Construction Contracts: Reducing Risk through Clear Agreements
No matter the size or scope of a project, one thing remains constant in the construction industry: risk. From budget overruns to legal disputes, the challenges that contractors and developers face can often be traced back to one root issue—unclear or incomplete contracts.
A strong construction contract does more than outline the work to be completed. It serves as a risk management tool that protects all parties involved and helps ensure projects are delivered on time and within budget.
So, what does a clear, effective contract look like? Let’s break it down.
Clarity Begins with the Scope of Work
The foundation of every construction agreement should be a clearly defined scope of work. This section must detail what will be built, what materials will be used, who is responsible for what, and when each phase of the project should be completed. Ambiguity here can lead to confusion, costly change orders, and strained relationships down the line.
Payments: Timing, Terms, and Triggers
Construction projects operate on tight financial timelines, so payment structures need to be equally precise. Well-written contracts define payment milestones, include requirements for documentation (such as lien waivers or approvals), and outline consequences for late payments or non-compliance.
Tip: Consider including provisions for retainage, progress payments, and final payment conditions to avoid misunderstandings.
Expect the Unexpected: Managing Changes and Delays
Every construction professional knows that unexpected changes are part of the job. That’s why it’s essential to include a formal change order process in every agreement. When handled properly, this process keeps work moving and reduces the likelihood of disputes.
Similarly, contracts should address project delays—both foreseeable and unforeseeable. Whether caused by weather, supply chain issues, or labor shortages, delays happen. A strong contract will anticipate these disruptions and include language that protects both the contractor and the client.
Risk Transfer Through Insurance and Bonds
A major goal of any construction contract is to clearly allocate risk. Insurance and bonding requirements are a critical part of this. Contracts should specify:
- Required coverages (e.g., general liability, workers’ comp, builder’s risk)
- Minimum coverage limits
- Responsible parties
- Bond types and amounts, if applicable
Consulting with a trusted advisor can help ensure these provisions are comprehensive and current.
What Happens When Things Go Wrong?
Disputes can arise even with the best intentions. That’s why contracts should always contain a dispute resolution clause. Whether you opt for mediation, arbitration, or litigation, defining how and where conflicts will be resolved helps avoid confusion—and excessive legal fees—when tensions run high.
Why It Matters
Ultimately, a well-drafted construction contract is one of the most effective ways to protect your business. It clarifies expectations, defines responsibilities, and reduces exposure to financial and legal risk.
At Brady Martz, we partner with construction businesses across the region to navigate the financial complexities of the industry. Whether you’re reviewing contract language, evaluating risk exposure, or planning for long-term growth, our experienced advisors are here to help.
