For companies in construction, development, or any industry reliant on major capital projects, the current risk environment is fraught with complexity. Material costs are volatile, insurance carriers are tightening coverage, and courts continue to expand or limit indemnity and exclusion clauses in ways that shift millions of dollars in exposure.

For corporate decision-makers, the wrong contract structure, a neglected exclusion, or a delayed claim notice can turn a profitable project into a loss. It’s important to not just review terms, but seek to anticipate where the next claim or cost escalation will arise and design protections before the contract is signed.

The contract as a risk allocation blueprint

Construction contracts are economic instruments as much as legal ones. They dictate who bears which risks and how much uncertainty the company can tolerate.

A cost-plus contract, which reimburses all actual costs plus a contractor’s fee, can keep a project moving when the design is still evolving. But it leaves the owner exposed to overruns with little incentive for cost discipline. A guaranteed maximum price (GMP) structure strikes a middle ground. It reimburses actual costs up to a ceiling, although contractors sometimes will negotiate  an increased cap to cover unknowns. Lump-sum contracts fix the price completely but only work when every scope detail is locked down.

It’s important to push for clarity at the outset. Is the company prepared to pay for flexibility, or does it need cost certainty? Aligning contract type with risk tolerance avoids the costly disputes that often arise when project realities fail to match contractual assumptions.

The persistent problem of price escalation

Even as supply chains have stabilized, prices for construction materials and labor remain unpredictable. Sophisticated parties now include explicit price escalation clauses to address these fluctuations.

A well-negotiated and drafted clause allows adjustments for significant, unforeseen increases in material or labor costs due to tariffs, supply shortages, or market disruptions. It also requires documentation and advance notice before any adjustment takes effect. Absent such language, parties are left arguing mid-project over who should absorb the difference when steel, lumber, or fuel prices spike.

One should ensure escalation provisions are narrowly tailored and transparent, preserving accountability while recognizing economic realities.

Hidden pitfalls of indemnity and insurance

Indemnity language is one of the most litigated provisions in construction law, yet it’s often recycled from outdated templates. The standard AIA clause requires contractors to indemnify owners for bodily injury and property damage arising from their negligence. Modified versions, however, can expand that duty by covering defense costs, subcontractor acts, and regulatory violations.

It’s critical to confirm whether the clause is proportional, tying liability to fault, or a broad form indemnity that makes one party pay for another’s mistakes. A single misplaced phrase, such as “arising out of,” can shift the balance of responsibility and potentially render the entire provision unenforceable under California law.

Insurance policies pose similar challenges. Wrap-up exclusions can strip coverage where project-wide insurance exists. Drone use may be excluded under “aircraft” clauses even when drones are used for basic inspections. Independent contractor endorsements can void coverage if subcontractors fail to maintain required policies. These are common reasons for coverage denials.

Coordinating with brokers and insurers early to confirm that policies reflect the company’s operational realities can be quite helpful. The cost of a thorough pre-renewal review is minimal compared with the price of uninsured loss.

Stability with a catch in today’s market

The insurance industry ended 2024 with its best underwriting results in years. That sounds encouraging, until you look at pricing. Property, Umbrella, and Auto lines remain stubbornly expensive due to inflation, catastrophic losses, reinsurance agreements and massive jury verdicts. The market in California is highly constricted as several carriers have exited the state. While regulators are encouraging reentry and a better business environment for carriers, the short-term outlook is limited capacity, stricter underwriting guidelines and higher premiums.

Across general liability, executive risk, workers’ compensation, and cyber, renewals are mostly stable, but “stable” now means modestly higher. Companies with clean loss runs should expect to budget conservatively for 5–8 percent overall premium increases, with property, umbrella and auto still driving the largest jumps.

Insurance procurement, claims handling, and the reporting trap

With respect to obtaining insurance, underwriters scrutinize five-year loss histories when pricing renewals, so it’s best to start the process early. Send in complete applications and submissions. Emphasize risk management considerations to negotiate the best pricing.

When in doubt, claims should be reported. Communication and cooperation with the claims professional, as well as providing appropriate evidence and documentation, are important. Coverage denials should be challenged when warranted.

The timing of reporting claims is especially critical under claims-made and reported policies, such as directors and officers or employment practices liability coverage. These policies trigger based on when the claim is made and reported, not when the underlying event occurred. A single delayed notice can nullify coverage. Internal teams should be trained to flag even informal written demands for immediate review.

Why outside counsel matters

In-house teams juggle commercial pressures and limited time. But construction risk management is a field where specialized outside counsel adds measurable value. Experienced construction and insurance lawyers can benchmark your indemnity and insurance terms against evolving case law, spot uninsurable risks, and negotiate language that aligns coverage with contractual obligations.

Outside counsel can also provide critical guidance when claims arise, ensuring notices are timely, tenders are properly framed, and insurer denials are challenged effectively.

In a market where costs are rising, coverages are narrowing, and disputes can drain budgets overnight, outside counsel can help you safeguard for your balance sheet and your reputation.