Construction contracts are more than just paperwork, they’re legally binding agreements that can shape the success or failure of a project. Whether you’re a general contractor or a subcontractor, understanding the key terms in a construction contract can help protect your business from unnecessary liability and financial risk.
Understand the Scope and Terms
Start by reviewing the scope of work. The description of services should be detailed and written in clear terms, enough that a third party could understand what’s expected. You should also confirm the timeline for completion, as well as how changes to the scope are handled.
The terms of payment should be just as clear. Make sure the schedule, amounts, and payment triggers are defined. Lack of clarity here often leads to disputes down the line.
Know Your Warranties and Liabilities
Contracts may contain both express and implied warranties. Express warranties are spelled out in the agreement, while implied warranties, like merchantability or fitness for a specific purpose, may be assumed under law. Be cautious of broad warranty disclaimers, which may limit your legal protections in the event something goes wrong.
Also pay close attention to clauses around damages, indemnification, and liability limits. These terms define who pays and how much, if things go sideways. If your company is assuming risk for a situation it doesn’t control, that’s a red flag.
Don’t Overlook the Fine Print
Several other clauses deserve close review:
- Insurance requirements: Do you meet the coverage minimums? Are you expected to add the other party as an additional insured?
- Termination and “right to cure” clauses: When and how can either party back out of the contract?
- Dispute resolution and governing law: Make sure you’re comfortable with the jurisdiction and legal process outlined.
- Intellectual property and standard of care: Especially relevant if you’re providing design or proprietary services.
Use Standard Forms with Caution
Industry-standard contracts from the AIA, EJCDC, or AGC can be helpful starting points. However, they often require jurisdiction-specific customization and may reflect the bias of the drafting organization.
In short, don’t rush through contract review. Take the time to understand the terms or work with legal counsel or your insurance advisor to help you assess the risk. At McHugh Insurance Group, we’re here to help construction businesses identify potential liability and ensure coverage aligns with contract requirements.