Important Clauses of Conditions

of Contract
Important Clauses of Conditions of Contract
 1. Security Deposit and Earnest Money
➢ The clauses on security deposit and earnest money serve as financial safeguards in
construction contracts. Earnest Money Deposit (EMD) is submitted along with the
tender to ensure that only serious and capable bidders participate in the bidding
process. If the lowest bidder refuses to accept the contract or withdraws during the
validity period, the EMD is forfeited. After the award of work, the contractor is
required to furnish a security deposit or performance security, usually in the form
of cash, retention from bills, or a bank guarantee. This security deposit is retained
until the completion of the project and the defect liability period, ensuring that the
contractor performs obligations diligently and rectifies any defects.
➢ For example, in Central Public Works Department (CPWD) contracts, the security
deposit generally constitutes (3/5)–(10)% of the contract value. This mechanism
protects the employer against non-performance, defective work, or abandonment
of the project, making it an essential clause in any standard contract.
• Negotiation Point:
– Reduce security deposit %, request phased release, or provide bank guarantee
instead of cash.
 2. Compensation for Delay (Liquidated Damages)
➢ Compensation for delay, commonly known as liquidated damages, is a
pre-determined sum payable by the contractor if the project is not
completed within the stipulated time. This clause is not considered a
penalty but a genuine pre-estimate of loss suffered by the employer due
to late completion. Typically, liquidated damages are fixed as a
percentage of the contract price per week of delay, subject to a
maximum cap, such as 10% of the contract value.
➢ For instance, if a ₹100 crore project specifies liquidated damages at
0.5% per week, a four-week delay would result in ₹2 crore being
deducted from the contractor’s payments. This clause ensures time-
bound completion and discourages contractors from unjustified delays.
However, it is crucial to note that liquidated damages cannot be imposed
if the delay is excusable, such as when caused by employer-related
factors or force majeure conditions.
❖ Negotiation Point:
Negotiate LD % per week, cap, or exemptions for specific delays.
3. Action When Whole of Security Deposit is Forfeited
➢ This clause empowers the employer to forfeit the entire
security deposit in cases of severe contractual breaches.
➢ Such breaches may include abandonment of the work,
deliberate non-compliance with specifications, or
fraudulent practices such as falsifying test results.
➢ Forfeiture of the security deposit is often accompanied by
other remedies such as termination of the contract,
blacklisting of the contractor, and execution of balance
works at the contractor’s risk and cost.
➢ Negotiation Point:
– Limit forfeiture to specific breaches; ensure warnings/notice
before full forfeiture.
 4. Delay in Work
➢ Delays in construction projects are classified into three categories:
contractor-caused, employer-caused, and neutral or force majeure delays.
➢ Contractor-caused delays include mismanagement, inadequate resources, or
defective work, which make the contractor liable for liquidated damages.
➢ Employer-caused delays arise due to late drawings, delayed site access, or
payment issues, in which case the contractor is entitled to an extension of time
and, in some cases, compensation.
➢ Force majeure (neutral delays), such as natural disasters, floods, or
regulatory restrictions, qualify for time extensions but not necessarily
financial compensation. This classification is critical because it directly
influences the entitlement to extensions of time and claims for damages,
ensuring that responsibility is fairly allocated.
➢ Negotiation Point:
• Clearly define contractor vs. employer-caused delays; include neutral/force
majeure clauses.
 5. Extension of Time
➢ The extension of time clause provides a mechanism for revising the contract
completion date when delays occur due to reasons beyond the contractor’s
control.
➢ Such as force majeure events, employer’s delays, government restrictions or
utility shifting (e.g., relocation of water pipelines or electric cables)
➢ To avail an extension, the contractor must notify the employer or engineer-in-
charge within a specified period, detailing the cause and impact on the project
schedule.
➢ The employer then assesses the justification, often using critical path method
(CPM) scheduling, to determine the revised completion date.
➢ The extension of time clause prevents disputes by ensuring that contractors are
not unfairly penalized for circumstances outside their control.
➢ Negotiation Point:
• Contractor proposes 15-day notice period for EOT requests instead of 7 days.
 6. Site Clearance
➢ Site clearance is a crucial clause mandating the contractor to remove debris,
temporary works, waste materials, and surplus resources upon completion of
the project.
➢ The contractor is responsible for restoring the site to a clean and safe condition,
suitable for intended use or occupation.
➢ In infrastructure projects, this may also include the safe disposal of
construction and demolition (C&D) waste as per environmental regulations.
➢ Failure to clear the site may result in withholding of completion certificates and
payments.
➢ This clause ensures environmental compliance, safety, and the smooth
transition of the completed project to the employer.
➢ Allow reuse of excavated materials on-site instead of full disposal.
➢ Negotiation Point:
• Define acceptable standards, reuse/disposal responsibility, and cost
responsibility.
 7. Completion Certificate
➢ The completion certificate clause provides the legal recognition of project
completion.
➢ A provisional completion certificate is issued when works are substantially
completed and fit for use, with minor defects listed in a punch list.
➢ The final completion certificate is granted after rectification of all defects and
fulfillment of contractual obligations, including submission of as-built
drawings and operation manuals.
➢ The issuance of the completion certificate triggers the release of retention
money, final payment, and commencement of the defect liability period.
Without this certificate, the contractor cannot claim the full settlement.
➢ For instance, in public works projects, the engineer-in-charge must certify
completion before the final bill is processed.
➢ Negotiation Point
• Define clear criteria for provisional and final Completion certificate
 Completion Certificate
1. Provisional Completion Certificate (PCC)
➢ Granted when the work is substantially completed and the project is fit for use
or occupation.
➢ Minor defects, pending works, or touch-up items are listed in a “punch list” (or
snag list).
➢ Allows the employer to take possession and start using the project (e.g., road
opening for traffic, building occupation).
➢ Defects Liability Period (DLP).
➢ Example: In a highway project, the road may be opened to traffic while minor
works like road markings, landscaping, or sign boards are pending.
➢ A Provisional Completion Certificate will be issued, with a punch list detailing
pending works.
 Completion Certificate
2. Final Completion Certificate (FCC)
➢ After the contractor has rectified all defects, completed punch list items, and
complied with all contractual obligations.
➢ Requirements include Submission of as-built drawings, Operation and
maintenance manuals, Warranties/guarantees of materials or equipment, Final
clearances and approvals.
➢ Purpose:
• Certifies that the project is fully completed as per contract.
• Triggers the release of retention money, security deposits, and final payments.
• Legally closes the contract obligations of the contractor.
 8. Possession Prior to Completion
➢ In certain cases, the employer may take possession of a portion of the project
before full completion.
➢ This is known as partial or sectional occupation. For example, in road projects,
completed sections may be opened to traffic while adjoining sections are still
under construction.
➢ In such cases, the defect liability period for the occupied portion commences
from the date of possession, while the contractor continues work on the
remaining sections.
➢ The clause ensures flexibility in phased projects, but it also requires clear
demarcation (separation) of responsibilities, especially regarding insurance,
safety, and access.
 Possession Prior to Completion
➢ Negotiation Point
❖ Limit Employer’s Rights for Early Possession:
• Contractors should negotiate to ensure the employer cannot arbitrarily take
over partially completed areas unless mutually agreed.
• This protects the contractor’s work program and site management.
❖ Compensation for Restricted Areas:
• If early possession reduces the contractor’s access, storage, or working space,
the contractor should be compensated for additional costs (e.g., disruption, re-
sequencing of work, safety measures, or delay).
9. Running Bill Payments / Retention / Mobilization Advance
➢ Construction projects typically involve large expenditures, and contractors
depend on interim payments for cash flow.
➢ The running bill payments clause allows contractors to submit periodic bills
based on measured work, which are certified by the engineer.
➢ From these payments, a retention amount (generally 5–10%) is deducted as
security for performance, with partial release at provisional completion and full
release after the defect liability period.
➢ Mobilization advance may also be granted at the start of the project to facilitate
the procurement of resources, against a bank guarantee, and is recovered in
installments from subsequent bills.
➢ This clause balances the employer’s risk management with the contractor’s
need for financial liquidity.
➢ Negotiation Point: Reduce retention %, adjust mobilization advance %, agree
on interest for delayed payments.
Running Bill Payments / Retention / Mobilization Advance
Retention Amount
➢ The retention amount is a portion of the contractor’s payment (usually 5–10%)
that is withheld by the employer as a security for satisfactory performance of
the contract.
➢ Upon provisional completion, a portion of the retention (e.g., 50%) may be
released to the contractor to improve cash flow.
➢ Remaining retention is released after completion of the defect liability period,
ensuring defects are rectified.
➢ Ensures that the contractor completes all works according to contract
specifications.
➢ Protects the employer against defective work, delays, or incomplete
performance.
➢ Encourages timely rectification of defects discovered during the Defect
Liability Period (DLP).
Running Bill Payments / Retention / Mobilization Advance
Mobilization Advance
➢ A mobilization advance is a lump sum amount paid to the contractor at the start
of the project to facilitate mobilization of resources (equipment, labor,
materials).
➢ Helps contractor arrange machinery, manpower, and materials before cash flow
from regular bills starts.
➢ Usually limited to a certain % of the contract value (e.g., 10–15%).
➢ Deducted in instalments from subsequent running bills until fully recovered.
➢ Enables the contractor to start work quickly without facing cash flow issues.
➢ Reduces the risk of project delays due to lack of resources.
 10. Works to be Open to Inspection
➢ This clause grants the employer or engineer the right to inspect all works
during execution to ensure compliance with specifications and quality
standards.
➢ The contractor must provide full access to site, records, and facilities.
Cooperate during inspections, audits, and tests. Inform the engineer when
specific stages (like reinforcement placement) are ready for inspection.
➢ Hidden works, such as reinforcement prior to concreting, must be inspected
and approved before being covered.
➢ If inspections reveal defects, the employer can direct the contractor to repair,
replace, or redo defective works without extra cost.
➢ This provision is critical for quality assurance and is typically enforced through
Inspection and Test Plans (ITPs) with defined hold points.
 Works to be Open to Inspection
➢ Most contracts now adopt Inspection & Test Plans (ITPs):
❑ Hold points (work cannot proceed until approval is given, e.g., reinforcement
check before concreting).
❑ Witness points (engineer may witness testing, but work can continue if they
are absent).
❑ Surveillance checks (random quality checks at any stage)
➢ Negotiation Point:
• Notice Period for Inspection: The employer should provide reasonable notice
(e.g., 24–48 hours) before attending inspections. This prevents work delays.
• Definition of Critical Hold Points: Both parties should agree in advance on
the activities requiring mandatory inspection (like pile load testing,
waterproofing, or welding joints) so that expectations are clear.
 Works to be Open to Inspection
➢ Difference Between Hold Point & Witness Point

Aspect Hold Point (HP) Witness Point (WP)

Work can proceed after
Work cannot proceed until
Approval Needed giving notice, even if the
the engineer approves.
engineer is absent.
Higher risk activity (e.g., Lower risk activity (e.g.,
Risk reinforcement check slump test, material
before concrete pour). sampling).
Optional/at engineer’s
Control Level Mandatory inspection.
discretion.
Contractor must
Employer/Engineer must
Responsibility document and proceed
attend.
responsibly.
 11. Covering Up the Work
➢ No work should be covered, concealed, or hidden without prior
inspection/approval.
➢ If done, contractor may be asked to uncover at his own cost for verification.
➢ For example, underground utilities, foundations, or concealed electrical
conduits must be checked before being backfilled or plastered. If the contractor
covers such work without approval, they may be ordered to uncover it at their
own expense.
➢ Negotiation Point:
• Provisional Covering Option - Temporary covering of work for operational
reasons
 Covering Up the Work
➢ Benefits of the Clause

Benefit Explanation
Contractors cannot cut corners,
Prevents Malpractice avoiding poor workmanship or cost-
saving shortcuts.
Hidden defects, if discovered later,
Avoids Future Disputes often lead to costly disputes or
litigation.
Confirms adherence to design
Ensures Compliance specifications, safety standards, and
codes.
Protects Owner and Ensures that critical infrastructure
Stakeholders elements are installed correctly.
12. No Compensation for Curtailment or Alteration of Work
➢ This clause allows the employer to alter, reduce, or omit portions of the work
as per project requirements, without being liable for compensation beyond
payment for actual executed quantities.
➢ Employer may omit or reduce quantities or re-sequence the work. Contractor is
paid for actual executed quantities; no lost-profit claim for omissions unless
contract allows.
➢ For instance, if the scope is reduced from 10,000 m² of plastering to 8,000 m²,
the contractor is only paid for 8,000 m². However, the contractor cannot claim
lost profit for the omitted work.
➢ This provision offers flexibility to the employer but must be exercised fairly to
avoid disputes, especially in cases where omitted work is awarded to another
contractor.
➢ Negotiation Point: Contractor claims lost profit and proportionate overhead
recovery for the omitted work. Employer agrees to a partial compensation
settlement to maintain fairness.
 13. Labour Laws
➢ The labour-laws clause requires the contractor to comply with all applicable
labour and social-security legislation, government notifications and local
regulations for the full duration of the works and any defects/liability period.
➢ This typically includes the Contract Labour (Regulation & Abolition) Act (for
India), Minimum Wages Act, Payment of Wages, Employees’ Provident Fund
& Miscellaneous Provisions Act, Employees’ State Insurance Act, Shops &
Establishments rules (if applicable), safety and welfare provisions (statutory
first-aid, drinking water, sanitation, rest shelters), and prohibitions on child
labour.
➢ The clause places obligations on the contractor to maintain statutory registers,
issue wage slips and payslips, submit returns, procure and display statutory
notices, arrange medical checks and safety training, and provide
insurance/compensation for workmen.
 Labour Laws
➢ From a contractual perspective the clause usually contains an indemnity in
favor of the employer—contractor will hold the employer harmless against
fines, penalties or liabilities arising from the contractor’s failure to comply.
➢ For effective claims and compliance the contractor must maintain labour
deployment registers, muster rolls, wage disbursement records, PF/ESI
receipts, and accident/incident reports; these records form the primary evidence
in any dispute about compliance or liability
➢ Negotiation Point: o Specify contractor responsibility, subcontracting rules,
and indemnity clauses.
 14. Method of Measurement of Completed Work
➢ Accurate measurement of work is fundamental to payment.
➢ This clause specifies the method and standard of measurement to be adopted,
such as the Indian Standard, CPWD specifications, or international codes.
➢ For example, RCC is measured in cubic meters, plastering in square meters,
and reinforcement in kilograms. Clear rules on deductions for openings, laps,
and wastage avoid disputes. Joint measurement by employer and contractor
representatives, recorded in Measurement Books (MBs), ensures transparency.
➢ Negotiation Point: Agree on measurement standards.
15. Materials and Stores Supplied by Employer/owner
➢ Where the employer provides specified materials or stores (cement,
reinforcement, bitumen, specialized components) the clause sets out issue rates,
storage, accounting and usage rules.
➢ The contractor is normally required to: (a) take delivery on a receipt note, (b)
store materials in secure conditions and at his own cost unless employer
provides a store, (c) use issued materials only for the contracted works, (d)
maintain consumption statements and return unused items, and (e) permit
inspection/testing and accountability checks by the engineer.
➢ Financially, the issue rate is used to debit consumption to the contractor’s bills
and any theft, wastage above acceptable norms or misuse is recoverable at the
issue rate plus penalties.
➢ Good practice requires a signed material receipt and joint reconciliation record
at intervals to prevent later disputes.
➢ Negotiation Point: Agree on issue rates, storage responsibility, and recovery
for wastage.
 16. Alteration in Specifications and Design
➢ The alteration clause grants the employer or engineer the right to vary
specifications, quantities, sequence or design to reflect site realities, regulatory
requirements or owner preferences.
➢ Variations can be additions, deletions, substitutions or changes in sequencing
and are a normal feature of complex projects.
➢ The clause sets out (a) the contractor’s obligation to execute variations, (b) the
valuation methodology (use contract rates, derived rates or analyses), and (c)
entitlement to time extension and, where applicable, compensation.
➢ Good drafting defines the order of precedence for valuation (contract rate →
similar item → schedule of rates → analysis/dayworks) and requires prior
written variation orders except in emergencies. The contractor must serve
timely variation claims with price breakdowns, impact on resources and
programme; the engineer should promptly issue variation orders to avoid CE
(claim escalation).
➢ Failure to adequately define valuation and timing can lead to protracted
disputes.
 Alteration in Specifications and Design
➢ Example: Mid-project the client requests higher-grade facade glazing. The
engineer issues a variation order; the contractor pricing uses vendor quotations
plus a negotiated markup and receives a 30-day EOT for the glazing lead time.
➢ Alteration in Specifications and Design
➢ Negotiation Point:
• Agree process, valuation method, and timeline for design changes.
• Example: Revised foundation design → fixed rate increase of 15%.
 17. Drawings and Specifications
➢ This clause requires the contractor to execute the works in strict accordance
with approved drawings, technical specifications and any subsequent issued
revisions.
➢ It mandates the contractor to review drawings before mobilization, verify on-
site dimensions and report conflicts or discrepancies promptly.
➢ The clause typically provides that the engineer may issue additional detail or
working drawings as shop drawings and that only the latest revision governs
execution.
➢ It also stipulates the contractor’s responsibility to produce “as-built” drawings
and operation/maintenance manuals at completion.
➢ Major disputes arise when contractors proceed on superseded drawings or
ignore shop-drawing processes; contractual protection demands that any
variance from issued drawings be formally approved in writing by the engineer.
 Drawings and Specifications
➢ A good implementation practice is a drawing revision log and a formalized
shop-drawing submission/review schedule integrated with the programme.
➢ Example: A structural reinforcement detail in the issued drawing is later revised
for larger bars; the contractor executes the new detail only after receiving
written approval of the shop drawing and cost/time implications
➢ Negotiation Point:
• Specify latest revision binding; contractor’s approval timeline.