Common Legal Pitfalls in Construction Contracts (and How to Avoid Them)

A well-drafted construction contract is the foundation of a successful project. It ensures clarity, protects all parties, and prevents costly disputes.

However, many construction companies fall into legal traps that lead to delays, financial losses, or even lawsuits.

Understanding these common pitfalls and how to avoid them can help mitigate risk, control costs, and increase profitability.

Vague or Incomplete Contract Terms

One of the biggest mistakes in construction contracts is failing to clearly define the scope of work, project timelines, payment schedules, and responsibilities.

Vague language can lead to misunderstandings and disputes over the agreed-upon terms.

How to Avoid Issues

• Clearly define the scope of work, including materials, labor, and project timelines.
• Specify payment terms, including milestones, retainage, and penalties for late payments.
• Use precise language to describe all obligations and avoid ambiguous terms.

Lack of Proper Change Order Procedures

Changes to a construction project are inevitable, but disputes over additional costs and delays can arise without a straightforward change order process.

Change order procedures help mitigate disputes and headaches by providing an explicit, formal, documented request to modify a contract while outlining the changes to SOW, schedule, or cost.

Because these change order procedures require approval from all parties, it ensures that all stakeholders stay up-to-date with clear, concise language.

How to Avoid Issues

• Establish a formal change order process in the contract.
• Written approval is required for all changes, detailing cost adjustments and schedule impacts.
• Keep thorough documentation of all modifications to prevent conflicts later.

Unclear Payment Terms and Conditions

Delayed payments or disputes over billing can cinch cash flow and lead to legal issues. Many construction companies experience payment problems due to poorly defined payment schedules and unclear terms.

How to Avoid Issues

• Include a clear payment schedule with deadlines and acceptable payment methods.
• Outline penalties for late payments and conditions for withholding payment.
• Implement a lien process to protect against non-payment.

Poorly Defined Liability and Risk Allocation

Construction companies may be responsible for damages, defects, or delays they didn't cause if the contract doesn't clearly state which parties are liable.

How to Avoid Issues

• Clearly define liability for defects, delays, and third-party damages.
• Specify warranties and guarantees on workmanship and materials.
• Require the appropriate insurance coverage for all parties.

Not Including Dispute Resolution Clauses

Disputes in construction are common, and if the contract does not outline a straightforward resolution process, it can escalate to expensive litigation.

How to Avoid Issues

• Include a dispute resolution clause specifying mediation or arbitration before litigation.
• Define steps for handling contract disagreements and timelines for resolution.
• Establish jurisdiction and governing law to prevent legal confusion.

Failing to Address Permits and Regulatory Compliance

Complying with local building codes, permits, and regulations is imperative. Failure to do so can lead to project shutdowns, fines, and legal liability.

How to Avoid Issues

• Specify which party is responsible for obtaining necessary permits and approvals.
• Ensure compliance with federal, state, and local regulations.
• Conduct regular compliance checks throughout the project.

Overlooking Subcontractor and Supplier Agreements

Many legal disputes arise due to issues with subcontractors or suppliers who may not fulfill their obligations or cause delays. Contractors can mitigate these issues by providing clear language on expectations (and penalties for failing to meet them).

How to Avoid Issues

• Require written agreements with all subcontractors and suppliers.
• Clearly outline responsibilities, timelines, and payment terms.
• Include indemnification clauses to protect against subcontractor-related claims.

Not Protecting Against Force Majeure Events

Unforeseen events (such as natural disasters, pandemics, or labor strikes) can significantly impact construction projects. Construction companies may bear unexpected costs and delays if the contract doesn't include a force majeure clause.

How to Avoid Issues

• Include a force majeure clause covering uncontrollable events and their impact on timelines and costs.
• Define procedures for handling delays and extending project deadlines.
• Ensure proper insurance is in place to mitigate financial risks.

Ignoring Indemnification Clauses

An indemnification clause protects a party from liability for certain damages or legal claims. Failing to include or understand this clause can result in unexpected legal and financial burdens.

How to Avoid Issues

• Ensure mutual indemnification clauses protect all parties fairly.
• Clearly define who covers what liabilities under the clause.
• Seek legal counsel to ensure the language is enforceable and balanced.

Not Having a Termination Clause

Ending a contract due to non-performance, delays, or other disputes can become complicated and expensive without a termination clause.

How to Avoid Issues

• Include a termination clause that defines valid reasons for ending the contract.
• Outline the process for terminating the agreement, including notice periods and penalties.
• Establish a process for handling incomplete work and financial settlements.
  

Work With Thomas D. Wilson Consulting Inc.

Avoiding these common legal pitfalls in construction contracts can save time, money, and headaches.

Construction companies should prioritize well-drafted, legally sound contracts that clearly define responsibilities, risks, and processes. Consulting with legal and construction professionals can help mitigate risks and ensure smooth project execution when drafting contracts.

By implementing best practices in contract management, construction businesses can reduce disputes, improve project efficiency, and increase profitability.

At Thomas D. Wilson Consulting, Inc., we've experienced all the industry's twists and turns. We are ready to consult on your projects. We are construction scheduling experts and know programs like SmartPM™, Primavera™, and many more.

Let's talk about your next project!