tender system and delivers the completed
construction within the Time, Cost and Quality that has been prescribed by the Owner & Architect.

The Conditions of Contract are generally of Two Types: Special and General:
a. Specific or Special Conditions - which are Specific to the project in hand with respect to Type,
scale, location, complexity and specific requirements of the Owner, if any.
b. General Conditions - are typically those that would apply to Any construction project - since
they are mostly in respect of good construction practices and prescribed procedures of
Tendering. These can be used in any Tender of any construction project as these are Standard
and Typical to construction work in General.

a. Special Conditions would generally include Clauses for the following:

• Type of tender - b1 / b2 or c - specifying the way quotation has to be submitted.
• Project duration - time limit given to the contractor from date of commencement
• Earnest Money Deposit (E.M.D) to be paid while submitting the tender
• Security Deposit - adjustment of (E.M.D) initial security deposit and total deposit
• Retention Percentage - balance of security deposit to be retained from each R.A bill
• Refund of Security Deposit - 50 % on virtual completion & 50 % after D.L.P
• D.L.P - defects liability period - normally 12 months after virtual completion (or more)
• Date of commencement – L.O.I/ work order / contract agreement whichever is earlier
• Date of completion - specific date with ref to project duration & commencement date

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• Liquidated Damages - Penalty Clause - stating damages to be paid in case of delay

• Period of Time for Interim Payments - periodic RA Bills during the course of the project
• Period of Time for Final Payment - Longer period required for Reconciliation
• Payment Terms – R.A Bills of Work - Frequency, Minimum Amount, Min Bills per Month
• Ad Hoc Payments and Payment against unfixed materials on site
• Mobilisation Advance and its recovery from initial RA Bills of Work
• Materials Advances and recovery from interim RA Bills of Work
• Conditions regarding Supply of Water and Power for Construction
• Variation Clauses - Variation in Quantity / Variation in Specification / Variation in Quality
• Extra Items of Work - approval of Architect and Owner / separate billing / payment terms
• Basic Rates of Steel and Cement and Terms regarding Owner supplied Items of work
• Conditions regarding Sub-letting of Contract, and approval of sub-contractors / agencies
• Payment of Taxes - Royalties / Duties / Levy’s / GST etc.
• Storage of Materials - specific locations / ordering schedules / care and security / etc.
• Insurance and Statutory requirements of Govt - such as ESIS / Provident Fund etc..
• Maintenance of Records and Measurement Book on Site - Site Office requirements
• Project Management - Testing of Materials / submission of Test Reports etc.
In short, All Conditions Specific To The Project, Site or Owners Need should be included in the
special Conditions of Contract. These conditions have to be drafted and included in the Tender by
the Architect, keeping in mind that these will become the legal, statutory and binding Clauses of the
Contract that will be signed between the Owner and the Contractor. It should also be borne in mind,
that all Special Conditions of Contract will have a significant impact on the Cost of the project.

b. General Conditions would generally include Clauses for the following:

All the Clauses listed in the IIA Document as General Conditions Of Contract are generally found to
be good for all construction projects. Some of the clauses May have to be modified slightly to suit
the specific project - especially if they are in contradiction to any Special Conditions that may have
been laid down.
The contractor is expected to study the Tender Conditions in detail and point out to the Architect
any discrepancies or contradictions during the Tender process. It is the Architect's privilege to decide
the final decisions and application of the Clauses for the Contract document in case of any
contradictions or discrepancies. The Architect's decision is always Final And Binding on the
Contractor.
2. 4 Special Conditions of Contract: This list as per the progress of work.
2.4.1 Earnest Money Deposit:
• The main Intention of E.M.D is to see that fair competition takes place and only Contractors
interested in executing the job bid for the Project.
• It shows the Contractor’s interest or Earnestness in getting and executing the job.

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• This is an initial money deposit enclosed with the tender and could be in the form of a Cheque
of a Nationalised Bank, Multi-National or a Scheduled Co-Op Bank , Pay Order, D.D. payable at
the place of the Owner, or even a Bank Guarantee or even Cash.
• This is generally fixed at 1% of the estimated cost of works.
• The E.M.D Cheque / Draft is to be submitted Outside the sealed envelope containing the Tender
document - and Not within, - since the payment is required to be checked and verified before
accepting the Tender submission.
• The amount remains with the Owner till the Contractor is selected and may be extended till the
job is awarded.
• E.M.D of the selected contractor is converted to a Security Deposit. E.M.D of Contractors whose
offers are rejected is given back.
• E.M.D does not bear interest and no one can claim interest on same.
• E.M.D is forfeited by
 A Contractor whose Tender is selected but is unwilling or refuses to undertake the work
 A Contractor whose Tender is selected but Delays payment of Security Deposit
 A Contractor whose Tender is selected but Intentionally delays the commencement of work
• In any of the above events, the Owner / Architect are free to select any other Contractor from
the pre-qualified list, or the Tender can be re-called and the entire process repeated.

2.4.2 Security Deposit Amount (S.D.A):

• This is generally (but not necessarily) 5% of the estimated cost of the project and now contract
cost.
• Selected contractor is asked to pay the S.D.A. The E.M.D already paid by the Contractor will be
adjusted towards the S.D.A.
• This Security Deposit is, therefore, a form of 'performance guarantee' given to the Owner by the
selected Contractor. The Security Deposit is held by the Owner through the period of the
construction - without any interest - and returned after completion.
• This is paid in Cash or even by Fixed Deposit Receipts.
• Since the 5.00 % amount can be a fairly large amount AND can be paid as follows.
 This may be paid in Instalments as follows, First Instalment to be paid before entering
into the Contract and further instalments to be deducted from every consecutive R.A
bill.
 It is often difficult for the Contractors to invest the large amount in the required
interest-free deposit at the beginning of the project. So, the Security Deposit is split into
two components - a) A 2.50 % INITIAL Security Deposit, and, b) A 2.50 % as the
Retention Percentage. The 2.50 % Initial Security Deposit is to be deposited by the
Contractor before commencement of the construction work. The accepted amount of
the E.M.D already received from the Contractor with the Tender is 'adjusted' against this
Initial SD
 In many projects, the established and reputed Contractors request the Owners /
Architects to accept a “Bank Guarantee " instead of the S.D.A so that they do not need
to 'invest' and block their money at the early commencement stage of the project. It is

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absolutely discretionary for the Owner / Architect to accept or reject such an offer, and,
the Contractors cannot 'demand' such a concession
• The Purpose of S.D.A is as follows
 Contractor fulfils all terms and conditions of Contract
 Carries out work to entire Satisfaction
 Maintains expected progress of work
• If the Contractor fails to comply with all conditions then S.D.A is forfeited.
• Contractor cannot demand any interest on the S.D.A. This is returned to the Contractor after
Deflects Liability Period if the Contractor attends and cures Defects brought to his notice and
within the stipulated time allotted for attending the repairs. If Provision for Deduction of
Retention Money is made in the Tender the Security Deposit is returned along with the Final Bill.

2.4.3 Retention Percentage:

• Contractor shall deposit a fixed amount with owner as guarantee for faith-full performance of
terms of Contract.
• This amount can be is generally 5% of the project cost.
 It can be Paid in instalment and or be in the form of a deduction from every running bill
since it is not possible to pay this amount in one instalment. Deduction of Retention Amount
from running Bill is continued till the total amount is collected.
 Another way of collecting Retention Amount is as follows. After recovery of the Initial
Security Deposit equivalent to 50 % of the TOTAL 5.00 % Security Deposit (i.e.approx.2.50 %
of the project cost), the Contractor is given the Work Order to proceed with the construction
work. As the work progresses, Running Account Bills are raised by the Contractors to claim
his charges for the completed work. From every Bill raised by the contractor, a further 2.50
% amount of the certified Bill amount is deducted and Retained by the Owner and added to
the initial Security Deposit.
 IF the Contractor has paid the Total 5.00 % S.D.A in the form of an irrevocable and
redeemable Bank Guarantee, the Retention Percentage is not required to be deducted from
every Running Account Bill
• Retention Amount so collected is refunded to the contractor after virtual completion to the
extent of 50%. The Architect/P.M.C has to ensure that the contractor has fulfilled all terms and
conditions of contract, used proper material and delivered good workmanship when returning
this 50%. The balance amount is to be paid after Defects Liability Period. In case the contractor
is bankrupt, Trustees of the bankruptcy cannot lay any claim to the Retention Amount.
• This amount does not bear any interest and is kept with the owner.

2.4.4 Clerk of Works:

• A Clerk of works is a manager on a construction site who checks to see that the work is
carried out properly and that health and safety rules are being followed. He is appointed
by the Architect or Client on the Construction Site. He represents the Interests of the
Client. Depending on the Contract his salary is paid by the Client, Architect or
Contractor.

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• As a clerk of works, or site inspector, he would oversee the quality and safety of work on
a construction site, making sure that building plans and specifications are being followed
correctly. He should have a good ability to pay attention to detail. He should have good
problem solving skills. He should have good knowledge of the construction industry and
of Building Regulations. He should have good written and oral communication skills. He
should also have an ability to meet targets.
His duties would include.
 Performing regular inspections of the work on site and comparing completed work
with drawings and specifications
 Measuring and sampling building materials to check their quality
 Recording results either on paper or a hand-held Personal Digital Assistant.
 Identifying defects and suggesting ways to correct them
 Liasoning with other construction staff, such as contractors, engineers and surveyors
 Monitoring and reporting progress to Construction Managers, Architects and Clients
 Supervising the workforce on the building site during a project.

2.4.5 Mobilization Fund and Recovery:

• Construction of Large Projects requires some money or Finance for preparatory works such
as recruitment of labour, travel of staff, erection of temporary structures, purchase of
cantering materials, insurance premiums, plant and machinery etc.
• This becomes all the more necessary as the first bill put in by the contractor for a substantial
amount will be much later as excavation is the first billed job to be commenced.
• Hence the contractor may be paid an advance which is called Mobilization Fund. Maximum
amount of this fund is 10 % of contract cost. It is paid in one single instalment or 2 or 3
instalments within one month of award of work or after signing of the contract. If paid
in stages can be paid as follows
a. Stage – 1 50% of M.F within one month of award of work.
b. Stage – 2 Part paid on preparation of Works
c. Stage – 3 Part paid on bringing plants and machinery.
This advance is recovered from every running bill as a certain percentage of the bill. Full amount
should be recovered before completion of 80 % of Work. It is advisable to advance this amount free
of interest.
Thus, a "Mobilization Advance" is an amount which an Architect can approve and recommend as a
relief to the Contractor at the beginning of a construction project.

2.4.6 INTERIM / R.A.BILLS OF WORK:

• This clause specifies the time and up to what amount can the contractor make a Running
Account Bill which is an accounting term for a periodic account statement made by the
contractor while the work is in progress. This Clause will also specify the maximum time duration
to be taken by the Architect to certify a submitted R.A bill.
• As the work proceeds and progresses, the Contractors prepare and submit 'Interim Running
Account (R.A) BILLS of the work to the Architect for Certification and subsequent payment by the
Owner. These Bills are called "Running Account ' Bills because each Bill is required to state the

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Previous, Present and Balance Quantity of each Item of work in the B.o.Q and also the Paid, Due
and Balance amounts against each Item. This system helps keep track of the Work done and
Work remaining throughout the course of the construction.
• Running Account (R.A) Bills can be raised by the Contractor by two principal parameters which
are set by the Architect in the special Conditions of Contract: Time and Value. In the initial
negotiations of the Contract, a mutually agreed period (like once every month or twice every
month), and / or a mutually agreed amount (like minimum 5 Lakhs or minimum 10 Lakhs) is fixed
as a criteria for raising Interim RA Bills. Contractors, therefore, cannot demand payments
anytime or for any amount unless the prescribed criteria are met.
• Normally, the number of Bills per month and minimum amount for Billing is fixed by dividing the
total value of the project over the total duration of work.

2.4.7 Material Advances and Recovery:

• Clause: A clause that states the amount to be paid in advance for Material and how this money
is to be recovered by deductions in the subsequent Running Account Bills
• Need: As the Construction Contract is inclusive of Materials and Labor, many Contractors often
ask for a monetary 'advance' to purchase constructions materials. Sometimes, when materials
are available at a low price, or when there may be a possibility of scarcity, Contractors
recommend bulk purchase of materials in advance to ensure continuity of the project. At such
times, Contractors request an 'advance' payment for purchase of the materials - long before the
'Item' of construction is executed. This advance payment is also discretionary and Architects may
accept and allow such payments to the Contractor considering the situation and the genuine
requirement.
• Recovery: Any amount paid as an 'advance' towards purchase of Materials is also recovered
from the Contractor in the forthcoming R.A. Bills of work in installments. In some cases, where
the entire material is 'purchased' by the Owner by way of a Material Advance, the Contractor
can charge ONLY for his Labor, Overheads and Profits in the particular Item of Work. Wastages,
in such cases, are on the Owners account. Many Architects negotiate a further 'discount' in the
Contractors quotation while allowing and giving a 'Material Advance', since they are reducing
the Contractors financial investment.

2.4.8 Ad-hoc/ On Account Payments:

• Definition: This clause is for making Ad-hoc payments (i.e. payments not based on bills) and
recovery.
• Need: When a Contractor submits a Bill for payment, the Architect is allowed some time to
check, scrutinize, verify, and certify the Bill to the Owner for release of the payment. This time
period may range from a week to fifteen days. Even after receiving a Contractors Bill, duly
certified, from the Architect, the Owner may also require a few days to make the payment of the
total amount certified in the Bill. These delays in the actual receipt of payment may financially
burden the Contractor, and sometimes, affect the smooth progress of the work.
Therefore, in the interest of the progress of the work (especially if the work progress is very
good) an Architect May recommend an 'Ad-Hoc' or arbitrary payment to the Contractor even
before the Contractor's Bill is checked and verified. The amount of such ad-hoc payment is
discretionary, but may range from 25 % to 50 % of the total Bill amount.

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• Recovery: Such a payment is called 'Ad-Hoc' payment and is generally deducted immediately
from the amount of the due Bill and only the 'balance' amount is paid to the Contractor. It is the
Architects discretion to recommend or refuse any such Advances, and thus, also the
responsibility to Recover such advanced payments in his scrutiny and certification of the Running
Account Bills.

2.4.9 Final Bill of Work:

• The Final Bill of Work is different from previous Running Account Bills because it completes the
project and releases the final payment after Certification by the Architect.
• The period of scrutiny and verification allowed for the Architect to check and certify the Final Bill
is therefore MORE than the previous RA Bills. The reason for this longer period is that the
Architect has to check, verify and certify the final status of the work and the contractor has to
submit with the Final Bill many documents of reconciliation of the material (like Steel and
Cement) issued and consumed and hand over the balance and account for the wastages.
• Payment of the Final Bill of Work by the Owner also signifies the completion of the project and
the conclusion of the Contract (except for the liability of the Contractor which continues over
the 12 months Defects Liability Period)

2.4.10Virtual Completion Certificate:

• The construction work is "virtually" or almost complete, and the building is generally fit for
occupation and use for the purpose which it has been designed. However it is not complete in all
respects of the contract. The Contractor then has to apply to the Architect for issue of a "Virtual
Completion Certificate". The Architect, after checking and verifying the status of the work, may
issue the V.C.C. The Defects Liability Period begins from the time this certificate is issued
• Upon issue of the Virtual Completion Certificate, 50 % of the Total Security Deposit of the
Contractor (equivalent to 2.50% of the project cost) is then Returned to the Contractor - without
any Interest - and the balance 2.50 % amount (retained during the course of the project through
Running Bills as the Retention Percentage) is further retained for a period of 12 Months after
Virtual Completion - known as the Defects Liability Period (D.L.P).

2.4.11Defects Liability Period:

• After the construction work is virtually complete, upon application from the Contractor, the
Architect issues a 'Virtual Completion Certificate'. From the date of such a Virtual Completion,
the Contractor's "Defects Liability Period" (DLP) - generally of 12 Calendar months - begins. Any
defects or construction faults attributable to the Contractor's work observed and communicated
to the Contractor by the Owner or the Architect during these 12 months DLP are required to be
repaired or rectified by the Contractor at his Own cost. The Defects Liability Period is thus the
"warrantee' period for the construction work.
• Any defect in the work must be brought to the notice of the Contractor either by the Owner or
Clerk of Works through the Architect who then issues a letter and also adds a stipulated time
within which this repair work must be carried out by the contractor after which it could be
carried out by an external agency.
• Defects Liability Period - also known as rectification provisions - can be of benefit to both
parties.

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• For the contractor, it is likely to be more economical and efficient for him to carry out remedial
works itself than to pay the costs of another contractor hired by the employer. From the
employer's perspective, he will not need to hire an alternative contractor to carry out the work,
or to carry out the work itself and reclaim the cost. The employer will also not run the risk that
any warranties provided by the original contract may be affected by a third party carrying out
works on the site.
• If there is a contractual right for the contractor to rectify defects, and the employer either does
not notify the contractor that rectification is needed or refuses access to the site, then the
employer may be in breach of contract. Case law illustrates, however, that the contractor will
not normally be 'let off the hook' if this happens. The employer will still have a claim for the cost
of rectifying the defects, but the claim is likely to be limited to the amount it would have cost the
original contractor to carry out the works. He will not be able to claim for remedial works or
working methods found not to be strictly necessary.
• Employers should therefore give careful consideration to the provisions in the contract before
hiring a new contractor to carry out remedial works. This is especially important if the contract
stipulates that the employer must notify the original contractor that remedial works are needed
before it can make a claim for recovery of any costs of rectification.
• We also need to know two other terms : Latent Defects and Patent Defects: Defects in a
building are those aspects of any work that are not in accordance with the contract, with respect
to either the specifications or the drawings or general workmanship. These Defects are further
classified as Patent or Latent
 Patent Defects are those that can be detected by reasonable inspection, e.g. the line
and level of flooring or walls or plumbing works.
The client during the Defects Liability Period may bring to the notice of the Contract Administrator
any defects that arise who may then decide whether they are a breach of contract or just
maintenance issues. In case they are defects he may issue a notice to the contractor who then has to
address these issues within a reasonable time and make good the defects. Since it is not the client’s
responsibility to detect defects (he not being a technical person) every time a defect is detected by
him, he should point out that this is not a comprehensive list of defects.
 Latent Defects are those which cannot be discovered by reasonable inspection. for
example bad concrete used in foundation which may not become apparent until several
years after completion when settlement causes cracking in the building.
It is the intrinsic nature of construction projects that many a times, faults or Defects in
Workmanship or Materials may not become apparent or readily detectable until many years after
completion of project and long after the end of the Defects Liability Period. Such Defects are called
Latent Defects.
Examples of Latent Defects are
1. Wrongly placed reinforcement allowing movement damage to the structure.
2. Under strength concrete used leading to cracks in the structure.
3. Defective Basement Tanking allowing water penetration.
4. Bad Water used in concreting leading to bad concrete and finally failure of Structure.

2.4.12Bonus Clause and Penalty Clause:

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As an incentive to provoke the Contractor into providing his Best services and using the best quality
of recommended materials, Architects often encourage the Owners to declare a Bonus for good
work. The 'Bonus' can be a Lump-sum amount or a small percentage of the project cost payable over
and above the Contract amount. It is mandatory for the Architect to get the consent of the Owner, in
writing, prior to inclusion of a Bonus Clause in the Tender.
In respect of a 'Penalty Clause' however, the Architect may specify the circumstances for invoking
the provisions of the clause to penalize the Contractor. These reasons may primarily be delay
beyond the date of completion, dis-obedience of Architects instructions, or consistent sub-standard
workmanship of construction.
It is NOT mandatory to include either the Bonus Clause or the Penalty Clause in a construction
Tender. As a gesture of transparency and fairness, if a Penalty Clause is included in the Tender as a
punishment, there should also be a Bonus Clause to appreciate and encourage good and timely work
by the Contractor.

2.4.13Escalation Clause:
An Escalation Clause is provision in a contract for increasing the quoted Item Rates of Contractors in
tune with the market prices or by an agreed percentage or a parameter such as the Consumer Price
Index (CPI). Inclusion of an Escalation Clause in a private sector Tender must be done with a clear
and absolute consent of the Owner, since it is NOT a mandatory provision. In Govt. or Public
projects, however, this provision is always made to compensate the annual rise in costs to
Contractors in long duration projects.
Once a Tender is accepted and a Contract is signed, the Contractors are bound to carry out the
construction at the Item Rates quoted and accepted. The quoted rates must remain valid up-to the
completion of the project if the time period is less than 12 months.
If the project time span is more than 12 months, however, an 'ESCALATION' Clause is often included
in the Tender to provide the Contractor relief from annual inflation. If, however, the provision of the
Escalation Clause is found to be misused by deliberately delaying the work beyond 12 months,
'Liquidated Damages' are levied as a Penalty.
In the private sector, the percentage of annual 'rise' in rates is often specified (say, 3% to 5% - for
example) considering market trends. In most Government Tenders, however, the Escalation Clause is
based on a formula developed by the CPWD and State PWD which derives the amount of rise in
direct proportion to the Consumer Price Index officially published by the Government every year.

2.4.14Liquidated Damages:
In the event of a Delay in the completion of a construction of a project - which may be due to any
reason for which the Contractor Can be indisputably held responsible - the Architect / Owner may
charge "Liquidated Damages" or a Penalty per day of delay beyond the stipulated date of
completion. Liquidated Damages are so called because they constitute an approximate gross value
of the loss which the Owner is likely to suffer on account of the delay distributed over the period of
the delay as compensation per day.
Where TIME is the essence of a Contract, the Liquidated Damages are pre-determined and included
as a condition in the Contract. Liquidated Damages age generally levied after the Contractor has
been given adequate Notice that the delay in the construction will NOT be tolerated beyond the final
/ extended date of Completion.

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When such damages are levied, the same may be deducted from the amount of any running bill
payable to the Contractor, OR, recovered from the Security Deposit of the Contractor held by the
Owner. It shall, however, be entirely discretionary for the Architect to waive the levy of Liquidated
Damages if it is established that it was impossible for the Contractor to avoid the delay. The
Architect can also set a Limit for the delay in completion
An Exception to the levy of Liquidated Damages is the Force Majeure clause where the work is
delayed due to natural calamities like floods, earthquakes or inclement weather, OR due to official
stoppage of work by any authority or Court-of Law for any reason for which the Contractor CANNOT
be held responsible.

2.4.15Other Special Conditions:

I. Basic Rates of Materials. A clause to determine the rate at which basic materials are bought by
the contractor from his suppliers in case of great variation during the period of contract. This
clause helps the Owner/Architect to receive quotations wherein there is parity in the quote
received from various contractors as to basic rates assumed.
II. Price Variation Clause. A clause to Cover the following Case: Sometimes during the period of
Contract there is great variation in the prices of certain items and if it can be proved that the
variation is greater than a certain percentage then prices may be revised.
III. Quantity Variation Clause. Sometimes some items could attract lower rates because of their
huge quantities and changing them could prove a loss to the Contractor. This clause deals with
this aspect and the provision made in case of variation beyond a certain value
IV. Quality Variation Clause. This clause deals with the quality of construction which will be valued
and be under the discretion of the Architect. He may decide to get some items demolished for
their poor quality and redone, some poor quality work to be rectified, and sometimes deduct
from the rates for the poor quality of work done.
V. Prime Costs and Provisional Sums. Basic idea of prime cost is to anticipate savings in
material and allow the contractor to quote at a predetermined cost. Provisional Sum in
essence is an amount reserved or stated in advance to be taken as the cost of certain
materials which could vary in cost later. The difference is either paid to the contractor or
recovered from the contractor. This will help contractors to quote with the same parity
VI. Validity of Quoted Rates. This clause deals with the time limit up to which the quoted rates shall
remain valid.
VII. Extra Items Work. This clause deals with those items of work which are neither a part of the
contract, nor been anticipated so rates were not quoted but now need to be executed. The
clause will deal with how to arrive at valid rates for these items. Generally the P.W.D item rate
analysis could be a good way of arriving at the rates of the items which were not quoted for in
the tender
VIII. Water and Power Consumption on Site. This clause deals with the contractor making an
application for a metered water source at a point indicated in the site plan. He shall pay all the
fees in connection with such services and shall pay the supply authority for the same.
Alternatively a Tender may state that water bills be paid by the owner.
IX. Steel and Cement Procurement Charges. A clause to determine the basic rate at which steel and
cement are used for calculation of item rates and the whether any undue escalation or

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relaxation in the rates of these materials should benefit the owner or contractor. This will help
contractors to quote with the same parity
X. Conditions for Storage of Materials. A clause to ask the contractor to provide erect and
maintain proper sheds for the storage of materials at site.
XI. Testing of Materials and of Executed Work. This clause deals with testing of Materials and
executed work. All materials and workmanship shall be subject to testing and examination by
the Architect. The Architect shall have the right to reject defective material and ask for defective
workmanship to be corrected. The contractor shall promptly furnish without additional charges
all reasonable facilities, labour and material necessary for safe and convenient inspection and
testing that may be required by the Architect.
XII. Subletting of Contract. The clause deals with the fact that the contractor shall not sublet any
work or part of the work without written consent of the Architect. If so allowed the Sub-
Contractor shall carry out the sub contract works in every aspect to the entire and reasonable
satisfaction of the Architect.
XIII. Insurance and Risk Coverage for Labourers and Materials. E.S.I., Provident Fund etc. The
contractor shall be liable for and shall indemnify the owner against any liability, loss, claim, or
proceedings whatsoever arising under any statue or common law in respect to Personal Injury or
even Death. The Insurance shall be paid by the Contractor and such policies and receipts shall be
in the safe custody of the Architect.
XIV. Arbitration. A clause to cover the fact that In case of disputes between contractor and Client
sole arbitrator is the Architect. However if either party disagrees with the decision given they
would be free to seek Redressal in Courts.
XV. Termination Clause and Conditions. In case of poor quality being delivered or inordinate Delays
occurring (not in keeping with the schedule submitted) the contract may be terminated under
certain conditions.

There are certain issues that are very difficult to decide whether these are to be bracketed in Unit1:
Tenders, Unit 2: Contracts or Unit 4: Site Management and I will certainly briefly list and explain
them here but if necessary detail them out in Unit 4:

2. 5 Specifications - Bill of Quantities - Billing, Measurement of work and

Payments:
2.5.1 Specifications And Bill Of Quantities
One of the most important contents of the Tender document is the Bill of Quantities (B.o.Q)
containing the Item Specifications, the Unit of measurement for each Item, Item Quantities, Rate
per Unit and the Item total Amount in columns. The Contractors are expected to fill in the Rates and
the AMOUNTS in the B.o.Q and submit the B-2 Type Item Rate Tender. The grand total summary of
the Item Amounts gives the total Cost of the project. It should be noted that Taxes and other official
payment on the Project Cost have to be added to the total amount to arrive at the actual Final Cost

In case of B-1 ( Percentage Rate Tender ) The Bill of Quantities may contain the Specifications of the
DSR - giving the specific Item Code number - which refers to the detailed PWD specification in the
Red Book of the PWD or the current DSR of the District.

Unit 2 Introduction to Contracts Compiled by Ar. Rajiv Raje @ Ar. Arthur Cutinho
 35

In case of C (Lump-Sum Tender) the specifications shall be in absolute detail for the Contractor to
include the cost in his Lump-Sum price quotation.

2.5.2 Billing, Measurement of Works and Payments :

• Once the construction work starts on the project site, the Contractor is expected to record
and register the quantity of work done daily in the Measurement Book (MB).

As a standard instruction to the Contractor, measurement of the work done Every Day has to be
recorded in the Measurement Book (MB) on the project site. This activity has to be carried out Daily
by the Contractor or his Site Supervisor Jointly with the Clerk of Works/Architects or Owners
representative/Construction Manager / PMC.
The Measurement Book has to record the dimensions of each item of work done on the site every
day, and the quantity jointly measured and accepted for record. The Architect has to cross-check at
random; some of the items in the measurement book, and sign the MB during his periodic visits to
the construction site. If any discrepancy is found in the recorded and actual measurements in the
cross check, ALL measurements are re-checked. A 'Mode of Measurements' is generally included in
the Tender to guide the way in which certain Items of Work are to be measured.
• The Contractor has to raise periodic Bills of Work for payment for the Architect to scrutiny
and verify and recommend payment to the Owner
• The Owner will pay the Contractor Only after the Bill of Work has been checked, verified on
site, and Certified for payment by the Architect.

2.5.3 Interim /R.A. Bills Of Work: Already Discussed Earlier

2.5.4 Final Bill of Work: Already Discussed Earlier

2.5.5 Payments to the Contractor

The Owner/Client of the Architect makes periodic payments to the Contractor for the work
completed on site as per the Running Account Bills Certified for Payment by the Architect. The
Architect, in the process of scrutiny, verification, measurement of work and certification of the RA
Bills, is empowered to withhold payment for any work which is Not satisfactory, or, to reject a claim
from the Contractor for work that has been rejected.

Payments to the Contractor are made directly by the Owner by money transfer or cheques issued
after Certification of the R.A. Bills by the Architect. The Architect is expected to keep a record of
payments made to the Contractor, to monitor the final cost of the project

If the Owner delays the payment to the Contractor After due certification by the Architect, the
Contractor is entitled to compensation of Interest on the due amount over the period of the delay (if
this provision has to be made and included in the Tender Terms & Conditions)

Unit 2 Introduction to Contracts Compiled by Ar. Rajiv Raje @ Ar. Arthur Cutinho
 36

2. 6 Theory Questions:
1. Define a Construction Contract. List the Salient Features of a Construction Contract.
2. Explain in short what do we mean by General Conditions of Contract and Special
Conditions of Contract
3. List out the Special Conditions of a Construction Contract.
4. Write Short Notes on the Following
1. Earnest Money Deposit
2. Security Deposit Amount
3. Retention Amount
4. Clerk of Works
5. Mobilisation Funds and recovery
6. Material Advances and recovery
7. Ad-Hoc Payment and recovery
8. Interim or R.A. Bills
9. Final Bill
10. Defects Liability Period.
11. Virtual Completion Certificate
12. Latent and Patent Defects
13. Bonus Clause and Penalty Clause
14. Liquidated Damages
15. Escalation Clause

Unit 2 Introduction to Contracts Compiled by Ar. Rajiv Raje @ Ar. Arthur Cutinho