Contract Risk Assessment Procedures
Document Type: Procedure
Version: 1.0
Last Updated: February 2026
Distribute To: Estimators, Project Managers, Executives
Purpose
Establish procedures for assessing contract risk before bid submission and during negotiations to protect the company from unfavorable terms.
Why Contract Risk Assessment Matters
Construction Contract Reality:
- Contracts allocate risk between parties
- Unfavorable terms can eliminate profit
- Some risks are uninsurable
- Legal fees from disputes are significant
- Bad contracts can threaten company survival
Risk Assessment Benefits:
- Avoid unacceptable risk
- Price risk appropriately
- Negotiate better terms
- Protect the company
- Informed go/no-go decisions
Contract Review Process
Review Stages:
| Stage | Who Reviews | Focus |
|---|---|---|
| Bid stage | Estimator + PM | Key risk terms |
| Pre-award | Legal + Management | Full contract |
| Execution | Authorized signatory | Final terms |
Risk Assessment Checklist
Contract Risk Review:
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CONTRACT RISK ASSESSMENT
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Project: _______________________
Client: _______________________
Contract value: $_________________
Reviewed by: _______________________
Date: _______________________
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SECTION 1: SCOPE RISK
☐ Scope clearly defined
☐ Drawings/specs adequate
☐ Site conditions addressed
☐ Allowances appropriate
☐ Exclusions clear
Risk level: ☐ Low ☐ Medium ☐ High
Concerns:
___________________________________________________________
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SECTION 2: SCHEDULE RISK
Substantial completion: _______________________
Final completion: _______________________
Duration: _____ days
☐ Schedule is achievable
☐ Weather days adequate
☐ Owner delay provisions fair
☐ Acceleration provisions reasonable
☐ Milestone penalties assessed
Liquidated damages: $_______ /day
Exposure at 30 days late: $_______
Risk level: ☐ Low ☐ Medium ☐ High
Concerns:
___________________________________________________________
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SECTION 3: PAYMENT RISK
Payment terms: Net _____ days
Retainage: _____%
Retainage release: _______________________
☐ Payment terms acceptable
☐ Pay-when-paid vs. pay-if-paid clear
☐ Retainage reasonable
☐ Lien rights preserved
☐ Change order payment terms defined
☐ Invoice requirements clear
Risk level: ☐ Low ☐ Medium ☐ High
Concerns:
___________________________________________________________
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SECTION 4: CHANGE ORDER RISK
☐ Change order process defined
☐ Pricing markup defined
☐ Disputed work provisions
☐ Constructive change provisions
☐ Time extension process clear
Risk level: ☐ Low ☐ Medium ☐ High
Concerns:
___________________________________________________________
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SECTION 5: INDEMNIFICATION
☐ Indemnification is mutual
☐ Limited to negligent acts
☐ No broad form indemnity
☐ Insurable exposures only
☐ Defense obligations clear
Risk level: ☐ Low ☐ Medium ☐ High
Concerns:
___________________________________________________________
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SECTION 6: INSURANCE REQUIREMENTS
☐ GL limits achievable: $_______ / $_______
☐ Auto limits achievable: $_______
☐ Umbrella limits achievable: $_______
☐ Professional liability required: ☐ Yes ☐ No
☐ Pollution liability required: ☐ Yes ☐ No
☐ Builder's risk addressed
☐ Waiver of subrogation required
☐ Additional insured required
☐ Primary/non-contributory required
Additional premium cost: $_______
Risk level: ☐ Low ☐ Medium ☐ High
Concerns:
___________________________________________________________
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SECTION 7: WARRANTY/GUARANTY
Standard warranty: _____ years
Extended warranty: _____ years
Workmanship warranty: _____ years
☐ Warranty terms standard
☐ No performance guarantees
☐ No consequential damages waiver
☐ Latent defect provisions reasonable
Risk level: ☐ Low ☐ Medium ☐ High
Concerns:
___________________________________________________________
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SECTION 8: TERMINATION
☐ Termination for convenience provisions fair
☐ Termination for cause provisions fair
☐ Cure period adequate
☐ Payment on termination defined
Risk level: ☐ Low ☐ Medium ☐ High
Concerns:
___________________________________________________________
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SECTION 9: DISPUTE RESOLUTION
☐ Dispute process defined
☐ Mediation before litigation
☐ Arbitration vs. litigation clear
☐ Venue acceptable
☐ Attorney fees provision fair
☐ Statute of limitations addressed
Risk level: ☐ Low ☐ Medium ☐ High
Concerns:
___________________________________________________________
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SECTION 10: OTHER PROVISIONS
☐ No-damage-for-delay clause? (RISK)
☐ Flow-down provisions reviewed
☐ Consequential damages waived (mutual)
☐ Limitation of liability?
☐ Force majeure provisions adequate
☐ Assignment restrictions reasonable
Risk level: ☐ Low ☐ Medium ☐ High
Concerns:
___________________________________________________________
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OVERALL RISK ASSESSMENT:
| Category | Risk Level | Impact |
|----------|------------|--------|
| Scope | | |
| Schedule | | |
| Payment | | |
| Change orders | | |
| Indemnification | | |
| Insurance | | |
| Warranty | | |
| Termination | | |
| Disputes | | |
| Other | | |
OVERALL RISK: ☐ Low ☐ Medium ☐ High ☐ Unacceptable
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High-Risk Contract Terms
Red Flags to Watch:
| Red Flag | Risk | Response |
|---|---|---|
| Broad form indemnification | Uninsurable liability | Negotiate to negligence-based |
| No-damage-for-delay | No recovery for owner delays | Negotiate exception or price |
| Pay-if-paid | May not get paid | Understand and price |
| Consequential damages | Unlimited exposure | Negotiate mutual waiver |
| One-sided termination | Arbitrary termination | Negotiate cure period |
| Unlimited warranty | Perpetual liability | Negotiate standard term |
| Attorney fees to owner only | Lopsided disputes | Negotiate mutual provision |
| Waiver of lien rights | Loss of security | Do not waive |
| Performance guarantees | Beyond control | Negotiate to best efforts |
| Automatic assignment | Forced to work for unknown | Negotiate consent right |
Risk Pricing
Pricing Contract Risk:
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RISK PRICING WORKSHEET
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Project: _______________________
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QUANTIFIABLE RISKS:
| Risk Item | Probability | Impact | Expected Value |
|-----------|-------------|--------|----------------|
| Schedule LD exposure | ___% | $ | $ |
| Additional insurance | 100% | $ | $ |
| Extended warranty | ___% | $ | $ |
| Unfavorable payment terms | ___% | $ | $ |
| Scope gaps | ___% | $ | $ |
Total quantifiable risk: $_________________
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CONTINGENCY FOR UNQUANTIFIABLE RISKS:
Contract risk level: ☐ Low (1%) ☐ Medium (2-3%) ☐ High (4-5%)
Base bid: $_________________
Risk contingency: _____% = $_________________
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RISK-ADJUSTED BID:
Base bid: $_________________
+ Quantifiable risk: $_________________
+ Risk contingency: $_________________
= Risk-adjusted bid: $_________________
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Negotiation Strategy
Terms to Negotiate:
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CONTRACT NEGOTIATION PRIORITIES
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Project: _______________________
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MUST CHANGE (Deal breakers if not modified):
1. Issue: _______________________
Current language: _______________________
Proposed change: _______________________
Fallback: _______________________
2. Issue: _______________________
Current language: _______________________
Proposed change: _______________________
Fallback: _______________________
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SHOULD CHANGE (Important but not deal breakers):
1. Issue: _______________________
Proposed change: _______________________
2. Issue: _______________________
Proposed change: _______________________
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NICE TO CHANGE (Improvements if possible):
1. _______________________
2. _______________________
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NEGOTIATION STRATEGY:
Lead negotiator: _______________________
Approach: _______________________
Authority level: _______________________
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Approval Requirements
Contract Approval Matrix:
| Contract Value | Risk Level | Approver |
|---|---|---|
| Any | Unacceptable | Do not bid |
| under $500K | Low/Medium | PM + Estimating Mgr |
| under $500K | High | VP Operations |
| $500K-$2M | Any | VP Operations |
| $2M-$5M | Any | CFO + VP Operations |
| over $5M | Any | CEO/Owner |
Pre-Signature Checklist:
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CONTRACT SIGNING CHECKLIST
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☐ Contract reviewed by appropriate level
☐ All negotiated changes incorporated
☐ Insurance requirements met
☐ Bonding confirmed (if required)
☐ Risk assessment documented
☐ Appropriate signature authority
☐ Contract value within authority limits
Signed by: _______________________
Date: _______________________
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Subcontract Flow-Down
Subcontract Risk Review:
When we are the GC, ensure subcontracts:
- Flow down relevant prime contract terms
- Include appropriate indemnification
- Match insurance requirements
- Include dispute provisions
- Don't create gaps in coverage
Related Documents
- Go/No-Go Decision Process
- Insurance Requirements
- Lien Rights
- Change Order Management
Template provided by support.construction. Read contracts before signing—it's cheaper than lawyers later.