Who Drafts Construction Contracts? Exploring Leverage, Risks, and Opportunities for Fair Terms

In many industries, the party responsible for drafting a contract is typically the one with greater leverage or specialized knowledge, such as Insurance company in Insurance agreements, banks in loan agreements or employers in employment contracts. This practice allows the drafting party to set terms that best align with their interests and regulatory obligations.

However, drafting also comes with the opportunity to build trust and demonstrate fairness. Offering terms that are perceived as reasonable can facilitate smoother negotiations and reduce the likelihood of disputes. It also allows the drafting party to shape the agreement’s framework in a way that manages risks while reflecting industry standards, making the process more efficient and predictable. In scenarios like employment contracts or software licenses, standardization also ensures compliance with legal requirements, streamlining the process across multiple agreements.

In the construction industry, much like in other sectors, the party responsible for drafting a contract often holds the upper hand. Typically, the party that pays—such as the owner or developer—takes the lead in preparing the first draft of the contract. This allows them to set terms that best reflect their interests, offering them greater control over timelines, budgets, and risk management.

For general contractors, and especially subcontractors, this dynamic can be challenging. Those on the receiving end often have limited room for negotiation, particularly after winning a project. While contractors can propose adjustments or raise concerns, the final terms often reflect the priorities of the funding party, leaving little room to negotiate unfavorable clauses such as delayed payment schedules or excessive liability.

Leverage During the Tender Process

However, it’s important to recognize that the tender process can present an opportunity for negotiation. Owners and developers typically don’t just select the lowest bidder—they seek qualified contractors who can successfully complete the project on time. This is where fair and balanced tender documents become crucial. If a contract imposes too much risk on the contractor, qualified bidders may opt out, unwilling to gamble on terms that could jeopardize their ability to deliver.

During this stage, contractors and subcontractors have some leverage. They can negotiate or request changes to terms they find overly risky. In essence, fair and balanced tender documents attract better-qualified bidders, which ultimately benefits both the owner and the contractor. However, once a contractor wins the bid, it becomes critical that the same tender document is used during final negotiations. If unfavorable changes are introduced after the bid is won, the contractor’s ability to push back diminishes considerably.

How Financing Can Help Balance Power

Another approach that can indirectly protect subcontractors is when the project is financed—either partially or fully—by a bank or financial institution. Banks have a vested interest in protecting their investment and often impose their own contract requirements to mitigate risks, such as ensuring timely payments, balanced risk allocation, and adherence to regulatory standards. In this way, the bank’s involvement can create an added layer of oversight, benefiting subcontractors by preventing overly one-sided contract terms.

Conclusion

In the construction industry, the party responsible for drafting contracts generally holds more power in shaping the terms, especially if they are the ones financing the project. However, the tender process offers an opportunity for contractors and subcontractors to negotiate more balanced terms upfront. Additionally, when banks or financial institutions are involved in financing the project, their oversight can provide some protection for subcontractors, ensuring that the terms remain fair and risks are not disproportionately shifted to the contractor.

By understanding these dynamics, contractors and subcontractors can strategically navigate the contracting process, using opportunities during the tender phase and leveraging external financing to secure fairer terms and mitigate risks.