Construction Contracts: What Every Contractor and Subcontractor Should Negotiate Before Starting Work

By Hank FasthoffJuly 5, 2026

A construction contract allocates risk. Every provision in it determines who bears the cost when something goes wrong, who gets paid and when, who's responsible for delays, who carries insurance, and who indemnifies whom. Contractors and subcontractors who sign contracts without negotiating these provisions accept the drafter's allocation of risk, and in most cases the drafter is the owner or the general contractor, which means the risk flows downhill.

Starting work without a written contract, or with a contract you haven't read, is how payment disputes begin. Most of the construction claims that end up in litigation or arbitration originate in a contract provision that one party didn't negotiate, didn't understand, or didn't know existed. Reviewing and negotiating before you sign costs a fraction of what litigating a dispute costs after the project goes sideways.

Scope of Work

Scope is where most construction disputes originate. A vague scope description invites disagreement about what's included and what's extra. "Contractor shall perform all electrical work" doesn't define whether low-voltage wiring, fire alarm systems, generator installation, or temporary power are included. If the contract doesn't specify, the owner and contractor will have different assumptions, and those assumptions won't surface until someone submits a pay application that the other side disputes.

Define scope by reference to specific drawings, specifications, and addenda. List the work included, and list the work excluded. If the contract incorporates plans and specifications, confirm which version (date and revision number) controls if the documents are updated during the project. Ambiguity in scope produces change orders, and change orders negotiated mid-project, under time pressure, produce worse terms than scope defined at the outset.

Payment Terms

Payment structure determines cash flow, and cash flow determines whether the project is financially viable for the contractor. Most commercial construction contracts use one of three payment structures.

Lump sum (stipulated sum) fixes the total price for the defined scope. You bear the risk that costs exceed your estimate, and you capture the benefit if costs come in below. Lump sum contracts require a precise scope, because every scope ambiguity becomes a dispute about whether additional work is included in the price or constitutes a change order.

Cost plus fee pays the contractor's actual costs (labor, materials, equipment, subcontractors) plus a fee (typically a percentage of cost or a fixed amount). Cost plus shifts the cost risk to the owner but provides the owner visibility into actual expenditures. Most cost-plus contracts include a guaranteed maximum price (GMP) that caps the owner's total exposure.

Unit price pays a fixed rate per unit of work performed (per cubic yard of concrete, per linear foot of pipe, per square foot of drywall). Unit price is common in civil and infrastructure work where quantities can't be determined precisely at the time of contracting.

Regardless of the payment structure, the contract should specify when pay applications are due, the owner's review period (typically 30 days under Texas Property Code Chapter 28 for private projects), the retainage percentage and the conditions for its release, and what happens if the owner disputes a portion of the pay application (the undisputed portion should still be paid on time).

Change Orders

Changes happen on every construction project. An owner adds features. An architect revises drawings. Concealed conditions require additional work. How those changes are priced, authorized, and documented determines whether they produce disputes.

A change order clause should require written authorization from the owner (or the GC, for subcontracts) before the contractor performs the changed work. Performing changed work without a signed change order and then seeking payment afterward puts the contractor in the weakest possible negotiating position, because the owner can argue the work was voluntary.

In 2023, the Texas Legislature passed HB 3485 (effective September 1, 2023, for contracts entered into on or after that date), which restricts owner-directed change orders. Under the new law, private and governmental owners can't issue unilateral change directives for owner-directed work without the contractor's agreement on price and schedule impact, except in limited circumstances. This legislation strengthens the contractor's position by preventing owners from forcing changed work before price is agreed.

For subcontracts, change order provisions should address the GC's markup on subcontractor changes (typically 10 to 15 percent for overhead and profit) and the timeline for the GC to process the subcontractor's change order request to the owner. A GC who ignores a subcontractor's change order request for months and then rejects it because the owner's approval window expired has effectively denied the subcontractor compensation through inaction.

Indemnity

Indemnity provisions determine who pays for third-party claims (bodily injury, property damage, and other losses) arising from the construction work. Before 2012, Texas construction contracts routinely included "broad form" indemnity clauses requiring the subcontractor to indemnify the owner and GC for all claims, including claims caused by the owner's or GC's negligence. Broad form indemnity shifted 100 percent of the risk to the sub, regardless of fault.

Texas Insurance Code Chapter 151, Subchapter C (the Texas Anti-Indemnity Act, effective January 1, 2012) changed that. Section 151.102 voids indemnity provisions in construction contracts to the extent they require the indemnitor to indemnify or defend the indemnitee for the indemnitee's own negligence or fault. After the TAIA, the only enforceable indemnity in a Texas construction contract is comparative or limited form indemnity, meaning the indemnitor is responsible only for damages caused by the indemnitor's own negligence or fault.

If your contract contains indemnity language that requires you to indemnify the other party "for any and all claims arising from the work," that language is void under the TAIA to the extent it covers the other party's own negligence. But don't assume the provision is entirely unenforceable. It's void only to the extent it exceeds the TAIA's limits. You're still liable for indemnity arising from your own negligence.

Review every indemnity provision in the contract against Chapter 151 before you sign. If the language is broader than what the TAIA permits, negotiate it down to comparative form or strike it as unenforceable. A provision that violates the TAIA is void by operation of law, but fighting about enforceability in litigation costs more than fixing the language in the contract.

Insurance

Construction contracts require each party to carry specified insurance coverages. Standard requirements include commercial general liability (CGL), which covers third-party bodily injury and property damage arising from the contractor's operations. Workers' compensation, which is required by most construction contracts even though Texas doesn't mandate it by statute (Texas is the only state that doesn't require private employers to carry workers' comp). Builder's risk (or course of construction) insurance, which covers damage to the structure during construction. Commercial auto liability for vehicles used on the project. Umbrella or excess liability for coverage above the primary policy limits.

Additional insured endorsements require the contractor's insurer to add the owner (and often the GC, architect, and lender) as additional insureds on the contractor's CGL policy. If a claim arises from the contractor's work, the owner can tender the claim to the contractor's insurer. Under the TAIA, additional insured coverage is also limited. The statute voids additional insured provisions to the extent they provide coverage for the additional insured's own negligence, the same limitation that applies to indemnity.

Waiver of subrogation provisions require each party's insurer to waive its right to subrogate against the other party after paying a claim. Without this waiver, a contractor's insurer who pays a claim could seek reimbursement from the owner (or vice versa), even though the contract allocated the risk differently.

Warranty

Most construction contracts include a warranty provision requiring the contractor to repair or replace defective work for a stated period after substantial completion. AIA standard contracts provide for a one-year warranty period, and many custom contracts follow the same convention.

A warranty provision doesn't limit the owner's rights under Texas law. Under Texas Civil Practice and Remedies Code § 16.009, the statute of repose for construction defect claims is 10 years from substantial completion. An owner who discovers a latent defect in year three can bring a claim even though the one-year warranty has expired, because the warranty period and the statute of repose are independent. The warranty obligates the contractor to repair without litigation. The statute of repose sets the outer boundary on legal claims.

For contractors, the warranty provision should define what's covered (defective workmanship and materials, not wear and tear or owner misuse), establish a reasonable notice and cure period (allowing the contractor to inspect and repair before the owner hires someone else), and address warranty on replacement work (does the one-year period restart for repaired or replaced work, or does the original period apply?).

Liquidated Damages

Liquidated damages provisions set a predetermined daily amount that the contractor owes the owner for each day the project is completed late. They're enforceable in Texas if two conditions are satisfied at the time the contract is signed. First, actual damages from delay must be incapable of or difficult to estimate. Second, the liquidated damages amount must be a reasonable forecast of just compensation, not a penalty. Phillips v. Phillips, 820 S.W.2d 785 (Tex. 1991).

For contractors, liquidated damages provisions should include a cap (either a total dollar cap or a percentage of the contract price), should apply only to delays caused by the contractor (not owner delays, design changes, or force majeure events), and should be the owner's exclusive remedy for delay (precluding claims for actual delay damages on top of liquidated damages).

Subcontractors should pay particular attention to flow-down liquidated damages provisions in subcontracts. A GC who is exposed to $5,000 per day in liquidated damages under the prime contract may attempt to flow that exposure down to the subcontractor whose work is on the critical schedule. If the sub's work is worth $200,000 and the liquidated damages exposure is $5,000 per day for an indefinite period, the sub's downside risk may exceed the contract value.

Dispute Resolution

Construction contracts typically require disputes to be resolved through arbitration, litigation, or a multi-step process that begins with negotiation, proceeds to mediation, and culminates in arbitration or litigation if mediation fails.

Arbitration is private, generally faster than litigation, and produces a final award with limited grounds for appeal. It's governed by the Federal Arbitration Act (9 U.S.C. §§ 1-16) or the Texas General Arbitration Act (Texas Civil Practice and Remedies Code Chapter 171). Most AIA and EJCDC standard contracts include arbitration provisions. For subcontractors, confirm whether the subcontract's arbitration clause binds you to the same arbitrator and the same rules as the prime contract, and whether the GC can consolidate your dispute with other subcontractor disputes.

Since September 1, 2024, the Texas Business Court has been operating as a specialized trial court for complex commercial disputes, including construction cases. If you prefer litigation over arbitration, the Business Court may provide a more efficient forum than a generalist state district court for construction disputes involving multiple parties, expert testimony, and complex contract interpretation.

Termination

Every construction contract should address two types of termination.

Termination for cause allows one party to end the contract when the other party has materially breached it (failure to pay, failure to perform, abandonment, persistent safety violations, or insolvency). A termination-for-cause provision should define the grounds for termination, require written notice and a cure period before termination becomes effective, and address the financial consequences (payment for work performed through the termination date, responsibility for completion costs, and the handling of retainage).

Termination for convenience allows the owner to end the contract for any reason, without cause, typically by paying the contractor for all work performed, plus overhead and profit on unperformed work, plus reasonable demobilization costs. Contractors should confirm that the termination-for-convenience provision provides fair compensation, because without it the owner can terminate the contract and leave the contractor with unreimbursed costs and lost profit.

Practical Recommendations

Read every contract before you sign it, including the general conditions and any documents incorporated by reference (plans, specifications, addenda, and standard form attachments). A contract you didn't read is still enforceable against you.

Negotiate indemnity to comparative form. Broad form indemnity is void under the TAIA, but the contract should reflect that limitation in its language rather than leaving it to litigation.

Require written change orders before performing changed work. Verbal directives to "just do it and we'll figure out the price later" are how contractors end up performing unpaid work.

Confirm that payment terms comply with the Texas Prompt Payment Act (Texas Property Code Chapter 28 for private projects, Government Code Chapter 2251 for public projects) and that retainage release is tied to substantial completion with a defined deadline.

Preserve your lien rights. If the contract contains lien waiver provisions that require you to waive liens as a condition of progress payments, confirm that the waivers are conditioned on actual receipt of payment, not merely on submission of the pay application. An unconditional lien waiver signed before payment is received can destroy your lien rights if payment never arrives.