SolarCalculatorsSolar EPC Contracts: PBG, Defect Liability (DLP) & Retention Money Guide 2026
1. The Four Pillar Financial Security Instruments in Solar EPC
In standard Indian commercial solar contracts, four distinct financial guarantees protect the capital balance between project developer and EPC contractor:
| Security Instrument | Standard Financial Value (% of Contract) | Validity Period | Primary Purpose & Release Trigger |
|---|---|---|---|
| Advance Payment Bank Guarantee (APBG) | 10% to 15% of total contract value | From contract signing until full delivery of major equipment on site | Protects client advance mobilization funds; released pro-rata upon site delivery of modules and inverters |
| Performance Bank Guarantee (PBG) | 5% to 10% of total contract value | Covers construction phase through Commercial Operation Date (COD) + 12 months | Guarantees on-time project completion, technical workmanship, and performance compliance |
| Retention Money (Milestone Holdback) | 5% to 10% deducted from each interim invoice | Held throughout construction until successful Final Acceptance Test (FAT) | Cash reserve protecting client against incomplete punch-list items and vendor defaults |
| O&M Performance Guarantee (O&M PBG) | 100% of one year's O&M contract value (or 2% of EPC CAPEX) | Renewed annually across the 5-year or 10-year O&M period | Guarantees contractual Weather-Corrected Performance Ratio (PR \(\ge 78\%\)) and uptime availability (\(\ge 98.5\%\)) |
2. Defect Liability Period (DLP): Obligations & Scope
The Defect Liability Period (typically 12 to 24 months from the date of DISCOM net-meter grid synchronization / COD) defines the EPC contractor's absolute warranty obligation to rectify latent construction defects at zero cost to the client:
- Scope of Rectification: Covers structural MMS deflection, roof sheet leakage around puncture clamps, cable tray sagging, loose busbar torquing, insulation resistance faults, and faulty earth pit connections.
- Manufacturer Pass-Through Warranties: The EPC contract must explicitly state that long-term original equipment manufacturer (OEM) warranties—specifically 12-year module product warranties, 25-30 year linear output warranties, and 5-10 year inverter warranties—are legally assigned and transferred directly to the asset owner, outlasting the contractor's initial DLP.
- Defect Rectification Notice: Standard contract clauses specify that upon written notification of a latent defect, the contractor must mobilize technicians within 48 hours. If the contractor fails to rectify within 7 business days, the client reserves the right to execute repairs via a third-party contractor and deduct 100% of costs from the held Retention Money.
3. Standard Milestone Payment Schedule for Commercial Solar EPC
A balanced, cash-flow friendly payment structure that protects both client and contractor follows this typical industry distribution:
- Advance Mobilization (10%): Paid against submission of equivalent Advance Payment Bank Guarantee (APBG) and initial engineering design submission.
- Major Equipment Dispatch (40% - 50%): Paid against Proforma Invoice and LR (Lorry Receipt) proving factory dispatch of Tier-1 ALMM-listed PV modules and grid-tied inverters.
- Civil & Structural Completion (15%): Paid upon 100% completion of roof/ground structure installation, torque auditing, and module mounting.
- DC & AC Electrical Completion (15%): Paid upon complete cable pulling, inverter mounting, chemical earthing, and pre-commissioning testing.
- Grid Synchronization & CEIG Approval (10%): Paid upon official DISCOM bi-directional net-meter charging and CEIG safety clearance.
- Final Acceptance & Performance Ratio Test (5% - 10%): Retention money released after 30 to 60 consecutive days of continuous stable plant operation demonstrating contractually guaranteed Performance Ratio (\(\text{PR} \ge 78\%\)).
4. Liquidated Damages (LD) & Delay Penalties
Delay Liquidated Damages: If the EPC contractor fails to achieve commercial operation by the agreed milestone date (excluding Force Majeure and DISCOM administrative delays), contracts typically levy penalties of 0.5% of total contract value per week of delay, capped at a maximum of 5% to 10% of total EPC value.
Performance Ratio (PR) Liquidated Damages: During the annual O&M period, if the audited weather-corrected Performance Ratio drops below the guaranteed benchmark (e.g., \(78\%\)), the contractor reimburses the client for the exact monetary value of lost kilowatt-hours at the full industrial DISCOM tariff rate.