Construction Contract Guide

In a lump sum contract, the contractor assumes all cost risk — if costs exceed the contract price, the contractor absorbs the overrun and keeps savings below the bid. In a GMP (Guaranteed Maximum Price) contract, the contract is cost-plus with a ceiling: the contractor is reimbursed actual costs up to the GMP, and any costs above the GMP are the contractor's responsibility. Below the GMP, savings are typically shared between owner and contractor per a "shared savings" provision (a common split is 50/50).

The key distinction beyond cost structure is information asymmetry: a lump sum contractor closely guards its cost breakdown as proprietary, while a GMP contractor provides full cost transparency — the owner sees actual subcontractor bids, labor rates, and overhead line items. This transparency is valuable for owner decision-making but requires a higher level of trust and contract administration sophistication.

For owners, a GMP provides a cost ceiling while giving the contractor incentive to control costs through shared savings. For contractors, a GMP shifts some of the risk of design development changes post-GMP to the owner (via GMP amendments), while the lump sum contractor bears all design gap risk. A GMP should always specify: (1) the design documents it is based upon; (2) the contingency included within the GMP; and (3) the process for adjusting the GMP as design is completed.

Retainage is a percentage of each progress payment (typically 5–10%) that the owner withholds throughout construction as security against incomplete or defective work. The retained funds are released at substantial completion or final completion. Retainage protects the owner's leverage to ensure punch-list completion and provides a fund from which defect correction costs can be recovered without filing suit.

From the contractor's perspective, retainage is essentially an interest-free loan to the owner — the contractor has performed the work and is entitled to payment, but a portion is held back, often for months or years. High retainage rates (above 10%) are economically inefficient: they increase contractor borrowing costs (which are passed back to the owner through higher bid prices) and create cash flow problems for subcontractors, sometimes leading to subcontractor insolvency and project disruption.

Twenty-seven states have enacted retainage caps limiting maximum retainage on public works contracts, typically to 5–10%. California caps public works retainage at 5%. Even on private projects, best practice is to reduce retainage to 5% at 50% project completion and release all retainage within 30 days of substantial completion, retaining only the value of outstanding punch-list items plus a reasonable contingency.

Under AIA A201, if the owner fails to pay a certified amount within seven days of the payment due date, the contractor may give seven days' written notice and then stop work until the payment is received. If the owner still fails to pay after the stop-work notice, the contractor may terminate the contract and recover payment for all work performed plus reasonable overhead, profit, and anticipated profit on the unperformed work.

Most state prompt payment acts independently impose consequences for late payment, including statutory interest (typically 1.5–2% per month on the overdue amount) and, in many states, the right to recover attorney's fees incurred in collecting the overdue payment. These statutory remedies often exceed the contractual remedies — contractors should always identify and invoke the applicable state prompt payment act.

Before stopping work, a contractor should carefully review the contract's dispute resolution clause: some contracts require mediation before any contract termination, and stopping work without following the prescribed process can constitute a contractor breach. Best practice is to send a written cure notice, document all amounts due with supporting payment applications and lien waiver exchanges, and consult construction counsel before exercising stop-work or termination rights.

A mechanic's lien (also called a construction lien or materialman's lien) is a security interest in real property that a contractor, subcontractor, or material supplier can file to secure unpaid compensation for work performed or materials furnished. A properly filed and timely enforced mechanic's lien gives the claimant a lien on the property — similar to a mortgage — which can ultimately be foreclosed to force sale of the property to satisfy the lien.

Mechanics lien rights are strictly statutory — each state has its own filing deadlines, preliminary notice requirements, and enforcement procedures. Preliminary notices (sometimes called "Notice to Owner" or "Notice of Furnishing") must often be served within 20–45 days of first furnishing labor or materials, well before any dispute arises. Missing a preliminary notice deadline eliminates lien rights entirely in many states, even if the claimant is owed substantial sums.

On private projects, a mechanics lien is the most powerful remedy available to unpaid contractors and subcontractors — it clouds the property title and can block a sale or refinancing, creating enormous owner pressure to resolve payment disputes. On public projects, mechanics liens cannot be filed against government property; instead, the payment bond (required by the Miller Act or state Little Miller Act) serves as the substitute remedy. Lien rights can be contractually waived in some states — review any "lien waiver" provision carefully before signing.

A performance bond guarantees that the contractor will complete the project per the contract terms — if the contractor defaults, the surety (the bonding company) steps in to complete the project using a replacement contractor, compensate the owner for the cost to complete up to the bond amount, or tender a new contractor. The surety has the right to investigate the alleged default, and a peremptory demand to the surety without following the bond's prescribed procedures can void the owner's rights under the bond.

A payment bond guarantees that the contractor will pay subcontractors, suppliers, and laborers — if the contractor fails to pay, unpaid parties can make claims directly against the surety for the amounts owed. Payment bonds provide a critical remedy on public projects where mechanics liens cannot be filed against government-owned property.

On federal projects, both bonds are required by the Miller Act (40 U.S.C. §§ 3131–3134) for all contracts over $150,000. State Little Miller Acts impose similar requirements for state-funded projects, with varying thresholds (some states require bonds on contracts as small as $25,000). On private projects, bonds are negotiated. A performance bond costs 0.5–3% of the contract value depending on the contractor's financial strength — an amount that is generally well worth paying given the protection it provides against contractor default.

Generally, a contractor must continue working during a dispute — stopping work without justification constitutes a contractor breach of contract, which can expose the contractor to consequential damages (including the owner's cost to complete with a replacement contractor). Under AIA A201, there are two narrowly defined situations where a contractor may stop work: (1) the owner fails to provide evidence of financial arrangements after a proper demand under §2.2; or (2) the owner fails to pay a certified amount within seven days after the payment due date and a proper stop-work notice has been given under §9.7.

Stopping work for any other reason — including a disputed change order, a disagreement about the scope of work, or dissatisfaction with the contract administration — is risky and should only be done after consulting a construction attorney. Many contracts explicitly require the contractor to continue working while disputes are being resolved ("work now, fight later" doctrine), and stopping work in violation of this provision can transform a creditor into a debtor.

Most state prompt payment acts provide independent rights to stop work or terminate for sustained non-payment — these statutory rights may be broader than the contractual rights. Contractors should always identify the applicable state statute before asserting stop-work rights.

"Pay-when-paid" clauses set the timing of subcontractor payment — the GC pays the subcontractor within a reasonable time after receiving payment from the owner, but the GC remains obligated to pay the subcontractor even if the owner never pays. The clause addresses cash flow sequencing, not risk transfer. Courts interpret pay-when-paid clauses as requiring payment within a "reasonable time" regardless of owner payment.

"Pay-if-paid" clauses condition the subcontractor's right to payment entirely on the GC receiving payment from the owner — if the owner defaults, the subcontractor bears that risk and has no claim against the GC for the unpaid amount. To shift this risk, the clause must use extremely clear and unambiguous language — courts disfavor pay-if-paid clauses and require express language making clear that the subcontractor's right to payment is conditioned on the GC's actual receipt of funds from the owner.

Pay-if-paid clauses are prohibited or significantly limited in California (Business & Professions Code §7108.5 requires payment within 7 days regardless of owner payment), New York (Lien Law §34), Nevada, Wisconsin, and several other states. Even where enforceable, the clause protects the GC only when the owner's non-payment is not due to the GC's own default. If the GC caused the owner's non-payment (e.g., by failing to properly perform its own work), the pay-if-paid clause typically does not protect the GC against the subcontractor.

To recover delay damages, a contractor must typically prove: (1) the delay was caused by the owner — not the contractor, weather, or other excusable but non-compensable events; (2) the delay was on the critical path — it actually extended the project completion date (delays to non-critical activities generally do not entitle the contractor to additional time or money, even if they caused the contractor additional cost); (3) the contractor gave timely written notice of the delay as required by the contract; and (4) the contractor suffered actual additional costs as a result of the delay.

Critical path method (CPM) schedule analysis is almost always required in significant delay claims. The analysis must compare the as-planned schedule (the baseline schedule at project start) with the as-built schedule (what actually happened) to identify which delays drove project completion and which party caused those delays. Contemporaneous project schedules updated monthly are essential — a CPM analysis built retrospectively from daily reports is far less persuasive than one built from schedules updated in real time.

Recoverable delay damages typically include: extended general conditions costs (superintendent, site office, temporary utilities, equipment rental); labor escalation due to extended performance period; extended home office overhead (Eichleay formula); and, in appropriate cases, lost profit on other work the contractor was unable to perform due to the delay. Direct labor and material costs are generally not recoverable as delay damages (those are change order costs, not delay damages).

A differing site conditions (DSC) clause protects the contractor when actual site conditions — particularly underground conditions — differ materially from what the contract documents indicated. Without a DSC clause, contractors price subsurface risk into their bids, which usually results in higher overall bid prices for owners. The DSC clause transfers that risk back to the owner in exchange for more accurate, lower bids.

Type I DSC conditions are those materially different from conditions indicated in the contract documents (e.g., geotechnical reports showed competent bearing soil, but the contractor encountered unexpectedly soft material). Type II DSC conditions are unusual, inherently unpredictable conditions not indicated in the contract documents — but also not conditions an experienced contractor would have anticipated. Type II claims are harder to prove.

The foundational case establishing the government's implied warranty of accurate site information — United States v. Spearin, 248 U.S. 132 (1918) — also underlies the DSC clause philosophy: owners have better access to site information and should bear the risk of inaccurate information they provide. Contractors must provide prompt written notice when they encounter what they believe to be a differing site condition, before disturbing the condition (to allow the owner to inspect), and must quantify the time and cost impact. Failure to give timely notice is the most common reason valid DSC claims are denied.

The American Institute of Architects (AIA) publishes a family of standard construction contract forms widely used in U.S. commercial construction: A101 (Owner-Contractor Agreement — Lump Sum); A102 (Owner-Contractor Agreement — Cost-Plus/GMP); A201 (General Conditions — the backbone of the AIA system); B101 (Owner-Architect Agreement); G701 (Change Order); G702/703 (Application for Payment/Continuation Sheet); G704 (Certificate of Substantial Completion); and dozens of others.

AIA forms represent decades of industry balance between owner and contractor interests, are well-understood by courts and arbitrators, and reduce negotiation time on boilerplate provisions. Their terms are not immutable — both parties negotiate AIA form modifications (called "Amendments" or "Modifications") — but they provide a sensible starting point that avoids reinventing the wheel.

Non-AIA contracts — particularly owner-drafted forms — tend to be significantly more owner-favorable. A sophisticated owner's legal team will have drafted the contract to maximize owner protection, shift risk to the contractor, limit the contractor's change order rights, and impose aggressive notice requirements. Contractors reviewing non-AIA contracts should compare each provision against the AIA equivalent and flag deviations. The 2017 AIA documents are the current edition; the 2007 documents are also still in use.

Substantial completion is the point at which the Work is sufficiently complete that the Owner can occupy and use it for its intended purpose. Substantial completion is one of the most consequential milestones in a construction contract because it simultaneously triggers multiple legal and contractual consequences: (1) the one-year correction of work period begins to run; (2) the risk of loss shifts from the contractor to the owner; (3) liquidated damages typically stop accruing; (4) retainage is reduced or released; (5) the owner's obligations to pay remaining contract balance come due; and (6) builder's risk insurance typically transitions to permanent property coverage.

Substantial completion is documented by the Architect's Certificate of Substantial Completion (AIA G704), which includes a punch-list of remaining items (incomplete or defective work the contractor must correct). Disputes about whether substantial completion has been achieved are common — particularly on projects where a significant punch-list remains. The contract should define "substantial completion" with reference to occupancy or use, not to percentage of work complete.

The punch-list itself is a source of frequent disputes: contractors argue that minor cosmetic items should not prevent substantial completion; owners argue that items affecting occupancy or safety must be complete. Best practice is to negotiate a "substantial completion threshold" — specifying that certain systems (fire suppression, HVAC, elevators, power) must be fully functional for substantial completion to be certified, while permitting cosmetic items and minor deficiencies on the punch-list.

Anti-indemnity statutes, enacted in at least 43 states, prohibit construction contracts from requiring one party to indemnify another for the indemnitee's own negligence. These statutes void "broad form" indemnity clauses that would otherwise require a contractor to pay for injuries caused by the owner's negligence — a provision that construction industry labor unions and contractor associations successfully lobbied against throughout the 1970s and 1980s after a wave of broad-form indemnity clauses shifted all injury liability to contractors regardless of who was at fault.

The scope and application of anti-indemnity statutes varies significantly by state. California Civil Code §2782 voids indemnity for the indemnitee's "active negligence" on private projects, but allows indemnity for "passive negligence." New York GOL §5-322.1 and Texas CPRC §130.002 have different scope and enforcement mechanisms. Some statutes apply only to construction contracts; others apply to any agreement involving construction work.

Even where anti-indemnity statutes apply, parties can typically: (1) require each other to maintain insurance for their own risks; (2) name each other as additional insureds (which functions similarly to indemnity but through the insurance mechanism); and (3) mutually indemnify each other for claims arising from their respective negligence (comparative indemnity). The additional insured endorsement strategy — requiring contractors to add owners as additional insureds on their CGL policies — effectively recreates the economic result of broad-form indemnity while avoiding the statutory prohibition.

The cardinal change doctrine applies when an accumulation of changes to a construction contract is so extensive that it fundamentally alters the nature of the project the contractor agreed to build. Named for the concept that some changes are "cardinal" — i.e., going to the heart of the contract — the doctrine gives the contractor the right to treat the contract as terminated and sue for breach, recovering on a quantum meruit (reasonable value of services rendered) basis rather than being limited to the contract's change order pricing mechanism.

Courts assess whether a change (or accumulation of changes) is cardinal by examining: (1) whether the character of the work was fundamentally altered; (2) whether the quantity of work was dramatically increased (courts have found cardinal changes at 100% to 200% overruns); (3) whether the contractor was deprived of the benefit of what it bargained for; and (4) whether the changes required performance of a different project than the one contracted for.

The doctrine is a last resort — the contractor must show not just that the changes were extensive, but that they collectively exceeded what the change order clause was designed to accommodate. In practice, contractors asserting cardinal change claims frequently combine them with constructive termination claims (arguing that the cumulative impact of changes was so severe that it effectively terminated the original contract). Recovery in quantum meruit can be substantially higher than the contract price — the contractor recovers the actual reasonable value of its services, unconstrained by the original contract price.

The Occupational Safety and Health Administration (OSHA) has promulgated comprehensive safety standards specifically for the construction industry under 29 C.F.R. Part 1926. These standards address fall protection (the most cited OSHA violation in construction), scaffolding, excavation and trenching, electrical safety, personal protective equipment, hazard communication, and dozens of other hazards specific to construction work.

On a multi-employer construction site, OSHA holds each employer responsible for the safety of its own employees, but also imposes "multi-employer citation policy" — a general contractor can be cited for a subcontractor's safety violation if the GC had authority to correct the hazard or knew of it and failed to act. This means general contractors bear significant OSHA exposure for subcontractor safety failures, even without a direct employment relationship.

OSHA penalties for serious violations range from $0 to $15,625 per violation; willful violations carry penalties up to $156,259 per violation. Multi-million-dollar OSHA citations for fatalities on construction sites are increasingly common. Contracts should require each contractor to maintain an injury and illness prevention program, designate a competent safety person on site, provide OSHA 10 or OSHA 30 training to all employees, and maintain OSHA 300 logs. The Davis-Bacon Act (on federal projects) and state prevailing wage laws impose additional recordkeeping and reporting obligations alongside OSHA requirements.

The Eichleay formula is a method for calculating a contractor's unabsorbed home office overhead — the portion of company-wide overhead costs (executive salaries, accounting, estimating, legal, rent, utilities) allocated to a delayed contract during a period of government or owner-caused suspension or delay. The formula derives its name from Eichleay Corp., ASBCA No. 5183 (1960), where the Armed Services Board of Contract Appeals approved the method.

The formula has three steps: (1) determine the overhead allocable to the delayed contract: (Contract billings for the contract period ÷ Total company billings for the contract period) × Total company overhead for the contract period; (2) determine the daily overhead rate: Overhead allocable to contract ÷ Contract performance days; (3) calculate the extended overhead: Daily overhead rate × Days of compensable delay.

The Eichleay formula is most established in federal government contract disputes, where the Court of Federal Claims and the Armed Services Board consistently apply it. In state construction disputes, courts have been more inconsistent — some states apply Eichleay, others require the contractor to prove actual overhead damages without using the formula. To qualify for Eichleay recovery, the contractor must demonstrate: (1) a government or owner-caused delay; (2) that the contractor was on "standby" — ready to resume work but unable to take on replacement work; and (3) that the overhead was actually unabsorbed during the delay period.