10 Essential Elements in Every Construction Contract

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In construction, the contract is your foundation. No matter how well-designed the building, no matter how experienced the team, if the agreement is vague or incomplete, you’re exposed to unnecessary risk.

At USA Construction Consultants, we’ve seen firsthand how the strength of a contract affects the flow, budget, and overall health of a project. As owner and lender representatives on projects ranging from $100,000 leasehold improvements to $100+ million ground-up builds, we review contracts every day to assess their strength, clarity, and alignment with real-world execution.

Here are the 10 most essential items that every construction contract should include – and why they matter to owners, lenders, and other stakeholders.

A Fully Executed Agreement

It may sound basic, but we’ve encountered far too many situations where contractors start work based on a proposal or an unsigned contract. That’s a red flag.

Until both parties sign on the dotted line, pricing is just a suggestion, and the entire arrangement remains a gray area. Without an executed contract, lenders can’t disburse funds, and owners can’t enforce performance or deadlines.

Construction contracts are only as good as their enforceability. A well-drafted and fully executed agreement forms the legal basis for every subsequent obligation, from payment schedules to dispute resolution. The American Bar Association emphasizes the importance of precision and specificity in contracts, noting that vague or overly broad terms can lead to unenforceable clauses or disputes that escalate into litigation.

Clear Date of Commencement

What marks the official start of construction? Is it the day the contract is signed? Are the permits issued? Or a formal notice to proceed?

The Date of Commencement must be explicitly stated in the contract. Without this, it becomes difficult to track timelines, determine liquidated damages, or assess whether a delay is justifiable. We often use this date when reviewing progress during site inspections or monitoring project schedules.

Defined Duration and Preliminary Construction Schedule

Establishing a realistic and well-structured construction schedule is crucial to maintaining accountability. The Project Management Institute (PMI) outlines how critical path method (CPM) scheduling helps ensure that key dependencies are identified and tracked.

Your contract should clearly define how long the work is expected to take and include a critical path method (CPM) schedule, preferably in Gantt chart format, to map out construction timelines and anticipate delays before they become costly.

It should also include:

Estimated project completion date
Allowable weather days, with definitions (What qualifies? How many are included?)
Requirements for schedule updates, ideally monthly or with each pay application

Basis of Payment

Selecting the right contract structure is a strategic decision that impacts the success of your project. According to the Construction Management Association of America (CMAA), project delivery methods should be chosen based on risk allocation, complexity, and transparency. Their guide provides a valuable overview for owners evaluating which method best suits their construction goals.

The contract must clearly state whether it’s a:

Stipulated Sum (Lump Sum) agreement, where a fixed price is paid based on the percentage completion of line items.
Or a Cost of the Work agreement, where actual costs are reimbursed, typically with a fee markup

For Cost of the Work contracts, a Guaranteed Maximum Price (GMP) is non-negotiable for lenders (in our opinion). Without it, the owner is exposed to uncapped cost growth, and lenders will have a limited budget with an unlimited contract amount.

Payment Frequency and Terms

Clarity around billing cycles protects all parties.

The contract should answer:

How frequently can contractors bill (monthly, milestone-based)?
How many days do owners or architects have to review pay apps?
Are lien waivers required for each draw?
What other backup is necessary? (i.e. invoices, subcontractor billing, etc.)
What’s the retainage amount? (5% is minimum; 10% is common)

This section becomes vital during draw request reviews, which USA Construction Consultants handles regularly, on behalf of lenders and owners. We ensure that the payment process matches the actual work in place.

Retainage can be an effective way to ensure performance and incentivize timely project completion, but it’s often misunderstood or inconsistently applied. Levelset, a leading authority on construction finance and legal best practices, offers a clear explanation of retainage rules by state and how they impact both cash flow and legal compliance.

Scope of Work Definition

A contract with a weak or undefined scope is a giant headache waiting to happen.

This section should:

Reference the final, approved drawings and specifications
Include any contractor clarifications, assumptions, or exclusions
Note all relevant construction documents and exhibits

We often refer to the original scope during change order reviews to determine whether the change is justified. Without a clear baseline, this becomes guesswork.

Detailed Cost Breakdown / Schedule of Values (SOV)

Transparency in the budget is critical. A detailed SOV helps streamline monthly draw requests, prevents overbilling, and supports real-time cost tracking. It is essential for lender reporting and construction progress oversight.

Your contract should include an SOV that:

Breaks the project into detailed line items
Clearly identifies allowance items (e.g., “Sitework Allowance – $150,000”)
Supports monthly payment applications with measurable values
Generally matches the AIA G702/G703 format

Change Order Process

Change orders are one of the most common areas for confusion and conflict in construction contracts. In an article from Construction Executive, industry experts share three key strategies to improve the clarity and approval process for change orders, helping avoid delays and disputes between owners, contractors, and design teams. Every construction project evolves. The key is how those changes are managed.

Your contract should outline:

A formal written submission and approval process
Required documentation (e.g., pricing backup, schedule impact)
How changes are integrated into billing and scheduling

Insurance, Bonding & Warranties

Builder’s risk insurance is a cornerstone of construction risk management, protecting against property damage during the course of construction. The International Risk Management Institute (IRMI) explains what to look for in a builder’s risk policy and how to tailor coverage to suit project type, contract structure, and lender requirements.

This section protects everyone involved. The contract should specify:

General liability, builder’s risk, and workers’ comp coverages
Whether payment and performance bonds are required
Minimum policy limits
Warranties for workmanship and materials (usually 1–2 years)

We recommend that lenders always get a copy of the insurance certificate from the General Contractor (or borrower as needed) to confirm that insurance also meets the bank’s specific insurance requirements.

Use of Standardized Industry Forms

Using contracts developed by the American Institute of Architects (AIA) is a best practice.

These forms:

Are industry-tested and legally vetted
Make it easier to include required details like payment terms, timelines, and scope
Are widely accepted by legal counsel, lenders, and insurers

When we’re performing a contract document review for an owner or lender, we always appreciate when AIA forms are used – it makes things clearer and more consistent.

Build Smart From the Start

You don’t need to be a contract expert, but you do need the right support.

At USA Construction Consultants, we don’t draft your borrower’s contracts, but we can help make them more thorough. Through construction monitoring, cost reviews, and project oversight, we ensure the commitments in your contract match what’s happening on-site.

We’re the boots on the ground and the second set of eyes, serving as trusted representatives for owners, lenders, and developers across the country.

Let Us Help You Stay Ahead of Risk

If you’re looking for support with:

Draw request reviews
Change order evaluations
Cost-to-complete analysis
Construction monitoring
Lender or owner representation

We’re here for you.

Practical insights.
Real-world experience.
Zero fluff.

Get in touch with us today to learn more about how USA Construction Consultants can protect your construction investment – from pre-construction to project closeout.

Visit the USA Construction Risk Solutions Blog for more insights on construction management and risk mitigation.