In an item-rate contract you pay unit rates for measured work, and quantities can vary by about 15 per cent per item before rates are revised. In a lump sum or turnkey contract the contractor carries quantity risk for a fixed scope and is paid by milestone. In a labour-only contract you buy the materials.
The official definitions below come from Government of India manuals for public works, which a private owner is not bound by. They are used here as neutral, named definitions and as a model of clauses to write into a house contract. Contract and tax law change, so take legal and tax advice before you sign.
What are the main contract types for a house?
There are four common forms, and the choice decides who carries which risk. The table summarises the manuals.
| Form | How the price is set | How you pay | Who carries the risk |
|---|---|---|---|
| Item rate (unit rate) | Contractor quotes a rate for each item on your bill of quantities | Measured quantity at the contract rate | You pay for what is measured, so quantity change falls on you; the contractor is bound to the quoted rates |
| Lump sum or turnkey (fixed price) | One price for a defined scope | Milestones or stages | The contractor carries quantity and price risk inside the scope; you carry the risk of scope change |
| Percentage rate | One percentage above or below an estimate | Bills at estimated item rates, adjusted by the percentage | Works best where there is no major design; the manual suits it to small routine works and repairs |
| Labour only | Contractor quotes for labour and workmanship | By measured work or time | You carry material price, wastage and quality risk |
The CPWD Works Manual 2022 names three standard forms: percentage rate (Form 7), item rate (Form 8) and lump sum (Form 12). The Department of Expenditure’s Manual for Procurement of Works, updated June 2022, describes the same types in paragraph 3.2. Neither manual defines labour-only contracts for houses, and neither defines turnkey as a separate form.
How does an item-rate contract work?
You give the contractor a bill of quantities, and the contractor quotes a rate for each item. The Department of Expenditure manual (para 3.2.2) calls this the most commonly used contract type for civil works and says it carries the least risk of uncertainty for the parties. It needs complete specifications and drawings first, or the quantities will move.
The payment rule is the useful part. The contractor is paid at the contract rate for the measured quantity, within a prescribed range that is usually plus or minus 15 per cent per item, according to the manual. Beyond the range, rates are revised for the excess. CPWD’s 2023 General Conditions of Contract, clause 12, add that extra items are claimed at a market rate with a rate analysis within fifteen days, and that the department decides within 45 days. The post on BOQ and contractor selection shows how to prepare a bill of quantities and compare quotes.
Item rate suits a house where drawings are complete and an architect or engineer will measure work. It needs measurement at each bill, so a supervisor matters. The studio’s site supervision and project management page describes that role.
How does a lump sum or turnkey contract work?
You fix one price for a defined scope, and payments are linked to milestones. The Department of Expenditure manual (para 3.2.1) says the price is deemed to include all elements of cost, with no arithmetical correction or price adjustment. It says the form suits work where the risk of change in quantity or specification and of unforeseen site conditions, such as hidden foundation problems, is minimal, and that it is suitable for stereotype or repetitive residential buildings.
The manual also names the weaknesses: the contractor may be tempted to cut corners on quality and scope, and disputes arise over what the scope includes. Detailed measurement of work done is not needed except for additions and omissions, and the manual warns against front-loaded payments. A schedule of rates is still useful to price additions that the contract does not cover.
The nearest official form to turnkey is EPC, or design and build (para 3.2.5). One lump sum covers investigation, design and construction. Soil conditions, weather and design and construction risk are assigned to the contractor, and the owner keeps the risk of delay in handing over land, approvals from local authorities and shifting of utilities. A defect liability period of two years may be specified. For a private house, ask in writing what a turnkey quote includes: drawings, approvals, materials by brand and grade, finishes, services, and exclusions. The post on house construction cost per sq ft in Kolkata explains why a per sq ft rate hides these differences.
What is a labour-only contract?
In a labour-only contract you buy the materials and the contractor supplies the labour. No official manual defines it for a house. It follows from the form itself that you carry material price, wastage and quality risk, and that you or your supervisor must control stock and measurement. The contractor’s risk is limited to workmanship and time.
On tax, Notification No. 12/2017-Central Tax (Rate) of 28 June 2017, in its original text, gave a nil rate for services by way of pure labour contracts for original works on a single residential unit that is not part of a residential complex. Taxscan reported on 16 April 2026 that the Karnataka Authority for Advance Ruling held the same for pure labour services on a single dwelling, subject to prescribed conditions. An advance ruling binds only the applicant, and the notification has been amended since 2017, so ask a chartered accountant what applies to you.
What are retention and defects liability, and what do the manuals say?
Retention is money held back until the work is accepted. The two official manuals give different figures, and they should not be merged:
| Item | Department of Expenditure manual | CPWD GCC 2023 |
|---|---|---|
| Performance security | Usually 5 per cent | Performance guarantee of 5 per cent in the Works Manual 2022 |
| Retention or security deposit | Usually 5 per cent of each running bill, replaceable by a bank guarantee | 2.5 per cent of the tendered amount, recovered from running bills |
| Release | Half at the taking-over certificate, half 365 days after the defect liability period | Not before twelve months after the completion certificate |
| Defects liability | Set in the contract; an EPC contract may specify two years | Twelve months, and six months for works of ₹10 lakh or less |
For a house, take the structure and not the exact numbers: hold back part of every bill, release it after a defects period, and say in the contract who fixes defects at whose cost. A ₹10 lakh threshold in CPWD’s conditions shows that a short period is accepted for small works, so set your own.
What should the contract contain?
The CPWD conditions and the Department of Expenditure manual suggest this list for a private contract:
- Scope, drawings and specifications, with the drawing numbers.
- The contract sum and its basis, item rate or lump sum.
- Time for completion, and milestones.
- Variations and extra items, with how they are priced and approved in writing.
- Payment schedule against measured or certified stages.
- Security deposit or retention, and its release.
- The defects liability period and who rectifies defects.
- Dispute resolution.
- Insurance and termination.
Which form suits which house?
Match the form to how complete your drawings are and how much control you want.
| Your situation | Form that usually fits |
|---|---|
| Complete drawings, an architect or engineer measuring, you want price transparency | Item rate |
| Fully defined scope, repetitive work, you want a fixed price | Lump sum |
| You want one party to carry design and construction risk and accept less control | Turnkey (EPC style) |
| Small repair or routine job | Percentage rate |
| You can buy and store materials and measure stock | Labour only |
A word on control. Under rule 16 of the West Bengal Municipal (Building) Rules, 2007, the architect or Licensed Building Surveyor is held responsible for any work executed on site in contravention of the rules, whatever contract form the owner picks. The post on architect vs civil engineer vs contractor explains who answers for what. For an owner who lives elsewhere, the post on building a house in Kolkata while living abroad adds stage payments and reporting.
What to do next
Before you sign, ask the contractor to price the same drawings under two forms, item rate and lump sum, and compare what each leaves out. The site supervision page describes how the studio supervises work against drawings, and the contact page is the place to send a project’s drawings and scope.
