Construction Contracts: What to Include and How to Review One

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Every construction contract divides risk among the owner, contractor, designer, and others on the project. When that division is unclear, the cost shows up later in disputes.

The average U.S. construction dispute in 2025 was worth $56 million and took just over a year (12.2 months) to resolve, according to Arcadis's 16th Annual Construction Disputes Report. Many of them start with the contract itself. The report's two leading causes are parties who don't understand or comply with their contractual obligations, and errors or omissions in the contract documents.

Both problems can be caught before anyone signs. This guide covers what a construction contract is, what to include, which clauses carry the most risk, and how in-house counsel can review one before signing.

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What is a construction contract?

A construction contract is a legally binding agreement that sets the scope, price, schedule, and risk allocation for a construction project. It defines what gets built, who builds it, when it is due, how much it costs, and how the parties handle changes and disagreements.

The parties may include:

• The owner
• A general contractor
• One or more subcontractors
• An architect or engineer
• One or more suppliers

A single project runs on several linked contracts. These can include a master construction contract between the owner and general contractor, construction subcontractor agreements further down the chain, and construction supply agreements for materials.

→ Related Article: AI Contract Review Software: Complete Buyer's Guide

What are the main types of construction contracts?

The type of construction contract you choose primarily depends on who’ll absorb overruns if the project goes over budget. 

Fixed-price (lump-sum) contracts

In a lump-sum contract, the contractor agrees to complete a defined scope for a set price. This means the owner gets cost certainty and a clear number to budget against, but the contractor takes the risk of overruns. If materials or labor cost more than expected, the contractor absorbs the difference.

Because the price is fixed, clarifying the scope is essential. Fixed-price contracts tend to include detailed change-order and contingency provisions to handle what comes up.

Best for: projects with a well-defined, stable scope where the owner values budget certainty.

Cost-plus contracts

In a cost-plus contract, the owner reimburses the contractor for labor and materials, plus an agreed fee or percentage as profit. The cost risk sits with the owner. That suits projects where the scope can't be fixed in advance, such as complex renovations or early-stage work.

Most cost-plus contracts pair this structure with a guaranteed maximum price (GMP) and a precise definition of "allowable costs,” which prevents reimbursement disputes.

Best for: projects with evolving scope where the owner accepts more cost risk in exchange for flexibility.

Time-and-materials contracts

In a time-and-materials contract, the owner pays for hours worked plus the cost of materials. The structure works for repairs or maintenance that start before the full scope is known.

Best for: smaller or open-ended jobs where the exact scope is hard to define.

Unit-price contracts

In a unit-price contract, payment is tied to the quantity of work completed, at a set price per unit (for example, per cubic yard, per linear foot, or per item). This is ideal for repeatable, scalable work such as utility and infrastructure projects.

Best for: projects with measurable outcomes but uncertain total quantities.

Design-build contracts

In a design-build contract, a single entity takes responsibility for both design and construction. The owner doesn't contract separately with a designer and a builder. This creates a single point of accountability and often compresses the schedule.

The trade-off is that the owner has less direct control over design. For a design-build contract to work well, it needs to spell out design standards in detail.

Best for: owners who want single-point accountability and a faster schedule.

What should a construction project contract include?

At a minimum, a complete construction agreement should set out:

• Scope of work: a detailed description of the work, the deliverables, and which party is responsible for each.
• Price and payment terms: the contract sum, payment schedule, retainage, and the conditions for releasing it.
• Project timeline: start and completion dates, milestones, and the consequences of delay.
• Change orders: a process for pricing and approving changes.
• Warranties and guarantees: standards for workmanship and materials, and the remedy when they fall short.
• Insurance and bonding: coverage requirements, additional-insured status, and any performance or payment bonds.
• Notice and claims procedures: who must be notified of what, in what form, and by when.
• Termination rights: the grounds and procedures for ending the contract, for cause and for convenience.
• Dispute resolution: the mechanism (negotiation, mediation, arbitration, or litigation) and governing law.

This list stays consistent from project to project. What changes is how each term allocates risk, and that is where review time often goes.

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Which construction contract clauses carry the most risk?

The provisions in-house counsel should read closely before signing are as follows: 

• Indemnification: Check whether each party covers only the losses it causes, or its own and the other party's negligence. Many states limit broad indemnity in construction, so check the local governing law. 
• Insurance: Match required coverage and limits to the indemnity obligations, so no one is left with losses they thought were insured.
• Limitation of liability and consequential damages: Look for a cap on total exposure and a mutual waiver of indirect losses like lost profits.
• Force majeure: Confirm which events qualify, what relief applies (more time, more money, or both), and how to give notice.
• Payment and retainage: Check how much is withheld and when it's released. In subcontracts, watch for pay-when-paid or pay-if-paid terms, which states treat differently.
• Change orders: Confirm who approves changes and how they’ll be priced. 
• Delay and liquidated damages: Make sure liquidated damages reflect a reasonable estimate of loss. Also check for a no-damages-for-delay clause, which can limit the contractor to extra time only.
• Differing site conditions: Decide who pays when the site turns out different from what the contract documents showed.
• Flow-down provisions: Make sure the prime contract's obligations pass down to subcontractors.
• Warranty: Check how long the warranty lasts and what it covers.

Reviewing these clauses against the same standard on every agreement keeps risk allocation intentional. LegalOn for construction includes attorney-built playbooks for construction agreements, subcontracts, and design-build contracts that apply your standard positions to these clauses automatically.

How to draft and review a construction contract

Step 1: Define the scope and structure first

Before anyone drafts language, define the scope of what is being built and what the deliverables are, plus the pricing and payment structure. The more precise you are from the start, the less you leave open to interpretation.

Step 2: Start from a standard form or your own playbook

Work from a reliable base rather than the counterparty's first draft. An industry standard form (such as AIA A201 or ConsensusDocs 200) or an attorney-built playbook gives you a known starting point with balanced terms. Whoever provides the paper sets the opening risk allocation.

Step 3: Review the high-risk clauses

Read the provisions that carry the most risk against a known standard:

• Indemnification: Is the scope of what you're covering reasonable and enforceable under governing law?
• Limitation of liability: Is there a cap, and does it work for both sides?
• Insurance: Do the required coverages and limits match the actual risk?
• Force majeure: Are the triggering events and relief clearly defined?
• Change orders: Is the pricing and approval process clear?
• Notice provisions: Are the deadlines realistic, and is the required form of notice reasonable?

Step 4: Check the agreements against each other

A construction project runs on linked contracts. Confirm that the prime contract, subcontracts, and supply agreements allocate risk consistently, and that obligations flow down as intended. 

Reviewing them together surfaces misalignment between what the owner requires and what reaches the subcontractors. Ideally, you’d store a single project's agreements in one repository, so the whole chain can be reviewed as a set.

Step 5: Redline against your playbooks 

A construction playbook records your standard positions and fallbacks on key clauses. Usually, owners, general contractors, and subcontractors need different positions on the same clause. 

LegalOn includes attorney-built playbooks for construction agreements, subcontracts, and design-build contracts. Teams can add their own positions in plain English, and LegalOn applies them on every review. That keeps redlines consistent across a project's full contract chain.

Step 6: Flag deviations and document the negotiation

Track every change from your standard position, and record the terms each party agreed to and why. If someone questions a concession months later, the redline history and the reasoning behind it become your record.

Step 7: Do a final consistency pass before signing

Before signing, confirm that the defined terms, dates, dollar figures, and cross-references line up across the document. This pass takes minutes and flags issues that are easier to fix before signature.

Done by hand, this process is thorough but slow. That is where an AI contract review tool like LegalOn helps, which automatically surfaces inconsistencies in construction contracts for your review. 

→ Related Article: Best Automated Contract Review Software Tools

Construction contract FAQs

What is retainage in a construction contract?

Retainage is a portion of each progress payment that the owner withholds until the project reaches a defined milestone, usually substantial or final completion. It is commonly 5% to 10%, and some states cap it by statute, particularly on public projects.

What is a guaranteed maximum price (GMP) contract?

A GMP contract is a cost-plus contract with a ceiling. The contractor is reimbursed for allowable costs plus a fee, but costs above the guaranteed maximum are the contractor's responsibility unless an approved change order adjusts the price.

What is a flow-down clause?

A flow-down clause makes a general contractor’s obligations to the owner binding on its subcontractors as well. This keeps each tier of the project accountable under the same terms.

What's the difference between pay-when-paid and pay-if-paid?

A pay-when-paid clause controls when a subcontractor gets paid, usually after the general contractor receives payment from the owner. A pay-if-paid clause controls whether the subcontractor gets paid at all. If the owner never pays, the subcontractor doesn't either. Some states limit or prohibit pay-if-paid clauses. 

LegalOn for construction contract review

LegalOn gives construction firms an attorney-grade first pass on construction agreements, subcontracts, and design-build contracts, so your in-house counsel can focus on negotiation instead of line-by-line review.

Engineering firm ECI cut its contract turnaround time in half with LegalOn, on agreements ranging from NDAs to EPC contracts over 200 pages.

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