Construction contracts are inherently complex, with numerous stakeholders, varying terms, and a high degree of risk. 

To manage and reduce risks—ranging from delays and cost overruns to legal disputes and safety concerns—becomes a priority for commercial teams.

Effective contract risk management in construction requires clear terms, precise risk allocation, and diligent monitoring of compliance throughout the project lifecycle. 

Proper planning and proactive management can mitigate many of these risks, ultimately ensuring smoother project execution and minimising the potential for costly disputes.

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1. Vague or ambiguous Contract Terms

Source: Construction Industry Institute (CII) (2022)

According to CII, 40% of construction disputes are linked to issues around ambiguous contract terms or poorly defined risk allocation. These disputes often arise over unclear responsibilities for delays, cost overruns, or quality standards.

In a 2021 study by the American Bar Association, 57% of construction professionals reported that vague contract language was the primary source of disputes.

Ambiguities in terms such as "reasonable efforts" or "best endeavours" can lead to misinterpretation, leaving contractors, subcontractors, and clients uncertain about their obligations. Incomplete or ambiguous risk allocation can lead to disputes, work stoppages, and costly litigation.

2. Delays and Scheduling Conflicts

Source: Project Management Institute (PMI) (2021, Pulse of the Profession)

According to PMI’s Pulse report, 73% of construction projects report delays due to poorly managed contract schedules, either through poor planning, misunderstanding of terms, or unforeseen circumstances.

The same PMI study showed that nearly 20% of delays were caused by poor contract terms related to scheduling (e.g., unclear milestones, deadlines, or conditions for force majeure).

Effective contract management must account for a multitude of scheduling risks, such as unanticipated delays in materials, regulatory approvals, and labour. Any delays due to these factors must be appropriately managed within the contract to avoid penalties or disputes.

3. Cost Overruns and Payment Delays

Source: National Association of Home Builders (NAHB) (2021)

The NAHB found that 66% of construction contracts lead to cost overruns or unexpected price escalations, often due to poorly managed contract terms.

A 2020 survey by Dodge Data & Analytics revealed that 56% of contractors reported that cost overruns were a direct result of contract risk mismanagement, especially during scope changes or insufficiently defined project costs.

Construction companies often face challenges with cost overruns due to unclear risk allocation for material price fluctuations, labour costs, or scope creep (unforeseen changes in project scope).

‍Source: National Federation of Independent Business (NFIB) (2022)

Payment delays are one of the most common challenges contractors face, with 40% of construction firms experiencing payment delays beyond 60 days. Such delays can exacerbate financial difficulties, especially for smaller contractors.

According to the NFIB, 35% of construction firms have experienced disputes over payment terms, often due to unclear contract clauses regarding payment schedules, conditions for progress payments, or penalties for delayed payments.

Ensuring that contracts include clear, enforceable payment terms is essential. Without such clarity, contractors risk late payments, which can strain cash flow and lead to disputes with subcontractors and suppliers.

4. Force Majeure and Contract Flexibility

Source: Construction Law Journal (2020)

A study on force majeure clauses revealed that 35% of construction firms struggled with applying or enforcing force majeure clauses during unexpected disruptions, such as pandemics, natural disasters, or geopolitical events.

The use of force majeure clauses to manage risks related to the COVID-19 pandemic highlighted that 40% of contracts did not have clearly defined language for extraordinary events, leading to confusion and disputes over contract performance during the pandemic.

Force majeure clauses are critical for protecting both parties in unforeseen circumstances, but ambiguous language can cause disputes about what constitutes an event that justifies a delay or excusal from performance.

5. Subcontractor Management

Source: Associated General Contractors of America (AGC) (2022 Report on Subcontractor Risk)

According to AGC, 70% of contractors report difficulty managing the performance of subcontractors. In many cases, poor contract management with subcontractors leads to delays, quality issues, and higher costs.

50% of construction companies report that mismanagement of subcontractor relationships and contract terms contribute to delays and cost overruns.

Effective subcontractor management is a contract risk that must be carefully controlled, particularly in larger projects that rely heavily on multiple subcontracts. Subcontractor non-performance or disputes over contract terms (e.g., timelines, deliverables, and quality) can derail a project.

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Finally in control

Effective contract risk management in construction requires clear terms, precise risk allocation, and diligent monitoring of compliance throughout the project lifecycle.

Proper planning and proactive management can mitigate many of these risks, ultimately ensuring smoother project execution and minimizing the potential for costly disputes.