Saturday, May 15, 2010

Some Important Terms in Contracting for Construction

Earnest Money: Is the money paid by the Contractor to the Owner at the time of submission of bid to show that the Contractor is serious about executing the works if the contract is awarded to him. For those contractors which are not successful at securing the bid, the earnest money paid by them is refunded.

Security Deposit or Performance Gaurantee: Money payable by the Contractor to the Owner in the form of a Secured Bank Gaurantee to protect the owner in the case of Contractor either abandoning the works or not executing the works as per the specifications of the contract. Performance Gaurantee may be in the range of 2 to 4 percent of the total contract value.

Retention Money: Money held back by owner(say about 5%) from the monthly bill of the Contractor to protect himself against any defects. This money is paid back at the end of defects liablity period

Defects Liability Period: is the amount of time from completion date that the contractor is liable for defective construction

Depreciation: is the decrease in value of any asset.

Depreciation has a major impact on the taxation. Depreciation is accepted as an expense in the balance sheet by the tax authorities. Depreciation increases operating expenses thereby reduces profit and income tax. However, depreciation is not an actual cash outflow from the company.

Depreciation on construction machinery helps a construction company save tax.

Liquidated Damages: is the penalty charged by the owner if the contractor does not finish the works by the approved schedule. Generally its upto 5% of the contract value.