How to Review Construction Contracts

Imagine you’ve just been handed a construction contract that’s hundreds of pages long. It’s thick, filled with legal jargon, and difficult to decipher. The clock is ticking, and a multimillion-dollar project depends on your careful review. What do you do? Reviewing construction contracts is a critical skill that can save companies from massive legal and financial headaches. Miss a single clause, and you could be on the hook for liabilities you didn’t even see coming.

Step into the details immediately. Forget about the introduction.

The first step to reviewing a construction contract like a pro is to focus on the scope of work. This section is arguably the most important. It defines what exactly the contractor is being hired to do. Every deliverable, task, and responsibility should be clearly spelled out. If it’s vague, demand clarification. The last thing you want is a misunderstanding down the road because something wasn’t clearly defined. If a contractor is supposed to provide materials, for example, make sure the contract spells out exactly what kind of materials, the quality, and the specific brands if necessary.

Understand the payment structure, or regret it later.

Few things cause more disputes in construction than money. The contract should outline a detailed payment schedule. Progress payments are common, but make sure the triggers for these payments are crystal clear. Are they based on milestones? Percent completion? What happens if the project is delayed? A retainage clause is also something to keep an eye on. Retainage is a portion of the contract amount withheld until the project is completed. Ensure you understand what percentage will be retained and when it will be released.

Be wary of the liquidated damages clause.

If delays occur, what will it cost you? Liquidated damages outline the penalties for not completing the project on time. These penalties can be significant, so make sure they’re realistic. If you’re on the contractor side, negotiate to limit or cap these damages. It’s better to fight for clarity now than face financial ruin later because of an ambiguous clause.

The change order process is your safety net.

In construction, changes are inevitable. But how will these changes be handled? A solid contract will have a clear change order process. If the owner decides they want an extra floor added to a building halfway through construction, the contract should clearly define how that change will be priced and how it will affect the schedule. Without this clarity, you could be left scrambling, absorbing extra costs and facing delays that weren't your fault.

Dispute resolution: Avoid costly litigation.

No one enters into a contract expecting to have disputes, but they happen. The contract should have a well-defined dispute resolution clause. Many contracts now include mediation or arbitration clauses to avoid costly litigation. Arbitration is faster and often cheaper than going to court, but it can also be final and binding. Make sure you understand the implications before signing.

Insurance and indemnification: Protect yourself from the unexpected.

In the world of construction, accidents happen. Your contract should clearly state who is responsible for carrying insurance and what types of insurance are required. Indemnification clauses are also critical. These clauses determine who is responsible for damages, injuries, or accidents on-site. Without a well-written indemnity clause, you might find yourself paying for someone else’s mistakes.

Warranties and guarantees: Know what you're getting.

Your contract should specify what warranties or guarantees the contractor is providing. How long will the work be covered? What will the contractor do if something goes wrong? This is your safety net in case the workmanship is subpar. Don’t settle for vague language. If you’re investing millions into a project, demand clear, specific terms about what happens if something goes wrong.

Termination clauses: Plan for the worst-case scenario.

What happens if the project needs to be stopped mid-way? Contracts should have a clear termination clause that outlines the conditions under which either party can terminate the agreement. Pay close attention to what happens with payments if the contract is terminated. Will you owe money for work completed? Will you be entitled to a refund for unfinished work? Make sure the terms are fair and balanced.

Force Majeure: The escape hatch.

Force majeure clauses cover unexpected events that prevent the contractor from completing the work on time. These might include natural disasters, war, or government actions. The clause should outline how these events will affect the project timeline and costs. It’s critical to ensure this clause isn’t too broad; otherwise, a contractor could potentially use it to escape liability for almost anything.

Retainage and final payment: Ensure completion.

Retainage is a percentage of the contract price withheld until final completion to ensure the contractor finishes the job. Pay attention to how much is being withheld and under what conditions it will be released. Make sure the contract includes final payment terms that guarantee you’re only paying for completed, quality work.

What if something goes wrong?

Bonding is another protection mechanism you should have in place. Performance and payment bonds ensure that if the contractor doesn’t finish the work or fails to pay subcontractors, you have financial recourse. Don’t sign a contract without making sure you’re covered by the appropriate bonds.

Governing law and jurisdiction.

This part of the contract might seem like just a formality, but it’s critical to know where legal disputes will be handled. A contract should specify which state’s laws will govern and where disputes will be litigated. This might not seem important, but if a dispute arises, it could make a massive difference in costs and procedures.

Final thoughts: Know what you're signing.

A well-written construction contract can prevent countless headaches, delays, and financial pitfalls. The key is understanding every single detail, no matter how small. The devil truly is in the details when it comes to these agreements. Make sure you’re not walking into a potential disaster by skipping over sections or not asking the right questions. Always consult with legal professionals who specialize in construction contracts, and make sure everyone involved understands and agrees to the terms.

Your ability to manage a project, stay on budget, and deliver on time starts with the contract. Miss a step here, and you’ll feel the effects throughout the entire project lifecycle. Take the time to review it thoroughly, and you’ll save yourself a world of trouble later on.