By Claire Wilson, Siteline
Contracts and agreements are a necessary part of life, whether you’re renting a car, starting a new job, or buying a home. According to Adobe Acrobat’s contracts survey, however, the vast majority of consumers (nearly 70%) admitted to signing contracts without reading them in full, if at all.
This may be a low-stakes habit in everyday life, but when it comes to construction contracts, it’s a different story. Though they’re lengthy and oftentimes full of legalese, overlooking important contract details is one of the biggest drivers of construction payment delays.
Contract Review: A Team Endeavor
Contract review shouldn’t be a one-person job. Too many subcontractors hand this off to their office manager or accountant and call it good. But different team members bring different perspectives—what matters to your project manager (PM) might not be on your accounting team’s radar, and vice versa.
The contract lays the foundation for how you get paid and sets the stage for every potential dispute, delay, and headache you’ll face. That’s why everyone—from the back office to the field—needs to read it. Front to back, line by line. And if a project lasts longer than a year, everyone should reread the contract as a refresher midway through.
When everyone understands the rules of the game upfront, you avoid those “I didn’t know” moments that can tank your cash flow.
Why You Need the Prime Contract, Too
While your team is reviewing your contract, don’t forget to ask the general contractor (GC) to share a copy of the prime contract with you. Not only does it contain clauses that apply to everyone working on the job, but it also details how the GC is incentivized and what requirements they must meet to get paid by the owner. This information can help your negotiations
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.
9 Contract Red Flags That Kill Cash Flow
With the full picture from both contracts, you’re ready to spot and fix the red flags. Here’s what to watch for:
1. One-Sided Indemnification Language
Indemnification is essentially a contractual agreement between two parties where one agrees to financially protect the other if things go sideways.
Red flags: Language where you’re 1% responsible but indemnifying 100% of the damages, or where you’re agreeing to pay an unlimited amount in damages without adequate defense cost coverage.
Why it matters: You could end up paying for problems you didn’t create, or be on the hook for millions in damages but only get $50,000 to defend yourself.
The fix: Don’t indemnify for more than your actual responsibility, and ensure defense costs align with indemnity limits.
2. Unlimited Liability Exposure
While indemnification means paying for someone else’s problems, liability determines who’s financially responsible for damage they actually caused, which is fair to a point. The problem comes when there are no limits on how much you could owe.
Red flags: Contracts with no caps on your liability exposure, or language making you responsible for “any and all damages” regardless of your actual involvement.
Why it matters: A single incident could bankrupt your company, even if you were barely involved in causing the problem.
The fix: Negotiate liability caps that match your insurance coverage and the actual scope of work on the project.
3. Vague Termination Language
Termination clauses define why and how a project can be canceled and what happens to payments when it is.
Red flags: “Termination for convenience” clauses that don’t cover materials already purchased, or cure periods that are too short to fix problems.
Why it matters: You could lose money on materials sitting untouched at the site, or get fired before you have time to address an issue.
The fix: Add language covering materials purchased but not yet installed, and negotiate for reasonable cure periods of at least 10-15 days.
4. Unjustified Liquidated Damages
Liquidated damages are penalties you’d pay to the owner if the project finishes late.
Red flags: Damages with no justification for the actual costs (like “$100/day” with no explanation), or where you’re liable for delays you didn’t cause.
Why it matters: Courts often throw out penalty clauses, but you’ll spend money fighting them. And if they stick, they can be devastating.
The fix: Ensure you’re only responsible for delays you actually caused, and push back on amounts that aren’t tied to real costs.
5. Excessive Warranty Periods
It’s common for construction contracts to require contractors to have warranties on their labor and materials. But there are limits to this.
Red flags: Unusually long warranty periods or warranties that don’t start until final acceptance (which could be months, or even years, after your work is done).
Why it matters: Extended warranties increase your risk exposure, especially on equipment that could get damaged during ongoing construction.
The fix: Negotiate reasonable warranty periods (typically one year) and clarify that they start after substantial completion—not installation and not final completion.
6. Missing Change Order Protections
Most subcontractors have dealt with their fair share, but the process for managing these changes varies from job to job. Don’t leave anything to chance.
Red flags: No clear process for change order (CO) approval, unreasonably tight windows for submitting CO requests, or language requiring you to proceed with extra work before getting written approval.
Why it matters: Moving forward without formal, approved change orders means you’re paying for changes out of your own pocket with no guarantee of reimbursement.
The fix: Ensure key change order details—like notification timing and submission deadlines—are clearly defined and reasonable. Never agree to start extra work without a signed change order.
7. Pay-If-Paid Clauses
This clause essentially means that if the GC doesn’t get paid, they’re not going to pay you. I’ll keep this one short and sweet:
Red flag: You see a pay-if-paid clause.
Why it matters: This language forces you to bear the risk of the owner’s financial problems. Many states have either outlawed or severely restricted these clauses because they can be so problematic for subcontractors.
The fix: Ask for this clause to be removed and replaced with pay-when-paid language instead (you get paid when the GC gets paid). Also, include a reasonable payment timeframe, like 60 days maximum.
8. No-Lien Clauses
Lien rights are your legal claim to a property if you don’t get paid. In other words, they’re your most powerful collection tool.
Red flag: Clauses requiring you to waive lien rights before the project starts.
Why it matters: By agreeing to a no-lien clause, you’re giving up your strongest legal protection against nonpayment, leaving you with few options if payment problems do arise.
The fix: Always redline no-line clauses. You can’t recover these rights once they’re lost.
9. Excessive Retainage Terms
If you want to collect that last bit of what you’re owed once a project’s complete, make sure you look closely at the retainage requirements.
Red flags: Retainage percentages above 10%, or contracts that hold all retention until 100% project completion with no milestone releases.
Why it matters: Some contractors wait years for retention. That’s your money sitting in someone else’s account, earning them interest.
The fix: Negotiate milestone retention releases when you reach certain project milestones, or push for retention reduction at 50% completion (from 10% down to 5%).
Other Important Contract Details
Beyond the major red flags, watch for these often-overlooked issues:
Outdated Documents: Schedules attached to contracts may be more than eight months old. Always ask which version of the plans and specs they’re using.
Missing Referenced Documents: Contracts often reference specifications or drawings that aren’t actually included. Get copies of everything before signing.
Unrealistic Schedules: Don’t bid on projects where drawings are only 60% complete. Wait until designs are much closer to 100% to reduce your risk.
LEED or MWBE Requirements: These tracking requirements can impact your payment if you don’t stay on top of them. Know which level of certification is required and what your responsibilities are.
Force Majeure Gaps: With tariffs and supply chain issues still affecting projects, make sure your contract includes specific language covering these situations for both time extensions and additional compensation.
Protecting Your Interests
Contract review isn’t just about legal protection—it’s about protecting your cash flow. A bad contract can turn a profitable job into a cash flow nightmare, no matter how well you execute the work.
Take the time to read every contract thoroughly, involve your whole team in understanding the requirements, and don’t be afraid to negotiate terms that don’t work for your business. Your cash flow may depend on it.
About the Author:
Claire Wilson is the co-founder and COO of Siteline, a billing software for subcontractors. Previously, she was a project manager at Tishman Construction in New York City, where she worked on major projects like Hudson Yards and JP Morgan’s Corporate Headquarters. She is an active CFMA San Francisco member, serves on the Bay Area Subcontractors Association board, and has spoken at numerous regional and national construction conferences. Claire holds a BS in Civil Engineering from Bucknell University.
