Canadian Design and Construction Report staff writer
Construction lawyer Debbie Bellinger says the most important 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 explained 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 people 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 contract documents and the mutual understanding of the parties.”
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.
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 contracts work well, but it is important to fill in the details correctly 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 understanding 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, financing/ lending requirements, the budget and status of design, 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.
This standard contract format “allocates the majority of the risk on prices, schedule and performance to the contractor” – 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 challenges if there are changes in the building code between the bid date and the issuance of the building permit.
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 minimize costs. While it can be helpful to have the general contractor involved earlier in the process with this model, the “uncertainty in terms of total cost to the owner” causes financing challenges, as well as equity issues as the “owner takes liability on cost overruns.”
This model makes the most sense when the owner has solid construction experience. Essentially, the owner assumes the responsibilities (and risks) of the general contractor, 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 compensated 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 obligations of the owner.” Bellinger says this model incentivizes keeping the project 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.”
Bellinger says “this model has gone by the wayside” because 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 requirements and stand back” but can be problematic because the architect and builder aren’t working together, and “the constructibility of the design becomes an issue.”
(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 eliminates many conflicts and delays, she said. “There’s increased potential for a relatively certain fixed price since all parties are working together to conform to the owner’s requirements.”