Why Construction Contracts Are Different
Most commercial contracts are arm's-length negotiations between parties with roughly equal leverage. Construction contracts aren't.
The GC has the project. You want work. The owner has money. The GC wants money. Everyone down the chain is squeezed by everyone above them.
This power imbalance produces contracts that shift risk downward. The owner's contract with the GC shifts risk to the GC. The GC's subcontract shifts that same risk - plus additional risk - to the sub. The sub's purchase orders shift risk to suppliers.
By the time you're signing, the contract has been through multiple rounds of risk-shifting, all flowing toward you.
Understanding what you're signing is survival, not legal formality.
The Standard Form Landscape
AIA Documents
A201 - General Conditions (owner-contractor) A401 - Standard Form of Agreement Between Contractor and Subcontractor
AIA documents are everywhere. They're comprehensive, courts have interpreted them extensively, and everyone knows them. This familiarity is valuable.
But AIA documents are written by the American Institute of Architects for architects' clients - owners. Owner-friendly provisions include:
- Broad owner termination rights
- Contractor warranty obligations
- Owner control over change order pricing
- Architect as initial decision-maker on disputes
Contractors and subs signing AIA documents are signing owner-friendly terms.
ConsensusDocs
Developed by a coalition including AGC (contractors), ASA (subcontractors), and other construction groups. More balanced than AIA.
Key differences from AIA:
- More mutual termination rights
- Clearer change order procedures
- Less architect authority in disputes
- Better payment protections
ConsensusDocs are gaining adoption but remain less common than AIA.
Custom Forms
Large GCs and owners often use heavily modified AIA documents or entirely custom forms. These deserve extra scrutiny because:
- Non-standard language may have unexpected interpretations
- Modifications may shift risk without obviously doing so
- Less legal precedent exists for unusual provisions
- The drafter (other party) understands nuances you don't
Red flag: "We always use our standard form" from a sophisticated party usually means their form favors them.
Payment Clauses: Where Money Dies
Pay-When-Paid
"Contractor shall pay Subcontractor within 10 days of Contractor's receipt of payment from Owner for Subcontractor's work."
This is a timing mechanism. The GC will pay you when they get paid, but they still owe you. If the owner goes bankrupt, the GC (theoretically) still owes you, though collecting may be difficult.
Most states treat pay-when-paid as creating a reasonable time for payment, not eliminating the payment obligation.
Pay-If-Paid
"Contractor's receipt of payment from Owner is a condition precedent to Contractor's obligation to pay Subcontractor."
This is an excuse for non-payment. If the owner doesn't pay, the GC doesn't owe you. Period.
Some states (California, New York, and others) void pay-if-paid clauses as against public policy. Other states enforce them strictly. Texas, for example, allows pay-if-paid if the language is explicit enough.
Action item: Know your state's law. If pay-if-paid is enforceable, negotiate hard to remove it or limit its scope.
Retainage Abuse
Standard practice: owner retains 5-10% of each payment until substantial completion. GC retains the same from subs.
The abuse: retainage held far longer than contract allows, often until final completion of the entire project - even if your scope finished months earlier.
Negotiation points:
- Cap retainage at 5% (10% is excessive for modern projects)
- Release retainage at your substantial completion, not project completion
- Require interest on retainage held beyond contract terms
- Specify exactly when and how retainage is released
Pay Application Procedures
A late or incorrect pay application can delay payment by a full billing cycle (30+ days). Contracts specify:
- Submission deadline (often 25th of month)
- Required format and documentation
- Approval process and timeline
- Consequences of rejection
Understand and calendar these deadlines. One missed application deadline can cascade into cash flow crisis.
Indemnification: The Hidden Insurance Policy
Indemnification clauses make you liable for things that may not be your fault. They're where sophisticated parties hide their biggest risk transfers.
Type I (Broad Form)
"Subcontractor shall indemnify Contractor against any and all claims arising out of or related to Subcontractor's work."
This makes you responsible for everything connected to your work, including the GC's own negligence. Many states have anti-indemnity statutes that void these clauses, but enforcement varies.
Type II (Intermediate Form)
"Subcontractor shall indemnify Contractor against claims arising from Subcontractor's negligent acts or omissions."
More reasonable - you're responsible for your own negligence. But watch for "arising from" vs "caused by" - arising from is broader.
Type III (Comparative Fault)
"Subcontractor shall indemnify Contractor to the extent claims are caused by Subcontractor's negligent acts or omissions."
Proportional responsibility. If you're 30% at fault, you indemnify for 30%. This is fair but rare in construction contracts.
What to Negotiate
At minimum:
- Limit indemnification to your own negligence
- Exclude sole negligence of the other party
- Ensure insurance covers indemnification obligations
- Add "to the maximum extent permitted by law" language
- Cap indemnification at insurance limits or contract value
Change Order Traps
Construction projects always have changes. How those changes are handled determines whether you profit or lose.
The Cardinal Change Doctrine
A "cardinal change" fundamentally alters the nature of the contract. You can refuse cardinal changes or treat them as breach.
Most changes aren't cardinal. You're stuck performing them under the contract's change order procedure.
Constructive Changes
You perform extra work without a formal change order, believing it's required or that you'll be compensated. Later, the GC claims it was within your scope.
Protection: Never perform work outside your scope without written authorization. "Start work and we'll figure out the paperwork later" is how contractors lose money.
Written Change Order Requirements
Most contracts require written change orders before performing changed work. Courts generally enforce these requirements.
"Contractor directed the work verbally" is usually a losing argument. Get it in writing before starting.
Time Extensions
Changed work takes time. If your contract has liquidated damages for delay, changed work without time extension means you eat the delay cost.
Always tie change order pricing to time extension. Don't accept change order approval that only addresses cost.
Pricing Disputes
Contract specifies how to price change orders:
- Time and materials with markup
- Unit prices from bid schedule
- Negotiated lump sum
- Reasonable cost plus percentage
Know your contract's method. Have backup documentation. Disputed pricing goes through dispute resolution - a process that takes months while you've already done the work.
Lien Waivers: Signing Away Your Rights
Conditional vs. Unconditional
Conditional waiver: "Subcontractor waives lien rights upon receipt of payment of $X."
You sign this with your pay application. Your lien rights remain until the check clears.
Unconditional waiver: "Subcontractor has received payment of $X and waives all lien rights."
You sign this after receiving payment. Your lien rights are gone.
The trap: Signing unconditional waivers before receiving payment. If the check bounces or never comes, you've waived rights for nothing.
Progress vs. Final Waivers
Progress waivers cover work through a specific date. Final waivers cover everything through completion.
Signing a final waiver when you have outstanding change orders or retainage means you've just donated that money.
State Statutory Forms
Many states (California, Texas, others) have statutory lien waiver forms. Using the wrong form may void the waiver (good for you) or create unintended waivers (bad for you).
Use your state's statutory form exactly as written.
Dispute Resolution: Where You'll End Up
Arbitration vs. Litigation
Arbitration:
- Usually faster than court
- Limited discovery (less evidence gathering)
- No jury (panels are construction-savvy)
- Very limited appeal rights
- Often mandated by AIA and other standard forms
Litigation:
- Full discovery
- Jury trial option
- Appeal rights
- Usually slower and more expensive
- Better for complex factual disputes
Neither is universally better. Know what your contract specifies.
Venue and Choice of Law
Where disputes are heard matters enormously.
Venue: If you're a Florida sub working on a Texas project with a California GC, which state's courts hear disputes? Travel and local counsel costs add up.
Choice of law: Which state's law applies? A pay-if-paid clause may be enforceable under Texas law but void under California law.
Negotiate for home state venue and law when possible.
Notice Requirements
Most contracts require written notice of claims within specified timeframes (often 7-21 days). Miss the deadline, lose the claim.
These requirements are generally enforceable. Build claim notice into your project procedures.
What AI Contract Review Can (And Can't) Do
AI-assisted contract review accelerates identification of risky clauses. It can:
Identify standard problem clauses:
- Pay-if-paid language patterns
- Broad indemnification triggers
- Unusual termination provisions
- Missing time extension rights
Compare to your standard positions:
- Flag deviations from your preferred terms
- Suggest alternative language from your playbook
- Prioritize issues by risk level
Generate redlines:
- Create markup showing your proposed changes
- Add explanatory comments
- Format for professional negotiation
AI can't:
- Make business decisions (accept this risk for this opportunity?)
- Know local law nuances (is this enforceable in this jurisdiction?)
- Understand relationship context (is this GC worth fighting with?)
- Replace counsel for high-stakes contracts
Use AI for efficiency on routine contracts. Escalate unusual terms and large contracts to experienced construction counsel.
Review Checklist
Before signing any construction contract:
Payment
- Payment timing is specific (days, not "reasonable")
- Pay-when-paid, not pay-if-paid (or pay-if-paid negotiated out)
- Retainage capped at 5%
- Retainage release tied to your completion, not project completion
- Pay application procedures are clear and calendared
Indemnification
- Limited to your own negligence
- Doesn't include sole negligence of others
- Covered by your insurance
- Capped at insurance limits or reasonable amount
Change Orders
- Written authorization required (protect yourself from verbal directives)
- Time extension tied to cost approval
- Pricing method specified and reasonable
- You have right to written directives before starting changed work
Claims and Disputes
- Notice requirements identified and calendared
- Venue and choice of law acceptable
- Arbitration vs litigation preference confirmed
- Statute of limitations/repose understood
Termination
- For-cause termination requires notice and cure opportunity
- For-convenience termination includes fair compensation
- Your termination rights are spelled out
Insurance and Bonds
- Required coverages obtainable at reasonable cost
- Additional insured requirements reviewed with broker
- Bond requirements understood (if applicable)
The Business Decision
Contract review isn't just legal analysis. It's business decision-making.
Some terrible clauses become acceptable when:
- The project is essential for your company
- The relationship has value beyond this project
- The risk is insurable at reasonable cost
- Your leverage is genuinely zero
Some acceptable clauses become deal-breakers when:
- The client has history of disputes
- The project has obvious problems
- Your exposure exceeds your capacity
- Better opportunities exist
Know your walk-away point before you start negotiating. The best contract protection is saying no to bad deals.
