Claire Wilson, Head of Construction, Siteline

The construction industry is no stranger to unexpected challenges. From unpredictable weather conditions to supply chain issues to workforce shortages, there is no limit to what can impact a project’s timelines and scope. To mitigate these risks—and reduce your chances of encountering delays, cash flow issues, and disputes—a construction contract is your greatest safeguard.

That said, it’s critical that everyone involved in a project reviews the contract before work begins. Easier said than done, right? Construction contracts are dense and filled with language that is difficult for those without a legal background to understand. To help you cut through the legalese—and protect your business’s best interests—here are eight key areas you should pay careful attention to when reading your contracts.

A Preliminary Consideration

But first, let’s briefly talk about the prime contract. You should always ask the GC to share a copy of the prime contract with you as it contains essential information you should be aware of, such as: 

• clauses that apply to everyone working on the job (trade partners most definitely included);
• details about how the GC is incentivized; and 
• requirements the GC must meet to get paid by the owner.

Similarly, subcontracts typically include language that stipulates the subcontractor is obligated to follow the same terms that the prime contractor has with the owner, commonly referred to as the “Flow-Down.” 

Most GCs don’t have an issue sharing the prime contract, but don’t be surprised if some confidential information is redacted—that’s normal. If the GC doesn’t want to share the prime contract with you, you may want to reconsider doing business with them. 

With that in mind, let’s move on to the main areas of contractual risk.

Key Areas to Review When Examining Your Contracts

1. Indemnification Clauses

Indemnification clauses define who is responsible if something goes wrong and can be used to shift costs from one party to the other. As indemnification clauses flow downstream from the owner to the GC to the subcontractor, pay attention to how they’re worded so that you’re not saddled with paying for something that isn’t your fault.

Always cross-reference these clauses with your insurance policy to ensure nothing is included that isn’t going to be insured. Additionally, look for any mention of liability—specifically, what makes you liable for problems you didn’t create.

2. Termination Clauses

When can you, as a subcontractor, cancel or suspend your work? And what is the proper process for doing so? That all depends on what’s in the contract’s termination clause, of which there are two types:

• Termination for cause: This occurs when a party fails to perform something they were required to do (a.k.a. “defaulted”). Defaults are significant problems or recurring issues, like poor workmanship, consistent failure to meet deadlines, and understaffing.
• Termination for convenience: Rarely seen in private contracts, this clause gives the owner the right to end the project anytime for any reason. 

Termination clauses often specify that subcontractors will be paid for work performed before the termination date but say nothing about materials. In these cases, you’ll want to add a clause that covers you for materials purchased, even if they weren’t used on the project due to cancelation.  

3. Liquidated Damages

Liquidated damages are penalties for completing the project past schedule. They’re intended to compensate the property owner for any loss they experience due to the project not being finished on time. That said, it’s critical that you: 

• understand who is liable for liquidated damages and 
• ensure that you’re only responsible for the liquidated damages associated with any delays you’ve caused.

It’s important to ensure that the amount of liquidated damages is reasonable and proportional to the actual loss incurred.

4. Warranties

Most construction contracts require contractors to warranty their labor and materials. Typically, this warranty period lasts one year, although it can sometimes extend up to ten years. So, if you encounter an unusually long warranty while reviewing a contract, make sure you’re comfortable honoring it (and consider redlining it if not). 

Also look at when the warranty starts. Ideally, warranties should begin the day the subcontractor completes the work. However, the prime contract may specify that the warranty starts a year after the owner approves it, which can leave any equipment installed before the warranty begins at risk of damages. Once the contract is signed, keep a record of the warranty periods for future reference. 

5. Tracking Requirements

Certain projects have unique tracking requirements included in the contract, particularly those related to environmental sustainability and diversity, equity, and inclusion initiatives. Some examples of these requirements include:

• LEED (Leadership in Energy and Environmental Design) certification: There are four levels of LEED certification. It’s important that you know which level the project must meet and what your responsibilities are.
• MWBE (Minority and Women-Owned Business Enterprises) tracking: Some projects will require that women- or minority-owned businesses complete a certain percentage of the work. This is especially relevant if you bring in lower-tier subcontractors or vendors to execute your part.
• Certified payroll: Some GCs require certified payroll reports weekly, monthly, and/or quarterly. Know what’s required in your contract so you can proactively collect the reports and submit them on time; otherwise, your payment might be impacted.

6. No-Lien Clauses

If you come across a no-lien clause in your review, know that this clause forfeits your right to file a lien before the project begins. By agreeing to this clause, you are essentially agreeing to work without protection in the event you don’t get paid. We recommend that you redline this item if present.

This section may also include a subordination of a lien clause, which determines who gets paid first (and last) if a lien is foreclosed on. The further down the lien tier you are, the less chance you have of recovering full payment—so make sure you’re not the last one in line.

7. Change Order Requirements

It’s rare to get the Schedule of Values 100% accurate the first time around. In fact, CoConstruct’s 2021 industry insights article found that most construction projects worth between $500,000 and $1M generate an average of 8.1 change orders. This is because material and labor estimations often change throughout the project due to unforeseen circumstances.

When seeking approval for change orders, there is a specific process to follow, which is typically outlined in the contract. Look for:

• When it’s necessary to notify the client of a change;
• The amount of time you have to submit your change order request after notifying the client; and
• How frequently you need to provide the client with a change order log.

8. All Payment Requirements

It already takes a long time for trade contractors to get paid while on the job—we’re talking 90 days on average. Therefore, it is crucial to carefully review the contract’s payment requirements to avoid any further delays. Pay close attention to the following items.

Pay-when-Paid and Pay-if-Paid Language 

Pay-when-paid means the GC will pay you after the owner pays them; this is how construction payments generally work. 

Pay-if-paid means if the GC doesn’t get paid, they’re not going to pay you either. If this clause is in the contract, ask for it to be removed.

Lien Waiver Requirements 

Filing the right lien waivers at the right time will help you get paid faster. Make sure you know:

• Whether the GC has specific lien waiver forms; 
• If the lien waivers need to be notarized; and
• When and how the lien waivers must submitted. 

Payment Application Requirements 

Every construction project has its own unique payment application requirements. Review and document details like:

• The type of payment application form used for the project (e.g., AIA billing);
• Whether the pay apps requires notarization;
• How often you’re allowed to submit progress payment requests; 
• The deadline for submitting pay applications; and
• How to submit pay applications (e.g., through a payment portal).

Retainage Requirements

Retainage is a percentage of payment withheld until a project is 100% complete. So, if you want to collect your full payment, some questions you must answer include:

• What’s the retainage for labor and materials?
• Are these rates fixed or variable? 
• What do you need to do to get the last bit of retention?

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Every construction contract is different. However, once you familiarize yourself with the areas that matter most—and understand how to document the essential requirements you must follow—the smoother these reviews become. Regardless, you should always circle the areas you’re unclear about and send them to your legal team for review. They can help you spot risk in advance and advise you on negotiating more favorable terms.

From there, make sure to loop in your accounting and project management teams to ensure everyone is aligned on payment, change orders, and tracking requirements. It will save you time (and money) in the long run.

About the Author:

Claire Wilson is Head of Construction Solutions at Siteline, the only pay app and lien waiver management software for trade contractors. Previously, Claire was a project manager at Tishman Construction in New York City where she worked on monumental projects including Hudson Yards and JP Morgan’s Corporate Headquarters. She has a BS in Civil Engineering from Bucknell University and now serves on the board of the Bay Area Subcontractors Association (BASA).