CON-2033 Construction Contracts and Laws Systems

CON-2033
Construction
Contracts and
Laws Systems
CON 2033
Overview
 The method of payment often defines the form of contract

e.g. lump sum, cost plus
 Other contracts are defined by the roles the parties will perform
e.g. design-build
 Some contracts confer rights (e.g. licensing agreements); others
provide for the provision of services (e.g. professional service
agreements)
 In all contracts, the roles and duties of the parties must be
clearly defined
Copyright © 2016 Brian M. Samuels and Doug R. Sanders, Practical Law of Architecture, Engineering, and Geoscience
Standard Form Contracts
 Created by industry groups for use by their members, and

generally favour the interests of their members over the parties
their members will contract with
 Most standard form contracts require modification to suit the
particular context
 Standard form contracts are often used without modification to
save costs, but this can lead to far greater costs if litigation
results
Standard Form Contracts
Fixes Price or
Stipulated
Sum
Public-Private
Cost-Plus
partnership
Contract
Payments
Alliance Unit Price
Copyright@ 2017 Cengage Learning
Fixed Price Contracts
 Goods and services are provided for a lump sum, including

overhead and profit
 Generally, the contractor has discretion over the methods of
construction
 The owner has no right to know the actual cost of the
construction
 Almost inevitably, changes to the scope of work or unforeseen
conditions lead to extras
Fixed Price Contracts
 To ensure client satisfaction, consultants should warn owners

to expect extras on fixed price contracts
 Contractors are typically made to bear the risk of unknown
conditions, but this is often economically inefficient
 Most common fixed price construction contract in Canada =
CCDC2
Cost Plus Contracts
 The contractor is paid the actual cost of construction, plus an

additional amount for profit, which may be a fixed amount or a
percentage fee
 Gives the contractor the opportunity to use transfer pricing to
transfer costs to the owner
 A drawback of cost plus contracts is that they give little incentive
to the contractor to work efficiently and to implement innovative
cost savings techniques
Cost Plus Contracts
 Target Price Contract: incentive formula is used and the owner

and the contractor share any saving or overrun relative to the
target price
 Guaranteed Maximum Price Contract: contractor is
responsible for all overruns above a specified price
 Cost plus contracts are useful when the scope of work is not
clearly defined at the time the construction begins
 Disputes often arise regarding work that needs to be redone
Unit Price Contracts
 The owner pays a stipulated amount for each unit or quantity

of work performed
 Common for repetitive work e.g. road building, earthmoving,
pipelines
 Useful when the number of units is uncertain at the start of
construction
 A variation formula can be used to vary the unit rate if the
required number of units changes significantly
Construction Management Contracts
 Instead of hiring a main contractor, the owner contracts with the

trades directly, and hires a construction manger to manage the
trades
 The construction manager may be "at risk" and at least partly
liable for increased costs and time
 Under another model, the main contractor works on a cost plus
basis and manages the other trades as the owner's construction
manager
 CCDC A5 is a commonly used standard form construction
manager agreement
Design-Build Contracts
 The design, construction and inspection of the project are

contracted to a single party
 Owner may hire an independent consultant to monitor quality
 CCDC 14 is a commonly used design-build standard form
contract
 Standard form contracts may be modified to give the owner some
control over design changes
Alliance Agreements
 Aim to diffuse the adversarial relationship between owners and

contractors
 The parties agree that there will be no liability for poor
performance or defective work
 The parties share in the economic success or failure of the
project
 The contractor is paid on cost plus basis with a painshare /
gainshare formula
 Requires clear definition of roles & responsibilities, and trust
and cooperation between the parties
Alliance Agreements- Critical Elements
A “no blame” clause (perhaps with

some limited exceptions), which
operates between all of the parties,
Critical including the owner
Elements  A clearly defined gainshare/painshare
A clear understanding of the roles of
the participants
Public-Private Partnerships
 Used for public projects that the government wants assistance in

funding
 Sharing of risk, responsibility and reward between the public
and private sectors
 Often, a private sector party (the concessionaire) provides
financing in exchange for the exclusive right to construct and
operate the project and receive its revenues for a set period
Professional Service Agreements: Introduction
 Should define the scope of work and expected outcomes

 May be fixed price, cost plus, or a percentage of the actual
construction costs
 Often have limitation of liability clauses that protect the
consultant from claims in excess of the available insurance
coverage
 May give the owner alternative remedies in the event the claim
is not covered by insurance
 Field review clauses are often contentious: the scope and
purpose of the review should be clearly set out
Engineering Service Agreements
 Commonly used standard form contract: ACEC 31

 The parties should address the following issues in detail when
using ACEC 31:
 Site inspections
 Copyright
 Limitation of liability
 Termination
Architectural Services Agreement
 Commonly used standard form contracts: RAIC Document 6 and

RAIC Document 7
 The parties should specifically address the same issues as listed
on the previous slide for ACEC 31
 In particular, the parties should address the right of the owner to
terminate the contract and the termination compensation to be
paid to the architect
Licensing Agreements
 A license is a grant of rights

 Exclusive license: licensee obtains the exclusive right to use the
rights granted by the licensor
 The "grant provision" is the most important in a license
agreement; it defines the scope of the license
 Commonly used in intellectual property and real property
 The license fee may be based on profits made by the licensee
Contracts: Standard Clauses
Scope of the
work
Dispute Contract
Resolution Time
Exclusion,
limitation, or
Waiver
Clauses Standard Changes
Clauses
Indemnificatio Damages and
n Bonuses
Termination Warranty
Standard Clauses: Scope of Work
 The scope of services and materials to be provided should be

clearly and unambiguously defined
 The scope of work is often defined by the drawings and
specifications
 The level of detail will depend on the form of contract e.g.
detailed for fixed price contract, broadly stated performance
criteria for a design-build project
Standard Clauses: Contract Time
 Time is of the essence >>> deadlines will be strictly enforced

 Clauses stating that time is of the essence generally apply to both
parties
 Schedules are an essential tool for delivering projects on time
 All tasks, large and small, should be given thorough
consideration when developing a schedule
Standard Clauses: Changes
 Changes inevitably occur; the contract must define how changes

will be approved and implemented
 Change procedures specified in the contract should be strictly
adhered to, else collateral contracts may be created by estoppel
 Changes cause conflict when the parties disagree on the impact
the change will have on the construction schedule
Standard Clauses: Damages and Bonuses
 Damages clauses will be either:

 penalty clauses, for late performance, (unenforceable), or
 liquidated damages clauses, an accurate pre-estimate of
the damages suffered as a result of the late performance,
(enforceable)
 Liquidated damages = accurate pre-estimate of the damages

suffered as a result of the breach
 If a liquidated damages clause is included in a contract, both

parties should perform and keep a calculation showing the
rationale for the calculated amount.
 There is an urban myth that every clause that gives damages to

one party for late performance must be accompanied by a clause
that provides a bonus for early performance.
 However, no such principle exists in Canadian law. Contracts
may provide bonuses for performance that exceed the expected
level, usually early performance, but there is no requirement to
do so even where there is a liquidated damages clause.
 A bonus clause for performance in excess of minimum

requirements may be combined with a liquidated damages
clause
Standard Clauses: Warranty
 Warranty = contractual promise to repair defects, within a

specified timeframe, in goods and services supplied
 Typically limited in time, location of service, scope of service
 Warranties may be implied by sales of goods legislation e.g. that
the goods are fit for purpose
 Express contractual terms may negate statutory warranties
Standard Clauses: Warranty
 Warranties protect buyers and sellers:

 The buyer is protected against defects arising during the warranty
period
 The seller is protected against liability after the warranty period has
expired
 A warranty is only as good as the financial strength of the party
providing it
 Buyers should ensure that warranties provided to sellers by
suppliers are transferable, and that they are transferred
Standard Clauses : Scope of work,
Contract time
Scope of Work Contract Time

The scope of services Time : deadlines will
and materials be strictly enforced
The scope of work: Generally apply to

 drawings and specifications both parties
The level of detail Rule of Scheduling

 form of contract  For all tasks, large and small,
Standard Clauses : Changes, Damages
and Bonuses
Damages and
Changes
Bonuses
Damages clauses will be either:
Changes approval and implementation  penalty clauses (unenforceable), or
 liquidated damages clauses (enforceable)
Liquidated damages = accurate pre-

Change procedures specified in the contract estimate of the damages suffered as a result
of the breach
Changes cause conflict when the parties A bonus clause for performance in excess
disagree on the impact the change will have on of minimum requirements may be combined
the construction schedule with a liquidated damages clause
Standard Clauses : Warranty &
Indemnification
Warranty Indemnification
Warranty = contractual promise to

repair defects, within a specified Indemnification clauses protect the
timeframe, in goods and services parties from each other's negligence
supplied
Typically limited in time, location

Indemnities can be used to shift risk
of service, scope of service
An indemnity is only as good as the

Warranties may be implied by sales
financial strength of the party that
of goods legislation
provides it
Express contractual terms may

negate statutory warranties
Standard Clauses: Termination
 Contracts should specify the circumstances under which the

contract can be terminated
 Typically, notice is required to give the breaching party an
opportunity to rectify the breach before termination
 A fundamental breach gives the right to terminate without
notice
 The contract may provide for termination without cause so long
as reasonable notice is provided
Standard Clauses: Exclusion & Limitation Clauses
 Exclusion clauses purport to completely exclude the damages or

remedies available to the innocent party to the contract
 Courts construe exclusion clauses against the party that drafted
them, so they must be clear and identify the liabilities excluded
 Exclusion clauses are also called exemption, exculpatory,
exception, escape and protective clauses
 Limitation clauses are similar to exclusion clauses, but merely

limit liability instead of entirely excluding it
 If a clause is clear, it should be given full force; it should only be
interpreted against the drafter when there is ambiguity
 When deciding whether to give effect to a clause, the court will
consider all the circumstances between the parties
 Exclusion and limitation clauses can be used to allocate almost

any type of risk
 Consequential damages clause: exclusion or limitation clause
that restricts the ability to claim for lost profit or other damages
indirectly related to the claim being made >>> allow parties to
provide products at reasonable prices even if failure of the
product may lead to a large loss
Standard Clauses: Dispute Resolution
 Disputes often occur so, at the outset, the parties should agree to
a process for resolving them
 Typically the first step of the dispute resolution process is to
provide notice of the claim
 gives the innocent party an opportunity to remedy the breach
Standard Clauses: Dispute Resolution
 After notice, negotiation follows, and then, if necessary, a

refereed process
 Careful thought should be given to mandatory arbitration
clauses: they can lead to litigation in multiple forums
Project Finance
 Traditionally, owners provided full financing

 If a third party (lender) is to finance the project, it may require
feasibility studies and a reporting scheme
 Lenders will require that all contracts on the project are
"bankable" i.e. acceptable to the lender
 The lender must be satisfied that the project will succeed such
that their loan is serviced from the revenues;
 this requires a optimal distribution of risk
Project Finance
 A bankable contract is one with terms acceptable to the lender

financing one of the project participants.
 Bankability is an issue when the borrower does not have
sufficient assets or assured cash flow to secure a loan from the
lender.
 If the borrower had sufficient assets or cash flow, the lender
would simply take security on that property or cash flow.
Project Finance
 Bankability is achieved when the lender is satisfied that the

project will be successful such that the borrower will profit from
the project and be able to repay the loan plus interest.
 The lender must be satisfied that the contractual allocation of
risk between the project parties is such that, even if difficulties
are encountered, the debt will be protected so far as reasonably
possible.
Project Finance
 For public–private partnership (P3) projects, the principal

asset of a P3 project is the public authority’s (generally the
government’s) promise to make payments over time.
 This type of long-term payment obligation is called a concession.

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CON-2033

 The method of payment often defines the form of contract

 Created by industry groups for use by their members, and

Alliance Unit Price

 Goods and services are provided for a lump sum, including

 To ensure client satisfaction, consultants should warn owners

 The contractor is paid the actual cost of construction, plus an

 Target Price Contract: incentive formula is used and the owner

 The owner pays a stipulated amount for each unit or quantity

 Instead of hiring a main contractor, the owner contracts with the

 The design, construction and inspection of the project are

 Aim to diffuse the adversarial relationship between owners and

A “no blame” clause (perhaps with

 Used for public projects that the government wants assistance in

 Should define the scope of work and expected outcomes

 Commonly used standard form contract: ACEC 31

 Commonly used standard form contracts: RAIC Document 6 and

 A license is a grant of rights

 The scope of services and materials to be provided should be

 Time is of the essence >>> deadlines will be strictly enforced

 Changes inevitably occur; the contract must define how changes

 Damages clauses will be either:

 Liquidated damages = accurate pre-estimate of the damages

 If a liquidated damages clause is included in a contract, both

 There is an urban myth that every clause that gives damages to

 A bonus clause for performance in excess of minimum

 Warranty = contractual promise to repair defects, within a

 Warranties protect buyers and sellers:

Scope of Work Contract Time

The scope of work: Generally apply to

The level of detail Rule of Scheduling

Liquidated damages = accurate pre-

Warranty = contractual promise to

Typically limited in time, location

An indemnity is only as good as the

Express contractual terms may

 Contracts should specify the circumstances under which the

 Exclusion clauses purport to completely exclude the damages or

 Limitation clauses are similar to exclusion clauses, but merely

 Exclusion and limitation clauses can be used to allocate almost

 gives the innocent party an opportunity to remedy the breach

 After notice, negotiation follows, and then, if necessary, a

 Traditionally, owners provided full financing

 A bankable contract is one with terms acceptable to the lender

 Bankability is achieved when the lender is satisfied that the

 For public–private partnership (P3) projects, the principal

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