How to Review a Construction / Works Contract in India

A construction or works contract decides who pays when a project runs late, who absorbs a spike in steel or cement prices, and how much money the contractor never sees until the building actually works. Most site disputes in India do not turn on the drawings. They turn on four clauses read too quickly at signing: price and escalation, extension of time, liquidated damages for delay, and retention. This guide is published by Adira, which makes contract review and CLM software, so we have a commercial stake in you getting good at this, but it is written to stand on its own. It walks through a works contract clause by clause, with the Indian statutory position on the clauses that end up in court.

What this contract actually does

A works contract is a hybrid: the contractor supplies both labour and materials, and property in those materials passes to the employer as the work proceeds, embedded in a building, road, or plant. Section 2(119) of the CGST Act, 2017 defines a works contract as "a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract." Source: Section 2(119), CGST Act, 2017. Under GST the whole bundle, labour, materials, and overheads, is deemed a single supply of service, so splitting a works contract into a separate "material" bill and "labour" bill to save tax does not work the way people assume.

Two pricing models dominate Indian practice. A lump-sum contract fixes one price for defined scope, common in turnkey and EPC work, and pushes quantity risk onto the contractor. An item-rate (BOQ) contract fixes a rate per unit of work against a Bill of Quantities, common in CPWD, PWD, and most government tenders, and pays on actual measured quantities. The choice changes how variations, escalation, and payment disputes play out.

Clause by clause: what to check

Scope of work and the BOQ. The scope clause and BOQ together define what "complete" means. In an item-rate contract the BOQ is the pricing mechanism: every line needs a description, unit, quantity, and rate that can be re-measured on site without argument. A scope that says "as per drawings" with no BOQ, or a BOQ line marked "as required" with no quantity, is where "was this included in the price" disputes are born. Test: pick five BOQ lines at random, check each has a measurable unit and rate.

Price and escalation. If lump-sum, check whether re-measurement is allowed for a defined list of "provisional" items when quantities differ from the drawings. If item-rate, check whether rates are fixed for the full duration or subject to escalation. Construction is the classic case for escalation: long duration, exposure to cement, steel, and labour costs that move on their own schedule. A workable clause names an index (WPI for materials, a stated labour index) and a formula, not "price to be revised as mutually agreed." Our price escalation clause guide covers the certainty test courts apply to these formulas.

Payment and running account (RA) bills. Construction payment runs on RA bills, periodic claims certified against work actually measured, not a flat instalment schedule. Check the certification timeline, the payment timeline after certification (commonly 15 to 30 days), and what happens on a partial dispute: whether the undisputed portion is released while one line item is contested, or the whole bill sits until resolved. Silence on that last point routinely stalls an entire payment cycle over one disputed line.

Milestones and completion. Milestones should be dated and tied to a physical, verifiable state, "RCC structure up to plinth level complete," not a vague percentage. Two completion states are often conflated: practical completion (usable, minor items remain; triggers handover and the defects liability period) and final completion (every defect closed, final bill settled). A contract defining only one leaves the retention release date and warranty start both open to argument.

Extension of time (EOT) and delay. An EOT clause lets the completion date move without penalty when delay is caused by the employer, force majeure, or another qualifying event, not the contractor's own default. Check for a defined list of qualifying events, a notice period (commonly 7 to 14 days from the delaying event), and whether granted EOT suspends LD for that period or merely moves the date without addressing money already accrued. A clause leaving EOT solely to the employer's discretion, with no criteria, is structurally one-sided.

Liquidated damages for delay. LD for delay is the most litigated clause in Indian construction contracts, governed by Section 74 of the Indian Contract Act, 1872: "the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named." Source: Section 74, Indian Contract Act, 1872. In ONGC v Saw Pipes Ltd, (2003) 5 SCC 705, the Supreme Court held that once parties have genuinely agreed a pre-estimated LD figure, the party relying on it need not separately prove the actual loss suffered. That cuts both ways: a proportionate LD tied to a real cost driver is easier to enforce in full; a flat, uncapped, or arbitrary figure invites a court to reduce it. Our liquidated damages guide covers the fuller case law on when courts reduce an LD figure. In practice, construction LD is usually a percentage of contract value per week or day of delay beyond the EOT-adjusted completion date, capped, commonly 5 to 10%.

Defects liability period (DLP) and retention. The DLP is the window, typically 6 to 12 months after practical completion, during which the contractor fixes defects at its own cost. Retention money, commonly 5 to 10% held back from every RA bill, gives the employer leverage to make that happen, usually released in two tranches: part on practical completion, the balance after the DLP ends with no open defects. Source: retention money in construction, Onsiteteams, last verified 4 September 2026. Check whether the contract lets the contractor substitute a bank guarantee for cash retention (better for cash flow) and whether release is tied to an objective condition rather than unilateral employer sign-off.

Variations. A variation clause lets the employer instruct scope or specification changes after signing, usually paid at the BOQ rate for similar work or an agreed mechanism for new items. The trap is a clause requiring written instruction before any variation work starts, in a trade where verbal site instructions are routine. Insist on a workable process: written confirmation within a stated number of days of a verbal instruction, not "no payment without a prior written change order" enforced as an absolute bar.

Force majeure. This clause suspends performance, and usually LD, for events outside either party's reasonable control. In Energy Watchdog v CERC, (2017) 14 SCC 80, the Supreme Court held that force majeure is confined to events actually named in the clause, and commercial hardship, a sharp rise in input costs, does not by itself amount to force majeure or frustration under Section 56. A clause that lists real events, and states whether it triggers EOT, cost relief, or both, survives this scrutiny far better than one that just says "force majeure" undefined.

Dispute resolution. Almost every Indian works contract routes disputes to arbitration under the Arbitration and Conciliation Act, 1996, sometimes after a mandatory conciliation step. Check the seat, the number of arbitrators, and whether a government-side nominee can sit as arbitrator, a practice courts have restricted where the arbitrator has a material interest in the dispute.

Performance and advance bank guarantees. A performance bank guarantee (PBG), typically 5 to 10% of contract value, secures completion; an advance bank guarantee (ABG) secures repayment of a mobilisation advance. Both are usually unconditional and on-demand: the bank pays on the employer's written demand alone, without adjudicating the underlying dispute. Indian courts generally refuse to injunct encashment of an unconditional bank guarantee except in narrow cases like established fraud, so treat a BG as close to cash and negotiate its trigger conditions, not its enforceability.

India-specific notes

The GST rate on a works contract depends on project type, commercial, affordable housing, and government works have carried different rates at different times, so check the current notification rather than assuming one applies. If the works contract sits inside a residential project, Section 3 of the Real Estate (Regulation and Development) Act, 2016 requires the promoter to register with the state RERA authority before booking, selling, or advertising units, subject to a small-project exemption of land under 500 square metres or up to eight apartments. Source: RERA, 2016, India Code. This duty sits on the promoter, but a contractor on a RERA project should confirm registration, since a promoter's RERA breach can cascade into payment pressure downstream.

Red flags

Normal	Red flag	Why it matters
BOQ lines have a stated unit and quantity	BOQ has "lump sum" or "as required" against items that should be measured	Converts a re-measurable price into a fixed guess, source of scope disputes
Escalation tied to a named index and formula	"Price subject to revision as mutually agreed"	Not calculable; no leverage to force a revision
EOT has defined qualifying events and a notice period	EOT granted solely at employer's discretion, no criteria stated	One-sided; employer-caused delay can still attract LD on paper
LD is a rate per week/day, capped (commonly 5-10%)	LD is a flat uncapped figure, or exceeds contract value	Invites reduction under Section 74; ONGC v Saw Pipes protects a genuine pre-estimate, not an arbitrary number
DLP release tied to an objective snag-list closure, BG substitution allowed	DLP release left to unilateral employer sign-off, cash retention only	Retention can be held indefinitely, contractor working capital locked up
Force majeure lists specific events and their effect	Force majeure clause undefined, copied from a non-construction template	Energy Watchdog confirms courts read only the events actually listed
Arbitrator appointment is neutral, seat named	Employer's own nominee is sole arbitrator, no seat stated	Independence and enforceability both weaken

Bad clause, better clause

Bad: "In the event of delay in completion of the Works beyond the Completion Date, the Contractor shall pay the Employer liquidated damages at the rate determined by the Employer, and the Employer's decision on any extension of time shall be final and binding on the Contractor."

What is wrong: no stated LD rate or cap, inviting a court to disregard the figure, and EOT decided unilaterally by the party who benefits from denying it.

Better: "If the Contractor fails to achieve Practical Completion by the Completion Date (as adjusted under Clause [EOT]), the Contractor shall pay liquidated damages of 0.5% of the Contract Value per week of delay, capped at 10% of the Contract Value. The Contractor shall be entitled to an extension of the Completion Date, on written notice given within 14 days of the delaying event, for delay caused by the Employer, force majeure, or instructed variations; such extension shall be granted or reasoned in writing within 14 days of the Contractor's notice."

What changed: the LD rate is calculable and capped, giving it a real shot at surviving Section 74 scrutiny, and EOT now has defined triggers, a notice mechanism, and a response deadline.

How it interacts with related clauses

Liquidated damages and price escalation carry enough case law for their own pages: the fuller Section 74 analysis is in our liquidated damages guide, and the certainty test for escalation formulas is in our price escalation guide. Indemnity and insurance sit alongside LD to cover third-party and property damage separately from delay, check they are not stacked with LD for the same event.

You can mark up an EOT trigger, an LD rate, or a variation clause directly in a construction contract draft, for free, using Weave, before you send it back for negotiation.

US and global contrast

US and UK construction forms (AIA, JCT, NEC, FIDIC) run on broadly similar mechanics, EOT, LD, retention, defects liability, but enforceability differs sharply from India's. In common law jurisdictions, an LD clause is enforceable in full only if it was a genuine pre-estimate of loss at signing; if a court decides it was designed to punish, the whole clause can fail as an unenforceable penalty, all or nothing. India's Section 74 has no such binary: every named sum is simply capped at reasonable compensation, and a court can award a reduced figure rather than strike the clause out. US "retainage" is usually 5 to 10% too, but many US states cap it by statute with release timelines the contract cannot override; India leaves retention almost entirely to contract terms.

The construction contract review checklist

1. Pricing model stated clearly, lump-sum or item-rate, with a BOQ that has real units and quantities?
2. Escalation, if any, tied to a named index and formula, not "as mutually agreed"?
3. RA bill certification and payment timelines stated in days, with a rule for partial disputes?
4. Practical and final completion both defined, tied to a physical, verifiable state?
5. EOT has defined qualifying events, a notice period, and a response deadline?
6. LD stated as a calculable rate, capped, not stacked with an uncapped indemnity for the same delay?
7. DLP duration and retention percentage stated, with a BG substitution option and objective release trigger?
8. Force majeure lists specific events and states its effect on time and cost?
9. Arbitration seat and arbitrator-independence addressed; RERA registration confirmed if residential?

FAQ

Is a construction contract the same as a "works contract" for tax purposes? Mostly yes for anything involving immovable property. Section 2(119) of the CGST Act, 2017 defines a works contract as building or construction work on immovable property where materials pass to the employer during execution, and GST treats the whole thing as one supply of service.

Can an employer set liquidated damages at whatever rate it wants for construction delay? No. Whatever the contract states is a ceiling, not an automatic entitlement. Under Section 74, a court can reduce an LD figure to "reasonable compensation" if it looks arbitrary, though ONGC v Saw Pipes lets a genuine, capped, pre-estimated rate stand without demanding separate proof of the exact loss.

Does a rise in cement or steel prices count as force majeure? Generally no. Energy Watchdog v CERC held that force majeure is limited to the events actually named in the clause, and a cost increase alone is commercial hardship, not force majeure, unless your specific clause was drafted to cover it.

Can I stop a bank guarantee from being encashed if I dispute the underlying claim? Rarely. Indian courts generally will not injunct an unconditional, on-demand bank guarantee just because the underlying dispute is unresolved, except in narrow situations like established fraud or irretrievable injury.

This guide gets you to a working understanding of what a construction or works contract covers in India, and the statutory backdrop, Section 74, GST, RERA, that shapes the clauses that matter most. It does not tell you whether your specific LD rate, escalation formula, or retention clause would survive challenge on your facts, that depends on the contract as a whole, and is not legal advice. Talk to a lawyer, and where relevant a chartered accountant on the GST position, before you sign, rely on, or dispute a construction contract.