Ministry considers extending defect-liability period in EPC contracts
ECONOMY & POLICY

Ministry considers extending defect-liability period in EPC contracts

The Ministry of Road Transport and Highways is contemplating an extension of the defect-liability period in engineering-procurement-construction (EPC) contracts to a decade, with the primary objective of reducing government road maintenance costs. This proposed measure is anticipated to incentivise contractors to enhance construction quality, subsequently contributing to a decrease in road accidents. Discussions are underway with stakeholders, and the ministry is poised to finalise these proposals soon, according to a senior government official who spoke with ET.

The official, speaking anonymously, revealed that expert consultations are ongoing to extend the defect-liability period in EPC contracts to 10 years, underscoring the ministry's commitment to elevating construction standards. In the EPC model of road construction, the central government assumes responsibility for national highway maintenance after the defect-liability period concludes, with contractors accountable for maintenance during this initial period.

The ministry has allocated Rs 26 billion for road maintenance in the fiscal year 2024-25, maintaining a comparable figure to the budgetary and revised estimates for 2023-24 but slightly exceeding the Rs 2,573.66 crore expenditure in 2022-23. Funding for central government-led highway maintenance is derived from the Central Road Infrastructure Fund, with implementation delegated to state public works departments, the Border Roads Organisation, the National Highways Authority of India, and the National Highways & Infrastructure Development Corporation.

Jagannarayan Padmanabhan, Senior Director and Global Head of Consulting at Crisil Market Intelligence & Analytics, noted that while an extended defect-liability period is beneficial for ensuring contractors consider long-term quality, it also exposes them to claims beyond their control.

As part of the Bharatmala Pariyojana, the government has awarded road projects totalling 25,713 km at a capital cost of Rs 7818.45 billion until December 2022. Of this, 56% (14,317 km) of the road length has been approved under the EPC mode, while 42% (10,989 km) is under the hybrid annuity model, and the remaining 2% (408 km) is managed through build-operate-transfer (BOT) contracts.

Looking ahead, the ministry intends to allocate larger road projects under the BOT mode, wherein maintenance responsibility rests with contractors. EPC will persist as the preferred mode for projects up to Rs 5 billion.

The Ministry of Road Transport and Highways is contemplating an extension of the defect-liability period in engineering-procurement-construction (EPC) contracts to a decade, with the primary objective of reducing government road maintenance costs. This proposed measure is anticipated to incentivise contractors to enhance construction quality, subsequently contributing to a decrease in road accidents. Discussions are underway with stakeholders, and the ministry is poised to finalise these proposals soon, according to a senior government official who spoke with ET. The official, speaking anonymously, revealed that expert consultations are ongoing to extend the defect-liability period in EPC contracts to 10 years, underscoring the ministry's commitment to elevating construction standards. In the EPC model of road construction, the central government assumes responsibility for national highway maintenance after the defect-liability period concludes, with contractors accountable for maintenance during this initial period. The ministry has allocated Rs 26 billion for road maintenance in the fiscal year 2024-25, maintaining a comparable figure to the budgetary and revised estimates for 2023-24 but slightly exceeding the Rs 2,573.66 crore expenditure in 2022-23. Funding for central government-led highway maintenance is derived from the Central Road Infrastructure Fund, with implementation delegated to state public works departments, the Border Roads Organisation, the National Highways Authority of India, and the National Highways & Infrastructure Development Corporation. Jagannarayan Padmanabhan, Senior Director and Global Head of Consulting at Crisil Market Intelligence & Analytics, noted that while an extended defect-liability period is beneficial for ensuring contractors consider long-term quality, it also exposes them to claims beyond their control. As part of the Bharatmala Pariyojana, the government has awarded road projects totalling 25,713 km at a capital cost of Rs 7818.45 billion until December 2022. Of this, 56% (14,317 km) of the road length has been approved under the EPC mode, while 42% (10,989 km) is under the hybrid annuity model, and the remaining 2% (408 km) is managed through build-operate-transfer (BOT) contracts. Looking ahead, the ministry intends to allocate larger road projects under the BOT mode, wherein maintenance responsibility rests with contractors. EPC will persist as the preferred mode for projects up to Rs 5 billion.

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