Five Critical Construction Contract Provisions Every Project Owner Should Consider

As a project owner, a well-drafted construction contract serves not only as your roadmap for project execution, but also as your first line of defense – or offense – in case of a dispute with a contractor.¹ Contract provisions can provide avenues for recourse, shift liability, and preserve key defenses.

Below are five important provisions that every owner should prioritize in their construction contracts:

1. Indemnification

An indemnification provision is a contractual promise by one party (here, the contractor) to protect another party (here, the owner) from certain liabilities, losses, or claims. An indemnification provision is typically used to protect the owner against third-party claims arising out of the contractor's work, such as property damage, personal injury, or violations of law. It may also require the contractor to defend the owner when a covered claim arises, or hold the owner harmless from claims by a subcontractor.² Importantly, when appropriately drafted, indemnification provisions allow an owner to recover based on the occurrence of a triggering event—such as property damage, personal injury, or a violation of law—and the resulting loss, including expenses, liabilities, or claims. The owner may rely on the indemnification provision without first establishing that the contractor breached the Agreement. This structure enables recovery based on the consequences of the event itself, rather than requiring proof of contractual fault.

Construction sites are high-risk environments. Accidents, property damage, and disputes can involve parties far beyond the owner, contractor, or subcontractors – such as neighbors, tenants, employees, government agencies, or suppliers. Although an owner may not be directly at fault, the owner is often named in a lawsuit simply because they own the property or hold permits for the work. Without a well-drafted indemnification clause, the owner can be left paying legal fees and settlement costs for problems caused entirely by the contractor or third parties.

Drafting Considerations:

• Be Broad in Scope – Cover personal injury, property damage, liens, environmental contamination, code violations, and any other foreseeable risk arising from a contractor's work.
• Survive Project Completion – State that indemnification obligations continue after final payment and project closeout, as many claims arise months or years after project completion.
• Comply with State Law – Many states have anti-indemnity statutes that limit enforceability; the provision should be drafted to the fullest extent permitted by the applicable state law.
• Limitation of Liability – Ensure that damages recovered pursuant to the tars of an indemnification clause are not subject to a clause or language limiting a contractor's liability.
• Waivers – Ensure that any waiver of damages by the owner does not operate to waive damages the owner may recover under the indemnification provision.

How Indemnification Plays Out in Disputes:

• Third-Party Injury Claims – If a subcontractor's employee is injured on-site and sues the owner under a premises liability theory, the indemnity clause can allow the owner to tender the defense to the contractor and to avoid paying legal fees for the defense and any incurred damages. However, immunities afforded to employers by workers' compensation laws must be accounted for in contract drafting.
• Property Damage to Adjacent Structures – If construction activity damages a neighbor's property and the neighbor sues, indemnification can shift that liability to the contractor whose work caused the damage.
• Regulatory Penalties – If work violates a building code or permit condition and the jurisdiction with authority fines the owner, indemnity provisions can require the contractor to pay those penalties and cover related legal costs.

2. Warranty Provisions

A warranty provision in a construction contract is the contractor's promise that the work will meet certain quality standards for a defined period after completion. Warranties can cover everything from general workmanship and materials to specific building systems, equipment, or components. Warranty clauses require a contractor to correct defective work within a defined period, often without additional cost to the owner. These provisions provide a mechanism for addressing deficiencies post-completion without resorting to immediate litigation and serve to extend the contractor's accountability beyond the day the owner takes possession of the project.

Without strong warranty provisions, owners can be left chasing a contractor for repairs through costly litigation or by absorbing the cost. Importantly, warranty terms can also help establish workmanship standards, create liability presumptions, and support damage calculations in litigation.

Drafting Considerations:

• Define the Scope Clearly – Cover materials, equipment, and workmanship, and require compliance with contract documents and applicable codes.
• Set a Reasonable Duration – Commonly one year for workmanship, but longer for specific systems (e.g., roofs, structural components, major mechanical systems).
• Include Repair/Replacement Obligations – Require the contractor to promptly correct defective work at its own cost, including any damage to other property caused by the defect.
• Not Limit Other Remedies – State that the warranty is in addition to, not in place of, other contractual or legal remedies.
• Survive Project Completion – State explicitly that warranty obligations continue after final payment and project closeout, as many claims arise months or years after project completion.

How Warranty Provisions Play Out in Disputes:

• Defective Installation – Six months after project completion, the owner notices water intrusion and mechanical system failures due to improperly installed flashing. A workmanship warranty allows the owner to demand that the contractor repair the issue promptly at its own expense, rather than the owner having to pay another contractor and seek reimbursement later.
• Finish Defects – An owner can have a contractor to address issues such as peeling paint, cracked tile, or uneven flooring discovered within the warranty period without proving breach of the broader construction contract.

3. Substantial Completion

Substantial completion is the point in the construction project when the work is sufficiently complete, in accordance with the contract documents, so the owner can occupy or use the project for its intended purpose. It is a formal contractual milestone that triggers rights and obligations for both the owner and the contractor. Construction contracts often tie substantial completion to the issuance of a temporary certificate of occupancy or equivalent authorization from the governing authority, the architect's or engineer's certification that the project is fit for its intended use, or completion of specific deliverables identified in the contract.

Both the definition and certification of substantial completion are critical milestones in a construction project. Substantial completion typically triggers obligations such as the start of warranty periods, the release of retainage and final payment obligations, calculating liquidated damages for late completion, and transfer of risk back to the owner. In delay and damages claims, disputes frequently arise regarding whether and when substantial completion occurred. If the contract lacks a clear definition or documentation process (e.g., issuance of a certificate of substantial completion), the parties may disagree over whether delay penalties were properly assessed or whether final payments are due.

Drafting Considerations:

• Tie to Objective, Verifiable Criteria – Identify necessary criteria to establish substantial completion such as a certificate of occupancy or written certification from the design professional that the project meets the contract's requirements for intended use.
• Require Completion of Key Deliverables – Identify specific systems, areas, or equipment that must be functional before substantial completion can be declared.
• Mandate Written Certification – Require a formal certificate of substantial completion signed by the architect, engineer, or owner's representative.
• Address Partial Occupancy – Specify that partial occupancy does not automatically constitute substantial completion for the entire project.

How It Plays Out in Disputes:

• Liquidated Damages – A clear, objective definition helps determine when a party may recover costs caused by another party's delay.
• Warranty Disputes – Establishing a defined completion date provides certainty on when warranty or service obligations begin.
• Premature Retainage Release – An objective definition ensures all required work is completed before final funds or withheld amounts are released.

4. Claim Procedures

Construction contracts often include formal claim procedures requiring timely notice and supporting documentation for additional time or compensation requests. These provisions typically require written notice within a specified number of days after the event giving rise to the claim and supporting documentation to substantiate the basis and amount of the claim.

Without strict claim procedures, owners can receive demands for more time or money long after the events causing delay occurs – when mitigation is no longer possible, and project records are incomplete. Claim procedures create a real-time alert system, allowing the owner to investigate, address, and potentially resolve issues before they spiral into litigation.

Drafting Considerations

• Set Short, Definite Notice Deadlines – Typically set 7–14 days from when the contractor knew or should have known of the basis for the claim.
• Require Detailed Documentation – Include cost breakdowns, schedules, photographs, and any supporting evidence with the initial notice.
• Make Notice a Condition Precedent – State explicitly that failure to follow the procedure waives the claim.
• Apply to All Claims – Ensure the procedure applies to delay, disruption, changed conditions, extra work, and any other demands for adjustment.

How They Play Out in Disputes

• Waiver of Delay Claim – Requiring written notice helps ensure that claims for delay or additional costs can be evaluated and defended against if not submitted on time.
• Change Order Disputes – If work is performed without following agreed procedures for authorization and documentation, recovery may be limited or denied.
• Scope Creep Control – Clear submission requirements help prevent parties from bundling small, undocumented changes into larger claims later.

5. Excusable Delay

An excusable delay provision defines the circumstances under which a contractor is entitled to additional time (and sometimes compensation) for delays to the project schedule. Delay provisions allocate risk by distinguishing between "excusable" delays – those outside the contractor's control, such as force majeure events – and "non-excusable" delays, such as poor project management or subcontractor failures. Properly defining what constitutes an excusable delay is essential to controlling project risk. By clearly allocating delay risk at the outset, owners can protect both the schedule and the budget.

Drafting Considerations:

• Define Events Narrowly – Limit excusable events to uncontrollable circumstances (e.g., natural disasters or certain government actions) and consider whether the applicable state law limits the enforceability of no damages for delay provisions.
• Exclude Foreseeable Risks – Exclude delays from labor shortages, supplier defaults, ordinary weather, and subcontractor failures.
• Limit Remedies – Provide that extensions of time, not compensation, are the sole remedy for most excusable delays unless expressly stated otherwise.
• Tie to Claim Procedures – Require timely written notice and supporting documentation for any excusable delay claim.

How It Plays Out in Disputes:

• Supply Chain Disruption Claims –If the contract defines excusable delay narrowly and excludes foreseeable market or supply conditions, the owner may avoid liability for added costs.
• Weather-Related Delays – When the excusable delay clause allows for weather extensions only for conditions that were unusually severe compared to historical averages, the owner may reject a delay claim if historical weather data showed the weather was typical for the region.

Conclusion

Owners who invest in carefully negotiating and drafting these core provisions position themselves to avoid legal disputes where possible and succeed where disputes are unavoidable. Each clause – indemnification, warranty, substantial completion, claim procedure, and excusable delay – can significantly affect the owner's exposure, leverage, and outcomes in both arbitration and litigation.

Footnotes

1. The comments contained in this publication relate to a project owner with a possessory interest in the real estate undergoing the improvements subject to the construction agreement. As such, the business of the owner, the nature of the improvements, the cost of the improvements, and a multitude of factors beyond the scope of this publication should be considered throughout the negotiation of a construction agreement.

2. Courts vary in their interpretation of the phrase "hold harmless." Some jurisdictions treat it as synonymous with "indemnify," while others view it as a distinct obligation separate from indemnification.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.