Identifying and Mitigating the Risks Created by Problematic Clauses in Construction Contracts

When it comes to identifying language which is likely to be problematic in construction contracts, even seasoned construction professionals can sometimes overlook a problematic clause, sentence, or word. Moreover, problematic contract clauses are frequently overlooked, or outright ignored, by contractors and owners eager to win the contract and get to work. At the same time, the failure to identify problematic contract clauses can put the financial well-being of the entire company at risk. To mitigate against this risk, companies need to establish effective processes and procedures which require a thorough review of the contract before they bind the company. These procedures should include (1) preparing a set of guidelines which reflects the company’s policies toward language commonly found in construction contracts, (2) designating and training a reviewer responsible for identifying problematic language and bringing it to the attention of the decision makers at the company, (3) developing a list of red flag and must-have clauses which must be avoided, or included, in every contract, and (4) identifying and compiling the lessons learned by the company to learn and improve from its mistakes. This article includes a discussion of certain red flag and must-have clauses which are frequently encountered in construction contracts, from the perspective of both the owner and the contractor.