Why AI Can’t Build a Safe Contract for You
FTF
January 22, 2026
You’ve built a successful residential contracting business. You know how to manage projects, crews, and demanding homeowners. Now, a commercial project has caught your eye, promising bigger scale and new challenges. Before you jump in, it’s important to understand that commercial construction operates under a different set of rules, especially when it comes to contracts.
While you may be used to negotiating terms and having more control in residential jobs, the commercial world is often less flexible. You’ll typically be handed a lengthy contract with little room for changes. Understanding these key differences can protect your business and your bottom line.
This guide will walk you through the major contractual shifts you’ll face, including scope of work, payment cycles, change orders, and termination clauses. Let’s make sure your first step into commercial work is a confident one.
|
Aspect |
Residential Construction |
Commercial Construction |
|
Contract Flexibility |
Negotiable terms; often customized for each project |
Standardized contracts (AIA, ConsensusDocs); minimal negotiation room |
|
Payment Structure |
Down payment (10-30%) before work starts; progress payments as you work |
No down payment; work 30-90 days before first payment; requires significant working capital |
|
Payment Timing |
Pay, then work |
Work, then pay |
|
Change Order Process |
Can be informal; verbal agreements sometimes accepted |
Strict written process; verbal approvals not enforceable; must follow exact contract procedures |
|
Contract Length |
5-15 pages typical |
50-200+ pages with multiple attachments and referenced documents |
|
Bonding Requirements |
Rarely required (except for larger projects) |
Often mandatory (payment bonds, performance bonds) |
|
Insurance Requirements |
General liability is usually sufficient |
Higher limits required; may need additional coverage (pollution liability, builder’s risk, professional liability) |
|
Termination Rights |
Both parties generally need a cause |
Owner/GC may have “termination for convenience” right (can end contract anytime) |
|
Risk Allocation |
More balanced; some negotiation possible |
Heavily favors owner/GC; subcontractor assumes most risks |
|
Payment Conditions |
Direct payment relationship |
“Pay-when-paid” or “pay-if-paid” clauses shift payment risk to you |
|
Dispute Resolution |
Court litigation common |
Mandatory arbitration or mediation is often required |
|
Warranty Period |
1 year typical |
1-2 years or longer; more extensive warranty obligations |
The bottom line: commercial contracts are designed to protect the general contractor and owner, often at the subcontractor’s expense. You need to enter into these agreements with a clear understanding of the risks you’re accepting.
In residential work, you often have a direct relationship with the homeowner, and agreements can be more informal. In commercial construction, the contract is everything. General contractors (GCs) and owners use standardized, attorney-vetted documents that are designed to protect them. Let’s break down the critical clauses you need to scrutinize.
You spent hours putting together a detailed bid for a project. You won the job—congratulations! But don’t assume the bid you submitted is now your official scope of work. In many commercial contracts, your original bid is not automatically included.
The contract will have its own “Scope of Work” section that defines your exact responsibilities. You must review this section line by line and compare it against your bid. Does it match exactly what you agreed to do for the price you quoted? Look for discrepancies, additions, or omissions. If the contract requires more work than you bid for, you must address it before signing. Otherwise, you could be on the hook for extra labor and materials without extra pay.
One of the biggest financial adjustments for residential contractors is the payment cycle. In residential projects, you often receive a down payment before you even start, with progress payments funding the work as you go. You get paid, then you work.
Commercial construction flips this model on its head. You work, then you get paid. You will likely need to cover payroll, materials, and equipment costs for 30, 60, or even 90 days before you see your first payment. This requires a significant amount of working capital. Make sure you have the cash reserves to float the project’s expenses without putting your business at risk.
To make matters more complex, many commercial subcontract agreements include a “pay-when-paid” clause. This clause states that the general contractor is only obligated to pay you after they have been paid by the project owner.
What does this mean for you? Even if your work is perfect and you submit your invoices on time, your payment can be delayed for reasons completely outside of your control. If the owner is slow to pay the GC, you will be slow to get paid. In some states, a similar “pay-if-paid” clause can even mean that if the owner never pays the GC, the GC has no obligation to pay you at all. Always read this section carefully and understand the risk you are accepting.
Changes are a part of any construction project. In a residential build, you might agree to a change with a homeowner based on a verbal conversation or a quick email. This approach can be disastrous in a commercial setting.
Commercial contracts have a very strict process for change orders. The rule is simple: get a signed change order before you do the work. A project manager’s verbal “go-ahead” is not enough. The contract will specify exactly who has the authority to approve changes and what the documentation process is.
If you perform extra work without a signed change order, you may never get paid for it. Protect yourself by following the contract’s procedure to the letter. Don’t start the extra work until you have the approved paperwork in hand.
Imagine being halfway through a project, with everything going smoothly, only to be told your contract is terminated. A “termination for convenience” clause gives the general contractor or owner the right to do just that—end your contract at any time, for any reason, without you being at fault.
This clause is a standard feature in many commercial contracts. If it’s invoked, you are typically entitled to payment for the work you’ve completed and any associated demobilization costs. However, you will lose out on the profit you expected to make on the rest of the job. It’s a risk you need to be aware of. While it’s not used often, it highlights the power imbalance that can exist in commercial agreements.
Stepping into commercial construction can be a fantastic growth opportunity for your business. The projects are larger, the work can be steady, and it opens up a whole new market. However, success depends on going in with your eyes open.
The key is to do your homework. Read every word of the contract, and if there are parts you don’t understand, seek legal advice. By understanding the new rules of the game—from scope and payment to change orders and termination—you can navigate the challenges and protect your company. This diligence will allow you to take on commercial projects confidently and build an even stronger future.
To learn more about your rights or to discuss your specific case, contact The Cromeens Law Firm. We specialize in construction law and contract disputes to protect your business.
Before signing your first commercial construction contract, verify:
The primary difference is control and flexibility. Residential contracts are typically negotiable, shorter (5-15 pages), and allow for more informal communication and changes. Commercial contracts are standardized, lengthy documents (often 50-200+ pages) with little room for negotiation. They’re drafted by attorneys to protect the owner and general contractor, shifting most risks to subcontractors. Additionally, commercial work operates on a “work first, pay later” model requiring substantial working capital, while residential projects usually start with a down payment.
A pay-when-paid clause states that the general contractor is only obligated to pay you after they receive payment from the project owner. This means your payment timing is dependent on the owner paying the GC, which can delay your payments by 60-90 days or more, even if your work is perfect and completed on time. You assume the risk of the owner’s slow payment. This is different from a “pay-if-paid” clause (which some states consider illegal), where if the owner never pays, the GC never has to pay you at all.
You typically need working capital equal to 60-80% of your total project costs to cover the gap between when you pay expenses and when you receive payment. Use this formula: Monthly Project Costs × Payment Lag (in months) × 1.25 safety factor. For example, a $500,000 project lasting 4 months would require approximately $390,000 in working capital. This might seem extreme, but it reflects the reality that you may work 60-90 days before receiving your first payment in commercial construction.
No. In commercial construction, verbal change orders are rarely enforceable, regardless of who approves. Commercial contracts require strict written change order procedures, typically including specific documentation, signatures from authorized personnel, and agreement on price and time impacts before work begins. Even if a project manager tells you verbally to proceed with extra work, you will likely not get paid without a signed change order. Never start additional work without proper written approval following your contract’s exact process.
Most commercial projects require surety bonds, especially performance and payment bonds. Public projects almost always require bonds, and most private commercial general contractors require them as well. A performance bond guarantees you’ll complete the work according to specifications, while a payment bond guarantees you’ll pay your subcontractors and suppliers. Obtaining bonds as a new commercial contractor can be challenging; surety companies evaluate your financials, experience, and working capital. Expect to pay 0.5-3% of the contract value in bond premiums.
A termination for convenience clause gives the owner or general contractor the right to end your contract at any time, for any reason, without you being at fault. They might terminate because the project is cancelled, they’re over budget, or they have simply changed their minds. When invoked, you’re typically paid for work completed to date plus demobilization costs, but you lose all profit you would have made on the remainder of the contract. While not used frequently, this clause represents a significant risk and power imbalance in commercial agreements.
Yes, if the contract includes a “termination for convenience” clause, which is standard in most commercial construction contracts. The GC or owner can terminate your contract without you having done anything wrong. However, they still must pay you for all work completed to date and reasonable demobilization costs. They can also terminate “for cause” if you breach the contract, such as falling behind schedule, performing defective work, or failing to maintain insurance. For-cause termination is much more serious and may result in you paying damages.
Commercial projects require significantly higher insurance coverage than residential work. Typical requirements include: General Liability Insurance ($2-5 million or higher), Workers’ Compensation covering all employees, Commercial Auto Insurance, and often an Umbrella/Excess Liability policy for additional coverage. Some projects also require Builder’s Risk Insurance, Professional Liability (if doing design work), and Pollution/Environmental Liability (for certain types of work). You’ll also need to provide Certificates of Insurance (COIs) naming the GC and owner as “additional insureds” before starting work.
Payment timing in commercial construction typically follows this timeline: You work for 30 days, submit a pay application at month-end, the GC reviews it for 7-10 days, the GC submits it to the owner, the owner pays the GC within 30 days, and the GC pays you within 7 days of receiving payment. Total time: 60-90 days from when you perform the work until you receive payment. This is radically different from residential work, where you might receive progress payments weekly or receive a deposit before starting.
Do not sign the contract until this is resolved. Compare the contract’s “Scope of Work” section line-by-line with your original bid. If the contract requires more work than you bid for, you have three options:
Once you sign, you’re legally obligated to perform all work in the contract scope at the price stated, regardless of what you bid.
Yes. Investing $1,000-2,000 in legal review of your first commercial contract can save you from six-figure mistakes. Construction attorneys can identify dangerous clauses (broad indemnification, pay-if-paid terms, excessive liquidated damages), explain terms you don’t understand, and negotiate better terms where possible. Think of it as insurance; you’re protecting against contract risks that could bankrupt your business. At a minimum, have an attorney review any contract over $100,000 or any contract containing terms you don’t fully understand.
You will likely not get paid for it. Commercial contracts are strict: no signed change order means no additional payment, even if a supervisor verbally directed you to do the work, even if the work was clearly necessary, and even if everyone acknowledges you did it. The standard is clear: written approval before starting the work. If you perform extra work without following the contract’s change order procedure, you’re essentially doing it for free. Protect yourself by never beginning additional work until you have the proper documentation in hand.
Warning signs include: pay-if-paid clauses instead of pay-when-paid, retainage exceeding 10%, broad indemnification requiring you to cover the GC’s negligence, one-sided waiver of consequential damages (you waive yours but they don’t waive theirs), vague or incomplete scope of work, unlimited liquidated damages with no cap, and no process defined for approving change orders. If you see multiple red flags, the contract terms are likely unreasonable. Have a construction attorney review any contract that seems one-sided or contains terms you don’t understand before signing.
A great resource for understanding commercial construction contracts is my book, Quit Getting Screwed. You can find it on Amazon for an in-depth, plain-English explanation of what to look out for and how to protect yourself.
Karalynn Cromeens is the Owner and Managing Partner of The Cromeens Law Firm, PLLC, with over 17 years of experience in construction, real estate, and business law. A published author and passionate advocate for contractors, she has dedicated her career to protecting the businesses her clients have built. Karalynn is on a mission to educate subcontractors on their legal rights, which inspired her books Quit Getting Screwed and Quit Getting Stiffed, as well as her podcast and The Subcontractor Institute.
