How to Read a Contract Before You Sign It

Learn the systematic approach to reviewing business contracts to protect your company and avoid costly mistakes.

1. Map the money and timeline first. Start with payment terms, amounts, and deadlines. Find the total contract value, payment schedule, and late fees. Note automatic renewals and price escalation clauses. This pass tells you if the economics work before you invest time in details.
2. Catalog your obligations and deliverables. List everything you must do, deliver, or maintain. Look for words like "shall," "must," "responsible for," and "agrees to." Note performance standards, deadlines, and reporting requirements. Calculate the true cost of compliance against your margin.
3. Find the liability and indemnification clauses. Locate sections on damages, indemnification, and limitation of liability. These determine your maximum exposure if things go wrong. Look for caps on damages and carve-outs for gross negligence. Compare potential liability to your insurance coverage and cash reserves.
4. Study termination and dispute resolution. Identify how either party can end the contract and what triggers automatic termination. Note required notice periods and post-termination obligations. Check if disputes go to arbitration or court, and which state's laws apply.
5. Review change orders and force majeure. Find how contract changes must be documented and approved. Look for force majeure clauses that excuse performance during disruptions. Note who bears risk for cost overruns, delays, or scope changes.
6. Check warranties, representations, and compliance. Review what each party guarantees about their authority, capabilities, and compliance status. Note ongoing compliance requirements like insurance minimums, certifications, or regulatory approvals. Verify you can meet these requirements throughout the contract term.