Construction contracts may appear complex on paper, but the wording contained within is often as important as the project itself. The wording of construction contracts is a well-considered legal exercise that should look at every single possibility that your mind could ever come up with.
Unfortunately, that means that these contracts are not always well-received. The legal language involved in the ‘fine print’ can make them appear bulky, clunky, and hard to read. Lawyers tend to write contracts with such unique turns of phrase that it can sometimes feel like you need a law degree just to finish reading until the end of the document.
Don’t worry. Our team regularly drafts construction contracts, and helps our clients interpret them as well. Here are a few things that are helpful to know before you sign off on your next project.
What goes into a construction contract?
Like most contracts, construction contracts spell out the rights and obligations of the parties involved. These are usually the builder and the owner, and the contract will spell out in specific terms what each party is responsible for in order to complete the project successfully.
A construction contract can contain a number of specifications when it comes to building materials, suppliers, and how the work will be carried out. It will also address what is required of the parties regarding insurance coverage, licensing, or anything else that they will need to carry out work on the premises.
The contract is also in place to establish what happens if there is a dispute about that contract. If an adjudication or arbitration clause is included, it can mean that any dispute about the contract will bypass the courts, and be dealt with specifically through means other than litigation, such as arbitration. This can help protect builders by laying out favourable terms, while also ensuring that disputes are settled quickly, and out of the public eye.
What types of construction contracts are there?
There are various types of construction contracts, largely depending on how pricing is allocated for the project.
In a cost-plus contract, contractors are paid for all of their construction costs, from materials and supplies to mileage and any other costs associated with their work. The ‘plus’ is essentially the contractor mark-up so that their expenses are covered. This can help ensure that contractors are not losing profit because of expenses, but it means that contractors need to keep close track of all costs.
Cost-plus contracts are advantageous for contractors, but they can make the project more expensive for owners. Ultimately these contracts need to be built upon a relationship of trust, and that the contractor will be acting in good faith. The owner needs to trust that the contractor is being honest about costs, and may ultimately dispute costs they believe are improperly reported.
Lump sum contracts see owners paying contractors in a lump sum for construction projects, which provides owners with a clear understanding of their final bill. This may be the right fit for property owners who are budget conscious, but it may put them at risk when it comes to quality.
If a contractor only has a set budget to work with, they may do whatever it takes to come in on or ideally under budget. An experienced contractor will be able to buffer this, and is likely well-equipped to accurately estimate their costs with little error.
Time and materials contracts ensure that contractors are paid both for their materials (usually at a markup) as well as for their labour costs. This helps contractors ensure that they are getting paid for the work that they do, and that they are not losing money on their supplies. These contracts are still premised on an estimate but may be most suitable to projects that have a lot of variables, or where the scope of work may change during construction.
These contracts may be less advantageous for property owners. Contractors are relied upon to create an accurate estimate of costs at the outset. These contracts can include clauses that stipulate some items are not to exceed a certain price, so owners can at least have some sense of assurance of their costs.
Unit price contracts bill for the work as divided into units, such as by the metre, or by an item specifically. Any costs are built into this price, so for example a metre of fencing, or a square metre of pavement will include the material cost, but also the labour cost, room for any variables, as well as room for profit.
These contracts may be different for owners because they are not dealing with the actual cost of an item or a service, but instead the marked-up cost to account for everything involved. Prices for permits, subcontractors, taxes, and anything else are included without a full breakdown of each component. These contracts are easy to expand and contract depending on the scope of work, but ideally should be used on projects that are easy to quantify.
Finally, guaranteed maximum price contracts (or “GMP”) set a maximum price for the work in the contract. The contractor is responsible for estimating the job correctly, and any overages are the responsibility of the contractors, not the property owners themselves. This may be ideal for property owners but can be a sizable challenge for contractors.
To draft these contracts effectively, contractors must consider every single variable that can be included – actual costs, labour costs, subcontractors, permitting, profit, and any variation in cost that may arrive.
These contracts may be favourable for lawyers, but they require a high degree of precision and expertise for contractors to get right. Contractors must have a deep knowledge of their administration costs to estimate properly and know how much they can negotiate without losing any profit. Much like a lawyer offering to work on a fixed fee, these contracts are better suited to professionals with extensive past experience doing similar work.
Final Thoughts
As a property owner who may be shopping for contractors to complete a construction project, it is important to understand your construction contracts and the various options that exist. Some may be more favourable for your bottom line, and others may be more favourable for the contractor, but none will be successful without a solid foundation of trust in the relationship that the work will be done properly, and reasonably on budget.
The dispute resolution clauses in these contracts are also crucially important. If a dispute does arise, and it may, the contract can stipulate exactly how it is handled. Not only will the contract focus on reasons a dispute may arise (unsatisfactory work, over budget, over time, etc.) but it can outline the best option to seeking a speedy resolution.
We have decades of experience supporting construction projects throughout the Cambridge, Kitchener, and Waterloo regions. We routinely assist with drafting and reviewing construction contracts, and our legal team is well-positioned to help avoid disputes before they even start. Contact us today to set up a consultation.