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Is Your Construction Contract Protecting You From Financial Losses?

If you own a construction business, nothing could be more important to your interests than a contract that protects you from being taken advantage of. Yet, many business owners in the construction industry forgo legal counsel, often to thicken what’s left of already slim profit margins.

There are a lot of reasons why even promising projects can end up costing contractors money – delays, change orders, and a client’s refusal to pay are a few of them. Fortunately, a well-prepared construction contract can protect contractors from financial loss. Keep reading to learn more about how you can protect your business.

Beware of Change Order Terms

Change orders don’t have to be tough to deal with, but that comes down to how they’re accounted for in the construction contract. As a business owner, you should be willing to abide by all terms concerning change orders.

In too many cases, contractors find themselves in difficult legal situations because they agreed to unreasonable notification requirements and were unable to provide notice according to these requirements. If you’re required to provide written notice for any change in an unfair or unreasonable amount of time, it’s best to renegotiate such terms before signing.

Also, make sure the change order terms of your construction contract address time extensions. While most change orders focus on the price, they should also address how much more time is needed to complete the project as a result of the change. Accounting for time extensions is a good way to protect your business against penalties incurred by delays or missed deadlines.

Take Note of Payment Clauses

At the end of the day, any construction contract is there to ensure one company gets paid as long as they perform according to the agreement. These clauses should be of particular concern to subcontractors, who may find their pay withheld by a general contractor awaiting payment from the client.

If you’re a subcontractor, you risk not getting paid if you agree to any “pay when paid” clause of your construction contract. Although these clauses are extremely common and there might not be a way to sign onto a project without agreeing to them, all subcontractors should be aware of this risk to their business. Consider the reputations of the general contractor and client – it might be worth asking your peers in the industry if you aren’t sure for yourself.

Try to Eliminate Retainage Clauses

Retainage is the amount of money a client can withhold from a contractor or subcontractor until the entire project is completed. The purpose of a retainage clause, from the client’s perspective, is to ensure that a contractor finishes their work correctly and completely. From your perspective, however, it means throwing 5% to 10% of your payment up in the air after you’ve done your job.

If you’re a contractor that does early-in work, like surveying or excavation, you could have your pay withheld by the client for significantly longer than, say, the plumber or electrician – but only because you started (and finished) sooner than those subcontractors did. Retainage can put significant pressure on your business and may even force you to consider filing a mechanic’s lien to ensure you get your full compensation.

For these reasons, it’s prudent to try to eliminate or at least minimize retainage clauses. This can be done by reducing the amount of retainage or by negotiating an early release of withheld compensation.