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📜 Construction Contract Basics

Understanding construction contracts is essential for protecting your business. This guide covers the key clauses you need to understand before signing.

Key Principle

Read every contract before signing. The terms you accept determine your profit margin and risk exposure.

Types of Construction Contracts​

Lump Sum (Fixed Price)​

  • You agree to complete the work for a fixed price
  • Most common for private work
  • Risk is on the contractor if costs exceed estimate
  • Best when scope is clearly defined

Cost Plus​

  • Owner pays actual costs plus a fee (% or fixed)
  • Lower risk for contractor
  • Requires detailed cost tracking
  • Owner may require open-book accounting

Time & Materials (T&M)​

  • Bill for actual labor hours and materials
  • Usually has a "not to exceed" cap
  • Best for undefined scope
  • Requires meticulous time tracking

Unit Price​

  • Price per unit of work (per SF, LF, CY, etc.)
  • Common for sitework, paving, concrete
  • Quantities may be estimated or measured
  • Watch for quantity variation clauses

GMP (Guaranteed Maximum Price)​

  • Cost-plus with a ceiling
  • Savings may be shared with owner
  • Risk shifts to contractor above GMP
  • Common on CM-at-Risk projects

Critical Contract Clauses​

1. Scope of Work​

What to look for:

  • Is the scope clearly defined?
  • What drawings and specs are included?
  • Are allowances clearly stated?
  • What's explicitly excluded?

Red flags:

  • Vague language ("all work necessary")
  • References to "owner's satisfaction"
  • Undefined standards or quality levels

2. Payment Terms​

Key items:

  • When are pay applications due?
  • How long does owner have to pay?
  • Retainage percentage and release terms
  • Requirements for lien waivers

Negotiate for:

  • Net 30 or faster payment
  • Retainage reduction at 50% complete
  • Interest on late payments

3. Change Order Provisions​

Understand:

  • Notice requirements (usually 48-72 hours)
  • What constitutes a valid change?
  • Markup percentages allowed
  • Dispute resolution for pricing

Watch for:

  • "No damages for delay" clauses
  • Waiver of claims through progress payments
  • Unilateral change order rights

4. Schedule & Delays​

Key provisions:

  • Contract duration or completion date
  • Liquidated damages amount
  • Extension of time procedures
  • Float ownership

Protect yourself:

  • Require written notice for delays
  • Document all delays immediately
  • Understand force majeure provisions

5. Insurance Requirements​

Typical requirements:

  • General liability ($1M/$2M common)
  • Auto liability
  • Workers' compensation
  • Umbrella/excess coverage
  • Builder's risk (who provides?)

Check:

  • Can you meet the limits?
  • Additional insured requirements
  • Waiver of subrogation needed?

6. Indemnification​

Types:

  • Broad form (you cover everything - AVOID)
  • Intermediate form (cover your negligence)
  • Limited form (cover only your negligence)

Red flags:

  • "To the fullest extent permitted by law"
  • Indemnifying for owner's negligence
  • No cap on indemnification

7. Termination Clauses​

Termination for Cause:

  • What constitutes cause?
  • Notice and cure period?
  • Rights to complete work?

Termination for Convenience:

  • Owner can terminate without cause
  • What are you entitled to recover?
  • Include mobilization, demobilization, profit on work completed

8. Dispute Resolution​

Options:

  • Litigation (court)
  • Arbitration (binding, limited appeal)
  • Mediation (non-binding, try first)

Consider:

  • Where will disputes be heard?
  • Who pays for arbitration?
  • Is there a step process?

Standard Contract Forms​

AIA Contracts​

  • A101/A201 (Owner-Contractor)
  • A401 (Contractor-Subcontractor)
  • Industry standard, generally balanced

ConsensusDocs​

  • Developed by contractor associations
  • More contractor-friendly than AIA
  • Good alternative to offer

Owner-Written Contracts​

  • Often heavily favor owner
  • More negotiation needed
  • Have attorney review

What to Negotiate​

Always Push Back On:​

  1. Pay-if-paid clauses - Convert to pay-when-paid
  2. Broad indemnification - Limit to your negligence
  3. No damages for delay - At least get time extensions
  4. Flow-down clauses - Review what flows to you
  5. Liquidated damages - Ensure they're reasonable

Reasonable to Accept:​

  • Standard insurance requirements
  • Reasonable retainage (5-10%)
  • Industry-standard warranty (1 year)
  • Documented change order process

Before You Sign​

Checklist:​

  • Read the entire contract
  • Review all exhibits and attachments
  • Verify scope matches your estimate
  • Check payment terms work for cash flow
  • Confirm you can meet insurance requirements
  • Understand your risk exposure
  • Have attorney review if over $100K
  • Get clarifications in writing

Questions to Ask:​

  1. What happens if I find unforeseen conditions?
  2. How are changes priced and approved?
  3. What are the payment terms and process?
  4. What insurance do I need to provide?
  5. How are disputes resolved?

Common Mistakes​

  1. Not reading the contract - "It's standard" isn't an excuse
  2. Signing under pressure - Take time to review
  3. Assuming verbal agreements count - Get it in writing
  4. Ignoring flow-down clauses - You inherit prime contract terms
  5. Not tracking notice requirements - Miss a deadline, lose your rights