A Straightforward Guide to Construction Contract Review

Construction contracts are like the glue for the project team. They're the ties that bind the working relationships and goals for the project, containing information about responsibilities, liabilities and processes that govern a relationship between construction stakeholders.

Despite their importance, contracts are long, and project team members are busy — so it’s easy to understand why something might be inadvertently missed. Contracts tend to be mostly standardized, lulling readers into believing they’ve read all the information before — and they’re often written in complicated legal language. This is why careful construction contract review is so important.

This article will discuss the reasons for carefully reviewing construction contracts, how to keep track of contracts — and some of the most impactful clauses to watch out for.

What is a construction contract review?

Construction contract review involves the examination of construction documents that govern the relationship between stakeholders on an individual project to gain a complete understanding of the expectations of that relationship.

The construction contract defines the agreement between construction stakeholders on a new project. The contract should outline the scope, timeline and budget for the work, as well as the responsibilities of each stakeholder.

Construction contracts can be thousands of pages, including the schedule of values, construction drawings and specifications sheets. For contracting firms that take on multiple projects at once, it can be a lot to digest.

Who’s in charge of reviewing all those pages may depend on the size of the project and the nature of the relationship in question. For instance, an owner seeking to build out a new project will write up a prime contract that applies to the owner and the general contractor.

The GC team should review that prime contract — and since contracts are lengthy and can be complicated, large GCs may have a dedicated contract administrator role. The person in that role is responsible for overseeing the contractual agreements and making sure that everyone on the team adheres to them.

Negotiating a Construction Contract

When contractors sign construction contracts, they agree to all the terms and conditions — even some they may have missed. Understanding the information in a construction contract is an important part of project planning and risk management. However, contractors do have a say in the terms of the construction contract documents they sign off on. 

The contractor gets a first glimpse at the owner’s terms during the request for proposal (RFP) stage, where the project is described in detail, and the first presentation of scope and timeline may be revealed. Once the contractor is selected for the job, the GC’s executive and business development team work to come to contract terms that work for both the owner and the contractor.

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5 Must-Read Sections of Construction Contracts

Construction firms need to read their construction contracts front-to-back, or else they risk creating new problems for the project and their company, like scope creep and missed payment app deadlines. Here are some key areas contractors should pay particular attention to when reading their construction contracts.

1. Scope of Work

   The scope of work sets out a contractor’s responsibilities for a project — it spells out the exact work a contractor needs to complete to fulfill a contract. Contractors need to watch for vagueness that will cause confusion or misunderstandings with the owner, and clear it up promptly. When owners and contractors have different views about project scope, it can lead to delays, disputes and rework — which all cost time and money.

2. Project Timeline and Milestones

   Contracts should include specific project timelines, including important milestones. Contractors need to understand these timelines and strive to meet deadlines — or else they risk financial penalties and strained client relationships. 

3. Payment Terms and Conditions

   Construction contracts lay out specific payment terms, including payment schedules, pay application deadlines and any other conditions for financial release. Contractors need to understand and abide by these guidelines to maintain regular payments and protect healthy cash flow.

4. Change Order Procedures

   Like it or not, change orders are a common occurrence on construction projects. Contractors should understand the procedures for approaching scope changes to gain owners’ official approval before work begins. Without specific and clear change order procedures, contractors and owners may end up in disputes over added costs and lengthened timelines.

5. Risk Management

   Contractors need to fully understand their level of risk on every construction project. Contract clauses addressing liability and indemnification define the situations in which contractors may be held responsible for damage and losses, while force majeure clauses define natural disasters or weather events that cause damage or delays contractors can’t be held responsible for. Further, contracts often stipulate the specific types and amounts of insurance the contractor requires to maintain compliance.

Be careful with these construction contract clauses.

Construction documents aren’t meant to trick anybody, but they are written to protect the rights and interests of the people who write them. Contractors need to watch out for certain clauses that may protect other construction stakeholders while putting them at increased risk.

Pay-when-Paid

In an effort to decrease risk on a construction project, general contractors will sometimes include a “pay-when-paid” or “pay-if-paid” clause in the contract documents. For instance, a pay-when-paid clause seeks to delay payments from the GC to the subcontractor until the GC has itself received payment from the owner.

Contractors should be aware of these clauses and how they will affect cash flow on a project, as well as the prompt payment laws that may apply in the project location. Subcontractors should pay particular attention to these clauses as they may make subcontractor payments contingent upon payments to upper-tier contractors.

No Damage for Delay

A “no damage for delay” clause protects the upper-tier construction stakeholders from having to pay damages to lower-tiers for delays they have caused.

For example, if a contractor frames a building using outdated construction drawings and then needs to move a wall over, it could delay the plumber from coming in to run water lines. Having already purchased the materials and set aside time to start the work, the plumber is now losing money waiting for the work to begin. Based on the no damage for delay clause, the contractor would not be required to reimburse the plumber for any of the costs that result from having to wait to begin work.

Termination for Convenience

When a project gets canceled before it’s complete, it can become tricky to parse out who’s responsible for the costs already incurred. Termination for convenience clauses indicate that the contractor will be paid for services performed and installed until the project termination date, leaving the contractor on the hook for any materials or equipment already purchased for the project but not yet installed. The contractor can negotiate to change the contract to include reimbursement for any materials or equipment already purchased for the project.

No-lien Clause

Construction liens are one of contractors’ most powerful tools against nonpayment in the construction industry. Liens allow contractors who have not been paid to claim a security interest against the property itself.

A no-lien clause can remove a contractor’s right to file a lien against the property. In many areas, lien rights are protected by law. Contractors who see this clause in a contract should be wary of its implications before signing.

Flow-down Clauses

Subcontractor contracts sometimes include a flow-down clause, which applies the terms of the owner-prime contractor contract to the lower-tier contractors. Subs who find a flow-down clause in their contracts should request copies of prime contracts so they know what they’re agreeing to.

Taking Care to Understand Contracts

Construction contracts are formal agreements between two stakeholders on a construction project. Far from being mere formalities, they are jam-packed with information that dictates how partnerships will work, what the contractors’ responsibilities are and the protections parties have against risk.

Seeking legal counsel for reviewing construction contracts is a good strategy: It ensures that all legal terms and conditions are thoroughly understood, preventing potential disputes or misunderstandings. Construction lawyers can identify and mitigate risks by highlighting unfavorable clauses and suggesting necessary amendments to protect a contractor's interests. By reviewing and being aware of all the terms in their contracts, construction stakeholders can avoid common pitfalls and better manage their partnerships.

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