INDIA Law and Practice Contributed by: Vivek Chandy, Archana Tewary, Kumarmanglam Vijay and Brijita Prakash, JSA
7. Construction 7.1 Common Structures Used to Price Construction Projects Construction contracts are typically categorised as lump-sum turnkey fixed-price contracts, bill of quantities-based contracts (item-rate con - tracts), and work package-based contracts. For projects where a detailed bill of quantities is possible, owners opt for an item-rate contract. For large infrastructure construction projects, lump-sum turnkey contracts and work package- based contracts are common. Regardless of pricing structure, construc - tion contracts incorporate detailed clauses to address eventualities which may impact com - pletion time and contract price, including change in law, force majeure, change in scope/variation and suspension. Contracts typically provide for mechanisms to adjust contract price upon the occurrence of such eventualities. Contractually agreed price escalation clauses with thresholds are also negotiated, eg, escalation on account of change in price of a specified raw material. 7.2 Assigning Responsibility for the Design and Construction of a Project Split structures and design-and-build struc - tures are commonly used for risk allocation and rewards for construction projects. Split structure (owners appoint an architect for design and a separate contractor for construc - tion) is prevalent for construction of real estate or manufacturing units. Under this arrangement, the owner bears the sole responsibility for design risks, while the contractor is responsible for exe - cuting the construction. Contractors may seek to shift responsibility for construction failures onto design issues, leading to counterclaims.
For design-and-build structures, the owner enters into a lump-sum turnkey contract for the entire project. Owners have a right to review and certify the contractors’ compliance. Contractors are often responsible even after completion, dur - ing an agreed defects liability period. 7.3 Management of Construction Risk Warranties as to quality, workmanship, structural stability, fitness for purpose and adherence to applicable laws, technical specifications and prudent industry practices are undertaken by contractors, subject to normal wear and tear, industry-specific and technical exceptions. Contractors may be required to provide the owner with a corporate guarantee or a fund- based performance guarantee. The retention of payments is also common, and such guarantee/ retention amount is released after completion of the defects liability period. Indemnity for claims due to breach of contract/ law, bodily injury, death, loss of property, gross negligence, wilful misconduct and fraud are prevalent in construction contracts. The over - all limitation of liability typically varies between 50% and 100% of the contract price. Contractors are also required to obtain and maintain adequate insurance, including contrac - tor’s all-risk insurance, third-party liability insur - ance and workman insurance. 7.4 Management of Schedule-Related Risk Time is of the essence in construction contacts, with fixed project schedules for key milestones and a target completion date. The project sched - ule is typically subject to extension of time claus - es. In case of any delay, typically delay damages are levied at small percentage (0.1% to 0.5%)
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