The Importance of Construction Contracts and Items to Consider When Preparing Construction Contracts

Ward and Smith, P.A.

It's important for parties entering into any significant economic transaction to have written contracts.  This is especially true for construction projects which are, by their nature, complicated.  A contract on a construction project sets forth the parties' obligations to each other and determines how risks will be shared or divided on the project. 

The Value of Having a Written Construction Contract

A construction contract does not have to be reduced to written form for it to exist or operate.  Once two parties agree to have construction work performed and the builder commences the work, there is a construction contract that exists, regardless of whether the agreement has been reduced to writing and signed by both parties. 

The key distinction between a contract that is in writing and one that is not is what terms control or define the parties' agreement.  In the case of a well-written contract, the written terms carefully and clearly define the parties' agreement, their expectations, and their respective risks and obligations.  With a mere oral contract, there are no written terms and the terms that control are defined by the parties' oral discussions or negotiation correspondence (and, in the case of a dispute, the parties will invariably not agree on what those discussions were), the course of performance of the contract (i.e., how have the parties performed the project work prior to a dispute), and the limited default rights applicable by operation of law.

One of the biggest problems encountered with non-written contracts is that each party's respective memory of the agreement changes over time, especially if a dispute arises.  Similarly, people are sometimes simply dishonest about the terms of the agreement when a dispute arises, large sums of money are at stake, and a recollection different from (or not entirely consistent with) "the truth" will improve their position.  These problems can be mostly avoided with a written contract.

There are many additional benefits to having a written contract for a construction project.  Even if the parties "trust" each other, a written contract provides a clear road map at the onset of the project of how the parties will proceed to carry out the work.  This helps to ensure that the project will run smoothly and diminishes the risk of potentially fatal problems.  Absent this written road map, each party may have certain assumptions about what the agreement is or how the other will behave in a certain situation.  Those assumptions are often incorrect and can prove fatal to a project.

Written contracts also help to guide—or even force—the parties to comply with reasonable business procedures since those procedures will be specifically spelled out in a well-written contract and become requirements of each party.  This is referred to as the "channeling function." 

Another application of the channeling function is that a well-written construction contract forces the parties to consider and agree on issues that they otherwise might not even contemplate at the beginning of a project but that are commonly encountered in the particular type of project and could very well become major issues during the course of performance. 

Finally, if the parties do have a dispute, particularly if that dispute ends up in litigation, the more terms that have been reduced to a clear written statement the fewer terms will be genuinely in dispute.  This leads to a more efficient, or at least less costly, resolution of the dispute since there will be fewer issues to legitimately fight over.

Default Provisions in the Law

If a term is not reduced to writing (if the contract, whether written or oral, is silent on the issue) the law may supply a default term if an issue arises.  By reducing such terms to writing, the parties can control how that issue will be handled and avoid having a default term imposed upon them that is not favorable to their position. 

Even if the law supplies a default term, in many cases (but not all) that term or requirement can be modified by the parties in their written contract.  In many cases modification must be in writing and must be signed by both parties.  In some limited cases the law requires not only that the modification be in writing, but also that particular (sometimes referred to as "magic") words be used.  A well-written contract will include these "magic" words.

However, some legal requirements cannot be modified by contract, even a written one.  An example of this is the statute of limitations which governs the amount of time that a party has after a dispute arises to initiate a claim in court.  As a very general rule, the parties to a contract can shorten this time period (down to a minimum, typically never less than one-year), but the parties cannot extend the period.

Risk Shifting

The economic effect of a contract is to shift or allocate risks.  By way of example, a builder who enters into a contract with a building materials supplier to purchase two-by-fours at a set price on a future date is shifting the risk onto the supplier-seller that the price of two-by-fours will increase between the present day and the future date set for the purchase.  Similarly, the builder-buyer assumes the risk that the price of two-by-fours will decrease. 

Every provision in a construction contract can be considered a mechanism to shift or allocate some identifiable risk.  If the construction contract contemplates the construction of a structure for a fixed fee, then the builder assumes the risk that forces beyond the builder's control may cause the actual cost of construction to exceed that fixed fee, cutting into the builder's expected profit, maybe even resulting in a loss.  At the same time, the owner assumes the risk that forces beyond the owner's control will cause the actual cost of construction to be significantly less than what was contemplated or expected by the parties at the time the contract was entered into, resulting in a bonus profit to the builder. 

There are numerous other risk issues, other than price, that can be allocated by a written construction contract.  It is important to understand that a risk does not have to be fully allocated to one party or the other.  Commonly in a construction contract, a risk is split such that it is either shared or allocated to one party only up to a certain point, after which the risk is either shared or allocated back to the other party. 

A cost-plus contract with a guaranteed maximum price is an example of this.  The owner is allocated the risk of cost overruns up to the guaranteed maximum price.  If the guaranteed maximum price is exceeded, the risk or burden of cost overruns is shifted back to the contractor-builder for each dollar that exceeds the guaranteed maximum price.  

Other risks that can be allocated by a well-written construction contract and examples of how they address such allocation are as follows:

  • Time.  If project completion is delayed, which party will incur the attendant loss, to what extent, and how will the loss be measured.
  • Design Issues.  In the case of a defect in the design, which party will be responsible for correcting the defect and to what extent.
  • Acts of God / Damage to the Work / Effects of Weather.  In the case of an "act of God," such as a severe storm, that delays or damages the work, which party will be responsible for the attendant loss.    
  • Funding.  If there is a disruption in the flow of funds to construct the project, such as a delay of disbursements from a lender, which party will be responsible.
  • Regulatory Risk / Approvals.  If the government fails to provide necessary approvals or issues regulations that require a change in the design or performance of the project, which party will be responsible for the resulting costs.
  • Concealed or Unexpected Conditions.  If there are conditions encountered on the project that are unexpected such as bad soil that will not support the construction without considerable, and expensive, additional work, which party will be responsible for addressing and overcoming the problem and to what extent.
  • Damage to Third Parties / Indemnity.  Which party will be responsible for damage or injury caused to third parties (i.e., those that are not a party to any contract for the project at issue) and to what extent.

This list is not exhaustive, and in the section below discussing key elements in construction contracts there are other terms commonly found in construction contracts where risk allocation is also appropriate. 

Parties to a Construction Contract

For a complex project, there could be, and usually are, multiple contracts at any one time.  The most obvious and common is the contract between the owner (or developer) and the general contractor (or builder).  Additionally, if a design professional is involved, there will be a contract between that party and the owner (or, as is increasingly common, between the design professional and the builder in the case of design-build contracts).  If the builder hires subcontractors rather than self-performing everything (the former being much more common) there will be subcontracts between the builder and its subcontractors (called "first-tier subcontractors"), and there are often additional contracts between the first-tier subcontractors and their second-tier subcontractors, and so down the line. 

Suppliers sit in the position of subcontractors in this scheme and there will likely be a supply subcontract (sometimes nothing more than a purchase order) between the supplier and the contractor or subcontractor with whom the supplier deals.  If a party is required to obtain or carry insurance, then the insurance is another form of contract that applies to the project.  Similarly, any performance and payment bonds obtained by a contractor or subcontractors are also contracts that apply to the project.  So clearly, even a moderately sized construction project can involve numerous sets of construction contracts.

Key Elements of a Construction Contract

It is not possible to enumerate each and every item that should be present in a written construction contract in all situations.  However, every construction contract should generally address the following items:

  • Price, including whether it will be calculated as a fixed fee, cost plus, or cost plus with a guaranteed maximum price;
  • How changes in the character of the work, contract time, or contract price will be handled (change orders);
  • The order of performance and triggering of events;
  • The time of performance of each step in the contract;
  • Whether delay damages will be assessed for delayed completion and, if they are assessed, whether they will be assessed as actual damages or liquidated (an agreed-upon amount) damages;
  • Sureties, including whether performance and payment bonds will be required;
  • The terms and conditions of any performance and payment bonds;
  • Warranty obligations;
  • How notices between the parties will be handled;
  • How disputes between the parties will be handled or conducted;
  • How liens on the project will be handled or waived;
  • How interim progress payments will be requested and disbursed, including what conditions must be met to trigger a disbursement;
  • Insurance, including what parties will be required to carry insurance, what occurrences must be covered by insurance, and what are the parties' rights to make a claim on the other party's insurance policies;
  • How the project will proceed in the event of a serious dispute arising during the project;
  • Firing and termination provisions that govern how situations of default will be handled; and,
  • Whether certain items in the contract will be considered allowances (items that the owner is allowed to select within a specified budget) and how allowances will be handled.

Even this extensive list is not exhaustive. 

Consistency, Flow Down, and Tiers

An important concern on construction projects with numerous parties and contracts is ensuring that the different contracts are consistent with each other including provisions that flow down from upper-tier contracts.  For instance, a general contractor-subcontractor contract will frequently have provisions that "flow down"— meaning the provisions of the prime contract between the owner and the general contractor will apply to the subcontract.  Such provisions should be carefully drafted, and if a party is subject to such provisions, it should make sure it has a copy of the upper-tier contract being flowed down or applied; otherwise, the party is agreeing to a set of contract terms to which it has not seen. 

Similarly, a contracting party should consider how claims involving other parties will be handled when there is no direct contract between that party and the other party.  For example, what will happen between the builder and the owner when the owner's neighbor claims that the builder has damaged the neighbor's property while working on the owner's property?  For this reason, there frequently are provisions in construction contracts dealing with indemnity and defense.   

Industry Forms

Standard industry forms are commonly used in the drafting and preparation of construction contracts, especially for large projects.  The most commonly used are those prepared by The American Institute of Architects ("AIA") and ConsensusDocs.  At one time the Associated General Contractors of America maintained its own set of forms; however these have been merged into ConsensusDocs. 

When using industry forms, it is important to understand that the different forms for different contracts interact and work together.  For example, the AIA form for an owner-architect contract assumes the use of the AIA form for the owner-contractor contract.  Thus, if you use one type of standard owner-contractor contract you should be careful to make certain that a standard contract from the same source is also used for the owner-architect contract.  Similarly, any modifications to a standard owner-contractor should be considered when preparing the owner-architect contract and vice versa.  The same consideration applies to modifications of contractor-subcontractor subcontracts, subcontractor-subcontractor subcontracts, and supplier purchase orders.


Any construction project of any size should involve a written contract or contracts.  You should consult a legal professional in the event you are entering into or considering entering into a contract for a construction project. 

Written by:

Ward and Smith, P.A.

Ward and Smith, P.A. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at:

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit
  • New Relic - For more information on New Relic cookies, please visit
  • Google Analytics - For more information on Google Analytics cookies, visit To opt-out of being tracked by Google Analytics across all websites visit This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at:

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.