Construction Contract Terms Every Contractor Should Know

Contract Time

Contract time defines the schedule expectations for the project.

For a simple project, this may include a start date and the anticipated completion date. For a more complex project, the contract may include interim milestone, substantial completion dates, phasing requirements, or other schedule obligations.

Contract time matters because delays can affect payment, coordination, owner expectations, and project closeout.

Your contract should clearly identify:

• When work begins
• When work must be substantially complete
• Whether interim milestones apply
• How delays will be addressed
• How approved changes affect the schedule
• Whether consequential damages will be mutually waived by both parties

Clear schedule terms help contractors manage expectations and protect themselves when delays occur for reasons outside their control.

Contract Sum and Payment Process

Contract sum and the payment process are among the most important terms for contractors.  

The contract should state how the contractor will be compensated and how payment applications will be submitted, reviewed, approved, and paid. 

There are different methods of compensation and payment structures, including stipulated sum, cost plus a fee, and other arrangements. The right structure depends on the project type, delivery method, and risk allocation.

Payment terms should address:

• Contract sum
• Payment schedule
• Application for payment process
• Required backup documentation
• Retainage and expectations for when retainage will be reduced
• Timing of owner review
• Timing of payment
• Final payment requirements

Clear payment terms protect cash flow and reduce the risk of delayed or disputed payment.

Dispute Resolution: Mediation, Arbitration, and Litigation

Good working relationships matter. You want to maintain a strong working relationship with the owner and project team. Unfortunately, even with a strong relationship, disputes may arise.

A comprehensive contract often helps resolve disputes without a formal process because the contract gives the parties a clear answer. When a dispute cannot be resolved informally, the owner-contractor agreement should identify the dispute resolution procedures that will be used.

Many AIA documents require mediation as the first attempt at resolution. If mediation is not successful, the parties may select a form of binding dispute resolution, including arbitration, litigation in a court of law, or another method the parties agree on.

More streamlined agreements for residential or small commercial construction projects may not include the same level of detail, but they should still provide a clear path for resolving disputes.

Owner Responsibilities and Defined Terms

Your contract should also address the owner’s responsibilities. These may include:

• Information the owner is required to provide
• Consultants the owner will retain

If an architect is on the project, the contract should identify any construction contract administration they will provide. The contract should also specify consultants or subcontractors that the contractor will provide. In addition, you should include important definitions, such as what makes up the contract documents.

Warranties, Liens, and Statutory Requirements

Statutory requirements, warranties, and liens should also be addressed in the contract.

Warranties and liens are often defined by statute, and requirements can vary by jurisdiction. Either way, your contract should clearly specify the warranty you are providing for the work. It should also address standards and processes for rejection and correction of work, which may be separate from the warranty. 

Because laws change, contractors should confirm that their contract terms reflect current requirements in the jurisdictions where they work.

Insurance Requirements

Insurance is an important risk management tool in construction.  

Your contract should identify the types and limits of coverage required for the project, including owner-provided and contractor-provided insurance when applicable.

Before you sign, make sure you understand:

• What coverage you must carry
• What coverage the owner must carry
• Required policy limits
• Additional insured requirements
• Certificates of insurance
• Waivers of subrogation
• Project-specific insurance requirements

It is highly recommended that contractors review insurance requirements with an insurance advisor.

Termination Rights

Nobody likes to talk about termination, but addressing it in the agreement helps protect both parties.

A termination clause should specify when the contract may be terminated and what each party is entitled to recover if termination occurs.

Your contract should address:

• Reasons that would permit you to terminate for cause, such as the owner’s failure to pay
• What you would be entitled to recover after termination
• Whether the owner can terminate for convenience
• Whether a termination fee applies
• What happens to work already performed
• How final payment will be handled

Clear termination terms help reduce uncertainty if the project cannot continue as planned. Most construction contracts will also allow the owner to terminate for convenience, typically with payment of a negotiated termination fee.