Construction Law:
Construction contract formats
Does the contract
truly reflect the parties’
mutual understandings?
Canadian Design and Construction Report staff writer
Construction lawyer Debbie Bellinger says the most im-
portant consideration in construction contracts isn’t the
legal wording or contract form – it is whether the contract
truly reflects the mutual understanding between the parties
to the agreement.
“If you feel you are about to get hung out to dry it is
probably not a good contract,” the partner with Nelligan
O’Brien Payne LLP told a Construction Specifications
Canada (CSC) Ottawa chapter gathering, where she ex-
plained the characteristics, advantages, and challenges
with different contract formats. “If you have trust between
the parties, the contract will be that much better.”
“The form of the contract is not the foundation of a good
project. A good project (happens when) the understanding
of the parties is clear, including their scope and obligations,
she said.
Bellinger said there is “always a danger of disconnect”
between the people negotiating the contract “and the peo-
ple on the ground – the project manager and site people”
and she said the ground level insights “are as important in
assessing risks” as those in the lawyer’s office.
She said “the paper contract is nothing more than the
reflection of the intention and understanding of the parties
with respect to a promise.
“The contract is only as good as the whole of the con-
tract documents and the mutual understanding of the par-
ties.” She said well drafted contracts, regardless of form,
goes beyond the key obligations and shifting of risks. The
contract also:
• Sets out processes and procedures;
• Sets out benchmarks for expectations;
• Sets out a means to record changes;
• Sets out a means for resolving and preventing
disputes, including the consultant, locale, choice
of arbitrator, and the costs of arbitration and process;
• Confirms the obligations of the parties; and
• Allocates risks and rewards.
10 – September 2016 — The Canadian Design and Construction Report
Bellinger said there are real challenges with enforcement
terms when things go wrong. “There’s a real break point
determining which disputes are worth fighting and which
aren’t,” she said. There is always merit in “trying to work it
out without lawyers.”
Bellinger says one of the biggest mistakes made is
when shortcuts are taken in drafting contracts by lifting
conditions and content from other projects and applying
them when they aren’t appropriate. The standard form con-
tracts work well, but it is important to fill in the details cor-
rectly and “when you start tweaking one part of the
standard form” you have to consider “what impact it will
have on others.”
“Don’t skip over developments of common understand-
ing when negotiating,” she advised. “Don’t hand off the
drafting of the contract document to someone else.”
The choice of delivery model will depend on a variety of
circumstances including the owner’s experience level, fi-
nancing/lending requirements, the budget and status of de-
sign, the schedule and pressures on schedule, and quality
versus price.
“There is a danger if you push too much risk to the other
party, if you end up in dispute, the other party is going to
push back,” she said.
Bellinger then outlined the different contracting models,
excluding Public/Private Partnerships (P3s) because these
complex undertakings have their own special challenges.
Fixed price
This standard contract format “allocates the majority of
the risk on prices, schedule and performance to the con-
tractor” – the owner’s only exposure and liability relates to
the obligation to pay the fixed costs.
Not surprisingly, the biggest challenges occur when there
are “changes in the scope of work, delays or other factors
that are beyond the contractor’s control” resulting in change
orders. “Detailed specs and plans are essential for avoiding
cost cutting on the part of the contractor and disputes as to
scope of work in the fixed price.” There can also be chal-
lenges if there are changes in the building code between the
bid date and the issuance of the building permit.
Cost plus
In this model, the owner pays the general contractor the
costs of construction plus a predetermined fee. This shifts
risk to the owner – because there is no incentive (other than
repeat business opportunities) for the contractor to mini-
mize costs. While it can be helpful to have the general con-
tractor involved earlier in the process with this model, the
“uncertainty in terms of total cost to the owner” causes fi-
nancing challenges, as well as equity issues as the “owner
takes liability on cost overruns.”
Construction Management
This model makes the most sense when the owner has
solid construction experience. Essentially, the owner as-
sumes the responsibilities (and risks) of the general con-
tractor, contracting with the contractor as a consultant, who
in turn contracts with sub-consultants. “The construction
manager acts as the owner’s agent and is typically com-
pensated for the cost of the work plus a predetermined
fee.” The owner assumes virtually all of the project risks.
Challenges arise when the construction manager must
answer to two masters, the design consultant and the
owner “each of whom may disrupt schedule or budget” –
and the difficulties in managing the schedule and budget
if contract documents are incomplete.
Construction Management at Risk
Here, the owner contracts directly with the consultant
and the construction manager. “The construction manager
then contracts with trade contractors, assuming the obli-
gations of the owner.”
Bellinger says this model incentivizes keeping the proj-
ect on schedule but there is “tension where construction
costs or schedule are impacted by design issues” – there
can be “finger pointing between the owner’s consultants
and the construction manager and trade contractors.”
Ontario’s Construction Lien Act Review
Continued from page 8
“The current legislation requires a fight,” he said. “It
is a multi-year process. You are paying interest on
money that you are borrowing. That’s where adjudica-
tion becomes an interesting option.” It would be better
than just putting a lien on the project, where holdbacks
and payment delays can stretch for years.
Howard Krapat, partner at DLA Piper, also said that
the adjudication process might combine a solution to
the Lien Act’s costly delays and consequences for
prompt payment.
Ackerley said the key may be three concepts,
“woven together in some fashion” including prompt
payment rules, a new adjudication process, and these
two ideas married with the existing lien legislation.
He said there is a fourth issue – how money is han-
dled within a construction project, specifically the trust
account concept.
The CLA’s trust provisions “is sort of a second pro-
tective remedy, which comes up frequently in insol-
vency proceedings,” Krapat said. But this has another
layer, because of conflicts at times with the federal
Bankruptcy and Insolvency Act – which receives priority
in considering the rules.
OVER $1,000,000,000
Design-Bid Build
Bellinger says “this model has gone by the wayside” be-
cause of the accountability issues and conflicts that can
arise. The owner contracts with the designer and hires the
builder at the early stage – and the builder is expected to
“come in on a fixed price before design is final.”
“This can work if the owner is prepared to give basic re-
quirements and stand back” but can be problematic be-
cause the architect and builder aren’t working together, and
“the constructibility of the design becomes an issue.”
Design/Build (Integrated Project Model)
In this model, the contractor and/or design/contracting
team set out to achieve the owner’s objectives with the
ability of the contractor and designer to modify the project
to meet the objectives.
“Giving a fixed price, it’s the pricing of the building
based on a basic statement of requirements of the owner.”
The challenge is that the owner should not get too far into
the details.”
The cohesive team approach from the beginning elimi-
nates many conflicts and delays, she said. “There’s in-
creased potential for a relatively certain fixed price since all
parties are working together to conform to the owner’s re-
quirements.” 600 - 1000 Centre St. N
Calgary, AB
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rogersinsurance.ca The Canadian Design and Construction Report — September 2016 – 11