Understanding Your Construction Contract: Key Clauses Every Owner Must Review

Construction contracts are dense, technical documents designed primarily to allocate risk. While owners often rely on legal counsel to confirm enforceability, enforceable language alone does not guarantee favorable outcomes during execution. The clauses that matter most are not always the longest or most complex—they are the ones that govern who controls risk, when money changes hands, and how problems are resolved.

Below are the key contract clauses every project owner should review carefully, with an emphasis on practical implications rather than legal theory.

1. Scope of Work and Contract Documents Hierarchy

Why it matters:

The scope clause defines what the contractor is obligated to deliver. The hierarchy clause determines which document controls when conflicts arise. Together, they decide whether a scope gap becomes a change order—or the contractor's responsibility.

Owner risks:

• Ambiguous descriptions of responsibilities
• Drawings and specifications that conflict without a clear order of precedence
• Reliance on "reasonably inferable" language

What owners should do:

• Confirm that all assumed work is explicitly assigned
• Verify the document hierarchy reflects how the project will actually be built
• Eliminate vague coordination and interface language

2. Changes and Change Order Procedures

Why it matters:

Change clauses govern how scope, cost, and time adjustments are handled. Poorly structured change provisions create leverage for one party—often not the owner.

Owner risks:

• Notice requirements that bar legitimate claims if missed
• Open-ended pricing methods
• Schedule impacts treated separately from cost impacts

What owners should do:

• Ensure notice timelines are reasonable and enforceable
• Define pricing rules clearly (labor, equipment, markup)
• Require contemporaneous schedule impact analysis

3. Differing Site Conditions and Disclaimers

Why it matters:

Subsurface and concealed conditions are among the most expensive risks on a project. How these clauses interact determines whether the owner or contractor absorbs the cost.

Owner risks:

• Overly broad disclaimers that undermine the DSC clause
• Geotechnical data provided "for reference only"
• Shifting investigative responsibility without access to information

What owners should do:

• Align disclaimers with the intent of the DSC clause
• Clearly define what information contractors may rely on
• Avoid risk transfers that invite claims rather than prevent them

4. Schedule, Delays, and Time Extensions

Why it matters:

Delay provisions determine who pays when the schedule slips—and under what conditions.

Owner risks:

• No differentiation between excusable and compensable delays
• Liquidated damages that are punitive rather than defensible
• No clear process for schedule updates and acceptance

What owners should do:

• Confirm delay categories are clearly defined
• Ensure liquidated damages are tied to real impacts
• Require baseline and updated schedules as contractual deliverables

5. Payment Terms and Retainage

Why it matters:

Cash flow provisions affect contractor behavior, pricing, and claims posture.

Owner risks:

• Ambiguous payment application requirements
• Retainage terms that incentivize disputes at closeout
• Final payment clauses that waive owner rights prematurely

What owners should do:

• Require clear, auditable pay application formats
• Structure retainage release to align with actual risk reduction
• Preserve leverage through final completion and closeout

6. Indemnification, Insurance, and Limitation of Liability

Why it matters:

These clauses define financial exposure when something goes wrong—often long after construction ends.

Owner risks:

• Indemnity obligations that exceed available insurance
• Inconsistent insurance requirements across contracts
• Liability caps that undermine recovery for major failures

What owners should do:

• Align indemnity obligations with insurance coverage
• Verify policy limits, endorsements, and durations
• Understand how liability caps interact with claims and warranties

7. Dispute Resolution and Governing Law

Why it matters:

Dispute clauses determine cost, timing, and leverage when disagreements arise.

Owner risks:

• Mandatory arbitration without discovery
• Venue selection unfavorable to the owner
• Escalation clauses that delay resolution without solving problems

What owners should do:

• Choose dispute mechanisms aligned with project size and complexity
• Preserve early resolution options without waiving rights
• Ensure governing law matches project location and risk profile

A Common Owner Mistake

Many owners assume that because a contract is "industry standard" or attorney-approved, it will function smoothly in the field. In reality, contracts succeed or fail based on how well they reflect construction reality, not legal theory alone.

The Owner's Opportunity

The best time to protect your interests is before the contract is signed—when language can still be clarified, risks can still be priced, and leverage still exists. A focused review of these key clauses often prevents disputes that no amount of project management can fix later.