Protect Your Projects By Identifying and Controlling Hidden Contract Risks

In a recent webinar entitled “Spreading the Risk and Avoiding Killer Contract Clauses,” Phelps lawyers Daniel Lund and Larry Borda examined contractual provisions that most often expose construction professionals to unexpected financial and legal risk. While construction contracts may appear routine, each contract serves as the primary mechanism for managing, allocating, and mitigating risk among parties involved in complex projects—often valued in the hundreds of millions or billions of dollars. When parties fail to fully understand the terms they sign, costly and avoidable consequences frequently follow.

Contracts as Risk-Transfer Instruments
Construction contracts are the primary method for transferring risk. While contracts authorize work and define scope, they also allocate responsibility for the risks inherent in construction projects. Some may imagine a world where a one-page agreement and a set of plans would suffice. In reality, modern construction requires detailed agreements—particularly provisions designed to anticipate problems, distribute burdens and reduce disputes.

If a party signs a contract without reading or fully understanding its risk-shifting provisions, it forfeits the ability to control outcomes when challenges arise.

What we see frequently is that parties treat complex agreements casually, assuming their prior discussions or relationship with counterparties will protect them. Neither litigation history nor judicial outcomes support that assumption. Courts routinely enforce clear contract language, even when it produces harsh results. Accordingly, every contractor, design professional, owner, and subcontractor must understand not only what a clause says, but how it will operate once a dispute arises.

Many clients ask whether a clause is legally enforceable, but the more meaningful question is whether the clause is financially survivable. A provision may be perfectly legal yet devastating when applied to limited margins. Parties must understand the financial consequences of contract terms before committing to them.

Signs of poor contract drafting often appear only after disputes arise. When a party needs an answer—or money—the contract controls, and nothing outside the four corners of the document matters unless the terms are ambiguous. For that reason, every provision should be treated as a deliberate allocation of risk. Before signing, parties should decide:

1. Whether the risk is affordable.
2. Whether the risk should be shifted or limited.
3. Whether the clause aligns with the party’s business objectives.

Clauses Most Likely to Create Problems
Certain contractual provisions operate as “killer clauses”—terms most likely to generate disputes or impose unintended consequences. The following provisions warrant particular scrutiny:

No-Damage-for-Delay Clauses Under these clauses, a contractor suffering delay receives additional time, but no compensation—even when the delay results from the owner’s actions. Courts typically enforce no-damage-for-delay clauses unless the owner acted intentionally or violated a statute. Contractors must therefore assess whether delay costs can be absorbed or whether the provision must be negotiated or rejected.

Mutual Waiver of Consequential Damages Owners may suffer significant consequential losses when projects open late, including lost profits, missed opportunities, reputational harm and extended financing costs. Contractors face narrower—but still meaningful—indirect damages. A mutual waiver bars both parties from recovering losses beyond the direct cost of the work. These waivers can reduce exposure to runaway claims and introduce predictability into dispute resolution.

Pay-if-Paid Clauses Pay-if-paid provisions shift the risk of owner nonpayment from the general contractor to the subcontractor. Courts once treated similar language as a timing mechanism, but express pay-if-paid clauses now condition payment on the general contractor’s receipt of funds. For some subcontractors, this risk may be existential. While many states enforce pay-if-paid clauses, others prohibit them. Parties must confirm enforceability under applicable law before agreeing to such terms.

Indemnity Clauses Indemnity provisions require one party (the indemnitor) to compensate another (the indemnitee) for specified losses or liabilities. Indemnity functions as a powerful risk-transfer tool and is frequently the subject of construction disputes due to poor drafting or misunderstanding.

Indemnity obligations should generally be limited to losses arising from a party’s own negligence. Attempts to expand indemnity—such as requiring coverage for another party’s negligence—create unbounded exposure and might violate applicable law putting the entire provision at risk. Many states also prohibit architects and engineers from indemnifying others for design errors, reinforcing the need for restraint and precision.

Limitation-of-Liability Clauses Limitation-of-liability provisions cap a party’s exposure, often by tying liability to available insurance or professional fees. While these clauses do not eliminate liability, they significantly reduce uncertainty in negotiation and litigation. Limitations, however, may not apply to all claims or all claimants, particularly third parties.

Why Drafting and Contract Administration Matter
Beyond individual clauses, poor drafting remains a leading cause of construction disputes. Contracts frequently suffer from inconsistent edits, outdated language or unclear incorporation of external documents. When using terms of art or subjective language, always ask: what does this mean in practice? If the answer is open to multiple interpretations, the language should be revised.

Parties often file contracts away after execution, only to later discover that they missed critical notice or documentation requirements. Someone must be designated as the contract administrator for the duration of the project. Without a person responsible for tracking deadlines, claims, and obligations, even a well-drafted contract may fail to protect the signing party.

Key Takeaways
Construction contracts are complex, living documents that function as risk-transfer instruments and shape financial outcomes long before work begins.

To manage risk effectively:

1. Treat every clause as a specific allocation of risk—not boilerplate.
2. Analyze whether each obligation is financially survivable before signing.
3. Recognize that courts enforce clear language, even when harsh.
4. Pay close attention to delay provisions, consequential-damage waivers, indemnity clauses, pay-if-paid language, and liability caps.
5. Maintain disciplined drafting and document control practices.
6. Assign a contract administrator to every project.
7. Understand contractual role limitations in the field.
8. Assign someone with the responsibility for keeping abreast of contractual requirements during the construction. Don't wait for disputes to arise to discern your rights.

Conclusion

By allocating risks and defining responsibilities clearly, careful contracting parties can:

• Reduce claim frequency and severity, lowering insurance costs.
• Limit exposure and expedite dispute resolution.
• Focus on core business objectives rather than litigation.

Please contact Daniel Lund III, Larry Borda, or any member of the Phelps Construction/Design team for guidance.