TL;DR:

• A construction contract sets clear roles, expectations, and payment terms to keep your project on track
• Choose the right contract type based on project needs—lump sum, time and material, cost-plus, or unit price
• Be specific in defining scope, timelines, and deliverables to avoid misunderstandings
• Regularly review and update the contract to adapt to any changes
• Leverage technology like SpotDraft to automate drafting, track changes, and ensure compliance

Construction projects are complex. Multiple teams, tight deadlines, large budgets. Without a clear contract, things fall apart quickly.

A construction contract sets out who’s responsible for what, how and when work gets done, and what happens if plans change. It’s how you avoid confusion, manage risk, and keep the project on track.

According to McKinsey, complex projects and large construction projects typically take 20% longer to finish than scheduled and run up to 80% over budget.

This guide walks through what matters in a construction contract. What to include. How to manage it. And how to make sure it holds up when issues come up.

What is a construction contract?

A construction contract sets the terms for how a project will run. It defines the scope, timelines, responsibilities, and payment terms clearly and in writing.

It tells you who’s doing what, when it needs to be done, and how much it will cost. No assumptions.

If something goes wrong or there’s a disagreement, the contract is where you go. It gives you a reference point to resolve issues and keep the project on track.

Importance of construction contracts

A clear, written contract brings structure and protects everyone involved.

#1 Clear roles and responsibilities reduce disputes

When roles, responsibilities, and timelines are clearly defined, there is less space for misunderstanding. A well-drafted contract helps avoid costly back-and-forth by setting expectations upfront.

#2 Risk is easier to manage when it’s planned for

Construction work often runs into issues like delays, design changes, or labour cost adjustments. A contract outlines how these situations will be handled, so the project can continue with minimal disruption.

#3 Payment terms keep the project financially stable

The contract should clearly state payment amounts, schedules, and conditions. Everyone knows what is owed, when it is due, and what must be delivered. This protects both sides of the agreement.

#4 Legal protection when performance falls short

If work is delayed, incomplete, or below agreed standards, the contract gives you a clear path to resolution. It outlines how disputes will be handled and gives you the legal grounds to enforce the terms if needed.

Also read: Master the Contracting Process: A Step-by-Step Guide

The key elements of a construction contract 

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A construction contract is the backbone of any project, ensuring that all parties involved in the construction industry are aligned and protected. For in-house legal teams, understanding and drafting these key elements are crucial to mitigate risks and facilitate smooth project execution.

#1 Scope of work

This section describes exactly what the contractor is responsible for. It should cover:

• A detailed list of tasks, deliverables, and quality standards
• Materials, methods, and any specific requirements for execution
• What is not included in the contractor’s responsibilities
• The process for approving and documenting changes in scope

In Jacob & Youngs, Inc. v. Kent, a dispute over the type of piping used turned into a legal battle. The contractor ultimately won, but the case shows how vague or overly rigid scope definitions can cause costly delays

#2 Payment terms

 The contract should explain how and when payments will be made. Include:

• The structure of payments, such as fixed price or milestone-based
• Accepted payment methods
• Penalties for missed payments or delays

#3 Project Timeline

 Dates matter. Without them, projects lose momentum. Cover:

• Start and end dates for the full project
• Milestones with specific deadlines for phases of work
• Contingency time for known risks like weather or supply delays

In Moses H. Cone Memorial Hospital v. Mercury Construction Corp., delays and disputes arose due to unclear timelines and responsibilities. The U.S. Supreme Court's involvement highlighted the importance of well-defined timelines and dispute resolution mechanisms in contracts to prevent prolonged litigation. ​

#4 Dispute resolution

 When conflicts arise, this clause defines how they are handled. Specify:

• Whether mediation will be used to settle disputes
• If arbitration is required before litigation
• The applicable jurisdiction and process for legal action if needed

#5 Warranties and guarantees

 This section protects the owner if the work is defective. Clarify:

• The length of coverage for workmanship, materials, and structural issues
• What is covered and what is excluded
• The remedy available if the work does not meet the agreed standard

Also read: What is a Contract? Types, Elements, and Use Cases

Types of construction contracts

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Choosing the right contract structure is one of the most important early decisions in any construction project. It affects how risk is shared, how payments are handled, and how disputes are managed. The type of contract should match the nature of the project, the level of design certainty, and how the work will be delivered.

#1 Lump sum contract

This is a fixed-price contract. The contractor agrees to complete the project for a set amount based on a clearly defined scope of work. It offers predictability in final cost and is often used in traditional design-bid-build projects. However, any changes or variations during construction can lead to additional claims or delays if not managed properly.

#2 Time and materials contract

This type is used when the full scope cannot be accurately defined at the outset. The contractor is paid based on actual labor hours and materials used. It’s common in emergency work or renovation projects where unknown conditions might arise. The contract should include provisions for tracking time, setting hourly rates, and placing limits on total labour cost.

#3 Cost-plus contract

Under this model, the contractor is reimbursed for actual costs, plus an agreed fee or percentage for all overhead costs. It gives flexibility when the project is complex or the scope may evolve, but it also requires tight cost tracking. This structure is often used in negotiated contracts, especially for large commercial builds or projects with fast-track schedules.

#4 Unit price contract

Here, the contractor is paid a fixed rate for each unit of work, such as cubic meters of concrete poured or kilometers of pipeline installed. This format is common in civil and infrastructure projects where quantities may vary, but the unit work is repetitive. It allows for easy adjustment of the total cost based on actual quantities completed.

Who is involved in construction contracts?

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Every construction project brings together multiple parties, each with specific responsibilities. A well-drafted contract defines how they work together, where the risks sit, and how legal obligations and construction costs are managed.

#1 Owner or client

The owner initiates the project. Their role is to define the scope, set the budget, and ensure the final result aligns with their objectives. In contract terms, the property owner pays attention on financial responsibility and is often the party who engages both the design and construction teams.

#2 Contractor

The contractor manages the physical delivery of the project. They coordinate resources, hire subcontractors, and are responsible for meeting timelines, quality standards, and budget constraints. Their obligations are typically detailed in the main construction agreement with the project owner.

#3 Subcontractors

Subcontractors handle specialist work such as electrical, plumbing, or structural steel. They are hired by the main general contractor and are usually bound by a separate subcontract. These agreements should mirror key obligations in the main contract to avoid conflicts.

#4 Architects and engineers

The architect leads the design process and works closely with structural, civil, and mechanical engineers. Together, they ensure the project is not only functional and code-compliant but also feasible to build. Their terms are typically outlined in consultant agreements.

#5 Legal advisors

Legal professionals ensure the entire project stays contractually sound. From drafting and reviewing agreements to resolving disputes and ensuring compliance with local laws, their role is central to risk management throughout the project lifecycle.

How to draft a construction contract?

Construction contracts don’t need to be exciting. They need to be precise. A vague or incomplete contract invites delays, confusion, and costly disputes.

Here’s how to get it right.

#1 Start with the project specifics

Every contract should reflect the unique requirements of the project. That includes materials, specifications, timelines, and known risks. A standard template won't cover everything.

Even large-scale builds run into surprises. During the Petronas Towers project in Kuala Lumpur, one tower began leaning due to a foundation shift. Because the contract already accounted for risk allocation, defect correction, and third-party engineering support, the issue was corrected without derailing the schedule or budget. The contract made the recovery possible.

#2 Choose the correct contract structure

Select a contract type based on the nature of the work:

• Lump sum: For well-defined scopes with detailed drawings and specs
• Time and materials: For flexible or evolving scopes
• Cost-plus: When the total cost is uncertain and the project is complex
• Unit price: For work that can be measured by quantity, such as paving or pipeline installation

#3 Define terms and conditions clearly

Ambiguity in scope, timelines, or payment terms can lead to disputes. The contract should clearly define:

• Scope of work
• Project schedule and deadlines
• Payment structure and timelines
• Roles and responsibilities
• Conditions for variations and approvals

Also read: 4 Basic Contract Terms & Conditions And How To Write Them

#4 Get legal review before execution

Have the contract reviewed by legal counsel. This ensures compliance with relevant laws and confirms that risk is allocated fairly. Legal teams can also flag gaps that might affect enforcement or cause issues during the project.

Also read: The Ultimate Guide to Contract Review Processes

#5 Comply with local laws and regulations

Building codes, environmental laws, and permitting requirements vary by location. Your contract must reflect these. Ensure all legal obligations are met, including safety requirements and licensing.

Non-compliance can lead to penalties or work stoppages.

Also read: What is Contract Compliance? The Ultimate Guide With Tips and Best Practices

#6 Include a dispute resolution clause

Define how disputes will be managed. Include a clear process for mediation, arbitration, or litigation, depending on the nature of the project and the jurisdiction.

This helps resolve issues efficiently and can reduce project delays.

#7 Use a contract management platform

Using a platform like SpotDraft allows your team to manage templates, automate approvals, and track contract status in one place. This reduces manual work and ensures consistency across projects.

Want to learn more? Request a demo to see how SpotDraft can support your legal team in managing construction contracts more efficiently.

Best practices for construction contracts

A solid construction contract can be your project’s secret weapon. Follow these best practices, and you'll avoid the common pitfalls, streamline the process, and keep things running smoothly.

Here’s how to set yourself up for success:

1. Use clear, specific language

Avoid general terms like “reasonable” or “timely.” Instead, define what, when, how, and to what standard.

For example, instead of writing “roofing material,” specify “architectural asphalt shingles from XYZ supplier.”

“Avoid unnecessary complexity and shoot for short sentences. Always ask yourself if what you wrote down is clear – could a judge or jury understand the section if there was ever litigation?  If not, rework it.  For example, think about this statement, ‘This Agreement will terminate on August 31, 2021.’  Does this mean that it terminates when the day starts? When the day ends? And when does the day end? At the end of the business day, at midnight, and in what time zone? The better sentence is ‘This Agreement will terminate on August 31, 2021, at 11:59 p.m. Central Time.’ Be precise and concise!”

~ Sterling Miller, CEO, Hilgers Graben
Ten Things: Making Contracts Easier to Sign

2. Tie payments to project milestones

Break down payments based on completed work. This ensures accountability and protects against paying for unfinished or subpar work.

For instance:

• 30% after foundation is completed and inspected
• 30% after framing
• 40% upon final completion and approval

3. Always use written contracts

Verbal agreements increase risk. A written contract defines scope, responsibilities, deliverables, and timelines.

In Jacob & Youngs, Inc. v. Kent, the court sided with the contractor who used a different brand of pipe. Because the contract specified quality, not brand, the contractor wasn’t at fault. Written clarity mattered.

4. Review and update as the project evolves

Construction projects change. When the scope, design, or schedule shifts, the contract should be reviewed and updated. This prevents misalignment and protects all parties.

Record any changes in writing, with signatures and dates. Use addenda or change orders, not informal emails or verbal confirmations.

5. Use technology to manage the process

Manual processes increase risk. With contract management tools, you can:

• Use templates to standardize drafting
• Store all contracts in a central, secure location
• Set automated reminders for payment dates, deliverables, and renewals
• Track revisions and maintain version control

Also read: 5 Contract Management Best Practices To Deploy For Handling Contracts Effectively

Construction contract management checklist

“First, I worked on setting up contract templates and contracting guidelines that every lawyer in the team dealing with contracts must use and follow. Doing so, we were able to bring in a lot of order to the system.”

~ Bhavna Singh, GC and DPO at Subex Limited
Streamlining Legal Processes: Advice from 7 GCs and Heads of Legal

Contract management starts once the work begins. This checklist helps you stay on top of tasks, timelines, and responsibilities throughout the construction project.

Contract setup

• Store the signed contract and annexures in a shared, secure location

• Assign a contract owner to track deadlines and obligations

• Summarize key terms, payment milestones, and responsibilities

• Set reminders for critical dates (payments, renewals, inspections)

Active management

• Track deliverables and milestones against the project plan

• Use formal change orders for any scope or schedule changes

• Monitor subcontractor compliance with key contract terms

• Check that insurance and permits stay valid throughout the project

• Keep stakeholders informed on key contractual developments

Communication and records

• Log formal notices, approvals, and amendments

• Keep updated versions of all documents in one place

• Record inspection reports and compliance documentation

Closeout

• Confirm all contract obligations are fulfilled

• Collect warranties, manuals, and final documentation

• Verify that all payments have been completed

• Archive the contract and document lessons learned

Also read: Manage Contracts 10x Faster with AI

Make contract management less manual with SpotDraft

SpotDraft has the best customer service, is extremely responsive, and offers a clean UI. They are constantly working to make their product better and their SalesForce and GDocs integrations are FANTASTIC! I've never worked with a more responsive team.

~Customer review for SpotDraft on G2

Managing construction contracts is already complex. SpotDraft makes it easier to keep everything organized and on track—without relying on spreadsheets or scattered follow-ups.

Here’s how it helps:

• Automated drafting: AI-powered templates generate contracts in minutes, so you're not rewriting the same clauses again and again
• Centralized storage: All contracts stay in one secure place—searchable, accessible, and version-controlled
• Deadline tracking: Set reminders for key dates like payments, renewals, and inspections so nothing gets missed
• Compliance support: Keep contracts aligned with legal and regulatory requirements using built-in alerts and audit trails

Also read: CLM Assessment Guide: How to Choose a Solution That Actually Works for You

Keep contracts clear, consistent, and under control

Construction projects move fast—and so do the risks. A well-structured contract helps you stay ahead by setting clear expectations, avoiding confusion, and reducing delays before they start.

Be specific. Choose the right contract for the job. And use the right tools to manage it all.

SpotDraft helps you stay on top of every detail—draft faster, track smarter, and keep everything in one place.

Want to see how it works? Request a demo.