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9 Tips to Help Subcontractors Spot Risk in Construction Contracts

Key Takeaways

• Construction contracts have moved well beyond handshake agreements — today's contracts contain complex clauses that can shift significant financial risk onto subcontractors.
• Indemnification clauses can hold subcontractors liable for problems outside their scope of work if the language is broad enough — these must be reviewed carefully before signing.
• Pay-if-paid, termination for convenience, and notice-of-claim clauses are among the highest-risk provisions that subcontractors frequently overlook during contract review.
• Reviewing construction contracts thoroughly before signing — including payment terms, change order procedures, and dispute resolution — is one of the highest-ROI activities for subcontractor back offices.

Once upon a time, construction was a handshake business. GCs and subcontractors were partners and everyone took each other at their word. Unfortunately, that’s not the way the industry operates anymore. It’s rare to base work on verbal agreements. Almost every project has a construction contract in place that aims to protect everyone involved.

But no one really wants to read construction contracts. They’re convoluted, boring, and written in legalese. Most people quickly skim them and skip to the signature, especially if they’ve worked together in the past. But overlooking important contract details is one of the biggest culprits causing construction payment delays.

Everyone working on a project (not just the person who signed it) should read the contract before starting a project—from front to back, every clause and provision. It’s the most important thing you can do to get ahead of document and payment issues. Accounting should review it. Project managers should review it. And if a project lasts longer than a year, everyone should reread the contract as a refresher midway through.

Why Construction Contract Reviews Are Critical

Construction contracts pack a whole lot of information into a few pages. They outline all the details of the project as well as each party’s responsibilities, requirements, and expectations. And they’re often full of a number of clauses that, if you’re not careful, can leave you holding the buck.

Before signing the contract, subcontractors should check the scope of work, contract amount, and project schedule to make sure it’s what they agreed to. Legal should review it for clauses that can put the company at risk so they can spot issues in advance and negotiate more favorable terms.

After signing the contract, accounting should review it to understand all the requirements to get paid. Project managers should read it to be aware of things like how to get change orders approved and any tracking requirements they need to follow.

9 Things to Watch for When Reviewing Your Construction Contracts

There are nine big areas we suggest you pay careful attention to when reading your construction contract. A few of these are clauses that you may want to redline if you’re still in contract negotiation. Others are important sections that will help you get paid faster.

1. Review the Prime Contract

This is the main contract between the project owner and the general contractor (GC). The prime contract often contains clauses that apply to everyone working on the project.

Pay attention to:

• Flow-down or pass-through clauses that apply to you, the subcontractor.
• How the GC is incentivized.
• What the GC needs to submit to the owner in order to get paid and when.

2. Indemnification Clauses

Indemnification clauses define who’s responsible if something goes wrong. Sometimes these clauses are worded in such a way that you’re left responsible for things that aren’t your fault.

Pay attention to:

• Whether you have the proper insurance coverage (compare your policy to the contract).
• Liability (you don’t want anything that makes you liable for problems you didn’t create).

3. Termination Clauses

Contracts typically include termination clauses that define why a project can be canceled, who has the right to cancel it, and the proper process for canceling.

Pay attention to:

• Termination for convenience, meaning that a contract can be canceled at any time for any reason.
• Payment terms for work performed and materials purchased to date.

4. 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 as a result of the project not being finished on time.

Pay attention to:

• Who’s liable for liquidated damages.

5. Warranties

It’s common for construction contracts to require contractors to warranty their labor and materials. One year is typical, but sometimes warranties can extend up to ten years.

Pay attention to:

• Unreasonable warranties for materials or services.
• When the warranty starts

6. Tracking Requirements

Some projects have unique tracking requirements, particularly those related to environmental sustainability and diversity, equity, and inclusion initiatives. These tracking requirements will be specified in your contract.

Pay attention to:

• LEED (Leadership in Energy and Environmental Design) certification: There are four levels of LEED certification. 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 a certain percentage of women- or minority-owned companies must work on the project.
• Certified payroll: Some GCs require certified payroll reports weekly, monthly, and/or quarterly.

7. No-Lien Clauses

No-lien clauses waive your right to file a lien before the project starts. This means that you agree to do the work without any protection if you don’t get paid.

Pay attention to:

• Inclusion of this clause; it’s always a good idea to redline this.
• Subordination of a lien; you don’t want to be last in line.

8. Change Order Requirements

It’s rare to get the Schedule of Values 100% accurate the first time around. Change orders are commonplace as you uncover the need for more (or less) labor or materials.

Pay attention to:

• When do you need to notify the client of a change?
• How long do you have after the notification to submit your change order request?
• How often do you need to provide a change order log to the client?

9. Pay Special Attention to All Payment Requirements

Every construction contract will define all the rules you have to follow to get paid throughout the job.

Pay attention to:

• Pay-When-Paid and Pay-if-Paid Language
• Lien Waiver Requirements
• Payment Application Requirements
• Retainage Requirements

Put Your Contract Terms on Autopilot

Once you read your construction contracts, you’ll realize they’re all different and there are way too many details to remember. You have to figure out a way to document all the important requirements you have to follow, particularly those regarding lien waivers, payment applications, and retention.