To make a construction contract, you put nine things in writing and sign them before anyone starts work: the contract type, a detailed scope, payment terms with lien-waiver protection, the schedule, a change-order process, insurance requirements, permits and warranties, dispute resolution and termination rights, and the drawings and specifications the work will follow. The sections below walk through each piece and the choices you’ll face.
Pick a Contract Type That Fits the Project
The contract type decides how the contractor gets paid and who absorbs the financial risk when costs shift. Four structures cover most residential and commercial work.
- Fixed-price (lump sum). The contractor completes the entire project for one set price. Best when scope and plans are fully defined before construction, because the contractor is estimating total costs in advance. You get budget certainty; the contractor bakes risk into the price, so you may pay a slight premium.
- Cost-plus. You reimburse actual costs (labor, materials, subcontractors, equipment) and pay a fee for overhead and profit, either flat or as a percentage. Suits projects where design isn’t finished or scope is likely to evolve. Final cost is unknown, so track expenses closely or cap the total with a guaranteed maximum price.
- Time and materials. The contractor bills labor at an agreed hourly or daily rate, and you pay for materials at cost. Works for smaller jobs, emergency repairs, or anything where nobody can predict how long the work will take. Always set a not-to-exceed limit.
- Unit price. You agree on a fixed price per measurable unit of work: per cubic yard of concrete, per linear foot of pipe, per square foot of flooring. The final price depends on actual quantities installed. Common in civil and infrastructure work where exact volume isn’t known until construction is underway.
Fixed-price pushes financial risk onto the contractor. Cost-plus and time-and-materials push it onto you. Unit price splits the difference: the rate is locked, the quantity isn’t. Match the structure to how well-defined your project really is.
Write a Scope of Work That Leaves Nothing to Interpretation
Scope is the single most important section of the contract. Vague language is the root cause of most construction disputes, because both sides read the same paragraph and picture different things. Treat it as a detailed instruction manual.
Start with a project overview: property address, type of work (new construction, renovation, addition), and the overall objective. Then break the work into specific tasks or trade divisions — site preparation, foundation, framing, electrical, plumbing, finishes — and for each one specify:
- Materials. Brand names, model numbers, grades, and colors wherever possible. “Hardwood flooring” invites arguments; “3/4-inch red oak, select grade, natural finish” does not.
- Methods and standards. Reference the building codes, manufacturer installation instructions, or industry standards the work must meet.
- Drawings and specifications. Attach the architectural plans, engineering drawings, and specification documents. List them by name, date, and revision number so there’s no confusion about which version governs.
- Exclusions. Spell out what the contract does not include. If the contractor isn’t handling landscaping, final cleaning, or appliance installation, say so. Unstated exclusions become disputes.
When you’re working from an architect’s drawings, incorporate them by reference and state that the drawings and specifications control over any general descriptions in the contract. Set a clear hierarchy, or the contractor will pick whichever interpretation costs less.
Payment Terms, Retainage, and Lien Waivers
The Payment Schedule
Construction contracts rarely call for full payment upfront or everything at the end. Progress payments are the standard: the contractor invoices at regular intervals or when specific milestones are reached, and you pay for work already completed. A typical structure runs a deposit at signing (often 10% of the contract price), progress payments tied to milestones, and a final payment after you’ve inspected and accepted the finished work.
Spell out the exact dollar amount or percentage for each payment, what triggers it, and how many days you have to pay after receiving an invoice. Include consequences for late payment on both sides: interest charges if you pay late, work-stoppage rights if payment is significantly overdue.
Retainage
Retainage is a percentage of each progress payment you hold back until the project is substantially complete. It gives the contractor a financial reason to finish the job and clear the punch list. The industry standard runs 5% to 10% of each payment. Some states cap retainage by statute, so check your local rules before setting the number.
Your contract should specify the retainage rate, the conditions for releasing it (typically after final inspection and completion of punch-list work), and whether retainage also applies to subcontractor payments.
Lien Waivers
This is where property owners get burned. If your general contractor doesn’t pay a subcontractor or material supplier, that unpaid party can file a mechanic’s lien against your property even though you already paid the general contractor for that work. You can end up paying twice for the same labor or materials.
The fix is collecting lien waivers with every progress payment. A lien waiver is a signed document in which the contractor, subcontractor, or supplier confirms they’ve been paid and gives up their right to file a lien for that amount. Two varieties matter:
- Conditional waiver. Takes effect only after the payment actually clears. Use this when you’re issuing payment but it hasn’t been deposited yet.
- Unconditional waiver. Takes effect immediately upon signing, regardless of whether payment has cleared. Only request these after you’ve confirmed the check cashed or the transfer completed.
Require the general contractor to provide lien waivers from every subcontractor and supplier as a condition of receiving each progress payment. Don’t release funds without them. On the final payment, collect unconditional final waivers from everyone who worked on the project.
Timeline, Liquidated Damages, and Excusable Delays
Start and Completion Dates
Pin down a start date, a substantial completion date, and a final completion date. Substantial completion means the project is usable for its intended purpose even if minor punch-list items remain. Final completion means everything is done. The distinction matters because it often triggers release of retainage and the start of warranty periods.
Liquidated Damages
If the contractor finishes late, you lose money: rent you can’t collect, mortgage payments on a building you can’t use, storage costs for furniture, extended temporary housing. Proving those exact losses after the fact is expensive and contentious. A liquidated damages clause solves this by setting a specific dollar amount the contractor owes for each day the project runs past the completion date.
The daily amount should reflect a genuine estimate of the financial harm you’d suffer from delay. Courts will enforce a reasonable estimate but will throw out a number that looks like a punishment. A commercial office project might set liquidated damages at several thousand dollars per day based on lost rental income; a residential renovation might use a few hundred dollars per day to cover extended temporary housing. Whatever number you choose, document how you calculated it. That documentation is what makes the clause enforceable.
Force Majeure
Not every delay is the contractor’s fault. A force majeure clause identifies events beyond either party’s control that justify extending the completion date without triggering liquidated damages. Common examples include natural disasters, government-ordered shutdowns, labor strikes not caused by the contractor, supply chain disruptions, and pandemic-related restrictions.
The clause should require the contractor to give written notice within a specific number of days after the event, explain how the event actually prevented work from proceeding, and show efforts to minimize the delay. Pointing to a hurricane two states away isn’t enough; the contractor needs to show a direct connection between the event and the schedule impact. A well-drafted clause also distinguishes between delays that extend only the timeline and delays that also entitle the contractor to additional compensation for increased costs.
Require Written Change Orders Before the Work Starts
No construction project goes exactly as planned. You’ll discover something behind a wall, change your mind about a finish, or realize the original plan missed something. Change orders are the mechanism for modifying the contract after work begins, and handling them poorly is one of the fastest ways to blow a budget.
Every change order should be in writing and signed by both owner and contractor before the changed work begins. Written requirements force everyone to agree on the new scope, cost adjustment, and schedule impact before the work happens, not after. An oral agreement to “just go ahead and do it” is a recipe for a billing dispute when the invoice arrives.
Set a specific process in the contract: who can request changes, what information the request must include (description of work, cost estimate, schedule impact), how many days the other party has to respond, and how pricing disputes get resolved. Include a provision that no changed or additional work will be paid for unless a written change order was executed in advance. Contractors sometimes push back on this rigidity, but it protects both sides.
Insurance the Contractor Must Carry
General Liability and Workers’ Compensation
Require the contractor to carry general liability insurance and workers’ compensation coverage. General liability protects against third-party bodily injury and property damage, like a delivery driver tripping over equipment on site or a neighbor’s fence damaged by excavation. Workers’ compensation covers the contractor’s employees if they’re injured on the job. Without it, an injured worker could pursue a claim against you as the property owner.
Specify minimum coverage amounts in the contract and require a certificate of insurance before work starts. Common minimums for general liability are $1 million per occurrence and $2 million aggregate, though larger projects may require more. The certificate should name you as an additional insured, which gives you direct protection under the contractor’s policy.
Builder’s Risk
General liability doesn’t cover damage to the structure being built. If a fire, windstorm, or vandal damages the partially completed building, general liability won’t pay to rebuild it. Builder’s risk insurance fills that gap, covering the structure under construction plus materials and equipment stored on site against covered perils like fire, theft, vandalism, and wind damage.
Either the owner or the contractor can purchase builder’s risk coverage, so your contract should specify who’s responsible. Whoever buys the policy, make sure the coverage amount reflects the full completed value of the project and that all parties with a financial interest are named.
Permits, Warranties, and Indemnification
Building Permits
Nearly every construction project requires building permits from the local jurisdiction. Permits aren’t optional, and work performed without them can result in fines, forced removal of completed work, or problems selling the property later. Assign permit responsibility to the contractor in the contract, including the obligation to obtain permits, pay the fees, schedule required inspections, and give you copies of all approvals.
Warranties
Construction warranties come in layers. The contractor’s warranty covers workmanship and materials: if something was installed wrong or a material fails prematurely, the contractor fixes it at no cost. One year from substantial completion is the standard duration for general workmanship warranties, a timeframe widely used across both public and private construction. Structural elements often carry longer warranties, and specific products (roofing, HVAC equipment, windows) have separate manufacturer warranties with their own terms and durations.
Specify the warranty period, what it covers, what it excludes (typically normal wear, owner misuse, and failure to maintain), and the process for submitting claims. Make sure manufacturer warranties are assigned or transferred to you at project completion; some require specific paperwork to remain valid.
Indemnification
An indemnification clause shifts financial responsibility for certain losses from one party to another. In a typical construction contract, the contractor agrees to indemnify you against claims arising from the contractor’s negligence. If someone sues you because the contractor’s employee damaged a neighbor’s property or caused an injury, the contractor pays your legal defense costs and any resulting judgment. Without this clause, you could be stuck defending lawsuits caused entirely by someone else’s mistakes, and defense costs alone can exceed the cost of the underlying claim.
Some states limit the scope of indemnification clauses in construction contracts, particularly provisions that attempt to make the contractor responsible for the owner’s own negligence. A legal review will flag any enforceability issues in your jurisdiction.
Account for Unexpected Site Conditions
Digging into the ground or opening up walls sometimes reveals surprises: rock where the soil report showed clay, contaminated soil, hidden asbestos, or underground utilities that weren’t on any survey. A differing site conditions clause decides who pays when reality doesn’t match expectations.
The standard approach, drawn from federal contracting practice and widely adopted in private contracts, recognizes two categories. The first covers conditions that differ materially from what the contract documents indicated, like a soil report showing sandy soil when the contractor hits solid rock. The second covers conditions so unusual that nobody would reasonably expect them for this type of project. In either case, the contractor must give prompt written notice before disturbing the conditions, and the parties negotiate a fair cost and schedule adjustment.
Including this clause actually tends to lower bids because contractors don’t need to price in as much contingency. The key is prompt written notice; a contractor who plows through unexpected conditions without documenting them first may lose the right to a cost adjustment.
Dispute Resolution and Termination
How Disputes Get Resolved
Construction disputes are nearly inevitable, so map out how they get resolved before anyone is angry enough to call a lawyer. Most contracts use a tiered process: direct negotiation first, then mediation, then either arbitration or litigation.
Mediation brings in a neutral third party who helps both sides talk through the problem and reach a voluntary agreement. The mediator doesn’t impose a decision. If mediation fails, you move to the next step. It resolves a surprising number of construction disputes because it’s fast, relatively cheap, and lets both sides craft solutions a court couldn’t order.
Arbitration is more formal. An arbitrator reviews evidence and issues a binding decision, typically faster and more private than court, but generally final with very limited appeal rights. If you value the ability to appeal, specify litigation as the final step instead. Litigation is the most expensive and slowest option, but it provides the full range of legal remedies and appellate rights.
Many states also have right-to-cure laws that require property owners to send written notice of construction defects to the contractor and give them an opportunity to inspect and repair before filing any lawsuit or arbitration claim. More than 30 states have some version of this requirement, and skipping the notice process can delay or derail your case. Your contract can and should include its own notice-and-cure provision regardless of state law.
Two Termination Paths
Every construction contract needs two ways to end. Termination for cause lets you fire the contractor when they’ve materially breached: abandoning the project, consistently failing inspections, refusing to pay subcontractors, or falling so far behind that completion is no longer realistic. Require written notice and a specific cure period (often 7 to 14 days) before termination takes effect, giving the contractor a final chance to fix the problem.
Termination for convenience lets you end the contract without the contractor having done anything wrong, as when funding falls through or the project no longer makes sense. Under a typical convenience termination, you pay the contractor for all work completed, costs already incurred, and a reasonable amount of overhead and profit on the unfinished portion. It costs more than termination for cause, where the contractor may owe you damages for the breach, but it avoids a wrongful termination fight.
Standard Forms, Legal Review, and Signing
Standard Forms vs. Custom Drafting
You don’t need to write a construction contract from scratch. Industry-standard forms have been refined over decades and cover the issues discussed throughout this article. The two most widely used families are AIA (American Institute of Architects) contract documents and ConsensusDocs, developed collaboratively by associations representing owners, contractors, and design professionals. Both offer forms for different project types and delivery methods.
Standard forms give you a solid foundation, but every project has unique characteristics that require customization. Supplementary conditions let you modify standard terms: adjusting insurance requirements, adding specific warranty provisions, or tailoring the dispute resolution process. Never use a standard form without reading every provision and adapting it to your project.
Legal Review
Have a construction attorney review the contract before anyone signs it. For projects of any significant size this isn’t optional. An attorney familiar with your state’s construction laws will catch enforceability problems with indemnification clauses, verify that lien waiver requirements comply with local statutes, confirm liquidated damages are set at defensible levels, and flag any provisions state law prohibits or restricts. The cost of a review is trivial compared to the cost of litigating a poorly drafted clause.
Signing and Records
Once the contract is finalized, every party signs and dates the document. Each party keeps a complete signed original. Attach and initial every exhibit, drawing, and specification referenced in the contract so there’s no dispute later about what was included.
Throughout the project, maintain organized records of everything: the signed contract, all change orders, payment receipts, lien waivers, inspection reports, correspondence, and photographs of work in progress. If a dispute reaches mediation, arbitration, or court, your documentation is your evidence. Owners who can’t produce lien waivers lose money they shouldn’t have to spend twice.