10 Facts Everyone Should Know About Contracts

10 Facts Everyone Should Know About Contracts 

Contracts are vital to construction projects. They specify who is responsible for what, the timetable, and expectations. Construction contracts have features unique to the industry. The following are the 10 essential components of a valid and effective construction contract.

AIA Contract

The American Institute of Architects (AIA) provides standardized forms for construction contracts. AIA forms are comprehensive and the industry standard. AIA contracts cover all the bases needed for an effective and fair construction contract. They ensure that all the important points and details are included in the contract.

Change Orders 

Change orders are common in the construction industry. A change order simply means that the contract has been amended by the agreement of the customer and the contractor. There are additive and deductive change orders. Additive change orders assign additional work to the contractor, such as adding a window, and come at an additional cost. Deductive change orders reduce work, such as not including a planned window, and reduce the cost of the contract.


Retainage is a contract device that prevents contractors from failing to complete work or providing shoddy construction. A portion of the contract price is withheld until the project is substantially complete and the quality of work verified. In the United States, due to statutory restrictions, retainage is generally about 10%. Often, the retainage is reduced to 5% once the project is 50% complete.

Payment Terms 

Construction payment terms specify when the customer must pay. Most construction invoices base the term on the number of days after the invoice was issued. Net 10, for example, means the bill is due in 10 days, while Net 30 means in 30 days. The amount due cannot include any retainage that remains in effect. For example, if the total for the job is $5,000, and the retainage remains in effect, the customer would pay $4,500. 


COI stands for Certificate of Insurance. Contractors need COIs to demonstrate they have met legal and contractual requirements. COIs are issued for all types of insurance, which may include Workers Compensation, Accident, Commercial and General Liability, Builder’s Risk, and automobile.

Punch List

The owner, architect, and general contractor will create a punch list near the end of a project. A punch list is a to-do list of items that need to be corrected, such as repairing scratches or reworking a shoddily completed wall. The punch list may also include new items that are added at an additional cost. 

Lien Waivers

If not paid in a timely fashion, contractors can place a mechanics lien against the property. To protect their interest, customers will require a lien waiver upon issuing payment. Lien waivers can be conditional or unconditional. They may also be issued for partial and full payments.


The general contractor, rather than the customer, hires subcontractors. Subcontractors work for the general contractor and are paid by the general contractor, usually after the general contractor receives payment from the customer. For example, a general contractor may hire a roofer as a subcontractor. 

Termination Clauses 

Termination clauses spell out when a contract may be terminated. There are two types: Termination for Cause and Termination for Convenience. Termination for Cause clauses spell out the reasons a contract can be terminated, such as failure to make payment or complete work as agreed. Termination for convenience essentially says the contract can be cancelled for any reason.

Substantial Completion

Substantial completion is a standard used to determine at what point in a project payment is due and when retainage remains if effect.

Construction contracts organize the project, divide responsibilities, and hold parties accountable. By knowing these 10 essential components, you are prepared to delve into the world of construction contracts.

Carlton Building Services General Building Contractors Hampton Roads Virginia

Carlton Building Services provides general contracting services for the Hampton Roads Virginia area. The company specializes in general contracting for medical facility remodeling, as well as new builds, office renovation, and retail space rehab. Visit the Carlton Building Services website for examples of excellent construction.

If you need a general contractor for commercial buildings in Hampton Roads Virginia, contact Carlton Building Services.

JP Carlton

J.P. Carlton

J.P. Carlton is the founder of Carlton Building Services, a Hampton Roads-based construction company.