Key Clauses Every Contractor Should Negotiate Before Signing
In construction, the contract serves as the foundation of the project, outlining responsibilities, payment terms, and risk allocation.
Yet many contractors sign agreements without carefully reviewing or negotiating key clauses, which can leave them vulnerable to disputes, delays, or financial loss.
Here are the most important clauses every contractor should pay attention to (and negotiate, if necessary) before putting pen to paper.
1. Scope of work
The scope of work defines exactly what tasks, deliverables, and responsibilities are included in a construction project.
Before signing anything, it’s crucial to outline all tasks, materials, and deliverables. A vague or incomplete scope can lead to disputes about what work is included and what isn’t.
Be sure to negotiate for clear definitions of deliverables, exclusions, and variation procedures. Doing this properly will protect your profit margin, reduce disputes, and set realistic expectations for both you and your client.
2. Payment terms
Payment terms are one of the most critical aspects of any construction contract. They dictate when and how you’ll be paid, and directly affect your cash flow.
Unfortunately, many contracts include terms that heavily favor the client, leaving contractors waiting long periods before receiving money for completed work.
To ensure you don’t have to wait for long or unclear payment terms, hire a lawyer who specializes in building legal advice.
They will help you negotiate for regular progress payments, reasonable timeframes, interest on late payments, and security of payment rights.
3. Variations and change orders
Construction projects rarely go exactly as planned. Design changes, unforeseen site conditions, or client requests often require adjustments to the original contract. Without clear clauses, these variations can lead to disputes and lost revenue.
When projects evolve, all the additional changes can significantly affect time and costs, leaving you doing extra work without payment.
When negotiating, make sure you insist that all variations be documented and signed off before work begins. Additionally, establish how changes to the original scope are handled, approved, and priced.
4. Time for completion and extensions
Clearly defined timelines are crucial in construction contracts. A vague or unrealistic schedule can lead to disputes, delays, and financial penalties. Contractors need clarity on deadlines and protection when delays occur through no fault of their own.
That’s why it’s crucial to negotiate for realistic compilation dates, extension of time provisions, and notification requirements.
Additionally, it’s also important to negotiate for flexibility for minor delays.
5. Liquidated damages
Liquidated damages are pre-agreed amounts that a contractor may have to pay if a project is not completed on time. While intended to compensate the client for delays, excessive or poorly defined clauses can significantly impact a contractor’s profitability.
This all can lead to numerous problems, both legal and financial.
To avoid these issues, every contractor should negotiate for clear definitions, caps on damages, and exclusions for uncontrollable delays.
Fair and clearly defined liquidated damages protect your profits while providing the client with reasonable compensation for delays.
6. Dispute resolution
Disagreements are common in construction projects, whether over payments, variations, or timelines. A well-defined dispute resolution clause helps both parties resolve issues efficiently and avoid costly litigation.
Ideally, you want to agree on procedures for resolving disagreements, such as mediation or arbitration, to avoid costly litigation.
A clear dispute resolution process minimizes delays, reduces costs, and provides a structured method for resolving conflicts, keeping your project on track and your cash flow secure.
7. Termination Rights
Termination clauses define the circumstances under which either party can end the contract. While necessary for risk management, poorly drafted clauses can leave contractors exposed to financial loss or unfair liability.
Before you sign any contract, it’s crucial to clarify the conditions under which either party can terminate the contract and the consequences thereof, including compensation and notice periods.
8. Retention and security
These two clauses are commonly included in construction contracts to ensure that contractors complete their work to the required standard. While these provisions protect clients, they can also tie up significant amounts of money if not carefully negotiated.
You should always negotiate for a reasonable retention percentage, clear release timelines and conditions for release, as well as alternative security options.
Properly negotiated retention and security clauses protect the client while allowing you to maintain healthy cash flow and reduce financial stress during and after project completion.
Bottom Line
Construction contracts often favor the party that drafted them—usually the principal or client. Contractors who sign without negotiation risk taking on more responsibility, financial exposure, and stress than necessary.
By carefully reviewing these key clauses and seeking legal advice before signing, contractors can protect their interests, safeguard their cash flow, and lay the foundation for a smoother project.