A sloppy tenant improvement agreement can cost you thousands in change orders, project delays, and disputes with your contractor. Knowing which contract terms to prioritize—and which red flags to catch early—protects your budget and timeline before anyone picks up a sledgehammer. This guide walks through the essential clauses every tenant improvement contract needs.
Scope of Work: Be Ruthlessly Specific
Your scope of work is the single most important section. Vague language like "standard finishes" or "as discussed" invites misunderstanding. Instead, specify:
- Exact materials and brands (e.g., "3x6 subway tile, Daltile Rittenhouse, color White" not "tile TBD")
- Square footage and locations of each work area
- Which items are included vs. excluded (e.g., paint included, but owner provides light fixtures)
- Before-and-after conditions (e.g., "remove existing drywall down to studs; patch and prime all walls")
Request detailed architectural plans or drawings referenced in the contract. If your project spans multiple rooms or floors, attach a room-by-room breakdown. Contractors typically charge $15–$40 per square foot for standard office build-outs, but the difference between "quality finishes" and "premium finishes" can easily shift you from $25 to $50 per foot. Locking in specifics prevents that creep.
Contract Price and Change Order Process
State the fixed price (if applicable) or hourly rate and budget cap. Most tenant improvement contracts run fixed-price for well-defined scopes, typically ranging from $100,000 to $500,000+ for mid-market office or retail spaces. Include a contingency line—usually 10–15% of the base contract—for unknowns like hidden structural issues.
Equally important: define how change orders work. Require written change order requests before work begins, with a detailed price impact and timeline adjustment. Set a threshold—say, anything over $5,000 needs owner approval. Without this, contractors can pile on extras and bill you later.
Timeline and Liquidated Damages
Include a hard project completion date and key milestones (demolition complete by Day 10, rough-in by Day 25, final inspection by Day 40). Realistic timelines for a 5,000-square-foot office tenant improvement run 8–12 weeks; retail may be 6–10 weeks depending on complexity.
Add a liquidated damages clause specifying what happens if the contractor misses the deadline—typically $500–$1,500 per day of delay. This isn't punitive; it reflects your actual costs (lost rent, holding costs, lost business revenue). Make sure the clause also protects the contractor if you cause delays (late material selections, scope changes).
Insurance, Permits, and Liens
The contractor must carry general liability insurance (minimum $1 million) and workers' compensation. Request a certificate of insurance naming you as an additional insured before work starts. Never skip this—you could be liable if someone is injured on site.
Clarify who pulls building permits and obtains required inspections. Most contractors handle this as part of their fee, but confirm it's explicitly their responsibility in the contract. Many tenant improvement disputes stem from missed inspections or code violations discovered mid-project.
Include a lien waiver clause. Before you pay the contractor's final invoice, require a signed lien waiver confirming they've paid all subcontractors and suppliers. Missing this can result in a lien against your lease or property.
Warranty and Punch List
Set a warranty period—typically 1 year for materials and labor—and define what's covered (e.g., paint defects, trim separation, mechanical equipment malfunction). Agree on a punch list process: before final payment, walk the space together and document any incomplete or defective work. The contractor has 7–14 days to address punch list items.
Dispute Resolution and Payment Terms
Specify payment schedule: many contracts use a draw system (e.g., 30% upon signing, 40% at 50% completion, 30% upon final walkthrough). Never pay the full amount upfront. Include a retainage clause holding back 5–10% until final inspection and lien waiver are complete.
For disputes, consider mediation or arbitration clauses to avoid costly litigation. Both parties agree to resolve disagreements through a neutral third party before going to court.
Tools like Mercoly let you compare and find trusted tenant improvement and build-out providers in one place, making it easier to vet contractors and their standard contract terms.
Frequently Asked Questions
Q: What happens if my contractor finds asbestos or mold during demolition? The contract should include language protecting both parties: the contractor stops work, documents findings, and provides written notice. You arrange testing and remediation (often a separate specialist), and the timeline adjusts accordingly. Budget an extra 2–4 weeks if hazardous materials appear.
Q: Can I reduce costs by hiring subcontractors directly instead of using the general contractor? It's possible but risky—you become responsible for coordinating, safety, and quality control. Most lease agreements prohibit direct hiring of subs anyway. A GC's fee (10–20% of project cost) covers coordination, liability, and permits; it's usually money well spent.
Q: What should I do if the contractor asks for early payment before hitting milestones? Red flag. Stick to your payment schedule tied to completed work and inspections. Early payment removes their incentive to finish on time and correctly, and it weakens your leverage if quality issues arise.
Use this checklist to vet your next tenant improvement contract—or let Mercoly help you find a contractor with a solid track record of clear, fair agreements.