A well-drafted construction contract is the foundation of a successful project, ensuring clarity, protecting all parties, and minimizing disputes. Understanding key contract clauses can help safeguard your interests and keep your project on track, whether you’re a commercial property owner, developer, or investor. Every owner should know a breakdown of the essential clauses before signing a construction contract.
1. Scope of Work
Why It Matters:
The Scope of Work (SOW) defines the contractor’s responsibilities, deliverables, and project specifications. Without a clear scope, miscommunication and cost overruns can occur.
What to Look For:
- A detailed description of tasks, materials, and labor.
- Clear performance expectations and quality standards.
- Inclusion of plans, drawings, and technical specifications.
2. Payment Terms and Schedule
Why It Matters:
Clearly defined payment terms help avoid disputes over costs and ensure financial transparency throughout the project.
What to Look For:
- Payment schedule (e.g., milestone payments, lump sum, or progress payments).
- Retainage percentage (a portion withheld until completion).
- Allowable changes to pricing (e.g., fixed price vs. cost-plus contracts).
- Penalties for late payments and dispute resolution procedures.
3. Change Orders
Why It Matters:
Changes in project scope, unforeseen site conditions, or material substitutions can impact the timeline and budget.
What to Look For:
- A defined process for submitting and approving change orders.
- Who has authority to approve changes.
- How changes will impact costs and schedule.
4. Project Timeline and Delay Provisions
Why It Matters:
Delays can result in significant financial losses, especially in commercial construction where rental income and occupancy timelines are critical.
What to Look For:
- A realistic project schedule with milestones.
- Clear force majeure provisions (acts of God, weather delays, supply chain disruptions).
- Liquidated damages clause outlining penalties for delays caused by the contractor.
5. Warranties and Defect Liability
Why It Matters:
A warranty clause protects owners from substandard workmanship or defective materials after project completion.
What to Look For:
- Length of warranty period (typically 1–2 years for workmanship, longer for materials and structural components).
- Responsibility for repairs and how defects will be addressed.
- Manufacturer warranties for mechanical, electrical, and plumbing systems.
6. Indemnification and Liability Protection
Why It Matters:
This clause determines who is legally responsible for damages, injuries, or lawsuits arising during construction.
What to Look For:
- Indemnification language protecting the owner from contractor negligence.
- Clear definitions of liability limits.
- Insurance requirements, including general liability, workers’ compensation, and builder’s risk insurance.
7. Dispute Resolution and Termination Clause
Why It Matters:
Conflicts can arise over payments, performance, or contract interpretation. A well-drafted dispute resolution clause prevents costly litigation.
What to Look For:
- Mediation or arbitration requirements before legal action.
- Termination for convenience (allowing the owner to end the contract under certain conditions).
- Contractor default provisions detailing the steps if the contractor fails to perform.
8. Lien Waivers and Payment Protections
Why It Matters:
A mechanic’s lien can be placed on your property if a contractor or subcontractor isn’t paid, even if you paid the general contractor.
What to Look For:
- Lien waiver requirements before each payment is made.
- Proof of subcontractor payments to prevent unexpected claims.
- A process for handling disputed invoices without delaying work.
Final Thoughts
Understanding these key contract clauses helps owners protect their investments, manage risks, and avoid costly disputes. Before signing a construction contract, consult a construction consultant or legal professional to ensure the terms align with your project goals.
At Orion Project Management, we provide expert construction contract review, administration, and owner representation to help you navigate the complexities of commercial construction agreements. Contact us today at www.orionppm.com to ensure your project is contractually sound and set up for success.
Michael Greco – Lead Consultant, Orion Project Management
With 20+ years of experience in construction project management, Michael Greco specializes in construction consulting, administration, management, and owner representation. As Lead Consultant at Orion Project Management, he ensures seamless project execution, focusing on cost control, risk management, and stakeholder coordination.
Michael has managed complex commercial projects, including remote cellular site developments in Hawaii, steel fabrication initiatives, tenant improvements, and large-scale ground-up builds. Before founding Orion Project Management, he held leadership roles with the General Services Administration (GSA) and a general contractor, where he developed technology-driven systems for sales and project tracking.
Michael is committed to efficiency, quality, and cost-effective solutions, helping clients navigate the complexities of construction with confidence.