Construction Contracts: Defending Your Margins
A contract isn't just about getting paid; it's a mechanism for allocating risk. If a risk isn't explicitly assigned to the owner or another party, it usually defaults to you.
Crucial Clauses You Must Include
Never rely on a handshake or a basic one-page invoice format. Your contract is your only defense when things go wrong.
1. The Scope of Work (And Exclusions)
Detailing what you will do is important, but detailing what you will not do is vital. If you are framing a house, explicitly exclude site grading, roofing, and painting. This prevents "scope creep"—when a client assumes you're handling related tasks.
2. Material Escalation Clause
In volatile markets, the price of lumber or steel can jump 30% between the time you submit a bid and the time you purchase the materials. An escalation clause states that if material prices rise beyond a certain threshold (e.g., 5%), the excess cost is passed to the owner.
3. Change Order Procedure
State explicitly that any deviation from the original scope must be documented in writing and signed by both parties before the work begins. Verbal change orders are the leading cause of unpaid work.
4. Right to Stop Work
If the owner stops paying, you must have the legal right to stop working without being in breach of contract. This clause forces the owner to cure non-payment quickly.
Understanding Indemnification
Indemnification clauses dictate who pays for lawyers and damages when someone gets hurt or property is damaged. Broad form indemnification (where you agree to pay for damages even if the owner is at fault) is illegal in many states. Always consult with a local attorney and your insurance agent to ensure your indemnification clauses are enforceable and covered by your policy.
Common Contract Mistakes
Signing the Owner's Contract Blindly
Large GCs and developers will provide their own contracts. These are drafted by their lawyers to protect them. Look out for "Pay-if-Paid" clauses (you don't get paid until the GC gets paid) and strike them out if possible.
Failing to Secure Lien Rights
A Mechanic's Lien is your most powerful tool to ensure payment. However, most states require a Preliminary Notice (a formal document sent to the owner) within 20-30 days of starting work. If you miss this deadline, you forfeit your right to lien.
Frequently Asked Questions
What is a Retainage?
Retainage is a portion of the contract price (usually 5% to 10%) held back by the owner until the project is substantially complete and all punch list items are finished. It ensures the contractor finishes the job.
Should I include an arbitration clause?
Arbitration is often faster and less public than traditional litigation, but it isn't necessarily cheaper. Many contractors prefer arbitration for technical construction disputes because the arbitrator is usually an industry expert rather than a lay jury.