Construction Contract Review Checklist: How to Make Sure Your Contract Is in Order
Construction contracts are lengthy and complex, and you may be tempted to skim over them and sign off.
But to protect yourself and the relationships with your clients and partners, it’s wise to review each construction contract thoroughly before signing.
In this article, we’ll help you sort it all out by answering the following questions:
- What is a construction contract review?
- Why is a construction contract review necessary?
- What should a construction contract include?
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Construction Contract Review Checklist: What It Is and Why You Need One
When approaching a monumental task with many components, it’s helpful to have a checklist to ensure no details are overlooked.
A construction contract review checklist does just that — it provides a list of every important detail that should be examined before signing a construction contract.
Even though the checklist is lengthy and is a comprehensive list, don’t neglect to review the actual contract as well.
In fact, the review of the construction contract should come first, and the construction contract checklist should be used to make sure all the key elements of the contract have been included.
In some cases, it may even be advisable to have the assistance of a contract review lawyer.
Construction contract review checklists are important for a variety of reasons, and help to:
- Protect your best interests - The details of the contract may include some terms that are not in your favor. Addressing those details and negotiating upfront will solve all sorts of potential conflicts later on.
- Preserve solid relationships - A complete review of the contract keeps you and the other parties involved from being surprised by terms or conditions that were overlooked or unknown. This knowledge can go a long way in maintaining a positive rapport with your partners.
- Allow for negotiations - A construction contract review leaves room for negotiations should you feel the need to adjust any of the contract conditions. After the contract is signed, changes typically cannot be made.
- Troubleshoot from the front end - The saying holds true here: “Do it right, do it light. Do it wrong, do it long.” It’s much easier to deal with issues on the front end of a project than when you’re in the thick of the work.
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What Should a Construction Contract Include?
If you want to know what to look for in a contractor agreement, here is a general list of what construction contracts should include:
- Contractor and homeowner names and contact information
- Property description from the deed in the county clerk’s office
- Cost of the project
- List of attachments (i.e., blueprints or other specifications)
- Description of the work
- Completion date
- How to terminate the contract if the homeowner fails to obtain financing
- Stop-work clause
- Breach of contract remedies
- Right to withhold payment
- Stipulations for licenses, insurance, and permits
- Change orders
- Inspections and access to the property
- Unforeseen events and acts of God
- Warranties
- Lien waivers
- Disposal of materials upon completion of the project
- Amount of damages
- Limitation of liability
- Date and signature of both parties
Though there are many types of construction contracts, these are the basic components that should be included in each one.
Construction Contract Checklist: 10 Areas to Review
In this section, we’ll take a look at some important construction contract elements to review and discuss the importance of each one.
Though a construction contract will likely have more than ten parts, a look at these ten areas will get you off to a good start:
- Project description
- Scope of work
- Project schedule
- Contract amount
- Owner’s responsibilities
- Indemnification
- Insurance
- Method of compensation
- Dispute resolution
- Termination of contract
Though not every detail of a project will be decided when the contract is signed, a construction contract should include as much information about the project as possible.
Look for a description of the following categories regarding the project description:
- Project title, goals, and objectives
- Project overview and justification
- Project location and site aspects
- Stakeholders
- Client intent and requirements
- Site surveys and environmental reports
- Project team - designers, architects, and other professional consultants
- Construction and project budget
- Schedule - Phase milestones, cost commitments, permit submittal timelines, etc.
- Method of construction delivery
- Evaluating and monitoring benchmark methods
It’s important to describe the scope of the work with as much accuracy as possible. A detailed description is preferred over a broad one. This ensures that all parties know what work is included and expected.
The scope of work should outline:
- The work to be done
- How it will be completed; and
- The responsible parties for each phase of the work
The scope of work should include the following aspects of the project:
- Overview
- Scope
- Deliverables
- Schedule
- Management
Before signing a contract, part of the construction contract review should include a look at the project schedule.
When reviewing the project schedule, look at the dates carefully to ensure that you have plenty of time to:
- Submit necessary documents for approval
- Order equipment and supplies
- Have supplies delivered before the work starts
Looking meticulously at the scheduled dates before signing the project will allow you to make changes early on if necessary.
It’s also important to remember that many factors can affect the schedule — many of them out of the contractor’s control — so all parties should approach the schedule as expectations as opposed to absolutes.
When reviewing this portion of the contract, ensure that the contract amount is the same amount as the proposal, as well as any change orders that were negotiated.
Make sure that the contract amount is changed to match any alterations to the scope of work.
Be certain that the owner’s responsibilities are clearly spelled out in the contract.
Look for client responsibilities like:
- Providing information on the project, including:
- Program
- Objectives
- Schedule
- Budget
- Naming a representative who is authorized to make decisions on behalf of the owner
- Creating and editing the project budget, including any necessary contingencies
- Giving approval and making decisions in a timely manner
- Providing insurance and assurance of financial funding and resources
- Providing services of design and other consultants contracted by the owner himself
- Providing legal and accounting services
Risk and liability are always considerations in the construction industry, and understanding any indemnity provisions is key to ensuring your own protection.
In any event, each party should be willing to claim responsibility for any losses caused by their own negligence.
When reviewing the construction contract, make sure:
- You understand the difference between a Commercial General Liability (CGL) policy and a Project Loss Insurance (PLI) policy, and what is insured under each type of policy.
- The parties that are being indemnified are clearly defined.
- The indemnification is tied to your negligence in a proportionate manner.
- The indemnification is applied only to claims by third parties.
- To delete “defend” from the indemnity clause and reject the need to give a defense for a party before a finding of fault.
Another item important to include on a construction contract review checklist refers to insurance.
To establish coverage in the case of negligence or an accident, you’ll want to be careful to ensure the following:
- Subcontractors should have the same insurance policies that the GC is required to obtain. This ensures that negligence on the part of the subs will be covered by their insurance. Insurance policies should include:
- Commercial General Liability (CGL)
- Professional Liability
- Pollution Liability
- Automobile Liability
- Umbrella Liability
- Workers’ Compensation
- The GC should be named as additional insured on these policies (excluding professional liability and workers’ compensation).
- The subcontractor’s indemnification duties should apply to you as the GC, just as your indemnification obligations apply to the owner.
Knowing when and how you are going to get paid is of utmost importance to avoid unnecessary conflict.
Check the contract to make sure the payment details are spelled out. Will invoices be sent monthly, or will payment be expected promptly at the time of service? Are any bonuses or incentives included? And what about any benefits?
Outlining these details from the outset will further help protect relationships among all parties.
Disputes are bound to occur from time to time, so reviewing the dispute resolution clause spelled out in the contract is a key item on the construction contract checklist.
When resolution strategies are not included in the contract, litigation often becomes the only option. Everyone would prefer to leave the courts and their costly fees out of the picture.
When reviewing the dispute resolution portion of the contract, look for these proactive solutions:
- Suggest a “meet and confer” session as the first step in resolution.
- If this “meet and confer” session is unsuccessful, the next best step would be formal mediation.
- When formal mediation is not successful, the contract may stipulate arbitration or litigation.
Also, check that your dispute resolution agreements regarding subcontractors match the agreement you have with the client.
Construction contracts can be terminated for a variety of reasons such as:
- Non-payment
- The owner’s failure to meet contractual duties
- Performance failure by the contractor or subcontractor
- Timeline commitments not met
- Poor communication
When termination of contract details are included in the construction contract, you’ll be better prepared to bring things to a close if necessary.
When reviewing the contract, look for:
- An outlined notification and cure period
- Rectification of failure
- Clauses regarding liability for delays (Reject this type of clause and instead include language suggesting an adjustment to schedule and fees when the work resumes.)
- An outline of the owner’s rights and restrictions related to your design documents, plans, or specifications
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