Last reviewed 16 Sept 2026 · 8 min read
Contract — legal essentials
A contract is an agreement enforceable by law (Indian Contract Act, 1872).
Essentials of a valid contract
- Offer (proposal) and acceptance.
- Lawful consideration.
- Competent parties — of the age of majority, sound mind, not disqualified by law.
- Free consent — not caused by coercion, undue influence, fraud, misrepresentation or mistake.
- Lawful object.
- Not expressly declared void; certainty and possibility of performance.
| Term | Meaning |
|---|---|
| Valid contract | Satisfies all essentials — enforceable |
| Void contract | Not enforceable by law (e.g. unlawful object, or becomes impossible) |
| Voidable contract | Enforceable at the option of one party (e.g. consent obtained by coercion or fraud) |
| Void agreement | Never enforceable from the start |
Types of construction contracts
| Type | Features | Suitability / risk |
|---|---|---|
| Lump sum contract | Contractor quotes a fixed total price for the complete work per drawings and specifications | Well-defined designs; contractor bears quantity risk; variations difficult to value |
| Item rate (unit rate / schedule) contract | Contractor quotes rates for each item in the bill of quantities; payment = measured quantity × rate | Most common in public works; owner bears quantity risk; flexible for quantity changes |
| Percentage rate contract | Contractor quotes a percentage above/below the departmental schedule of rates estimate | Simple evaluation; common in PWD works |
| Cost plus percentage | Actual cost + a percentage of cost as fee | Urgent/undefined works; no incentive to economise — cost rises with fee |
| Cost plus fixed fee | Actual cost + fixed fee | Some incentive to finish early; owner bears cost risk |
| Cost plus fluctuating fee / target cost | Fee varies with performance against a target cost (savings/overruns shared) | Encourages economy |
| Labour contract | Contractor supplies labour only; owner supplies materials | Small works; owner controls materials |
| Piece work | Payment per unit of work for small jobs without formal agreement | Petty works |
| Turnkey / EPC contract | Single contractor responsible for engineering, procurement and construction, handing over a ready-to-use facility, usually at a lump sum price | Owner transfers design and construction risk; single-point responsibility |
| Design-build | Same entity designs and constructs | Faster (overlapping design and construction) |
| Negotiated contract | Terms settled by negotiation with one or a few contractors | Specialised/urgent works |
Public–private partnership (PPP) models
| Model | Meaning |
|---|---|
| BOT (Build–Operate–Transfer) | Private party builds, operates (collects tolls/user charges) for a concession period, then transfers to government |
| BOOT (Build–Own–Operate–Transfer) | Private party also owns the asset during concession, then transfers |
| BOO (Build–Own–Operate) | Ownership stays with the private party (no transfer) |
| DBFOT (Design–Build–Finance–Operate–Transfer) | Private party designs and finances as well |
| BOT (Annuity) | Government pays fixed annuities to the concessionaire; traffic risk with government |
| HAM (Hybrid Annuity Model) | Used for national highways in India — government pays part of the project cost (commonly 40%) during construction; balance by the developer, recovered through annuity payments with interest; toll/revenue risk with government |
| EPC | Not PPP — government finances; contractor builds for a fixed price |