Construction Contract Red Flags: What to Look for Before You Sign

A handshake and a good feeling about your contractor is not a construction contract. Neither is a one-page proposal with a scope description and a price. A proper construction contract is a document of 10–30+ pages that specifies the scope in detail, establishes a payment schedule tied to construction milestones, defines the change order process, allocates risk between owner and contractor, and provides remedies when things go wrong.

Most construction disputes — and there are many — trace back to contracts that were vague on scope, did not define the change order process, or did not establish clear payment terms. The time to negotiate contract terms is before you sign, not after a problem arises.

Large upfront deposits are the most common financial red flag. A legitimate GC on a custom home project should not need more than 10–15% upfront to mobilize — cover their initial overhead, permit costs, and first material purchases. Requests for 30–50% upfront are warning signs. A contractor who needs that much cash before doing significant work either has cash flow problems that suggest financial instability, or is building in a cushion that gives them less incentive to complete the project.

Draw schedules should be tied to construction milestones, not calendar dates. "Pay $50,000 on the first of each month" is a terrible structure because it does not connect payment to progress. "Pay $40,000 at completion of framing, verified by inspection" aligns the contractor's interest with actual progress.

Vague scope descriptions in the contract — "kitchen cabinets, builder's choice" rather than specific manufacturer, style, and finish specifications — allow the contractor to use whatever is cheapest and still claim contract compliance. Specify every significant material selection by manufacturer and model number in the contract or in attached specifications.

A change order is any modification to the original scope — adding a room, changing a material, expanding the deck, moving a wall. The change order process in your contract determines whether these modifications are priced fairly and documented clearly, or become a source of disputes and unexpected costs.

A good change order provision requires: written documentation of every change before work begins (no verbal agreements), pricing that shows labor and material costs separately, owner signature required before work proceeds, and a defined markup percentage for GC overhead and profit on changes. A markup of 15–20% on direct costs is typical and reasonable.

Red flags: no defined change order process ("changes will be handled as they arise"), unlimited markup on changes, a provision that allows the GC to proceed with changes based on verbal approval, or a contract that makes the owner liable for "any additional work required by field conditions" — a clause that can be used to justify almost any additional charge.

Lien waivers from subcontractors are essential. Your general contractor's subcontractors and suppliers can file mechanic's liens against your property if the GC does not pay them — even if you have paid the GC in full. Require that your GC provide conditional lien waivers from all subcontractors and suppliers with each draw request. This documentation proves the GC has paid (or will pay upon receipt of your draw) the people working on your home.

A completion bond or performance bond protects you if the GC cannot finish the project. This is particularly important for large projects or when working with a GC who is significantly underbidding competitors — the low bid may reflect a contractor taking on a project they cannot profitably complete. Bonded contractors have an insurer guaranteeing completion.

Dispute resolution provisions define what happens when you and the contractor disagree. Arbitration is faster and less expensive than litigation for most construction disputes. Specify that arbitration (not court) is the dispute resolution mechanism, choose the arbitration forum (American Arbitration Association is standard), and define the governing law as your state's construction statutes.