Financial / liability risk · Contract risk SEO
Cost Overrun Clause: Risks, Examples, and How to Detect It
This guide explains cost overrun clause in plain English so you can spot red flags fast — even if you’re not a lawyer. Use it to scan your contract, find the wording, and know what to negotiate.
Direct answer
cost overrun clause is a contract term that defines who pays for losses and how big the damages can be. The risk is that it can make you responsible for costs you didn’t price in and may lead to an uncapped bill, a lawsuit, or losses far bigger than the contract price. This can change the real cost of the deal and how much leverage you have when negotiating.
Quote
“Trust, but verify.”
— Ronald Reagan
Source: Reagan Presidential Foundation & Institute
Quote
“An ounce of prevention is worth a pound of cure.”
— Benjamin Franklin
Related stats (business contracts)
Sources: World Commerce & Contracting + Deloitte (via Legal Dive).
Why it’s risky (specific outcomes)
- You may owe damages far above the contract price if liability is uncapped.
- You could be responsible for lost profits, indirect, or consequential damages.
- Broad indemnity language can make you pay for third-party claims you didn’t cause.
- Insurance may not cover the full exposure if the clause is too broad.
- Liability and indemnity obligations often survive termination.
Red flags to look for
Search your contract for these phrases. Each one can change costs, leverage, or your ability to exit a bad deal.
Indemnity uses “any and all losses” and covers the other party’s negligence.
Action: ask for a limit, a clear definition, and a written notice/dispute window.
The cap excludes key claim types (so the cap doesn’t really protect you).
Action: ask for a limit, a clear definition, and a written notice/dispute window.
You must defend at your cost, not just reimburse later.
Action: ask for a limit, a clear definition, and a written notice/dispute window.
Warranty disclaimers remove remedies but liability remains broad.
Action: ask for a limit, a clear definition, and a written notice/dispute window.
The term “cost overrun clause” is used but not defined in Definitions.
Action: ask for a limit, a clear definition, and a written notice/dispute window.
“cost overrun clause” is set by a cross-reference (Exhibit/Schedule/Order Form) you might not review.
Action: ask for a limit, a clear definition, and a written notice/dispute window.
Liability is “uncapped” or “without limitation”.
Action: ask for a limit, a clear definition, and a written notice/dispute window.
Consequential/indirect damages are included (lost profits, downtime).
Action: ask for a limit, a clear definition, and a written notice/dispute window.
Real example (what you can lose)
- Who: A contractor
- What they signed: a project agreement with broad indemnity and consequential damages included
- What went wrong: a delay triggered a claim for “lost profits” well beyond the project fee
- What they lost: they settled for $7,500 and spent weeks on dispute cleanup
How to identify it
Limitation of liabilityDamagesIndemnificationWarrantiesRemedies
“without limitation”“any and all losses”“consequential damages”“indirect damages”“defend and indemnify”
- No cap (or cap excludes key claims).
- Consequential/indirect damages included.
- Indemnity covers broad events you can’t control.
How to protect yourself
- Add a clear liability cap (e.g., fees paid in the last 12 months).
- Exclude consequential/indirect damages explicitly (lost profits, downtime).
- Limit indemnity to third-party claims you actually cause.
- Negotiate: ask for a narrower scope and clear definitions.
- Limit: add caps, thresholds, and clear notice windows.
- Remove: delete one-sided language where possible.
- Use AI: upload the contract to spot risky wording fast.
Upload your contract and detect liability & damages risks instantly using AI.
BrieflyGo scans contracts and highlights risky wording in plain English — so you can decide what to accept, what to negotiate, and what to avoid.
No legal jargon overload. Fast scan. Clear red flags.
FAQ
Is this type of clause legal?
Often yes — but legality depends on your location, the exact wording, and the context. Even a “legal” clause can still be a bad deal for you.
Can it be changed in the draft?
Yes, many clauses can be removed or narrowed. If the other side won’t remove it, ask for limits, exceptions, or a trade-off (price, term, scope).
Who benefits from it?
Usually the party with more power in the negotiation. The clause often shifts risk away from them and onto you, especially when it’s broad or one-sided.
When does it become dangerous?
When it’s broad, has no clear limits, applies after termination, or is tied to large money. It’s also risky when the contract has vague definitions or hidden cross-references.
Related terms
contract terms · risk clause · legal exposure · liability risk · hidden obligations · negotiation · red flags · damages · liability cap · indemnity · losses · limitation of liability