Not Every Job Is Worth Winning: Contract Risk Questions Contractors Should Ask Before They Bid

Introduction

Winning the work is not the same as winning the project, at least financially. Consider a contractor that commits to procure custom or long-lead materials before receiving complete construction documents. Depending on the language of the contract, if the final design is altered after those materials have been ordered, the contractor may be left responsible for replacement costs, procurement delays, or both. Alternatively, a subcontractor that accepts a pay-if-paid provision without investigating the owner’s financing, or prematurely waives lien rights, potentially risks nonpayment for properly performed work.

Such concessions can quickly transform an apparently profitable project into a significant financial burden. A successful bid can therefore become an unsuccessful project if the contractor accepts contractual “red flags” without evaluating their consequences and the long-term financial impacts that they may have. The significance of each risk will depend on the project, the parties, the proposed contract, applicable law, and the contractor’s business objectives. Although not comprehensive, this article identifies several key considerations for that process to help mitigate certain risks.

Step 1: Evaluate the Owner & Project Parameters 

Before analyzing the contract, a contractor should evaluate the owner and the project’s fundamental parameters. Even a well-drafted contract cannot make an inadequately financed, poorly defined, or unreasonably scheduled project profitable.

Is the Owner Positioned to Fund the Work?

A contractual right to payment may offer limited practical protection if the owner lacks the resources to fund the project. Contractors should consider the status of project financing, whether funding is subject to contingencies, and whether the contract permits the contractor to request reasonable evidence of the owner’s financial arrangements. The contractor should also determine whether it may suspend or terminate work for nonpayment. These considerations may be particularly important for subcontractors or suppliers asked to accept pay-if-paid provisions or to prematurely waive lien or payment-bond rights (if permitted by law).

Is the Project Sufficiently Defined to Price?

A contractor typically cannot reliably price work that has not been adequately defined. Before bidding, the contractor should evaluate the completeness and coordination of the plans, specifications, site information, existing-condition reports, and design criteria. Where material information remains incomplete, the contractor should identify appropriate assumptions, exclusions, allowances, or contingencies and determine who will bear the cost and schedule consequences if those assumptions prove incorrect.

Is the Schedule Achievable?

Finally, the contractor should test any Owner-proposed schedule against the project’s actual conditions, including the status of design and permitting, procurement lead times, labor availability, access restrictions, and third-party dependencies. An aggressive schedule may be workable, but only if the contractor understands the assumptions underlying it and the contract provides appropriate relief when events outside the contractor’s control affect performance.

Step 2: Identify the Contract Terms that Can Turn a Good Project Into a Bad One 

The contractor should then determine how the proposed contract allocates the risks identified during that review.

Compensation and Payment Risk

Contractors should review the timing and conditions of payment, retainage, withholding and setoff rights, progress-payment releases, and final-payment requirements. Particular attention should be given to provisions that shift the risk of owner nonpayment downstream, limit the contractor’s lien or payment-bond rights, or leave the contractor without a meaningful right to suspend work for nonpayment. The practical questions are whether the contract provides a realistic means of obtaining payment and whether the contractor can carry the project if payment is delayed.

Scope, Design, and Coordination Responsibility

The contract documents should reasonably define the contractor’s scope and identify its responsibility for design, coordination, and existing conditions. Contractors not performing design work should be cautious of provisions requiring them to guarantee design completeness, discover errors or inconsistencies, or assume responsibility for information furnished by others. Where complete information is unavailable, the contract should address the assumptions underlying the contractor’s price and the consequences if those assumptions prove incorrect.

Schedule Exposure – Liquidated Damages and Milestones

An aggressive schedule may be manageable when the contract provides appropriate relief for events outside the contractor’s control. The contractor should evaluate milestone requirements, liquidated damages, notice obligations, and any provisions limiting or waiving compensation or time extensions for delay or disruption. It should also determine whether liquidated damages are capped, whether multiple assessments may apply simultaneously, and whether the contractor has corresponding rights to additional time and compensation for owner-caused or third-party-caused delay.

Changes, Differing Conditions, and Price Escalation

Changes are inevitable on many construction projects, but the contract determines who finances changed work while entitlement and price remain unresolved. Contractors should understand when they may be required to proceed, who may authorize additional work, and what notice and documentation are required to preserve payment. The contract should also be reviewed for relief arising from differing site conditions, changes in law, tariffs, shortages, or extraordinary material-price escalation, particularly where procurement must begin before the design is complete.

Indemnity & Insurance

A contractor should compare its indemnity and defense obligations against the insurance coverage actually available. Provisions imposing liability without regard to fault, requiring the contractor to defend claims before responsibility is determined, or exposing the contractor to uncapped damages may create risks that cannot be adequately priced or insured.

Disputes, Default, and Termination

Finally, the contractor should review governing law, venue, dispute-resolution procedures, claim deadlines, attorneys’ fee provisions, and obligations to continue disputed work. The contract should also provide reasonable cure periods and address the contractor’s compensation if the owner suspends the project or terminates for convenience. Although easily overlooked, these provisions often determine the contractor’s remedies when the project does not proceed as anticipated.

Step 3: Convert the Review into a Go/No-Go Checklist 

A practical go/no-go checklist can help ensure that appropriate legal, operational, financial, and risk-management personnel evaluate material risks before the contractor commits to the project. The checklist should inform business judgment, not replace it. A strategically important project may justify greater risk, but that decision should be informed and deliberate.

Separate Risks into Categories

Each material risk can generally be placed into one of four categories: accept, clarify, negotiate, or decline. Some risks may be customary, manageable, and appropriately reflected in the contractor’s price. Others may require a written bid qualification, additional contingency, revised contract language, or a decision not to pursue the project. The appropriate response will depend on the contract as a whole and the contractor’s ability to price, control, insure, or otherwise mitigate the particular risk.

Establish Escalation Thresholds

The checklist should also identify provisions requiring approval from senior management or other designated decision-makers. Depending on the project, these “red flags” may include unlimited liability, uninsurable indemnity obligations, uncapped consequential damages, broad payment contingencies, premature waivers of lien or payment-bond rights, responsibility for incomplete design, or the absence of meaningful remedies for nonpayment or owner-caused delay. Other provisions, such as liquidated damages, retainage, short notice periods, and extended warranties, may not be automatic dealbreakers but should be understood and evaluated before the bid is submitted.

Step 4: Use Balanced Contract Language as a Benchmark

After identifying the project’s material risks, contractors should consider whether the proposed contract allocates those risks fairly. A balanced standard form can provide a useful benchmark, particularly when an owner-drafted agreement shifts risks to the contractor that the contractor cannot control, price, or insure.

For example, ConsensusDocs 200, Standard Agreement and General Conditions Between Owner and Constructor (Lump Sum), addresses many of the issues discussed above, including payment, changes, differing site conditions, delays, insurance, indemnity, termination, claims, and dispute resolution. Comparing a proposed agreement against ConsensusDocs 200 can help a contractor identify significant departures from a more balanced allocation of risk and develop appropriate qualifications or proposed revisions. Like any standard form, however, ConsensusDocs 200 should be evaluated and modified as appropriate based on the project, delivery method, parties, and applicable law.

Conclusion: Know Which Risks You Are Accepting

Contractors cannot eliminate every risk from a construction project, and an unfavorable provision should not automatically end a pursuit. The objective is to identify material risks before signing the contract and determine whether they can be priced, managed, insured, or negotiated. A disciplined pre-contract review allows contractors to make that decision knowingly. After all, the ability to walk away from the wrong project may be just as valuable as the ability to win the right one.

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The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.