CONTRACTS AND CLAIMS

MANAGEMENT
247002CCM | MBA ACM
COMPREHENSIVE UNIT-WISE NOTES
Dr. Prachi Vinod Ingle | School of Construction | NICMAR
UNIT 1 — Introduction to Contract Management
1.1 What is a Contract?
A contract is a legally enforceable agreement between two or more parties who are legally capable
(not a minor, of sound mind, not under influence of drugs/alcohol). It involves an exchange of
goods, services or efforts over a specific time period.
Key point: It is a relation, not just an action. An oral contract is valid, but written is preferred. All
contracts must be enforceable by law — not all agreements are contracts.

1.2 Indian Contract Act, 1872 (ICA)

• Enacted on 25 April 1872; operative from 1 September 1872
• Originally had 266 sections in 11 chapters
• India follows Common Law System (inherited from British rule) — court decisions from the
past (judicial precedents) form a major source of law
• Civil Law System (e.g. China, European countries) — laws are written as statutes by
government

1.3 Elements of a Valid Contract

• Offer: Clear and specific offer of services/goods
• Acceptance: The other party agrees without changes
• Consideration: Both parties exchange something of value (money, service, ownership)
• Capacity: Both parties must be legally capable (not minor, not insane)
• Lawful Object: The purpose must be legal
• No Invalid Defense: No force, fraud, misrepresentation

1.4 Types / Classification of Contracts

By Nature of Agreement
• Quasi-Contract: Not a real contract, but law treats it like one to prevent unjust enrichment.
E.g. goods left by mistake at someone's house — they must pay.
• Unilateral: Only one party is bound. E.g. 'Reward for finding lost dog.'
• Bilateral: Both parties make promises to each other. Most construction contracts are
bilateral.

By Validity
• Valid Contract: Enforceable by law
• Void Contract: Not enforceable (illegal object, expired time)
• Voidable Contract: Enforceable at the option of one party (if signed under pressure)
• Unenforceable Contract: Valid but court won't enforce (e.g. oral contract for property)

By Form
• Contracts by Deed: Formal legal document — e.g. property transfer, title deeds
• Simple Contracts: Both parties have mutually agreed
• Express Contracts: Written or oral, clearly stated
• Implied Contracts: Implied by actions — e.g. continuing to use a service implies agreement
to pay

Other Types
• Contingent Contract: Only becomes effective if a specific event happens — e.g. fixing steel
price in case of inflation
• Collateral Contract: A side contract supporting the main one — e.g. supplementary work
• Contract of Indemnity: Protection against loss — e.g. insurance; defective work liability
1.5 Key Legal Concepts
• Quantum Meruit: 'The amount deserved' — if someone does work without a contract or
without a price being fixed, they can claim a reasonable sum based on law of restitution
• Doctrine of Promissory Estoppel: If a party makes a promise and the other relies on it, the
first party cannot go back on the promise even without formal consideration
• Letter of Intent (LoI): Expresses the intention to enter into a contract but is not itself a full
contract — however, if terms are clear enough, it can be treated as one
• MOU: Memorandum of Understanding — both parties agree to begin a program; not
necessarily binding unless essential terms are included

1.6 Why Construction Needs Contracts

• Construction is unique, complex, involves multiple sub-contractors (vertical and horizontal
layers)
• Exchange takes place in the future — price is fixed today, work done later — creating
uncertainty
• Contracts serve two purposes: (1) Tie down the future (predictability), (2) Allocate risks

1.7 Need / Importance of Contracts

• Describes scope of work (drawings, specifications, money)
• Establishes time frame for completion
• Establishes cost and payment procedures
• Sets out obligations and relationships of parties
• Minimises disputes
• Improves economic return on investment

1.8 Components of a Construction Contract

• Parties involved (names, addresses, contacts)
• Scope of work (drawings, specifications)
• Duration (start date, end date, milestones)
• Payment terms (amount, schedule, taxes)
• Variations/Change Orders procedure
• Penalties for non-compliance
• Dispute resolution clause
• Termination clause
• Force Majeure clause
• Signatures and witnesses

1.9 Contract Management Lifecycle

Contract management is the structured process of managing a contract from creation through
execution to completion. Also known as the Contract Management Lifecycle (FIDIC definition).
Three main phases:

A. Pre-Award (During Tendering)

• Study contract documents, clauses, conditions
• Assess legal, financial, and execution implications
• Clarify doubts in pre-bid meetings
• Investigate site conditions
• Respond to earnest money requirements

B. Award (On Contract Award)

• Carefully review and agree all terms
 • Submit Performance Security / Bank Guarantee
• Obtain Construction All Risk (CAR/EAR) insurance
• Submit detailed planning schedule (men, material, equipment)
• Raise invoices for mobilization advance
• Conduct post-award site investigation

C. During Execution
• Monitor and report progress (weekly/monthly)
• Prepare monthly Running Account (RA) bills based on actual measurements
• Identify and record variations in scope/quantity
• Issue notices for Extension of Time, claims
• Maintain Project Diary (weather, delays, instructions, labour, materials)

D. On Completion
• Reconcile all bills and unpaid invoices for final billing
• Settle claims for variations and changed conditions
• Prepare dispute resolution presentations if needed
• Prepare formal contract closure report

1.10 Roles and Responsibilities of Main Parties

1. Employer (Client)
• Provide project site and access
• Finance the project and make timely payments
• Appoint the Engineer
• Issue variation orders through Engineer
• Take over completed works upon certification

2. Contractor
• Execute works as per specifications and drawings
• Maintain quality standards and meet timelines
• Comply with health and safety regulations
• Submit claims following contract procedures
• Rectify defects during Defects Notification Period

3. Engineer
• Administer the contract impartially
• Issue instructions to contractor on behalf of employer
• Oversee quality assurance
• Issue payment certificates (interim and final)
• Resolve disputes before formal escalation

1.11 Legal, Contractual, and Tort Liabilities

• Legal Liabilities: Obligations imposed by law — building codes, labour laws, environmental
laws, health and safety standards
• Contractual Liabilities: Obligations from the contract — scope of work, time, quality,
payments. Delays lead to liquidated damages; defects lead to rectification obligations
• Tort Liabilities: Responsibility for damage/injury to third parties due to negligence —
property damage to neighbours, personal injuries on site

1.12 Enablers of Good Contract Management

• Read and understand the contract thoroughly — every word
 • Identify all documents that form the contract
• Plan contract management from the start of procurement
• Change control — no changes without proper authorization
• Maintain consistency across all contract documents
• Two-way communication — mutual trust with client
• Monitor progress and take corrective actions
• Document everything — maintain records at every stage

1.13 Compliance with Legal Requirements (India)

• Indian Stamp Act 1899: Contracts must be on stamp paper of adequate value (state-wise)
• Indian Registration Act 1908: Agreements for immovable property must be registered
• BOCW Act 1996: Building and Other Construction Workers Act — labour protection
UNIT 2 — Standard Form of Contracts & Contract Interpretation
2.1 Role of Contracts in Construction
• Defines scope of work, responsibilities, roles (e.g. architect's role)
• Defines processes, payment terms, completion dates, liquidated damages
• Forms of compensation — lump sum, cost-plus, incentives
• Prepared with lawyers; signed by authorized representatives

2.2 Tiers of Contracts in Construction

Tier Structure
• Tier 1 (Main Contract): Employer ↔ Main Contractor — overall management responsibility
• Tier 2 (Subcontracts): Main Contractor ↔ Trade Specialists (electrical, plumbing, HVAC)
• Tier 3: Subcontractors ↔ Sub-subcontractors or individual tradespeople

Types of Contracts in the Web

• Prime Contract: Between client and main contractor — foundation for risk allocation and
claims
• Subcontract: Main contractor to sub for specific portions — 'flow-down' clauses pass
obligations
• Supply Contract: For materials and equipment — governs material delays and warranty
claims
• Consultancy Contract: With architects, engineers, PMs — governs design changes and
professional liability
• Labour Contract: With labour agencies — governs labour disputes and safety compliance

2.3 Construction Contract Documents

• Conditions of Contract: General (GCC) and Special (SCC) — scope, payment, arbitration,
safety; GCC covers everything standard, SCC is project-specific
• Drawings: Graphical representation of all design elements
• Specifications: Written description of work — Open (generic standards), Closed/Proprietary
(specific brands), Standardized (MORTH, IRC codes)
• Addenda: Modifications during bidding period — interpretations, changes, deletions; must
be signed by bidder
• Agreement: The formal document signed by both parties making the contract binding
• Modifications: Written amendments or change orders signed by both parties after contract
award

2.4 Priority of Documents

When there is a conflict between documents, a priority order governs. FIDIC Clause 1.5 order of
precedence:
• (a) Contract Agreement
• (b) Letter of Acceptance
• (c) Letter of Tender
• (d) Particular Conditions Part A — Contract Data
• (e) Particular Conditions Part B — Special Provisions
• (f) General Conditions
• (g) Specification
• (h) Drawings
• (i) Schedules
• (j) JV Undertaking (if contractor is a JV)
 • (k) Any other documents
CPWD Priority: Schedule of Quantities > Particular Specification > Drawings > CPWD
Specifications > BIS.

2.5 Standard Form vs Bespoke Contract

Aspect Standard Form Bespoke Contract
Drafted by One party (or industry body) Negotiated between parties
Modification No modification — take it or leave it Fully customised to project needs
Also called Adhesion / Boilerplate contract Tailored contract
Best used for Most standard projects Complex, unique projects
Disadvantage May be one-sided Time-consuming and costly to draft

2.6 Standard Forms Used in India

Government/Public Sector
• CPWD (Central Public Works Department) — most widely used; came into existence July
1854
• MES (Military Engineering Services) — since 1923; for Army, Navy, Air Force works
• Railways, State PWDs, Irrigation Departments
• NHAI, Metro Rail, BRO, NPCC, NBCC, IOC

International Standards
• FIDIC: Federation Internationale des Ingenieurs Conseils — founded 1913; 86+ member
countries; secretariat in Geneva, Switzerland
• NEC: New Engineering Contract — UK-based
• JCT: Joint Contracts Tribunal — UK construction

2.7 FIDIC Contract Suite

FIDIC is widely recognised as the most balanced international contract form. Used by World Bank,
Asian Development Bank for funded projects.
Features: Balanced risk allocation, widely accepted, effective with clear provisions, supported by
development banks.

FIDIC 1999 — Four Main Books

Book Full Name Suitable For Design By Payment Basis
Red Book Conditions of Contract for Building/engineering Employer Bill of
Construction works Quantities
(measured)
Yellow Plant and Design-Build Electrical/mechanical Contractor Lump Sum
Book Contract plant; design-build (milestones)
Silver EPC/Turnkey Contract Power plants, Contractor Lump Sum
Book process factories, (complete) (fixed price)
infrastructure
Green Short Form of Contract Small, simple, low- Either party Lump Sum or
Book value, short-duration Measured
works

Other FIDIC Books

 • White Book: Client-Consultant Agreement — for pre-investment studies, design, contract
administration
• Blue/Turquoise Book: For dredging and reclamation projects
• Pink Book: Derivative of Red Book — for multilateral development bank-funded projects
(World Bank, EBR, AfDB)
• Gold Book: Design, Build and Operate (DBO) — 20-year contract period

FIDIC Red Book — Key Clauses

• Clause 1: General Provisions | Clause 2: Employer | Clause 3: Engineer | Clause 4:
Contractor
• Clause 8: Commencement, Delays, Suspension | Clause 11: Defects | Clause 12:
Measurement
• Clause 13: Variations | Clause 14: Payment | Clause 15: Termination by Employer
• Clause 16: Suspension/Termination by Contractor | Clause 17: Care of Works | Clause 18:
Exceptional Events
• Clause 19: Insurance | Clause 20: Claims | Clause 21: Disputes and Arbitration

2.8 Rules of Contract Interpretation

Interpretation = finding the true meaning the parties intended. Construction = drawing conclusions
from the spirit of the text.

Key Rules
• Rule 1: Give meaning that validates the contract, not one that makes it void
• Rule 2: Handwritten/written parts override printed parts in case of conflict
• Rule 3: Ignorance through negligence does not excuse a party from obligations — read the
contract fully
• Rule 4: Words free from ambiguity are given their natural, ordinary meaning
• Rule 5: Conduct of parties (how they behaved in practice) is given weight in interpretation
• Rule 6: Intent of parties at the time of signing is considered
• Rule 7: Contract must be read as a whole — not clause by clause in isolation
• Rule 8: Every word/clause must be given effect — no clause should be rendered
meaningless
• Rule 9: Court will not supply terms that the contract is silent about (unless implied terms
apply)
• Rule 10: Alterations before signing are binding; unilateral changes after signing by one party
do not have effect — all changes must be initialled by both parties
• Rule 11: Ambiguous phrases — subsequent conduct of parties becomes relevant to
determine meaning
• Rule 12: If two interpretations are possible, the one that gives effect to all clauses is
preferred
• Rule 13: Conflict between earlier and later clause — earlier clause generally prevails
• Rule 14: An invalid clause does not void the whole contract unless it is inseparable from the
core transaction
• Rule 15: Headings and marginal notes cannot override clear clause language — they are for
reference only

Special Doctrines
• Contra Proferentem Rule: Ambiguous language is interpreted against the party who
drafted the contract. Used as last resort only.
• Ejusdem Generis Rule: 'Of the same kind' — general words following a list of specific
things are limited to the same class. E.g. 'cyclone, earthquake and other disasters' — 'other
disasters' means natural ones, not man-made.
 • Doctrine of Implied Terms: Terms not written in contract but understood as necessary to
make the contract work — e.g. drawings to be supplied in reasonable time
• Doctrine of Estoppel: A party who makes a representation and the other relies on it cannot
later deny it. E.g. employer says no penalty for delay, contractor relies on this — employer
cannot impose LD.
• Doctrine of Promissory Estoppel: A clear promise acted upon by the other party is binding
even without formal consideration
• Doctrine of Public Policy: Agreement is void if its object is harmful to public interest or
morality

Exemption Clauses
Courts are reluctant to allow parties to exempt themselves from liability when it would be
unconscionable (unfair). Exemption clauses are given less weight when bargaining power is
unequal.

Oral Evidence in Interpretation

• Generally not allowed: To add to, vary, or clarify clear written contract language
• Allowed when: Language is clear but meaningless with reference to facts; language fits two
different situations; technical or foreign words need explanation; a third party has a separate
oral agreement

Words vs Figures / Clerical Errors

• Words override figures in a contract
• Obvious clerical errors are corrected by courts — e.g. 'sock' instead of 'rock'
• Deletions before signing are ignored; alterations before signing are binding
UNIT 3 — Contract Clauses on the Management of Projects
3.1 What are Red Flag Clauses?
Red Flag Clauses (also called Killer Clauses or Dispute-Prone Clauses) are contract provisions that
significantly affect rights, obligations, and risks. Every clause must be read and understood before
signing. These are more prone to disputes and financial impact.

3.2 Time for Completion

• Contracts must clearly state the start date and end date (number of calendar or working
days)
• Calendar days — includes Saturdays, Sundays, and holidays — preferred as it avoids
confusion
• Working days — exclude Sundays, holidays, bad weather days, acts of the owner — can
cause disputes

Commencement Date
• CPWD Cl. 5: Start date = date specified in Schedule F or date site handed over, whichever
is later
• FIDIC 1999 Cl. 8.1: Engineer gives minimum 7 days' notice; commencement within 42 days
of Letter of Acceptance
• FIDIC 2017 Cl. 8.1: Same, but 14 days' notice required

Completion Certificate
• Project is 'complete' when completion certificate is issued by the owner/engineer
• Substantial Completion = structure is usable for intended purpose even if minor items remain

3.3 Time as Essence of Contract

When contract says 'Time is of the Essence', completion on time is a fundamental obligation. Failure
to complete on time is a breach of contract.
• Indian Contract Act, Section 55: If time is essential, contract becomes voidable at the option
of the promisee upon breach
• If time is NOT essential, the contract does not become void on delay, but the promisee can
claim compensation for losses
• If client accepts late completion without notice, they waive the right to claim LD for that delay
• Time ceases to be essential when: there is a penalty clause for delay (not voidable, just
penalised), or when multiple extensions are granted

3.4 Damages — Liquidated and Unliquidated

Types of Damages
• Liquidated Damages (LD): Pre-agreed penalty amount per day/week of delay — written in
contract. No proof of actual loss needed. Must be a reasonable estimate of actual loss.
• Unliquidated Damages: Not pre-fixed; victim must prove actual loss in court or arbitration
Objective of damages: Put the injured party in the same financial position as if the breach had not
occurred. Compensate — not punish.

CPWD Clause 2 — Compensation for Delay

• Rate: 1.5% of contract value per month (calculated per day)
• Cap: Maximum 10% of tendered contract value
• Decision of authority imposing LD is final — not open to arbitration
• Milestone-based withholding: Amount earmarked for missed milestone withheld; released
when contractor catches up
 • No interest on withheld amounts

Early Completion Bonus — CPWD Clause 2A

• Bonus @ 1% per month (per day basis) if contractor completes early
• Maximum bonus: 5% of tendered value
• Paid with final bill; only applicable if mentioned in Schedule F

LD Calculation Formula
• Daily LD = Contract Price × LD rate per day
• Total LD (uncapped) = Daily LD × number of delay days
• LD Payable = min(Total LD, Cap)
• If EOT is granted: Net liable days = Actual delay − EOT granted

3.5 Extension of Time (EoT)

Extension of Time relieves the contractor from LD and termination for default when delay is caused
by events beyond the contractor's control.

CPWD Clause 5 — Grounds for EoT

• Variations ordered by employer
• Force Majeure events
• Abnormally bad weather
• Serious loss/damage by fire
• Civil commotion, strikes, lock-outs
• Delays by nominated subcontractors (despite contractor's best efforts)
• Delays by other contractors of the employer
• Non-availability of employer-supplied stores
• Breakdown of employer-supplied plant/equipment
• Suspension of work ordered by employer
• Any other cause beyond contractor's control (at discretion of authority)

EoT Not Allowed When

• Contractor's own failure to plan for materials, labour, or equipment
• Adverse weather that was reasonably foreseeable

Procedure to Request EoT

• Notify the engineer/owner in writing within the notice period specified in the contract
• Include specific facts: times, dates, places, supporting data about the cause of delay

3.6 Types of Project Delays

Delay Type Definition Contractor's Examples
Entitlement
Critical Delay Affects project EoT if excusable Delay in foundation
completion date or causing all subsequent
milestones delays
Non-Critical Does not affect No EoT Delay in landscaping
Delay completion — float when building not yet
available ready
Concurrent Delay Two+ delays at Shared/complex Owner late handover +
same time on responsibility contractor equipment
critical path breakdown
Excusable Delay Beyond EoT granted Force majeure, owner
contractor's control scope changes
 Non-Excusable Contractor's own No EoT, no money Poor planning,
Delay fault subcontractor failure
Compensable Caused by EoT + monetary Late drawings, design
Delay employer/owner compensation changes, delayed
payments
Non- Neutral event EoT only, no Floods, strikes, epidemics
Compensable beyond both parties money
Delay

3.7 Force Majeure

Force Majeure events are events beyond the control of both parties — natural disasters, epidemics,
wars, government lockdowns. These are excusable but usually non-compensable — contractor gets
EoT but no extra money. Labour not returning after festivals or subcontractor delays are NOT force
majeure.

3.8 Quality of Work, Defects and Maintenance

• Contractor must execute work exactly as per drawings and specifications
• Must appoint a qualified engineer for site execution
• All contracts include a 'Defects and Maintenance Clause'

Defect Liability
• Contractor must rectify defective work and replace inferior materials at own cost
• Defect Liability Period (DLP): Usually 6 months to 1 year after completion — longer for
complex/special works
• Contractor's obligation covers only defects discovered during DLP
• If contractor refuses to fix: Employer can fix at contractor's cost, reduce contract price, or in
extreme cases terminate and recover all sums paid

FIDIC Defect Clauses

• Clause 7.1: Proper workmanship, good practices, non-hazardous materials
• Clause 7.2: Submit material samples for engineer's approval
• Clause 7.3: Request for Inspection (RFI) before covering work; engineer must inspect or
waive
• Clause 7.4: 24 hours' notice before testing; engineer must attend or testing proceeds
without engineer
• Clause 7.5: Defect rejection: Engineer notifies; contractor proposes remedial work; engineer
approves within 14 days
• Clause 9: Tests after completion — minimum 21 days' notice; retesting if fails; price
reduction if fails again
• Clause 11: Defect Liability Period — employer can extend DLP by up to 2 years
• Clause 11.9: Performance Certificate issued within 28 days of DLP expiry
• Clause 11.11: Contractor must clear site within 28 days

3.9 Suspension of Work

Suspension is a temporary stoppage ordered by the employer/engineer — not a breach if done
under valid reasons (safety, site investigation, emergencies).

CPWD Clause 15 — Suspension

• Written order from Engineer-in-Charge required
• EoT = Actual suspension period + 25% extra (for remobilization)
 • If suspension exceeds 30 days: Contractor gets actual cost + 2% for indirect expenses
(within 15 days); no profit
• If suspension exceeds 3 months: Contractor can treat contract as terminated for that work;
gets compensation + 2% indirect expenses; no profit

FIDIC Clauses 8.8–8.12 — Suspension

• Engineer can suspend part or all works — must notify cause
• If cause is contractor's fault: No EoT, no compensation
• If cause is employer's fault: EoT + cost + profit
• If suspension exceeds 84 days: Contractor can request to resume; if not allowed within 28
days, can treat as omission or terminate

FIDIC Clause 16.1 — Contractor's Right to Suspend

• Unique clause: Contractor can slow down or stop work if employer/engineer fails in
obligations
• Contractor entitled to EoT + Cost + Profit
• If no corrective action, contractor can terminate without losing rights
Aspect CPWD (Cl. 15) FIDIC (Cl. 8.8–8.12 & 16.1)
Who can suspend? Only Engineer-in-Charge Engineer (8.8); Contractor if
employer defaults (16.1)
Time Entitlement EoT = suspension period + EoT = suspension period
25%
Cost Entitlement 2% indirect expenses; no profit Cost + profit (if employer fault)
Long Suspension >30 days: compensation; >3 >84 days: omission or
months: termination termination option

3.10 Termination of Contract

Grounds for Termination
• By Employer (Breach by Contractor): Non-performance, faulty work, failure to maintain
progress, persistent disregard of laws/instructions, financial insolvency. Employer can
terminate, take over work, or hire another contractor.
• By Contractor (Breach by Employer): Non-payment, unreasonable delay in project, failure
to provide site/drawings, financial insolvency of owner
• By Mutual Agreement: When both parties find it beneficial — e.g. contractor's financial
reversal or key personnel loss
• For Convenience (Public Contracts): Owner can terminate at any time in its best interest;
contractor gets payment for work done + reasonable profit + cancellation expenses
• Due to Impossibility: Impossible to perform due to circumstances beyond both parties (e.g.
government-protected site discovered, structure destroyed by fire before renovation)
UNIT 4 — Financial Procedure Clauses
4.1 Performance Guarantee (PG)
• Security deposit submitted by the contractor after tender acceptance, before work starts
• Protects the employer from improper performance, default, or misuse of employer-supplied
materials
• If contractor fails, security deposit is forfeited

CPWD Clause 1 — Performance Guarantee

• Amount: 5% of tendered value — irrevocable bank guarantee
• Submit within period in Schedule F from date of Letter of Acceptance
• Form: Cash (only <₹10,000), FDR, Banker's Cheque/DD, Bank Guarantee, Pay Order
(<₹1,00,000)
• Validity: Up to Scheduled Completion Date + 60 days; extended if contract period extended
• 50% of PG retained for maintenance work; released proportionately
• If contract is determined or rescinded, PG is forfeited

Security Deposit — CPWD Clause 1A

• Recovered from running bills at 2.5% deduction
• Released after defect liability period or after final bill is passed (whichever is later)

4.2 Measurement and Payment

Why Periodic Payments Matter
• Contractors should not finance large projects from their own funds — unfair
• If unpaid, contractor borrows at interest and adds it to tendered rates — cost ultimately
borne by employer
• Most contracts provide periodic (monthly) payments based on work done

CPWD Clause 6 — Measurement of Work

• Measurements recorded jointly in Measurement Books (MB) and signed with date
• If contractor absent despite 3 days advance notice, measurements deemed accepted
• Contractor must give 7 days' notice before covering any work
• MB recording is not conclusive proof of work quality — defects can still be pointed out

CPWD Clause 7 — Interim / Running Bills

• No running bill for work up to ₹20,000
• Bills submitted in triplicate on fixed date — if contractor fails, department prepares bills (no
interest claim)
• Payment within 10 working days (local), 15 days (outside headquarters)
• If payment delayed beyond 45 days after bill in order: Contractor entitled to simple interest
@ 7.5% per annum
• Interim payments are advances against the final bill — not evidence of quality acceptance
• Advance payments (pending measurements): Up to 75% of assessed work value; not for
foundation or finishing work

Retention Money
• Engineer withholds ~10% of monthly payments as retention
• Gives employer control over contractor; discourages abandonment near completion
• Used if contractor under-performs — in addition to security deposit

CPWD Clause 9 — Final Bill

 • Final bill must be submitted within 3 months of physical completion or within 1 month of
completion certificate, whichever is earlier
• No further claims allowed after final bill is submitted
Contract Value Payment Timeline
Up to ₹45 lakhs 2 months
₹45 lakhs to ₹2.5 crores 3 months
Above ₹2.5 crores 6 months

• Delayed beyond prescribed period: Simple interest @ 7.5% p.a. compounded annually

Payment at Reduced Rates (CPWD Clause 16)

• If work is not exactly as per specifications but is structurally sound and usable, engineer may
accept at reduced rates
• Example: Smooth concrete finish specified; rough surface with honeycombing — accepted
at reduced rate

4.3 Advances to Contractor

Mobilization Advance (CPWD Clause 10B)
• Up to 10% of contract value
• Requested within 1 month of work commencement order
• Paid in 2 or more installments (next on proof of utilization of earlier)
• Bank Guarantee from scheduled bank required
• Carries simple interest @ 10% per annum from date of payment
• Recovery starts from running bills after first 10% of gross work is done — full recovery
before 80% completion

Plant and Machinery Advance

• 5% of tendered value; 90% of new plant cost; 50% of depreciated value for second-hand
• Plant hypothecated to government — cannot be removed without permission
• Insurance required
• Interest @ 10% p.a.; 75% advance on arrival, 25% on commissioning

Secured Advance
• Advance on perishable, fragile, combustible materials at site
• Requires comprehensive insurance cover
• No advance on high-risk materials: glass, sand, petrol, diesel

4.4 Variations and Deviations

Definitions
• Variation/Extra Work: Work outside the original contract not included in the contracted
price — but within the framework of the contract
• Additional Work: Work necessarily required for contract completion but not intentionally
omitted
• Substituted Item: Original item modified — e.g. teak wood changed to sal wood
• Extra Item: Completely new item not in contract — e.g. aluminium windows instead of
timber

Causes of Variations
• Change in design, drawings, or specifications during execution
 • Change in quantity of items
• Change in scope of work
• Unforeseen circumstances at site
• Requirements of law or government authority instructions
• Failure of existing works

Why Variation Clauses are Necessary

• Construction is influenced by changing variables and unpredictable factors
• Without variation clause: Contractor cannot be forced to do extra work; employer cannot
omit work arbitrarily
• Variation clause gives employer the right to modify scope unilaterally, prevents contractor
from demanding excessive prices for extras
• Contractor protection: Entitled to price adjustment, EoT, and equitable compensation for
variation-related costs

CPWD Variation Clauses (12 & 12A)

• Engineer-in-Charge can order any alteration, addition, or modification in writing
• Contractor must carry out the variation on the same terms and rates as the main work
• If no rate exists: Contractor must notify within 7 days of order with proposed rate; if not
agreed, Engineer can cancel the variation order
• Time extension: In proportion to increase in cost due to variations — certified by Engineer

Deviation Limits
• CPWD: Deviation limit up to ±20% or ±25% per item before rate revision is triggered
• FIDIC: More than 10% variation in item quantity constitutes a variation entitling contractor to
new rates
• Drastic reduction (e.g. 80% of contract value cut) entitles contractor to claim loss of profit

Variation Pricing
• Substituted items: Agreement rate adjusted for market rate difference between original and
substituted material
• Extra items: Market rates prevailing at time of execution
• If parties disagree on rates: Arbitrator verifies reasonableness and awards accordingly

Variations Due to Unforeseen Circumstances

• If physical conditions are beyond contractor's control and were not foreseeable: Contractor is
entitled to compensation (decided by arbitration)
• If conditions were within contractor's control: Contractor bears cost; no claims entertained
• If owner provides incorrect data: Contractor entitled to compensation with proper
documentation
• If contractor misinterpreted specifications: Contractor is at fault; no extra payment

4.5 Differing Site Conditions (DSC)

Physical site conditions encountered during construction that are different from what was indicated
in contract documents or normally expected — typically sub-surface: soil, rock, groundwater, hidden
utilities.
• NOT considered DSC: Floods, hurricanes, labour shortages
• Before bidding: Owner must disclose available site information; contractor must inspect and
investigate
• To sustain a claim: Condition must be physical, unusual, different from reasonable
expectation, and must increase cost/time significantly
• Procedure: Contractor must notify owner in writing promptly and maintain separate cost
records
4.6 Price Escalation (Price Variation Clause)
Accounts for inflation in labour wages and material prices during the project. Escalation payment is
available only for work done within the stipulated contract period — NOT for extended period.

CPWD Formulae for Escalation

• Materials VM: 0.85 × Ri × (PM/100) × ((Mi − Mo)/Mo)
• Labour VL: 0.85 × Ri × (PL/100) × ((Li − Lo)/Lo)
• POL (Fuel) VF: 0.85 × Ri × (PF/100) × ((Fi − Fo)/Fo)
• Steel Vs: So × T × ((Si − So)/So)
• Cement Vc: Co × T × ((Ci − Co)/Co)
Where: Ri = Gross work value in the period; Mi, Li, Fi = Current indices; Mo, Lo, Fo = Base indices;
PM, PL, PF = Percentage of each component; T = Quantity used.
Base index = price index one month before commencement. Rolling index = monthly price index.
Price indices from All India Wholesale Price Indices (Ministry of Commerce).

4.7 Breach of Contract

• Total Breach: Complete failure to perform an obligation
• Partial Breach: Agreement broken only in part
• Anticipatory Breach: Party declares before performance that they are unwilling or unable to
fulfill the contract

Breach by Contractor
• Abandonment or failure to complete work
• Delay in completion
• Defective work
• Unauthorized subcontracting
• Failure to insure, employ qualified engineers, maintain labour reports
• Damage to property or work of other agencies
• Misappropriation of Schedule A materials (cement, steel)

Breach by Employer
• Failure to hand over site
• Delay in supplying drawings/designs/decisions
• Delay in supply of owner-provided materials
• Ordering wrongful suspension or interference
• Delayed payment of mobilization advance, RA bills, final bill
• Wrongful deduction of liquidated damages
• Wrongful termination of contract

Remedies
• For breach by contractor: Owner can: (1) rescind/terminate the contract, (2) take over and
complete as agent of contractor, (3) hire another contractor
• For breach by employer: Contractor can: claim damages for losses caused, rescind the
contract and seek full settlement including compensation for lost profit
UNIT 5 — Disputes and Claims Management
5.1 What is a Construction Claim?
A claim is a request for compensation not anticipated in the original contract terms. A disputed
change order is a claim. Accepted/signed change orders are NOT claims.
Contractor Claims Owner/Client Claims
Delay caused by client Delay by contractor
Extra work Poor quality work
Price escalation Failure to meet contract terms

5.2 Claims Management Process — 4 Phases

Phase 1: Claim Prevention
Best time to prevent claims is at pre-tender and contract formulation stage. After award, opportunity
to prevent claims ends.
• Clearly define scope of work
• Distribute required information to all parties
• Create a fair risk-sharing scheme
• Set realistic timelines
• Avoid bias in drafting conditions
• Include dispute resolution clauses

Phase 2: Claim Mitigation

Minimize the likelihood of claims throughout project execution.
• Clear scope, responsibilities, and risk allocation
• Fair contract terms with logical risk sharing
• Risk management plan
• Early dispute handling mechanism (Dispute Review Board)

Phase 3: Pursuing Claims

• Claim Identification: Analyse scope of work vs. contract to identify extras or delays. Clearly
describe what is extra and why.
• Claim Quantification: Calculate additional cost and/or time extension using critical path
analysis, direct and indirect cost breakdown.
• Claim Notification: Inform the engineer within the contract-specified timeframe — failure to
notify leads to rejection of claim.
• Claim Substantiation: Support with contract clause references, drawings, site records,
vouchers, letters — revalidate periodically for time-related claims.
• Pricing the Change: Provide detailed cost breakdown for negotiation — can be forward
pricing (before work) or post pricing (during/after work).

Phase 4: Claim Resolution

Step-by-step process to resolve the claim. If agreement is reached, claim becomes a change order.
If not, proceeds to negotiation → mediation → arbitration → litigation.

5.3 Components to Calculate in Claims

• Extension of Time (EoT)
• Prolongation costs (extended site overheads)
• Head office overheads and profit
• Actual change in rates due to variations
 • Loss in productivity
• Acceleration costs
• Price fluctuations (escalation)
• Finance charges for delayed payment
• Cost of preparing the claim document

5.4 Preparation and Presentation of Claims

Elements of a Successful Claim (CEES)
• Cause: What happened — extra work instruction, delay caused by employer, adverse site
conditions, price escalation
• Effect: What impact it had — time delay, cost increase, or both
• Entitlement: Does the contract give the right to claim for this event? Reference specific
clauses
• Substantiation: Every fact must be backed by verifiable project records

Supporting Documents
• Site records and diaries (Project Diary, Contract Diary)
• Correspondence — letters, emails, meeting minutes
• Programmes and progress schedules
• Payments claimed and made
• For variation claims: Copy of instruction, date of receipt, nature of variation, how it affected
progress, proof of expense

Do's in Claim Preparation

• Make the document well-presented, user-friendly, indexed
• Write in simple, direct language — avoid jargon and legalese
• Refer to parties by name (Contractor, Engineer) — not 'he', 'him'
• Quote actual contract clause wording
• Lead the reader to a logical conclusion — never let the reader draw their own
• Present calculations with breakdown (not just a total)
• Carry out peer review before final submission

5.5 Dispute Resolution Methods

Overview of Common Disputes
Dispute Category Percentage
Contractual Clause Interpretations 20%
Delay Claims & Extension of Time 20%
Extended Stay & Delay Compensation 20%
Reciprocal Obligations & Responsibilities 10%
Additional & Extra Work Payment 10%
Escalation Payments 5%
Works Quality & Defect Liability 6%
Final Bill Settlement 4%
Contract Termination 2%
Unforeseen Contingencies 3%
1. Amicable Settlement / Negotiation
Parties sit across the table and sort out problems through direct discussion — without third party
involvement. Focus: 'First, let's fix the problem' not 'First, let's fix the blame.'
• Voluntary, non-binding (but agreement once reached may be legally significant)
• Fast, inexpensive, preserves relationships
• Maintains control of the outcome with the parties themselves

2. Dispute Review Board (DRB)

• Panel of 3 expert engineers (or 1 for small contracts) — appointed soon after contract award
• Visits site regularly; kept informed of progress throughout project
• Decisions are not legally binding but are respected due to expertise of board members
• Biggest advantage: Prevents disputes from escalating; work continues without interruption
• Constituted under contract provisions on mutually agreed terms

3. Mediation
A neutral, impartial third party (mediator) helps the parties voluntarily reach a settlement. Mediator
does not decide — assists in assessing risks, finding compromise areas, formulating settlement
recommendations.
• Private, confidential, informal, non-binding
• Faster and cheaper than arbitration
• Disadvantage: Mediator is trained to 'close deals' — may not focus on facts or contract
language

4. Conciliation
Similar to mediation but the conciliator plays a more active role — provides potential solutions as an
expert (beyond facilitation). Regulated by Indian Arbitration and Conciliation Act, 1996, Sections 61-
81.
• Conciliator meets parties separately and together
• Lowers tensions, improves communication, proposes solutions
• Settlement agreement is binding on parties like an arbitral award
Aspect Mediation Conciliation
Role of third party Facilitator only — helps Expert facilitator — also
communication suggests solutions
Outcome Agreement enforceable by law Settlement binding like an
arbitral award
Binding on parties? Depends on agreement Yes — binding like an arbitral
award

5. Arbitration
A quasi-judicial process where disputing parties agree to refer their dispute to one or more
arbitrators who hear arguments and issue a binding award — like a court decree.
• Based on arbitration agreement (in main contract clause, or separate agreement)
• Arbitral Award is final and binding on both parties
• Arbitrator should be: impartial, high integrity, domain expert (technical), understanding of
legal procedures

Duties of an Arbitrator
• Check qualifications and disclosure of interest
• Call preliminary meeting to understand issues; send notices for statement of case
• Not receive evidence in absence of the other party
 • Not examine witnesses without both parties present
• Not delegate authority or exceed scope of reference
• Adhere to time schedule for making and publishing award

Arbitration Proceedings
• Claimant files Statement of Claims with supporting documents and examines witnesses
• Respondent files Reply and Counter Claims with supporting documents and examines
witnesses
• Cross-examination of witnesses by both sides
• Respondent sums up case; claimant replies
• Award declared within time limit

6. Litigation
The traditional method — one party sues the other in a Court of Law. Governed by: Contract Act,
Specific Relief Act, Civil Procedure Code, Law of Evidence, Law of Limitation.
• Starts at lowest court; can go up to Supreme Court through appeals
• Very time-consuming: adjournments, heavy caseload, judge transfers
• Disadvantage: Courts may not fully understand complex engineering and technical issues
• Most expensive and slowest method

7. Online Dispute Resolution (ODR)

Use of digital technology and internet platforms to resolve disputes without physical meetings.
Growing in use for low-value and cross-border disputes.

8. Hybrid Dispute Resolution

Combination of methods — e.g. Med-Arb (start with mediation; if unsuccessful, move to arbitration
with the same or different third party).

5.6 Indian Arbitration and Conciliation Act, 1996

• Governs arbitration and conciliation proceedings in India
• Based on UNCITRAL Model Law — internationally aligned
• Arbitration Agreement: Must be in writing; can be part of main contract or separate; must
cover present or future disputes
• Arbitral Award: Final and binding; treated like a court decree; arbitrator need not give
detailed judgment — showing trend of thought is sufficient
• Conciliation: Sections 61–81 — conciliator facilitates settlement; settlement agreement is
binding
• Recent amendments: Faster timelines, online arbitration, institutional arbitration promotion,
appeal limitations to reduce court interference

— END OF NOTES —