Why & When CPWD Terminates a Contract
Termination in CPWD is the last step of a documented journey: from monitoring and notices to compensation, show-cause and finally changing the contractor when the project is at risk.
Last updated: 7 December 2025
1️⃣ Why does CPWD even have a termination mechanism? (Purpose)
It helps to start with the “why”, not the “how”.
CPWD doesn’t terminate contracts because it’s bored. It terminates when things are so off the rails that continuing with the same contractor is riskier than the pain of starting over with someone new.
Broadly, the termination framework – especially Clause 3 · Determination of contract, read with Clause 2 · Compensation for delay and Clause 35 · Death of contractor – is designed to:
- Protect the public project. The ultimate aim is to make sure the building, bridge or hospital actually gets completed. If one contractor can’t or won’t do it, the contract must allow CPWD to change horse mid-stream.
- Deter casual / non-serious contractors. Clause 2 compensation for delay and the threat of Clause 3 termination push contractors to take milestones seriously. This is the “discipline” part of the GCC.
- Create a fair, documented sequence. Before it reaches termination, the contract creates steps: monitor progress → raise issues in writing → impose compensation for delay → issue show-cause → then consider termination.
- Allow clean exit in no-fault situations. Clause 35 (termination on death of contractor) is a good example: sometimes life events make continuation impossible. The contract gives the department a clean, no-compensation termination route so the project isn’t stuck.
So, think of termination not as a random bomb, but as the last node in a carefully built chain of protections.
2️⃣ What actually triggers termination? (Grounds & patterns)
In real life, termination is never based on one bad day. It’s a pattern.
Under Clause 3, termination (or “determination” of contract) usually comes up when one or more of these are true:
The contractor is missing key milestones and the delay is attributable to them (not to hindrances, late drawings, payment issues, etc.).
- Compensation under Clause 2 is either already being levied, or clearly going to hit the maximum (usually 10% of tendered value) if trends continue.
- Despite written reminders, meetings and revised bar charts/programmes, the contractor isn’t deploying resources (labour, shuttering, plant) to catch up.
This is the classic storyline: “We tried Clause 2 pressure, but they just didn’t respond. Now we’re moving under Clause 3.”
Another common route is quality going wrong again and again:
- Repeated poor quality work – honeycombing, alignment issues, failed cube tests.
- Non-conforming materials or not following drawings and specifications.
- Engineer-in-Charge orders dismantling and re-doing work, issues test orders and warnings – but the contractor keeps repeating or refuses to rectify.
In the file, you’ll typically see a chain of site orders, letters and test reports that show a pattern of non-compliance. That’s what sustains Clause 3 later.
This can be more dramatic, where the department’s reputation is at stake:
- Not following safety regulations (unsafe scaffolding, no PPE, repeated accidents).
- Violating labour laws or CPWD Labour Regulations (non-payment of wages, child labour, etc.).
- Illegal sub-letting or assignment without approval.
- Blacklisting-type behaviour (fraudulent documents, corruption – sometimes linked to the Integrity Pact).
Here, CPWD doesn’t want to “nurse” the contractor back to health. Termination becomes a protective reaction, not just a commercial step.
If the contractor is adjudged insolvent, goes into liquidation, or enters composition with creditors, the concern is simple: they may not be able to complete, no matter how much time you give.
In such cases, CPWD usually moves faster, because every day on site increases risk. Continuing with the same agency may simply not be commercially or legally safe.
3️⃣ Before Termination: How a “Smart” Department Builds Its File Clause 2 · Clause 3 · Clause 5
A rushed termination with weak records is a gift to the contractor in arbitration. A smart Engineer-in-Charge slowly builds a file that shows: “we monitored, instructed, warned – and only then terminated.”
Last updated: 7 December 2025
This is where good contract administration shines. A rushed termination with poor records is a gift to the contractor in arbitration. A well-advised Engineer-in-Charge quietly builds a file long before typing “Clause 3” in any letter.
First, the Engineer-in-Charge looks at the milestone schedule in Schedule F / Clause 5 and compares planned versus achieved progress.
Once a milestone is clearly missed and the delay is attributable to the contractor (not hindrances, drawings, payments etc.), the department:
- calculates compensation under Clause 2 (say, 1% for that month), and
- issues a letter like: “You have failed to achieve Milestone No. 2. As per Clause 2, compensation @ … is liable to be recovered.”
This does two subtle but powerful things:
- Creates a contemporaneous record of delay.
- Puts the contractor on notice that the contractual mechanism is being used, not just oral scolding on site.
Engineers often fall into the “oral adjustment” trap – “We told him on site to speed up.” For termination, that’s deadly. Arbitration lives on paper.
What you want in the file are clear written instructions:
- Letters / e-mails / site orders that say things like:
“Provide additional shuttering and gangs to catch up delayed foundations.”
“Rectify honeycombing in Grid 3–5 columns by 7 days.”
“Deploy tower crane & pump as committed in your programme.” - Meeting minutes recording commitments:
“Contractor agreed to deploy 20 additional masons and double shuttering by 15th…”
So when Clause 3 is invoked, you can show a judge or arbitrator:
“We didn’t jump to termination. We guided, instructed, and warned – repeatedly.”
This is the pivot point. The show-cause under Clause 3 is your last bridge before termination.
The show-cause will typically:
- refer to previous letters and site orders,
- list specific defaults (delay, quality, safety, etc.),
- quote Clause 3, and ask why:
- the contract should not be determined, and
- Performance Guarantee (PG) / Security Deposit (SD) should not be forfeited, and
- risk & cost action should not be taken.
- give a reasonable time – often 7–15 days – to reply and/or cure.
A good show-cause is specific, not generic.
Now the file can branch in two directions. This decision note is gold in arbitration because it shows you weighed both sides.
Reply is reasonable
Contractor proves things like:
- drawings delayed,
- site not handed over,
- major change of scope,
- serious payment delays, etc.
Then, the department should:
- record this acknowledgement in the file,
- process Extension of Time (EOT) under Clause 5, and
- adjust compensation under Clause 2 accordingly.
Reply is weak or absent
You often see:
- generic excuses (“labour problem”, “market condition”) without evidence,
- no realistic recovery plan, and
- no real mobilisation on site even after show-cause.
This situation logically justifies the next step: determination under Clause 3. Your note should record: “In spite of notices and show-cause, no adequate justification or recovery has been shown. Continuation with the same contractor is not in public interest.”
- Milestone-wise progress vs programme is clearly charted, with Clause 2 calculations on record.
- Written instructions and meetings show a trail of guidance and warnings, not surprises.
- Show-cause notice is specific, backed by dates, percentages and locations.
- Decision on the reply is reasoned – whether you went for EOT or for determination.
4️⃣ The Termination Order Itself – Look, Feel & Content Audit-proof wording for CPWD projects
A Clause 3 termination order should never feel like a surprise thunderbolt. It should calmly narrate the history, cite the right clauses, spell out consequences, and let an arbitrator reconstruct the full story in one sitting.
Last updated: 7 December 2025
When the Engineer-in-Charge finally passes the termination order under Clause 3, it shouldn’t feel like a surprise thunderbolt. It should read like the calm last chapter of a story you’ve already been telling through progress reviews, Clause 2 letters and a detailed show-cause.
A solid termination order typically does five things:
First, the order calmly recites the history. Anyone reading it should know what contract we are talking about and how we got here.
- Date of award, original completion date, and any EOTs granted.
- List of missed milestones and key slippages, with dates.
- Reference to letters where compensation under Clause 2 was levied.
- Reference to site orders, meeting minutes and other written directions.
- Clear mention of the show-cause notice and the contractor’s reply (or non-reply).
This part should feel like an executive summary of the entire file, not a set of vague allegations.
Next, the order must frame the legal basis. This is where Clause 3 enters the stage explicitly.
- Explicitly cites Clause 3 (and sub-clauses, depending on the GCC wording).
- States clearly that due to the contractor’s breach, the Government is determining the contract for the remaining work.
- Links the factual defaults (from the history) to the rights under the clause – delay, bad workmanship, safety or other breaches.
By the end of this part, a reader should be able to answer: “Under which clause has CPWD acted, and which behaviour triggered that clause?”
A good termination order also spells out what happens next, on the ground.
- stop further work except what is required for safety / handing over.
- vacate the site of work within a specified time (often 48–72 hours),
- retain only authorised watch & ward staff if permitted.
- take possession of site, materials, temporary works and T&P to the extent allowed under GCC.
- get the balance work done at the risk & cost of the contractor.
Read this part as the “Monday morning instructions” section: if someone only read this, they should still know what to do on site.
The order should not be silent on PG, SD and future payments. This is where most money arguments later arise.
It normally states that:
- Performance Guarantee (PG) is liable to be forfeited in terms of the GCC.
- Security Deposit (SD) will be adjusted as per the contract.
- Future payments will be strictly based on:
- measured work already done, and
- minus recoveries (advances, materials, compensation, risk & cost, etc.).
This gives a clear financial roadmap for accounts and for any future dispute on how much is still payable or recoverable.
Finally, the order should show institutional application of mind through proper marking.
- Copies to SE / CE for information and further instructions.
- Copy to Accounts, so that PG, SD and other recoveries can be handled.
- Copies to Vigilance / Legal if facts justify it (serious integrity or fraud issues).
This isn’t just formality; it shows that termination was not a lone-wolf decision, but one taken within the departmental structure.
5️⃣ What Happens After Termination? (Risk & Cost & Close-out) 💸 From “terminate” to final account
Termination is not the end of the story – it’s the end of one chapter and the start of another. Once Clause 3 is invoked, CPWD still has to measure work done, complete the balance work, compute risk & cost, recover dues and close the account (with disputes, if any).
Last updated: 7 December 2025
Think of termination as a reset point, not a full stop. After the Clause 3 order, CPWD still has to decide: “What exactly have we paid for? What remains? How much extra did it cost to finish with someone else? And how do we recover that difference?”
First, CPWD must freeze the picture of what is actually on ground. This is the starting point for both payment and risk & cost.
- Take joint measurements (where possible) of:
- all work executed up to the date of termination,
- usable materials brought to site, and
- certain temporary works if payable as per contract.
- If the contractor doesn’t cooperate, CPWD still takes measurements with independent witnesses, photographs, video, etc.
These measurements become:
- the basis for the final bill up to termination, and
- the benchmark for risk & cost comparison for the remaining work.
In disputes, this “frozen picture” is often the first thing arbitrators look for – if it’s weak, the entire risk & cost story wobbles.
Termination doesn’t build the building. CPWD still has to complete the project.
Typically, the department will:
- invite fresh tenders for the balance work, or
- get it executed departmentally / through other agencies (depending on approvals and quantum).
In fresh tenders, you will often see:
- a BOQ for “balance items” based on entries from the original agreement, and
- a note that the new contractor must also:
- rectify some defective work left behind, and/or
- deal with altered site conditions.
Practically, this is where planning, rate analysis and constructability meet the legal story of termination.
This is the heart of post-termination accounts. Risk & cost is basically the extra amount CPWD had to spend (if any) to get the balance work done compared to the original contract.
Conceptually, you do two big calculations:
- Determine the value of balance work at original contract rates:
- Take total agreement value.
- Subtract value of work done (at original rates).
- The remainder is the “balance at original rates”.
- Determine the actual cost incurred to complete balance work:
- based on new tender rates, or
- departmental execution cost (labour, materials, overheads, etc.).
The excess (if any) between:
- actual completion cost, and
- original contract balance value
is the “risk & cost” amount to be recovered from the terminated contractor, along with departmental charges if applicable.
Once the risk & cost amount is known, CPWD looks at where to recover it from, and in what order.
Typically, the department will try to recover:
- from money due in this contract (unpaid items, withheld amounts),
- from Security Deposit and Performance Guarantee,
- from amounts due in other CPWD contracts of the same contractor (via cross-lien / withholding).
If there is still a shortfall, recovery may continue through:
- revenue recovery mechanisms,
- legal action, and
- set-off in future dealings (including blacklisting, depending on rules).
This is why contractors need to see termination not just as “losing one job”, but as a decision that can ripple across their entire CPWD portfolio.
After measurements, completion of balance work, risk & cost calculation and recoveries, CPWD prepares a final statement.
By this stage:
- work done is paid,
- risk & cost is calculated, and
- the net payable / recoverable is worked out.
If the contractor disputes:
- the termination itself,
- the risk & cost calculation, or
- forfeiture of securities,
then the matter usually goes down the dispute resolution route – pre-arbitration steps plus Clause 25 arbitration in CPWD GCC.
In arbitration, the quality of your measurements, tender records, risk & cost workings and recovery notes will decide how much of the department’s story survives scrutiny.
Balance at original rates = Total agreement value
– Value of work done (at original rates)
Risk & cost recovery = Actual cost of completing balance work
– Balance at original rates (if positive)
6️⃣ No-Fault Termination (Clause 35) & 7️⃣ The Clause 2–Clause 3 “Dance” 🩰 Human exit vs disciplinary escalation
Not every termination is a punishment. Clause 35 handles the human, no-fault situations like death of a contractor, while Clause 2 and Clause 3 work together as a two-step discipline system—from financial pressure to changing the contractor when faith is lost.
Last updated: 7 December 2025
Clause 3 terminations feel dramatic—but CPWD GCC also recognises no-fault exits and a more gentle “pressure-then-termination” journey through Clause 2 and Clause 3. Understanding this difference is critical if you want to advise the department (or the contractor) fairly.
Clause 35 is CPWD’s way of saying: “Sometimes life happens, and it’s nobody’s fault.” It deals with situations like:
- an individual contractor passing away, or
- a key person in a proprietary / partnership set-up dying, making it unclear if:
- legal heirs can or will continue, or
- the organisation still has technical and financial capacity.
In such cases, Clause 35 usually allows CPWD to:
- terminate the contract without levying compensation for default, because this is not a “fault” situation in the usual sense, and
- settle up to the date of termination:
- work done,
- payments due, and
- adjustment of materials, advances, etc.
Possible pathways after death:
- Heirs / partners want to continue
- CPWD examines technical capacity, financial status and legal status of the firm.
- If satisfactory, continuation may be allowed with proper documentation.
- Heirs / partners don’t want or can’t continue
- CPWD invokes Clause 35, terminates, settles up to date and re-tenders the balance work.
The key difference from Clause 3 is tone and consequence:
- This is not punitive:
- no “risk & cost penalty” in the classic sense,
- no label of default or blacklisting purely on this ground.
Think of Clause 35 as CPWD’s “let’s close this chapter gracefully” mechanism—used when the problem is human and unavoidable, not mismanagement or bad faith.
You can think of Clause 2 (Compensation for delay) and Clause 3 (Determination of contract) as a two-step disciplinary system.
Step 1 – Clause 2: Financial pressure, still a chance to recover
- As soon as the contractor starts slipping, CPWD:
- withholds milestone amounts, and
- levies compensation (e.g. 1% per month, capped at 10%).
- The message is clear:
- “We’re unhappy, but we still want you to finish. Show us you can recover.”
Step 2 – Clause 3: Loss of faith, time to change contractor
- When delay is chronic and serious:
- compensation is at or near maximum, or
- even maximum compensation won’t repair the situation (time, quality, credibility).
- CPWD’s stance shifts to:
- “We no longer believe you can or will complete. We’re ending this contract and finishing with someone else, at your risk & cost.”
From a risk-management angle:
- Clause 2 protects CPWD’s time value of money – compensates for delays while hoping the same contractor finishes.
- Clause 3 protects CPWD’s ability to actually deliver the project – switches to a new contractor when faith is lost.
- Contractor stays on the job.
- Financial pain via compensation for delay.
- Intent: push to catch up and finish.
- Project still bets on the same contractor.
- Contract is determined for remaining work.
- Balance work goes to others, at risk & cost.
- Intent: cut losses and de-risk completion.
- Faith in existing contractor is gone.
On a live project, keep asking yourself: “Are we still in Clause 2 territory (we want this contractor to succeed), or have we mentally crossed into Clause 3 territory (we need to cut our losses)?” Your file and your letters should reflect whichever territory you’re truly in.
8️⃣ “What if…” stories & 9️⃣ Safety tips for the clause world 🏗️ From case-style scenarios to practical behaviour change
Termination disputes are built on stories and paperwork. These three realistic scenarios—and the safety tips that follow—show how CPWD Clause 2, Clause 3 and Clause 35 actually play out on a live project, and how both sides can protect themselves.
Last updated: 7 December 2025
Let’s turn dry clauses into three mini case-studies. As you read, keep asking: “If I was defending this in arbitration, how would the story look on paper?”
At month 8, progress is only 30% (should have been around 65–70%). CPWD has:
- issued multiple letters on slow progress,
- levied compensation for delay under Clause 2 for several months, and
- conducted meetings where the contractor keeps promising, “we will mobilise”.
Finally, CPWD issues a show-cause under Clause 3. The contractor replies:
- “labour shortage, rain, market conditions” – all generic reasons,
- but no credible recovery plan, no real mobilisation on ground.
Result:
- Contract is determined under Clause 3.
- CPWD calls fresh tenders for the balance work.
- New contractor completes at higher rates.
- Excess cost versus original balance value = risk & cost recovery claimed from the first contractor.
This is the “textbook” case where the file usually supports CPWD—provided letters, Clause 2 recoveries and realistic comparisons are well documented.
Same milestones are missed, but this time:
- site was handed over late,
- drawings were delayed by 3 months for a major block,
- several NS items and change orders increased complexity.
The contractor has a paper trail proving all of this. Despite that, CPWD still terminates under Clause 3, branding it simply as “excessive delay”.
In arbitration, the contractor produces:
- hindrance register,
- letters seeking decisions and drawings,
- minutes of meetings recording late drawings and scope changes.
Likely outcome:
- Termination is held wrongful.
- Risk & cost claim is rejected or scaled down.
- Contractor may even get loss of profit on unexecuted work.
Moral: Termination must be legally justified, not just emotionally satisfying. Mixed-delay stories require much deeper analysis before you push the Clause 3 button.
A solo proprietor contractor dies midway. Work progress was decent, but:
- heirs don’t want to continue, or
- they don’t have the technical / economic capacity.
CPWD then:
- invokes Clause 35, terminates without compensation for default,
- measures work done,
- settles dues with the estate, and
- re-tenders the balance work.
This is an administrative, not punitive termination. The aim is “keep the project moving” while respecting that this is not a fault-based case.
If you’re advising or managing a CPWD project, treat Clause 2, Clause 3 and Clause 35 as a system, not isolated bombs. Here are practical tweaks for both sides.
- Document, document, document
- Keep a live hindrance register.
- Issue site orders instead of only verbal instructions.
- Capture milestone review notes, photos, progress charts.
- Align Clause 2 and Clause 3 use
- If you’re thinking of Clause 3 but there is zero record of Clause 2 compensation, that’s a red flag.
- Either start using Clause 2 properly, or be ready to justify why Clause 3 is being used directly (e.g., integrity or safety issues).
- Make show-cause notices precise
- Quantify delays and progress (“30% vs 70% expected”).
- Identify specific breaches (quality, safety, labour, programme).
- Attach supporting references: letters, minutes, hindrance records.
- Apply mind before termination
- Record in a file note:
- why the contractor’s reply is unacceptable, and
- why continuation is riskier than termination.
- Record in a file note:
- Don’t sleep on paper
- If there are genuine hindrances, record them early.
- Seek decisions in writing—letters and e-mails, not just WhatsApp calls.
- Treat Clause 2 letters seriously
- Once compensation starts, understand you’re on the termination escalator.
- Offer a realistic catch-up plan (extra shifts, more shuttering, more gangs).
- Reply strongly to show-cause under Clause 3
- Attach hindrance details, charts, photos.
- Show not just excuses, but a concrete recovery plan.
- Think arbitration from day one
- Each letter and meeting minute is a future exhibit.
- Doing this doesn’t just save the contract; it dramatically improves your position if termination still happens and the dispute goes to arbitration.
In short: good behaviour + good records make this clause world safer—for CPWD and for serious contractors.