Maintenance and Repairs

July 13, 2023 Published by Golden Horseshoe Chapter - By Jeremy Nixon

Construction Contracts from an Engineer’s Perspective

From the Volume 16, Summer 2023 issue of the CCI GHC Condo News Magazine

This is not legal advice!

OK, now that the obligatory disclaimer is out of the way, we can dig into some of the common questions, considerations, and practical applications of construction contracts from an Engineer’s perspective. Specifically for this document, when talking about contracts, this means a CCDC (Canadian Construction Documents Committee) format. Typically CCDC 2 for “Stipulated Price” contracts and CCDC 4 for “Unit Price” contracts. An entire article could be written discussing the functionality of each of these contract types, which is not the current objective. Let’s just say that to get the best use of a CCDC 2 contract, one must have a pretty firm grasp of the project parameters and a well-defined scope of work with a low probability of variability in the work. In our firm’s experience, few Condominium projects meet those criteria. For that reason, we mostly see CCDC 4 contracts used.

I’ve seen hundreds, if not thousands of construction contracts in my career. Our firm routinely prepares them on behalf of our Clients at the outset of most construction projects. They are mostly routine, although are very deserving of attention at the outset as they are essentially establishing the “rule of law” to be enforced on a project. Except for certain statutory requirements that cannot be waived (again, I am not a lawyer!), contracts set the rules to be abided by, and by which a court or other authorized legal body would base their judgements. 

Side note (still not a lawyer!) - If you get into the courts, things have really gone awry. In my experience, there are few reasons for things to ever be taken this far. The best alternative is to try to find a compromise, which is what the courts will try to make you do anyways. Once the lawyers get involved, everyone gets their backs up and a bit more entrenched in their positions. Communications tend to become very guarded and less about finding a palatable outcome for everyone, and more often about trying to be the one who is right. Everyone ends up angry with one another and no one wins (except the lawyers!) Just try to avoid. Find compromise if you can.

The best time for lawyers to get involved, which we’re seeing more of in recent years, is BEFORE tendering. In that way, they can bring forth any supplementary conditions that are worth considering before Contractors even get a sniff of the work. We are sometimes finding that these types of legal reviews are happening after tendering but before the signing of a contract, often even after notification of award to a Contractor. This is extremely awkward timing as the Contractor has bid on a set of documents and conditions that have now changed, for which they may have otherwise considered their bid differently regardless of how substantially. While most often a contract is eventually signed, they are not always as the Contractor is not obligated to accept any post-tender conditions. Even when ultimately signed it can break down some goodwill (from the Contractor’s perspective anyways) setting the project off on the wrong foot before it has even started. The Owner/Client can of course do whatever they’d like, however we encourage them to obtain any legal input at the development stage before bidding occurs to maximize clarity and goodwill. After all, everyone must work together for the duration of the project. Better not to get off on the wrong foot.

Once a contract is finally ready to be prepared, you select the applicable CCDC 2 or 4, reference any prepared tender documents and/or quotations to be enforced, supplementary conditions, along with referencing any other relevant documents, communications, etc. that provide insight into negotiations, etc.

The contracting parties get listed in the appropriate areas – i.e. Owner and Contractor. If there is a Consultant (e.g. engineer or another technical professional who likely prepared the tender documents) involved, they get listed in the appropriate area. The Consultant, who is otherwise not a direct party to the construction contract, is charged with fairly and objectively administering it in the manner defined within, without preference to either party. (There is a separate CCDC 31 contract for Owners that want a formal contract with their Consultants that generally follows a similar format as CCDC 2 & 4s.) Consultant responsibilities include general review of the work, review of contractor payment applications, advising on and administering proposed changes in the work that come about from examination of previously concealed conditions or otherwise, as well as being the first intermediary in relation to disputes.

The Consultant is paid by the Owner, which sometimes comes with the perception that they are the Owner’s agent or representative, and will “do and rule” as the Owner wants, which is not how the CCDC requires the role. There is a bit of a line to toe of course, as the Consultant and Owner have presumably worked together in developing the scope of work leading to the construction contract with the Contractor, so there is perhaps a bit of a natural expectation of favouritism. Practically, I’ve found that the best approach is communicating well with an Owner (and their Property Manager, if there is one) on what is known and unknown. Discussing pros and cons of what might be gained by spending more time and/or money trying to get a better handle on those unknowns at the development stage. Then going into the construction work practically and with an open mind. While certainly bringing as much clarity as possible at the development stage is ideal, there is often a practical limit to attempting to obtain additional information versus going into the work knowing that there will be some unknowns to deal with. Often a Consultant can develop mechanisms that deal with obtaining some of the missing information at the construction stage.

Regardless, there is always new information that comes about during the work. A contingency (often 10-15%) should be built into the contract to deal with these types of unknowns and/or additions to the work, which the Contractor can only make reasonable claims to based on additional authorized work completed. Any unused amounts remain with the Owner. As the unknowns come to light during construction, it is important that everyone remember that at the most basic level, everyone is after the same thing – A job well done!

Despite best intentions and good faith by all parties, there will at times invariably be differences of opinion or perspective. In such instances, again, fall back on effectively communicating the issues, evaluating their standing amongst previously known or expected conditions, then making fair decisions on the merits. It is no less fair that an Owner be asked to pay for a Contractor claim based on something that was clearly known or outlined in the tender documents than a Contractor be asked to absorb costs for something that was not. Find compromise.

Another contract consideration is bonding, which is akin to insurance-like protection against a Contractor’s ability to complete and warranty the work. Without getting into the various types of bonds for construction, related requirements should form part of the bid documents, and in this author’s opinion should never be sacrificed in an attempt to save a few bucks. Hopefully none of us ever experiences the loss of our home such as by fire; but if we do, we’ll be very glad to have home insurance. While bonding isn’t exactly like home insurance, it is a close enough analogy for this discussion, which is to say that if you ever need to call it in, you’ll be glad you have it. I’ve seen both sides of bonding being in place or omitted in circumstances that have warranted it. Let me tell you that it is a powerful tool when needed and available, conversely an excruciating experience if needed but omitted. In short, get bonding!

A further discussion that comes up periodically is penalty clauses. Typically this comes in the form of a Client asking about or for the inclusion of penalties in contracts in relation to the failure of Contractors to complete the work “on time” and/or budget. While on the surface the sentiment behind them is rational. That is, attempting to bring some sort of certainty in terms of cost and schedule to an otherwise uncertain context. In actuality, penalties are a tricky one as they are usually wrought with exceptions that can become a significant administrative task on their own. Not to mention potentially incentivizing ‘cutting corners’ by the Contractor to meet timelines. All of which detracts from the objective of just getting a project done, and done well.

For instance, concealed conditions, which are the nature of almost every Condominium project, would always be considered outside of such clauses. Is it better then to haggle over the penalties to be assigned to these unknowns, not to mention the delays that they sometimes cause to the known work, or rather focus that time and effort on resolving the technical nature of these encountered conditions? The other aspect of penalties that is often overlooked is the “bonus” side should a Contractor exceed expectations. These types of clauses are more common on the type of ‘mega’ projects, not normally associated with Condominium capital expenditures. The handful of times that we’ve administered contracts with penalty clauses have really left much to be desired, not to mention they probably cost the Client more. Contractors inflated costs accordingly to hedge their bet and the additional administration time spent by us increased our Engineering fees, all of which is the opposite of the intended effect.

We offer one final thought for this piece on Holdbacks. For this topic, we’re going to talk about two types – Statutory Holdback and anything else that isn’t a Statutory Holdback. There remains much confusion about what these are and aren’t, what they are for, who is obligated to do what and when. Even Contractors remain confused, which I find confusing as they’re usually pretty on top of the money!

Statutory Holdback (i.e. that 10% deduction off of each Contractor progress draw) is for the preservation of liens and no other purpose. Anyone who provides products and/or services has lien rights, right down to the guy who supplied a single 2x4 to a subcontractor. Lien claims that are ultimately validated would potentially be paid from Statutory Holdback funds. (Once more, I’m not a lawyer. Obtain proper legal advice on deeper aspects of this intricate bit of the Construction Act including all of the correct terminology.)

Here’s what I know: there are very clear timelines on when Statutory Holdbacks are to be released. There is common confusion among Clients and Contractors alike that Statutory Holdbacks can be used to enforce deficiency resolution. They cannot. Well, not lawfully anyways. It is still sometimes used for that purpose, improperly I might add, potentially exposing Clients to risks that they have not considered. While we still often see Client intended outcomes, and “validation” that withholding Statutory Holdback was the right thing, aside from being unlawful in the strictest sense, it more often than not finishes projects off on a sour note that were otherwise well executed. Quite simply, when Substantial Performance (not necessarily Total Performance) has been achieved, related waiting timeframes met, required documents submitted by the Contractor in relation to the release of Statutory Holdback, and payment certificate prepared by the Consultant, funds must be released regardless of whether outstanding deficiencies remain.

In relation to withholding funds for outstanding deficiencies, sometimes thought of as a Performance Holdback (or better yet, don’t call it “holdback” at all so as to not confuse it with Statutory Holdback); separate, additional funds should be withheld from final progress payments for that purpose. There should usually still be some money available, which would be somewhere between the value required to achieve Substantial Performance and that required for Total Performance (i.e. 100% project completion). If the value of the outstanding work is more than this difference, then Substantial Performance has not been achieved and should not be (or have been) declared.

While there are certainly many more aspects of construction contracts that could be discussed, including much further nuance on the topics within, these are some of the more common ones in this author’s experience. Again, this piece has attempted to look at things from a practical and compromising perspective rather than an absolute right or wrong one. In my experience, being “right” is not always what it is cut out to be, often leaving you dissatisfied with some aspect of the outcome.

For a deeper discussion on the practical aspects and application of contracts talk to your Consultant. For the strict legal side, of course your solicitors should be sought out. A well-informed Property Manager will also have an excellent perspective and be a bridge between these worlds and others.

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Jeremy Nixon is the Vice President at Brown & Beattie Ltd., a building science engineering firm dedicated to providing clear and sensible building improvement, maintenance, and repair planning advice by listening to clients’ objectives. Mr. Nixon is licensed with Professional Engineers Ontario (PEO) and holds a Building Science Specialist (BSS) designation.