For a contractor, signing a construction contract is not simply the final step before getting started. It is the moment when the financial and legal risks of the project are allocated.

A contract may look straightforward: the contractor agrees to perform certain work, the owner agrees to pay a specified price, and the project has a target completion date. But the provisions buried in the contract can determine whether a contractor makes money on the job or spends months fighting to get paid.

Before signing an owner-contractor agreement, contractors should pay particular attention to five areas: scope of work, payment and change orders, delays, indemnification and insurance, and termination and dispute resolution.

1. Scope of Work: Know Exactly What You Are Agreeing to Build

A contractor's most important question before signing a contract should be simple:

What exactly am I obligated to do for the contract price?

That question is not always as easy to answer as it sounds.

Construction agreements frequently incorporate architectural drawings, specifications, schedules, proposals, addenda, allowances, and other documents. Those documents may contain inconsistencies or requirements that were not contemplated when the contractor prepared its bid.

A contractor should carefully review the entire contract package, and not just the agreement itself.

Particular attention should be paid to:

• The plans and specifications incorporated into the contract;
• Exclusions contained in the contractor's proposal;
• Allowances and unit prices;
• Owner-supplied materials and equipment;
• Permit and inspection responsibilities;
• Design responsibilities;
• Site conditions;
• Demolition and existing conditions; and
• The order of precedence among conflicting contract documents.

The contractor should also be wary of broad language requiring it to perform work that is "reasonably inferable" from the contract documents or necessary to complete the project.

That language can become a battleground when the owner contends that additional work was included in the original contract price, and the contractor believes it constitutes extra work.

The practical lesson: If something is not included in the contractor's price, it should be clearly identified as an exclusion. Ambiguity at the beginning of a project can become an expensive dispute later.

2. Payment and Change Orders: Don't Let Extra Work Become Free Work

Cash flow is critical to every contractor. A contract that provides a substantial payment at the end of a project may look acceptable on paper but create serious financial pressure during construction.

The payment provisions should clearly establish:

• The contract price;
• The payment schedule;
• Progress-payment requirements;
• Retainage;
• Billing procedures;
• Required payment documentation;
• Timing of payment;
• Conditions for payment; and
• Rights to suspend work for nonpayment, where applicable.

But payment provisions are only half the equation.

Change-order provisions may be even more important.

Construction projects inevitably change. Owners request upgrades. Architects revise plans. Existing conditions differ from what was represented. Materials become unavailable. Government authorities impose additional requirements.

Contractors need a clear contractual mechanism for getting paid when the work changes.

Ideally, the contract should specify that changes to the work must be documented in writing and should establish how the price and schedule will be adjusted.

Contractors should also pay attention to provisions requiring notice of additional work within a short period. A contractor that performs extra work without following the contract's notice requirements may later face an argument that it waived its right to additional compensation.

At the same time, contractors should be cautious about performing substantial additional work based solely on an owner's verbal instruction.

If the work is outside the original scope, document it. If the price changes, document it. If the schedule changes, document it.

Good documentation is often a contractor's strongest protection when a payment dispute eventually arises.

3. Delays: Don't Accept Responsibility for Delays You Don't Control

Contractors are frequently held responsible for completing projects by a particular date. But the contractor may not control everything that affects the schedule.

Owners may delay decisions or approvals. Architects may issue revised drawings. Other contractors may fail to complete their work. Materials may be delayed. Permits may take longer than anticipated.

The contract should address how these events affect the contractor's obligations.

Contractors should carefully review provisions concerning:

• Extensions of time;
• Owner-caused delays;
• Delays caused by other contractors;
• Differing or unforeseen site conditions;
• Material shortages;
• Weather;
• Force majeure;
• Notice of delay;
• Acceleration; and
• Liquidated damages.

One particularly important issue is notice.

A contract may require the contractor to provide written notice of a delay within a specified number of days. Failure to comply can potentially affect the contractor's ability to obtain an extension or additional compensation, depending on the contract and applicable law.

Contractors should also be cautious about agreeing to an aggressive completion date without considering whether the schedule depends upon actions by the owner, architect, engineer, subcontractors or other third parties.

A contractor should not assume that a schedule provision is merely administrative. It can become a significant financial obligation.

4. Indemnification and Insurance: Understand the Risks You Are Taking On

Indemnification provisions can transfer substantial risk to a contractor.

A typical provision may require the contractor to indemnify, defend and hold harmless the owner from certain claims, damages, losses, or expenses arising from the contractor's work.

Contractors should determine exactly what triggers the obligation.

Does the contractor indemnify the owner only for losses caused by the contractor's negligence? Does the provision extend to subcontractors? Does it cover claims arising from the owner's conduct? Does it require the contractor to defend a claim before fault has been established?

Those distinctions matter.

The insurance provisions should also be reviewed together with the indemnification provisions. Contractors should confirm that the insurance they are required to maintain actually corresponds to the risks they are assuming under the contract.

The contract may require:

• Commercial general liability insurance;
• Workers' compensation coverage;
• Automobile liability insurance;
• Builder's risk coverage;
• Umbrella or excess coverage;
• Professional liability insurance; or
• Additional insured status for the owner or other parties.

A contractor should never assume that an insurance requirement is simply boilerplate. An obligation to provide coverage that is unavailable, prohibitively expensive, or inconsistent with the contractor's existing policies can create a significant problem.

The key question is not simply "Do I have insurance?" It is "Does my insurance cover the contractual risk I am agreeing to assume?"

5. Termination and Dispute Resolution: Know How the Contract Ends Before You Sign It

Contractors often focus on how a project begins and forget to consider how the relationship can end.

An owner may have the right to terminate the contractor for cause if the contractor materially breaches the agreement, fails to maintain the schedule, abandons the project, or fails to correct defective work.

But contractors should also look carefully at whether they have meaningful remedies when the owner breaches the agreement. For example:

• What happens if the owner fails to make a payment?
• Can the contractor suspend work?
• How much notice is required?
• Can the contractor terminate the agreement?
• Is the contractor entitled to recover demobilization costs, lost profits, or other damages?

These questions should be answered in the contract and not left to be negotiated after the relationship has broken down.

Contractors should also understand any termination-for-convenience provision. An owner may have the right to terminate a project even when the contractor has not breached the contract. If that right exists, the contract should clearly establish what the contractor gets paid following such a termination, including payment for completed work, committed costs, demobilization and, where negotiated, applicable profit or other compensation.

Finally, the contractor should understand the dispute-resolution provision.

Will disputes go to court, arbitration, or mediation? Where will the dispute be heard? Does the prevailing party have a right to recover attorneys' fees? Are there contractual notice requirements or deadlines for asserting claims?

These provisions can significantly affect the contractor's leverage and the cost of pursuing a claim.

The Contract Is Part of the Job

Contractors are experts at building. But a profitable project requires more than good construction; it requires a contract that properly allocates risk and a disciplined process for documenting what happens during the job.

Before signing an owner-contractor agreement, contractors should focus particularly on five questions:

1. What exactly am I required to build?
2. How and when do I get paid, including any changes?
3. What happens if the project is delayed for reasons outside my control?
4. What risks am I assuming through indemnification and insurance requirements?
5. What are my rights if the owner breaches the agreement or terminates the project?

The contractor who addresses these questions before mobilizing to the site is in a substantially better position to manage the project once construction begins.

A construction contract should not merely describe the work. It should protect the contractor's ability to get paid for the work it performs and provide a clear allocation of responsibility when the project does not go according to plan.

If you have questions about whether you’ve protected your rights and avoided potential exposures in your contracts, feel free to connect with Ritika directly at: rv@gdblaw.com.