Protecting Your Construction Business Starts With the Right Contracts
Construction law in California doesn’t cut any corners. From San Diego to Sacramento, construction projects involve a web of legal obligations, moving parts, and tight timelines.
Contractors juggle everything from OSHA compliance and permit requirements to change orders and payment disputes.
What often gets overlooked—but can make or break a project—is the written agreement between a general contractor and subcontractors.
If you’re a business owner or entrepreneur working in construction—whether you’re building custom homes in Orange County, managing a commercial remodel in Fresno, or overseeing public infrastructure in the Bay Area—you already know how much hinges on getting the contract terms right.
Drafting general contractor and subcontractor construction agreements that actually protect your business helps avoid costly missteps, delays, and finger-pointing down the road.
Read on to learn what to include in those agreements, where problems often arise, and how a business lawyer can help you craft contracts that work for your specific needs.
Keep reading if you want to understand how to reduce risk and get peace of mind before the first shovel hits the dirt. When you’re ready, contact a California construction attorney for a confidential consultation to find out how they can help you draft a solid and enforceable contractor or subcontractor agreement.
Key Parties and Roles in a Construction Contract
Construction projects rely on a chain of contracts, and every link in that chain carries legal and financial responsibilities. You need a lawyer who understands the roles of general contractors and subcontractors—and how their contracts fit together—so they can draft agreements that actually protect your business.
General Contractors vs. Subcontractors
General contractors hold the primary contract with the project owner. They’re responsible for overall project execution, coordination, scheduling, and ensuring the final product meets the contract terms. They may perform some of the work themselves or hire others to do specialized tasks.
Subcontractors, by contrast, contract directly with the general contractor—not the project owner. They may complete specific portions of the work, such as electrical wiring, plumbing, roofing, or drywall installation. These agreements are legally distinct from the general contract with the owner but should align with its requirements.
Typical Contractual Hierarchies
In most projects—residential remodels in Orange County, public schools in Sacramento, or commercial builds in Oakland—the structure looks like this:
- Owner contracts with the General Contractor
- General Contractor hires one or more Subcontractors
- Subcontractors may engage sub-subcontractors or suppliers
Each party is responsible for their own tier of the contract chain.
Problems arise when responsibilities aren’t clearly stated, especially if the subcontractor assumes the general contractor is providing certain materials or handling certain compliance issues.
Why Clear Definitions and Scope Matter
If the roles aren’t spelled out clearly, finger-pointing starts fast when problems occur.
For example, if a plumbing subcontractor in San Jose installs piping that fails inspection, and the contract doesn’t specify who’s responsible for code compliance or rework costs, both sides might try to shift blame—and neither side has a clear way to resolve it.
Every contract should:
- Define the role of the contractor or subcontractor
- Describe how they interact with other parties
- Specify what they’re responsible for—and what they’re not
This helps avoid disputes over work quality, deadlines, and legal compliance. It also protects general contractors from liability tied to a subcontractor’s mistakes and gives subcontractors clarity on expectations, materials, and payment conditions.
Clear roles up front reduce conflict later. In California’s high-stakes construction market, that clarity is more than helpful—it’s good business.
Essential Components of a Construction Agreement
Even a short-term or lower-budget project should include key terms to protect everyone involved. Leaving them out creates gaps that other parties can exploit later when something goes wrong.
1. Scope of Work
This section outlines exactly what the subcontractor agrees to do. Vague language like “Install HVAC system” opens the door to disputes.
Instead, the scope should include:
- Detailed descriptions of each task
- References to plans, blueprints, and specifications
- How changes will be handled (change orders) and who must approve them
For instance, if a subcontractor installs windows in a Santa Barbara office building, the contract should specify how many, what type, and which floors. It should also explain who pays for upgrades or corrections if changes occur mid-project.
2. Payment Terms
Cash flow problems derail more projects than poor workmanship ever could.
The contract should spell out precise payment terms:
- Type of contract: Lump sum? Cost-plus? Unit price?
- Payment milestones: Based on completion phases, inspections, or time intervals
- Retainage: A portion withheld until the work is finished satisfactorily
- Final payment conditions: What needs to happen before that last check is cut?
For example, a concrete subcontractor working on a Bakersfield retail project might receive 30% after pouring the foundation, 40% after curing and inspection, and the rest upon completion. Without clear terms, arguments over “percentage of work completed” can stall progress.
3. Project Timeline
Schedules matter. If the framing crew doesn’t finish on time in Riverside, the drywallers can’t start—and everyone loses money.
Include:
- Start and completion dates
- Penalties for late performance (like liquidated damages)
- Definitions of excusable delays, such as weather events or material shortages
This section should also include what happens if delays are caused by other subcontractors or the general contractor themselves.
4. Insurance and Bonding
Everyone on site needs proper coverage to avoid financial fallout if something goes sideways.
Make sure the agreement spells out:
- Required insurance types: General liability, workers’ compensation, builder’s risk
- Minimum coverage amounts
- Who carries what insurance
- When performance or payment bonds are required
These terms must also comply with California’s public works requirements for public jobs in places like Los Angeles or San Jose.
5. Licensing and Legal Compliance
Construction in California demands full legal compliance—no shortcuts allowed.
Contracts should:
- Confirm that contractors and subcontractors are properly licensed for their trade
- Require all work to comply with applicable building codes, zoning laws, and safety regulations
Skipping this step can void a contract altogether—especially under California Business and Professions Code § 7031, which prevents unlicensed contractors from recovering payment.
Risk Management and Dispute Resolution
Construction projects rarely go exactly as planned. Materials arrive late, subcontractors run behind, weather shuts down a site, or workmanship doesn’t meet the agreed standards.
When that happens, the contract needs to provide a clear path forward.
Without strong risk management provisions, minor problems can spiral into lawsuits or project shutdowns.
Drafting general contractor and subcontractor construction agreements with built-in protections helps reduce exposure and offers ways to resolve disagreements without derailing the entire job. Here’s how that works.
Indemnity Clauses
Indemnity clauses shift financial responsibility when something goes wrong. If a subcontractor’s actions lead to injury, property damage, or legal claims, a properly worded indemnity clause can require them to cover those costs—including legal fees.
For example, if a subcontractor on a Long Beach apartment build fails to secure scaffolding and someone gets hurt, an indemnity clause could make that subcontractor responsible for the resulting liability, rather than the general contractor.
California law limits how broadly you can write indemnity provisions in construction contracts. Agreements need to comply with Civil Code Section 2782, which prohibits general contractors from forcing subcontractors to indemnify them for the contractor’s own active negligence.
Still, carefully drafted indemnity clauses provide meaningful protection—especially when paired with appropriate insurance coverage.
Limitation of Liability
Limiting liability in a construction contract helps prevent one party from being hit with unreasonable or disproportionate damages. For instance, a subcontractor might limit their liability to the total contract amount, especially in lower-margin trades.
This kind of clause is especially useful in high-value commercial projects in cities like San Francisco or Los Angeles, where a single error could snowball into major financial exposure.
Courts may not enforce overly broad limitations—so you need a lawyer who can draft enforceable language under California law.
Warranties and Guarantees
Construction contracts should clarify what level of workmanship is guaranteed and for how long. These can be express warranties—spelled out in the contract—or implied warranties under California law.
For example, a drywall subcontractor in Fresno might warrant their work to be free from defects for one year. If cracks appear due to improper installation, the contractor can require them to return and fix the issue at no additional cost.
Warranties should include:
- Duration
- What’s covered (materials, workmanship, code compliance)
- How warranty claims are handled
- What triggers voiding the warranty (e.g., unauthorized repairs)
Without this section, disputes over quality or responsibility often lead to finger-pointing—and delayed payments.
Dispute Resolution Mechanisms
Disputes in construction are almost inevitable. The question is how they’ll be resolved—and how quickly.
Your agreement should clearly state the method for resolving disagreements.
Common options include:
- Mediation: A neutral third party helps the parties negotiate a solution. Mediation is non-binding but can preserve business relationships and avoid litigation.
- Arbitration: A private judge (arbitrator) hears evidence and makes a decision. Arbitration is usually faster and less formal than court, and the decision is binding.
- Litigation: Taking the dispute to court. This can take time and money, but more serious conflicts may require a judge or jury to rule.
For example, a subcontractor in San Diego might agree to mandatory arbitration in San Diego County for any disputes arising out of the project. That prevents a general contractor in a different county from pulling the subcontractor into an inconvenient jurisdiction or forcing litigation without trying other options first.
Contracts should also explain:
- Which state’s laws apply (typically California)
- Where the resolution will take place
- Whether attorneys’ fees can be recovered by the prevailing party
By spelling all this out ahead of time, both sides know what to expect if something goes sideways.
Flow-Down Provisions
Subcontractor agreements often borrow terms from the general contract—but skipping a few key phrases can lead to chaos.
Flow-down clauses ensure subcontractors follow the same rules the general contractor agreed to with the project owner.
These provisions might cover:
- Schedules
- Scope changes
- Safety procedures
- Insurance requirements
- Dispute resolution terms
Omitting them can result in conflicting responsibilities or inconsistent deadlines. For example, if a Napa Valley general contractor agrees to use specific fire-rated materials, that obligation should flow down to the subcontractors responsible for those installations.
Termination and Default Clauses
Every agreement should explain how and when a party can exit the deal—or be removed for poor performance.
Include:
- Termination for cause (like failing to perform)
- Termination for convenience (at the discretion of one party, with notice)
- Cure periods that allow time to fix issues before termination
- Remedies after default, including hiring a replacement and back-charging costs
Suppose a roofing subcontractor in Anaheim walks off the job after a payment delay. The agreement should lay out how much notice is required, how disputes are handled, and what happens to the remaining work.
Common Mistakes to Avoid
Even experienced contractors fall into traps when rushing contracts.
Watch for these common errors:
- Vague scope of work that leads to scope creep and budget fights
- Missing dispute resolution clauses, forcing everyone into court
- Unclear change order processes, causing delays and billing confusion
- Unrealistic payment terms, which can trigger cash flow problems
- Forgetting flow-down requirements, creating inconsistent obligations
Each of these can lead to project delays, liability exposure, or nonpayment—all of which stronger contract language can prevent.
How a Construction Law Attorney Can Help
A business attorney who understands construction law can ensure your contract doesn’t leave you holding the bag when a project goes sideways.
They can:
- Draft or review contracts tailored to your project and region
- Identify hidden risks or missing terms
- Ensure subcontractor agreements reflect your general contract
- Help enforce or defend against claims over payment, delays, or scope
- Advise on compliance with California construction law
Whether you’re developing commercial properties in Palm Springs or managing solar installation projects in the Central Valley, legal guidance during the drafting stage pays for itself in reduced risk and fewer disputes.
Contact Our Business Lawyers in California Now
At Tropea McMillan LLP, we work with business owners, contractors, developers, and entrepreneurs across California to draft and review construction agreements that hold up when it counts.
From San Diego to San Jose, we help clients reduce legal risk, close loopholes, and make sure everyone gets what they bargained for. When a project goes off-track, a solid agreement gives you leverage to recover costs, correct problems, and keep things moving.
Don’t wait until there’s a dispute to realize something important was left out of your agreement. Contact Tropea McMillan LLP today for a confidential consultation with a business lawyer who experiences in construction law near you.