Key Takeaways

  • A contract savings clause (or severability clause) ensures that if one part of a contract is found invalid, the remaining terms still stand.
  • Savings clauses often include reformation language, allowing parties to adjust invalid terms without voiding the agreement.
  • Specialized savings clauses, such as usury savings provisions, limit obligations to comply with laws like interest rate caps.
  • Shared savings clauses in cost-plus contracts incentivize cost reductions by allowing parties to share savings from efficiencies.
  • Government and corporate contracts also use share-in-savings models to align incentives and drive performance while reducing expenses.
  • Including a contract savings clause minimizes legal risks, maintains enforceability, and supports flexible renegotiation.

What is a contract savings clause? Also known as a severability clause, it's a clause that protects the validity and enforceability of the rest of the contract if any clause therein is found to be unenforceable. When a contractual clause is determined to be invalid, the parties may then negotiate substitute terms in place of the invalid ones.

About the Savings Clause

Most contracts contain a savings clause, which upholds the enforceability of the agreement. With the exception of the disputed clause, the rest of the contract remains in effect. However, if a contract doesn't have a savings clause, it's possible for the whole contract to be found invalid.

The savings clause states that contractual terms are independent of each other. Even if a court finds one or more provisions invalid, the rest of the contract stands.

In some cases, a savings clause makes it clear that some provisions are so important to the agreement that, if they're found to be invalid, the whole contract will be voided.

Savings clauses usually have two parts:

  • Savings language: This preserves the rest of the contract if a court finds one part to be invalid.
  • Reformation language: This describes how contractual parties may modify the invalid provisions or delete them altogether.

Usually, the parties can rewrite the problematic provision to fit the original intention of the agreement and to meet court requirements, within reason.

Common Types of Contract Savings Clauses

While a standard contract savings clause deals with severability — ensuring the rest of the agreement survives even if one part is unenforceable — there are several specialized variations tailored to specific legal or commercial needs:

  • Usury Savings Clause: Common in loan or note agreements, this clause ensures that interest rates comply with maximum legal limits. If a contract inadvertently sets an interest rate above the lawful rate, the excess is automatically reduced and credited back to the principal or adjusted to the highest permissible rate.
  • Statutory Compliance Clauses: These provisions ensure the contract remains valid under evolving regulatory environments. If a new law renders a term unenforceable, the clause allows the parties to amend that term without voiding the entire agreement.
  • Essential Terms Exception: Some contracts explicitly note that certain clauses (like confidentiality or non-compete provisions) are integral. If those are invalidated, the entire contract may be void, emphasizing the importance of those terms.
  • Savings Clauses in Employment Agreements: These clauses often address potential conflicts with labor laws, ensuring non-compete or arbitration provisions remain enforceable in jurisdictions with strict employment regulations.

These variations show that contract savings provisions are not one-size-fits-all — they are strategic tools that protect the agreement’s enforceability in different contexts.

An Example of a Shared Savings Clause Helping to Cut Costs

A construction cost-plus contract may contain a shared saving clause to help owners and construction managers save money. Owners invest time and money into projects with the expectation that they'll get a quality structure that doesn't go over budget and is built to specifications. The contractor wants to make the owner happy without overspending.

With the right agreement in place, both sides may cut costs and split the difference.

Construction contracts come in different types, such as design-build, lump sum, and integrated project delivery. Cost-plus gives both sides the chance to share cost savings, with its shared savings clause and a guaranteed maximum price (GMP).

In the bidding process, contractors present proposals to the owner. Most owners factor the total estimated cost in their decision of which contractor wins the bid. This bid establishes the GMP.

Under a cost-plus contract, owners pay actual costs along with a percentage for profit and overhead. Barring any exceptions, the GMP part means the owner pays no more than that, even if the following apply:

  • The contractor makes a miscalculation.
  • The price of materials increases.
  • The cost of the job increases.

A shared savings clause is designed to motivate the contractor to reduce costs. This clause allows the contractor and owner to split the difference when total expenditures are less than the GMP. Renegotiating subcontracts — or the buyout process — is what usually leads to savings.

There's not much wiggle room on the cost elements of a project or material prices. The area that's most open to change is what the subcontractors charge. When they know they have the job, they're sometimes more willing to cut labor markups to come down on their price. In many cases, contractors start with a higher bid because they know they'll probably have to negotiate down.

Construction companies are required to open their books to the owners for audits that determine final costs. This is part of entering into cost-plus contracts. The contract specifies how construction managers and owners split savings. Usually, it's a 50-50 split.

However, if the owner doesn't give up much, the contractor isn't likely to go through a lot of trouble to get a little more savings. As long as the construction manager is savvy at negotiating and the owner is willing to give a little, a cost-plus agreement with a GMP and shared savings clause is often a win for all parties.

Contracts often contain a number of terms, conditions, and provisions. Including a savings clause can prevent the entire agreement from being invalid, which may cause you to start from square one on a new contract. If you're unsure of the best way to draft a contract, consult with an expert in contract law.

Contract Savings in Government and Corporate Agreements

Beyond construction and commercial projects, contract savings principles play a crucial role in large-scale government and corporate contracts, particularly through share-in-savings (SIS) models. These arrangements align incentives between parties to achieve cost reductions and share the resulting financial benefits.

1. Share-in-Savings in Public Procurement Government agencies often use share-in-savings contracts to modernize systems or improve operations without significant upfront spending. In these agreements, a contractor implements a solution that reduces operational costs. The savings generated over time are then shared between the contractor and the government, rewarding performance while protecting public funds.

2. Performance-Based Incentives SIS models are considered a form of performance-based contracting, as they link compensation directly to outcomes. This encourages innovation, risk-sharing, and more efficient project execution. For example, a contractor might overhaul IT infrastructure, leading to reduced maintenance costs; the resulting savings are split according to a pre-agreed formula.

3. Risk Mitigation and Long-Term Value By tying payment to achieved savings, organizations avoid paying for underperforming solutions and instead focus on results. These clauses also enable longer-term partnerships, as contractors are invested in continued efficiency gains.

4. Benefits to Both Parties

  • For clients: Reduced risk, budget predictability, and guaranteed cost savings.
  • For contractors: Incentives to innovate and improve efficiency, plus potential for greater profit if savings exceed expectations.

These savings-focused models demonstrate how a contract savings approach goes beyond severability — it can fundamentally reshape the way agreements allocate risk, reward, and performance responsibility.

Drafting Tips for an Effective Savings Clause

When drafting a contract savings clause, clarity and precision are essential to ensure enforceability and protect both parties. Consider the following best practices:

  • Use clear severability language: Clearly state that invalidation of one clause does not affect the validity of the rest of the agreement.
  • Include reformation provisions: Give parties the option to modify or replace invalid terms to reflect original intent.
  • Specify essential terms: Identify clauses that are so central that their invalidation would void the contract.
  • Tailor clauses to jurisdictional laws: Laws governing severability and enforcement vary by state and country; customize language accordingly.
  • Address specific legal risks: Include provisions for compliance with usury laws, antitrust regulations, or employment statutes where relevant.

With a well-drafted savings clause, parties can safeguard the integrity of their agreement while maintaining flexibility to adapt to legal or practical changes.

Frequently Asked Questions

  1. What is the main purpose of a contract savings clause?
    It ensures that if one provision of a contract is found invalid or unenforceable, the rest of the agreement remains in effect.
  2. Is a contract still valid without a savings clause?
    It may be, but without a savings clause, a court could declare the entire contract void if any part is unenforceable.
  3. How does a share-in-savings clause work?
    It allows parties to split the financial benefits of cost reductions achieved during a project, aligning incentives and rewarding efficiency.
  4. Can savings clauses be customized?
    Yes. They can be tailored to specific legal risks, such as interest rate compliance, employment law issues, or regulatory changes.
  5. Should every contract include a savings clause?
    While not legally required, including one is a best practice to reduce risk and ensure the agreement remains enforceable even if some terms fail.

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