Signing a new construction contract is exciting but risky. While it promises steady income and challenging work, rushing in without preparation can lead to disputes, payment delays, and unexpected costs. Smart contractors know that a thorough contract review can prevent headaches. This guide covers key elements to protect your business and build strong client relationships.
Review the Scope of Work
The scope of work serves as your project’s roadmap, defining exactly what you’re responsible for completing. Many contractors make the mistake of skimming this section, assuming they understand the project based on initial conversations. This oversight can lead to costly misunderstandings down the line.
Start by examining every line item in the scope. Does it match what was discussed during your initial meetings? Look for vague language like “as needed” or “similar work” that could be interpreted differently by you and your client. These ambiguous phrases often become sources of conflict when clients expect additional work that you hadn’t planned to include.
Pay special attention to project specifications and quality standards. If the contract references specific materials, brands, or installation methods, ensure you’re familiar with these requirements and have factored their costs into your pricing. Sometimes clients specify premium materials without understanding the price implications, leading to budget disputes later.
Understanding Project Boundaries
Consider what’s not included in the scope as carefully as what is. Exclusions should be clearly stated to prevent clients from assuming certain work is part of your responsibilities. For example, if site cleanup isn’t included in your scope, make sure this is explicitly noted to avoid end-of-project disagreements.
Documentation requirements also fall under the scope of review. Some contracts require detailed progress reports, photo documentation, or regular meetings. Factor the time needed for these administrative tasks into your project timeline and pricing.
Think about potential scope creep situations. How will additional work be handled? The contract should include clear procedures for modifying the original scope, including approval processes and pricing mechanisms for extra work.
Assess the Payment Terms
Cash flow makes or breaks construction businesses, making payment terms one of the most critical contract elements to evaluate. Beyond the total project cost, examine when and how you’ll receive payment throughout the project lifecycle.
Most construction contracts use progress payments tied to completion milestones. Review these milestones carefully—are they realistic and achievable? Some contracts set overly ambitious timelines or tie payments to subjective completion standards that clients can manipulate to delay payment.
Payment Processing and Timeline
Understand the invoice and payment processing timeline. Many contracts specify that invoices must be submitted within certain timeframes and that clients have 30, 60, or even 90 days to process payment. These extended payment periods can strain your cash flow, especially on larger projects where you’re covering material and labor costs upfront.
Look for retention clauses that withhold a percentage of each payment until project completion. While standard in the industry, excessive retention percentages can create cash flow challenges. Typical retention ranges from 5-10% of each payment, but some contracts demand higher percentages that may not be sustainable for your business.
Change order payment procedures deserve special attention. Construction projects frequently require modifications, and you need clear procedures for pricing and paying for additional work. Without proper change order protocols, you might complete extra work but struggle to receive compensation.
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Evaluate Risk Allocation
Construction projects involve inherent risks that someone must bear when problems arise. Smart contractors examine how contracts allocate these risks between parties, ensuring they’re not accepting unreasonable liability for situations beyond their control.
Insurance and bonding requirements represent one major risk consideration. Review what types and amounts of insurance the project requires, then verify that these align with your current coverage. Some projects demand specialized insurance that could significantly impact your costs.
Understanding Liability and Indemnification
Liability clauses determine your responsibility when accidents, delays, or defects occur. Watch for broad indemnification language that makes you responsible for problems you didn’t cause. For example, some contracts hold contractors liable for design defects even when they’re following architect-provided plans.
Performance bonds, payment bonds, and other surety products also carry costs that should be factored into your project pricing. These financial instruments protect clients but require contractors to demonstrate financial stability and pay premiums that affect project profitability.
Weather delays, permit delays, and other external factors can derail project schedules. Examine how the contract handles these situations. Are you penalized for delays beyond your control? Can you recover additional costs when external factors extend the project timeline?
Consult Legal Counsel
Construction contracts contain complex legal language that can have significant implications for your business. While you might understand the technical aspects of construction work, the legal ramifications of contract terms often require professional interpretation.
A construction law attorney like those in Utah can review contracts before you sign them, identifying potential problems and suggesting modifications to protect your interests. This upfront investment in legal review often costs far less than resolving disputes after they arise.
Key Areas for Legal Review
Your attorney should pay particular attention to dispute resolution procedures. Many contracts require arbitration or mediation before allowing court proceedings. While these alternative dispute resolution methods can be faster and less expensive than litigation, they also have limitations that might not serve your interests in all situations.
Termination clauses need careful legal scrutiny. Under what circumstances can either party end the contract? What happens to work completed and materials purchased if termination occurs? These provisions can significantly impact your financial exposure on projects.
Warranty obligations extend your responsibilities beyond project completion. Some contracts require extensive warranty periods or hold contractors responsible for problems that might stem from factors beyond their control. Legal counsel can help negotiate reasonable warranty terms that protect clients without exposing your business to excessive long-term liability.
Conclusion
Thoroughly reviewing project contracts protects your business from risks and ensures profitable client relationships. Focus on the scope of work, payment terms, risk allocation, and legal provisions. Contracts are negotiable, so discuss changes if needed. Use a contract review checklist to avoid missing key details. Investing time in review can save months of disputes, payment issues, and unexpected costs.
