How to Read a Construction Contract: What Developers Should Know Before Signing
A construction contract is one of the most consequential documents a developer will sign on any project. It defines the scope of work, establishes financial obligations, allocates risk between parties, and sets the legal framework for how disputes are handled if something goes wrong. Yet it’s one of the most commonly misread — or outright unread — documents in the development process.
Most developers focus on the price and the schedule. Those matter, but they represent a fraction of what a well-drafted construction contract actually covers. Understanding what’s in the contract before you sign it isn’t just due diligence — it’s one of the most effective risk management tools available.
Here’s what to look for. . .
1. Scope of Work: The Most Important Section in the Contract
The scope of work defines exactly what the contractor is responsible for building. It should be specific, detailed, and tied directly to your construction documents. Vague scope language — “contractor shall perform all work necessary to complete the project” — creates ambiguity that leads to disputes, change orders, and delays.
Before signing, read the scope section carefully and compare it line by line against your drawings and specifications. Any discrepancy between what the scope says and what the drawings show is a gap that needs to be closed in writing before the contract is executed. Items left out of the scope are not the contractor’s responsibility — they become change orders, and change orders cost money.
A well-written scope of work is the foundation of a predictable project. If it’s thin or vague, ask for it to be expanded before you proceed.
2. Contract Price and Payment Terms
The contract price section should clearly state the total contract sum, the payment structure, and the conditions under which payment is released. Most construction contracts use one of three pricing structures: lump sum (a fixed price for the defined scope), cost-plus (actual costs plus a contractor fee), or a guaranteed maximum price (GMP), which caps total cost while allowing some flexibility in how it’s spent.
Each structure has different implications for risk allocation. A lump sum contract puts more risk on the contractor — if costs run over, that’s generally their problem. A cost-plus arrangement shifts more exposure to the owner, which is why the definition of allowable costs and the fee structure need to be airtight.
Pay attention to the payment schedule. Draw-based payment tied to completed milestones is standard on most commercial and multi-family projects. Be cautious of front-loaded payment schedules that require large upfront disbursements before meaningful work has been completed — that structure benefits the contractor, not the owner.
3. Change Order Procedures
Change orders are inevitable on any construction project. What varies is how they’re handled — and a contract that lacks a clear change order process is an open invitation for cost disputes.
The contract should specify how changes to the scope are initiated, how pricing for changes is determined, and what authorization is required before a change order becomes binding. Verbal agreements to proceed with additional work — even when everyone is acting in good faith — create liability if they’re not documented properly.
Look for a defined timeline for change order submission and approval, a clear methodology for pricing changes (time and materials, unit pricing, or negotiated lump sum), and a requirement that no change order work begins until it is approved in writing. These provisions protect both parties and keep the project financially predictable.
4. Schedule and Delay Provisions
The project schedule should be incorporated into the contract, either directly or by reference. The contract should define the substantial completion date, the conditions under which time extensions are granted, and what happens if the contractor fails to meet the schedule.
Two provisions worth understanding here are force majeure clauses and liquidated damages. Force majeure defines events — weather, supply chain disruption, labor strikes — that excuse a delay without penalty. Liquidated damages establish a predetermined daily cost the contractor owes the owner for each day the project runs past the substantial completion date. Both are standard in commercial construction contracts, and both deserve careful review before signing.
If a contractor resists including a substantial completion date or pushes back on liquidated damages without a clear explanation, that’s worth a conversation before you proceed.
5. Insurance and Indemnification Requirements
The contract should specify the types and minimum coverage amounts of insurance the contractor is required to maintain throughout the project — general liability, workers’ compensation, and builder’s risk at a minimum. Before work begins, you should receive certificates of insurance naming you as an additional insured on the contractor’s general liability policy.
The indemnification clause defines who is responsible for claims, damages, and legal costs arising from the project. These clauses can be broad or narrow, and the language matters. A contractor who is indemnifying you only for their own negligence is different from one indemnifying you for any claim arising out of the project. Have your attorney review this section — the difference can be significant if a claim is ever filed.
6. Dispute Resolution
Most construction contracts include a dispute resolution process — typically starting with direct negotiation, escalating to mediation, and then to arbitration or litigation if the matter isn’t resolved. Understanding which venue applies to your contract, and under which law your contract is governed, is important before you sign.
Arbitration clauses are common in construction contracts and generally favor faster, less expensive resolution than litigation. However, arbitration decisions are typically binding and non-appealable, so the process you agree to matters. If your contract requires arbitration, make sure you understand who selects the arbitrator and what rules govern the proceeding.
7. Lien Rights and Waivers
In New Jersey and across most states, contractors, subcontractors, and material suppliers have the right to file a mechanics lien against your property if they aren’t paid. A lien can cloud your title, complicate financing, and delay a sale or refinance.
A well-structured contract includes provisions for lien waivers — documents signed by the contractor and subcontractors confirming that payment has been received and releasing their right to lien for work completed to date. Conditional lien waivers (released upon payment) are exchanged at each draw; unconditional waivers confirm final payment. Never release a draw without receiving the corresponding lien waiver documentation.
Read It, Then Have Someone Else Read It
The most important thing a developer can do with a construction contract is read it — all of it — before signing. The second most important thing is having an attorney with construction experience review it as well. Contract language that appears standard may contain provisions that are unfavorable to the owner, and the time to identify and negotiate those provisions is before the contract is executed, not after a dispute has arisen.
A contractor who is confident in their process and their work will have no objection to a developer who takes the contract seriously. The ones who resist scrutiny are telling you something worth knowing before you’re legally bound.
Santos Contractors Corp works with developers and property owners across New Jersey and the tri-state area on projects of all scales — and we believe that a well-structured contract protects everyone involved. If you’re preparing for an upcoming project and want to work with a contractor who brings transparency to every phase, we’d welcome the conversation.
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