From straightforward home renovations or big infrastructure projects, owners and contractors need a construction contract. The contract sets out the legal relationship and risk allocation between the two parties and requires careful drafting. As with most commercial contracts, what might seem like unnecessary hair-splitting can later turn out to be indispensable when disputes arise. Taking the time to get the terms right is a sound investment.
The Price Is Right
The total price of the project should be included in the construction contract. It is important to note that under the Consumer Protection Act, contractors are not permitted to exceed their offered cost estimate without the owner’s consent.
Contracts should avoid ambiguity about the type of pricing involved – i.e., whether it is a “fixed-price” or “cost-plus” contract. As the name suggests, fixed-price contracts are “all-in” prices that outline a scope of work to be performed. These types of contracts are generally preferred by owners as they provide greater cost certainty. Cost-plus contracts, by contrast, entitle the contractors to a specific sum or percentage over and above any agreed-upon costs.
Where there is ambiguity as to whether a contract is fixed-price or cost-plus, significant disputes can arise, especially if budgets get overrun.
The Impact of Delays
It’s not uncommon for a project to run behind schedule. As a result, the contract should set out the ramifications for any delays, including the calculation of damages. It should also address whether or not the damages are capped and who is responsible for paying for out-of-pocket expenses.
One common form of compensation available to owners as a result of project delays is what is known as liquidated damages, which eventually function as a deductible on the contractor’s profit margin. Unsurprisingly, these damages are generally disliked by contractors, but in some instances, they may limit liability where damages would be greater as a result of a breach of contract.
What Are the Warranties?
Construction contracts usually contain warranty clauses that require the contractor to fix work defects. Warranties are sometimes unclear – for example, they may specify that there is a one-year warranty on parts of the project but fail to specify when that one-year limitation period begins to run. Does the clock start ticking from the date the contract comes into effect, the date the project is completed, or the date on which the defect is noticed? These ambiguities can be avoided by a clear, detailed warranty set out in the construction contract.
The construction contract should also address how disputes are to be resolved, whether through alternative dispute resolution processes or litigation.
Big Down Payments
Owners often make substantial down payments at the request of contractors. This is risky for the owner for at least two reasons:
- Credit risk, as money is being transferred in advance of any work being done; and
- Foregoing the ability to deduct money in the form of set-off if the contractor does run afoul of the contract.
The obvious way for owners to reduce this risk is to try to minimize down payments. In some cases, absorbing the cost of working capital from contractors in exchange for a reduced down payment may be a wise trade-off, considering the reduced credit risk.
Where down payments are particularly large, or owners are concerned about taking on excessive risk, they may want to consider requesting a letter of credit or other formal, written mechanism as security. Owners may also consider including terms in the contract that require the contractors to apply down payment funds to specific things at certain project intervals.
Standard Form Contracts: You Can’t Contract Out of the Law
Standard form contracts are appealing from a cost standpoint but can vary significantly by province or country. In 2019, new rules came into effect under Ontario’s Construction Act that set out several requirements for construction contracts. As a result, using a standard form contract from outside of Ontario may inadvertently render some of the provisions unenforceable in Ontario.
For example, some American jurisdictions permit lien waivers, while in Canada, these are generally unenforceable. Lien legislation can have a substantial impact on all parties as third parties (including suppliers and subcontractors) will not be bound by any attempts to waive its applicability, and Ontario courts have been unwilling to enforce contractual provisions that run contrary to it.
This can give rise to problematic scenarios, such as an agreement by the contractor to waive lien rights in exchange for the owner agreeing to no holdback. If the project goes poorly and the contractor believes they are owed additional payment, notwithstanding the agreed-upon waiver, there will be little that an owner can do to prevent the contractor from registering a lien.
To avoid these pitfalls, use caution with standard form contracts, and if you do, ensure that it is valid under Ontario law so that it does not run afoul of or risk having terms rendered unenforceable by the applicable legislation.
Contact the Construction Lawyers at Tierney Stauffer LLP in Ottawa for Dependable Advice on Construction Contracts
Using a qualified construction lawyer to draft or review your construction contract can help provide peace of mind for all parties. The team at Tierney Stauffer LLP provides practical and effective advice on construction contracts, as well as all other aspects of construction projects. We represent clients at all levels of the construction pyramid in transactional matters and in dispute resolution or litigation. Call us at 1-888-799-8057 or reach out online to set up a consultation with an experienced construction lawyer.