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Understanding Construction Contracts: A Guide for New Contractors

Oct 2, 2023 | Blog

Starting out as an independent contractor in the construction industry can be both exciting and daunting. One of the critical steps you will encounter is navigating through construction contracts. These documents, often laden with legal jargon, can be confusing. Yet, they’re pivotal to safeguarding your interests.

So, what should a construction contract have, and what do you need to look out for? Let’s dive in.

1. Essential Components of a Construction Contract

Every construction contract should clearly spell out certain essential elements:

Parties Involved: Clearly identify the names and contact information for the owner, contractor, and, if involved, the architect or designer.

Description of the Work: Outline the scope of the work in detail. This can include blueprints, plans, and detailed specifications.

Contract Price: Clearly specify the total price to be paid, including any upfront deposits and a payment schedule.

Timeframe: Define the start and completion dates. Including milestones can be helpful in ensuring progress matches payment.

Change Orders: Describe the process for any changes to the work, including who has the authority to approve changes and how they will affect the price and schedule.

Termination: Define the circumstances under which the contract can be terminated and what compensation or penalties may apply.

2. Indemnities: What They Are and Why They Matter

Indemnity clauses protect one party from financial loss arising from the actions or negligence of another party. As a contractor, you might be asked to indemnify the owner against claims relating to your work.

Tip: Ensure that indemnity clauses are mutual, meaning both parties share the burden of protection. Don’t blindly accept unlimited liability. Understand what you’re indemnifying and ensure it’s reasonable in relation to the project’s size and risk.

3. Fairness in the Agreement

To ensure a contract is fair, here’s what you should watch out for:

Payment Terms: Be cautious of contracts that have very delayed payment terms. A common term might be 30 days after invoice, but if it’s much longer, it might impact your cash flow.

Penalty Clauses: Some contracts include penalties for delays. Make sure these are reasonable and that exceptions for uncontrollable events (like natural disasters) are included.

Retainage: This refers to holding back a portion of payment until project completion to ensure satisfactory work. While common, ensure the amount and terms are fair.

Warranty: Understand the warranty period you’re agreeing to and ensure it aligns with industry standards and the nature of the work.

4. Miscellaneous Must-Knows

Licensing: The contract should acknowledge that you, as the contractor, are licensed (if required in your jurisdiction) to perform the work.

Insurance: Ensure there are clear terms about who must carry insurance and the types and amounts of coverage required.

Dispute Resolution: It’s crucial to know how disputes will be resolved. Mediation or arbitration can be faster and less expensive than litigation.

Prevailing Law: The contract should specify which state’s (or country’s) laws will govern if disputes arise.


While this guide provides a broad overview, remember that every construction project is unique. Always consider seeking legal advice when drafting or entering into a contract. With a comprehensive, clear, and fair agreement, you’re setting the foundation (pun intended) for a successful construction project!