December 12, 2025 7:18 pm Published by Jeff Handy |

Before your firm begins on any large-scale building projects, it is crucial to have solid commercial construction contracts. These agreements lay the groundwork for clear expectations, risk management, and legal protection. Whether you’re an owner, contractor, or subcontractor, understanding how to craft effective commercial construction agreements is key to avoiding disputes and ensuring a successful project.

What Are Commercial Construction Contracts?

Commercial construction contracts are legally binding documents that define the roles, responsibilities, financial terms, and timeline for construction projects involving non-residential properties—such as office buildings, warehouses, retail centers, and industrial facilities. They serve as the blueprint for project execution, outlining everything from the scope of work to dispute resolution procedures. A well crafted commercial construction contract provides the necessary components of a successful project:

Clarity of Scope: Ensures all parties agree on the specific deliverables and avoid scope creep.

Risk Management: Allocates financial and performance risks, reducing the likelihood of costly disputes.

Legal Protection: Provides a contractual framework to enforce rights and remedies if obligations aren’t met.

Project Efficiency: Establishes deadlines, payment schedules, and quality standards to keep the project on track.

What Should be Included in a Commercial Construction Contract?

A comprehensive commercial construction agreement should include the following core components:

1. Scope of Work
   • Detailed description of tasks, materials, and deliverables
   • Reference to drawings, specifications, and schedules
2. Payment Terms
   • Contract price or pricing method (lump sum, cost-plus, GMP, etc.)
   • Schedule of values and progress payment milestones
   • Retainage provisions
3. Timeline and Milestones
   • Project start and completion dates
   • Interim milestones with associated deadlines
   • Liquidated damages for delays
4. Change Orders
   • Procedures for requesting and approving changes
   • Pricing adjustments and timeline impacts
5. Termination and Dispute Resolution
   • Grounds for termination by owner or contractor
   • Mediation, arbitration, or litigation clauses
   • Governing law and venue
6. Insurance, Bonds, and Warranties
   • Required liability, builder’s risk, and workers’ compensation insurance
   • Performance and payment bond requirements
   • Warranty periods for workmanship and materials
     

The Different Types of Commercial Construction Contracts

Choosing the right contract type ensures that the right incentive structures are in place.

• Lump Sum (Fixed Price): One total price for the entire project; contractor bears cost overrun risk.
• Cost-Plus: Owner reimburses actual costs plus a fee; transparent but less predictable final price.
• Guaranteed Maximum Price (GMP): Cost-plus with a ceiling; savings shared, overruns capped by contractor.
• Design-Build: Single entity handles design and construction; streamlines communication and accountability.
• Unit Price: Pricing per unit of work (e.g., per square foot); useful for projects with repetitive tasks.

Frequently Asked Questions

Q1: What makes a GMP contract different from a lump sum contract?
A GMP (Guaranteed Maximum Price) contract reimburses actual costs plus a fee, with a cap on the total. In contrast, a lump sum contract fixes the price upfront, leaving the contractor responsible for any cost overruns.

Q2: How should change orders be managed in commercial construction contracts?
Include a detailed change order process: written request, impact assessment on price/time, owner approval, and formal amendment to the contract before work begins.

Q3: Are standardized contract forms like AIA documents sufficient?
Yes, AIA and ConsensusDocs provide industry-recognized templates. However, always customize key provisions—such as insurance requirements and dispute resolution—to fit your project’s jurisdiction and complexity.

Q4: What insurance is typically required under these agreements?
Common requirements include general liability, builder’s risk, workers’ compensation, and professional liability (for design-build), plus performance/payment bonds as applicable.

Crafting thorough, balanced commercial construction contracts not only safeguards all stakeholders but also fosters trust, efficiency, and timely delivery. Babcock Scott and Babcock attorneys are experts in crafting contracts that deliver for our clients. Reach out through the form below to get in touch today.