How Trade Contractors Can Use AI to Review Contracts
AI will not replace those who have worked in the industry for years and the experience they bring to navigate the risks that come with such massive contracts. But with the right prompts, AI can dramatically speed up contract evaluation and help trade contractors make better decisions earlier.
Artificial intelligence is rapidly becoming part of everyday use in the construction industry. When properly applied, AI can provide additional support to trade contractors having to navigate massive amounts of information, including dense general conditions, modified AIA documents, and high-risk change orders.
Trade contractors who treat AI like search engines often walk away unimpressed. Alternatively, those who treat it like a junior project administrator—giving it a role, a document and a precise task—are seeing real value.
The key is knowing how to ask the right questions. This article provides information and examples of prompts when using AI for contract review by trade contractors that are performing the work.
Ground Rules and Confidentiality
Trade contractors should have internal rules about what project information can be uploaded into AI, particularly when working on confidential projects with high-security requirements, such as data centers or military facilities.
Confidential estimating practices, productivity rates and other sensitive information may be accessible to others depending on the AI platform being used, so careful consideration should be given.
Trade contractors should not interpret AI as its own attorney and expect information to remain privileged as it would when communicating with a live attorney.
Knowing the Right Questions to Ask
Asking AI vague questions such as “Is this a bad contract for the contractor?” produces equally vague answers. To make this effective, the initial prompts should be part of a “new chat” to avoid confusion with previous inquires and provides some general information about the trade contractor and project. Below is an example of an initial prompt that helps set the table for more specific prompts later.
I am a drywall and framing subcontractor operating in xyz state. I have been asked by xyz construction manager to provide preconstruction pricing on xyz project located at xyz address. xyz is the project architect.
I will be performing both exterior metal framing, sheathing and air vapor barrier. I will also be performing interior metal framing, ceiling and drywall activities. Please review the attached subcontract, owner contract and general conditions and answer the following series of questions to help me evaluate the risks of the project.
It is crucial that I know of the risks being imposed by certain contract terms as those terms will affect the preconstruction pricing I am being requested to provide.
Once the initial information is provided, the next step would be to identify the various documents that are incorporated into the subcontract. Often, this is expected to include the owner contract and its general conditions. See below for some examples.
- What documents are incorporated into the subcontract?
- Is the subcontract required to satisfy the requirements in these documents?
- Do the obligations of the contractor to the owner flow down to the subcontractor?
- Does the specialty contractor have the same rights that the contractor has against the owner?
Any additional key document identified relating to legal terms and obligations should be obtained and then copied into the AI platform with the initial subcontract. From there, specific prompts focusing on key provisions can then be asked.
Identify the Payment Terms
When assessing the risks of a contract, understanding the payment terms should be an early priority. It is important to recognize the timing for payments and if the payment terms are conditioned on the construction manager receiving owner payment—commonly referred to as a pay-if-paid clause.
A true pay-if-paid provision makes the construction manager’s receipt of payment from the owner an express condition precedent to payment of the trade contractor. Depending on the state and the specific facts, if the owner does not pay the construction manager, the trade contractor may not get paid—regardless of the trade contractor’s performance.
This clause shifts the risk of the owner’s failure to pay, including for insolvency, entirely downstream. With these provisions, trade contractors should closely evaluate the financial standing of the owner, including how reliant it is on funding through a bank or lender.
If a specialty/subcontractor accepts a pay-if-paid provision, the subcontract should include the right to suspend or terminate work for nonpayment. Without this protection, the subcontractor risks continuing work without any assurance of eventual payment. By contrast, pay-when-paid clauses—such as in an unmodified AIA A401 subcontract—do not extinguish the subcontractor’s right to payment against the construction manager.
Under a more friendly pay-when-paid, the construction manager remains obligated to pay the trade contractor and is not excused simply because the owner did not pay the construction manager.
Closely related provisions—such as waiver of mechanic’s lien rights or broad set-off rights for unrelated projects—compound this risk and should be carefully scrutinized or resisted whenever possible. Below are some prompts to identify the payment issues raised above.
- What are the payment terms under the subcontract?
- Is owner payment an express condition precedent for the construction manager to pay the subcontractor?
- Who is the owner?
- What information is required by the owner to show it has sufficient financing in place to satisfy its payment obligations?
- Is the owner a limited liability company?
- How long has the limited liability company been in existence?
- Can the subcontractor stop or suspend work if it has not been paid timely?
- Does the subcontract allow for a lien on the project if the subcontractor has not been paid timely?
- Do the subcontract terms waive a subcontractor’s right to assert a lien?
- Are late payments subject to interest?
- What are the permitted reasons a construction manager can withhold payment?
- Is the construction manager permitted to withhold payments on unrelated projects?
Exposure to Project Delays
Most subcontracts include provisions to address the exposure a trade contractor faces by delaying the project. Recognizing the exposure imposed by these terms is crucial to properly evaluating the project.
Trade contractors should recognize if the subcontract includes liquidated damages, which is commonly a per-diem rate that is deducted against the subcontract amount depending on the number of delayed days.
Equally important is to understand whether consequential damages, such as loss of use, are recoverable against the trade contractor. Depending on the project, such as a large hospital or private hotel, the loss of use damage can far exceed what is often imposed by liquidated damages.
Consequential damage can be significant and can be devastating to even a large trade contractor. Fortunately, consequential damages are often waived, such as in the unmodified AIA A201 general conditions. However, there is no guarantee that the same applies in all contracts, so that assessment should be made. Below are some prompts to identify exposure to delaying the project.
- Does the subcontract impose liquidated damage? If so, what are the damages imposed?
- Do the terms imposing liquidated damages limit the damage only to the extent of the delay caused by the subcontractor?
- When does the subcontract permit the assessment of liquidated damage?
- Are liquidated damages based on an overall project substantial completion date or specific milestones?
- Does the subcontract waive consequential damages from being assessed by the owner and construction manager?
- Does the subcontract incorporate the general conditions and owner contract?
- Do the general conditions and owner contract permit it to recover consequential damages?
- What about the owner’s recovery for loss of use and lost profits?
Right to Recover for Certain Delays
As part of the evaluation of project delays, trade contractors should also understand their rights and limitations if the project is delayed for reasons beyond their control. Prompts should focus on those delays that are excusable and compensable (permit both time and money) compared with those that are just excusable (permit time but no money).
Understanding these provisions and when additional compensation may be permitted is critical for a trade contractor. Below are some examples to help identify these provisions.
- What delay events are both excusable and compensable under this subcontract?
- What delay events are excusable but non-compensable under this subcontract?
- Is there a no-damage-for-delay provision?
- Do the subcontract terms permit additional compensation for a delay beyond the subcontractor’s control?
- Do the subcontract terms permit additional compensation for delays due to weather?
- Do the subcontract terms permit additional compensation for a force majeure event, such as a war or terrorist attack?
Design Responsibility
Construction contracts are increasingly imposing design responsibility on trade contractors, often without clear boundaries. Further compounding the problem is a lack of universal terminology for the various types of design services ranging from design assist, delegated design and design-build.
Under design assist, the specialty contractor provides preconstruction services to help inform the architect’s design, typically without assuming responsibility for final design decisions. Delegated design, by contrast, requires the specialty contractor to engineer specific elements of its scope—such as façade systems or framing connections—often through stamped shop drawings.
In these situations, it is critical that the subcontract confirms that the architect remains the designer of record and retains responsibility for overall design coordination and code compliance. Design-build arrangements present an even higher risk allocation. In these contracts, the design-builder is acting as a single point of responsibility for both design and construction.
To limit exposure, subcontract language should clearly state that the specialty contractor’s liability for design services is capped by the proceeds of its professional liability insurance. Without such a limitation, specialty contractors may face uninsured exposure for design-related claims that far exceed their contractual compensation.
Accordingly, below are prompts to further identify the design obligations imposed by the subcontract.
- Does the subcontract impose design obligations?
- What portions of the project are subject to design obligations?
- Are the design obligations described as design assist, delegated design, or design-build?
- Is the specialty contractor required to have professional design liability insurance?
- What are the limits of professional design liability insurance?
Change Orders and Permitted Rate for Overhead and Profit
Change order provisions, including pricing clauses, should also be evaluated to determine what items are subject to a change order. Often, these provisions limit whether project administration time can be added or if it is part of the permitted rate for overhead and profit.
When it comes to change orders themselves, specialty contractors are cautioned against inadvertently waiving claims additional compensation through change orders. Broad release language stating that all claims “through this date” are waived can eliminate pending changes and previously notified claims.
Some examples of effective prompts when it comes to the subcontract’s change provisions are listed below:
Does the subcontract include language that states any signed change order represents a settlement of all claims relating to the change order, including cumulative impacts and delays?
- What markup is permitted on change orders?
- Are overhead and profit capped?
- Are there limitations on recovering from additional project administration time to process change orders?
For this specific change order, am I waiving my right to recover for pending change orders by signing this change order?
Insurance Requirements
When it comes to insurance requirements, trade contractors should evaluate whether they have the contractually required insurance in place or condition its pricing on mutually agreeable insurance and policy limits.
ubcontracts routinely require trade contractors to maintain coverage consistent with both the subcontract and the prime contract, often subject to whichever requirements are more stringent.
Furthermore, trade contractors should also identify the party responsible for the project builder’s risk insurance. Builder’s risk insurance is a specialized type of property insurance and is vital for protecting construction projects from financial loss due to property damage (fire, theft, vandalism, and weather) during construction, covering the structure, materials and equipment.
As part of this evaluation, the deductible and how it is allocated should also be determined, as the deductible can often be significant. Some examples of effective prompts when it comes to evaluating insurance provisions are listed below:
Compare the insurance requirements in the subcontract to my certificate of insurance and identify if there are any shortcomings?
- How long after the project is completed is the insurance to remain in place?
- Under the terms of the subcontract, who is the party responsible for the builder’s risk or property insurance?
- What types of losses does the subcontract require the builder’s risk insurance to cover?
- Who is the party responsible for the builder’s risk insurance deductible and how is it allocated?
Claim Notice Requirements and Dispute Resolution
Claims for additional time and compensation often require timely written notice as a condition precedent to any claim for additional compensation or time. Delays and missteps in the claim submission process can significantly diminish the claim’s value and may bar recovery altogether.
Trade contractors should understand how effective notice is accomplished to best protect itself and recover for additional time and compensation.
If a claim cannot be resolved through negotiations amongst the parties, the subcontract’s dispute resolution provisions dictate whether claims proceed through litigation or arbitration. Litigation offers full discovery and appellate rights but is often more time-consuming than arbitration. For trade contractors typically seeking money, arbitration can be more advantageous because of its shortened duration, though it is still expensive.
Regardless of the forum, a key factor when evaluating the dispute resolution provision is where the dispute will be resolved and under what state law. Accordingly, trade contractors are advised to modify the dispute resolution provisions to avoid having to travel and apply a different state law from where the project is located.
Some examples of effective prompts when it comes to evaluating the subcontract’s notice and dispute resolution provisions are below:
- What are the notice requirements if the trade contractor identifies additional work is required?
- What are the notice requirements if the trade contractor is being delayed by others?
- What information does the notice for additional compensation and time require?
- What are the time requirements to provide notice?
- Are disputes between the trade contractor and construction manager resolved by arbitration or litigation?
- Where is the dispute to be resolved?
- What state law applies in a dispute?
- Are attorney fees recoverable to the prevailing party?
- How is the prevailing party determined?
Closing
AI will not replace those who have worked in the industry for years and the experience they bring to navigate the risks that come with such massive contracts. But with the right prompts, AI can dramatically speed up contract evaluation and help trade contractors make better decisions earlier. CD
Mike Madigan is a director at Kegler, Brown, Hill + Ritter and chair of the firm’s construction law practice, where he advises clients on all facets of construction, including contract drafting and negotiation, risk management and dispute avoidance. A regular contributor to construction and legal industry publications, Mike focuses on practical guidance for contractors and project stakeholders, including the responsible use of emerging technologies, such as artificial intelligence, in contract review and project administration.
