Contracts and Agreements

The purpose of contractual documents, called contracts or agreements, is to provide clear direction on the roles and responsibilities of owners, managers, and contractors. Owners are rarely directly involved in the day-to-day operations on a jobsite, unless the project is relatively small and they have experience in managing trades contractors. On larger or more extensive construction sites, project managers (also known as general contractors) are the link between owners and trades workers. They take on the oversight of a project by managing the trades contractors (known as subcontractors). Subcontractors are responsible for work such as plumbing, electrical, HVAC and carpentry, and are generally overseen by the project manager who reports directly back to the owner. Project managers also exist within subcontractors’ companies, where they may oversee multiple projects for the subcontractor at the administrative level.

The owner is ultimately responsible for all aspects of the work required and for those performing the work. The points listed below are recommendations of the CHBA for owners and project managers of a new home build or major renovation. They are guidelines for establishing and carrying out a written contract between them and other parties.

• The parties to the contract (e.g., owner and the contractor) must be documented, including street addresses, telephone/fax/email information, and business or GST numbers.
• All attachments that form part of the contract, such as:
  • Drawings/blueprints/plans
  • Specifications (description of work and a precise list of materials and products such as types, brands, grades, thickness, colour, model, etc.)
  • Other documents encountered through the course of the contract that must be agreed upon by both parties (e.g., change order forms)
• A description of work to be done by the contractor, as well as work not to be done under the contract, or to be done by others outside the terms of the contract.
• Start and completion dates, which often include a statement indicating that the contractor cannot be responsible for delays due to circumstances beyond their control (e.g., changes to the work, adverse weather conditions, supply chain interruptions, etc.).
• Terms of payment that set out the total amount of the contract and a payment schedule, including deposit upon signing the contract, how and when the remainder will be paid (e.g., at regular intervals or specific milestones), and the treatment of taxes.
• “Holdbacks” are a provincially legislated requirement in construction in BC. It is mandatory that any contract holder on a project hold back 10% of the contract amount owed at each agreed upon payment date. An owner will hold back 10% of the contract price from the general contractor, the general contractor will hold back 10% from each subcontractor and so on down the chain. The holdback exists to protect potential lien claimants, such as subcontractors. Both the ‘lien period’ and ‘holdback period’ start at the same time, normally at completion, termination, or abandonment of a project, called a “triggering event”. If someone is owed money on the project, then they may place a lien on the property within 45 days of that triggering event. If no lien is filed, then the holdback moneys may be released 10 days after that deadline.
• “Changes in work” once the building or renovation project is in progress (also called extras and deletions) must be written up as “change orders”, signed by both parties and attached to the contract. Any change to the contract price and schedule should also be clearly noted on the order.
• “Allowances” refer to a lump sum in the contract price, allocated for items to be selected directly by the homeowners, such as flooring, fixtures, or cabinets.
• “Contingencies” refer to an amount set aside to deal with unexpected work needed or items that the contractor cannot gauge accurately until work is in progress, such as dry rot remediation discovered on a renovation project.
• “Standards of work” describe the contractor’s commitment to performing the work in accordance with the contract documents and in a diligent, efficient and competent manner.  Keeping minimum inconvenience to household occupants, protecting the owner’s property as well as neighbouring properties and to comply with regulatory requirements. It should Include responsibility for daily clean-up and disposal of construction debris.
• The contractor’s liability insurance and workers’ compensation coverage must be up-to-date, and proof of coverage should be provided and attached to the contract.
• Municipal and/or utility permits, inspections and approvals are usually arranged by contractors/subcontractors as part of their service (note: homeowners are ultimately responsible for complying with these regulations). The contract should specify who is going to obtain them.
• The contractor’s warranty describes what is covered and for how long. It should include a statement of the contractor’s intent to hand over manufacturers’ product warranties to the owner upon completion of work.
• Use of facilities and utilities should be outlined, such as a construction water supply, electricity, washroom facilities, and secure storage for materials.
• A statement may be included that permits the contractor to display a promotional sign on the property during the project.
• Dispute resolution in the event of a conflict may be included that names a third-party arbitrator, or states that both parties agree to binding arbitration. This may avoid the involvement of the legal system if conflicts occur.

Types of Contracts and How Prices are Determined

Contractors typically use one of four methods to set the price of a project, and the method used for the project should be clearly laid out in the contract. Each method is suited to a particular type of work. On larger projects, there may be one contract between the owner and the person who is doing the construction (e.g., the contractor), and a second (separate) contract between the owner and the person who is doing the design work (e.g., an architect or designer).

Fixed – Price Contracts

A Fixed – Price Contract (also called a Lump Sum Contract) sets out the total price for the work, including all labour, materials, sub-contractor labour, equipment rentals and other expenses. Taxes are either included in this price or additional to it, and this must be clearly stated. Fixed – Price Contracts are suited to small repair or renovation projects that are straightforward and easy to plan. Any change or adjustment to a fixed-price contract requires a written Change Order signed by both parties.

Cost – Plus Contracts

A Cost-Plus Contract is based on the cost actually paid for labour, subcontracted services, materials, and other direct expenses, plus a fee to cover the contractor’s time managing and coordinating all aspects of the project. The fee can be either a fixed amount or a percentage of the costs. A Cost – Plus Contract is often used in larger renovation projects when the exact extent of the work to be done cannot be accurately determined in advance. The project budget set out in the contract should provide estimated costs for major elements of the work. To ensure that the project costs are kept under control, a maximum budget can also be set out in the contract.

Design – Build Contracts

A Design – Build Contract is a variation on either a Fixed – Price or Cost – Plus contract. The distinguishing feature of a Design – Build Contract is that, instead of the owner signing one contract for design and a separate contract for construction, the whole project is covered in a single document. In other words, one firm designs and builds the project. This approach is most common with custom home construction and large-scale renovations. For example, architects often manage an entire custom home project, designing the home and then hiring contractors to build it. Most often, design-build management fees are a percentage of all costs. Developers who purchase large tracts of land and develop whole neighbourhoods on them commonly do so using Design – Build contracts which specify that they have the exclusive right to the homes’ construction.

Unit Price Contracts

A Unit Price Contract is based on a given rate per unit of measurement. A basic house design may be estimated to be a certain cost per square foot, and the choice of specific finishes or details will be additional to that base price. For example, backfill or decorative stone can be charged by the cubic meter or by area. Some subcontractors will use a base price per fixture when estimating a price for plumbing a house, giving the customer the option of paying extra for higher quality fixtures and trim. Normally, the brand and model of fixtures is specified within the unit price contract, and the customer is then encouraged to visit suppliers’ showrooms to view “higher end” options that would add to the contract price. A Unit Price Contract is a good choice for plumbing contractors, in that the contractor can specify to the customer the supplier they intend to use. The supplier can then offer the potential customer price points that, while offering savings on list prices to the customer, will provide an extra bit of profit or “kick back” to the contractor.

MasterFormat™

MasterFormat™ is a system of numbers and titles for organizing construction information into a standard order or sequence. Produced jointly in 1975 by the Construction Specifications Institute (CSI) and Construction Specifications Canada (CSC), in 2004 MasterFormat™ expanded from 16 Divisions to more than 40 Divisions. Within each division are sections, with each section having a 6-digit number instead of the 5-digit number from the previous version of MasterFormat™. Most large commercial, institutional, and industrial contracts follow this format. Although there are officially 50 divisions, there are some that have no content as they are reserved for future use. The divisions are:

• Division 00 – Procurement and Contracting Requirements
• Division 01 – General Requirements
• Division 02 – Existing Conditions
• Division 03 – Concrete
• Division 04 – Masonry
• Division 05 – Metals
• Division 06 – Wood, Plastics, Composites
• Division 07 – Thermal and Moisture Protection
• Division 08 – Openings
• Division 09 – Finishes
• Division 10 – Specialties
• Division 11 – Equipment
• Division 12 – Furnishings
• Division 13 – Special Construction
• Division 14 – Conveying Equipment
• Division 21 – Fire Suppression
• Division 22 – Plumbing
• Division 23 – Heating, Ventilating, and Air Conditioning (HVAC)
• Division 25 – Integrated Automation
• Division 26 – Electrical
• Division 27 – Communications
• Division 28 – Electronic Safety and Security
• Division 31 – Earthwork
• Division 32 – Exterior Improvements
• Division 33 – Utilities
• Division 34 – Transportation
• Division 35 – Waterway and Marine Construction
• Division 40 – Process Integration
• Division 41 – Material Processing and Handling Equipment
• Division 42 – Process Heating, Cooling, and Drying Equipment
• Division 43 – Process Gas and Liquid Handling, Purification and Storage Equipment
• Division 44 – Pollution and Waste Control Equipment
• Division 45 – Industry-Specific Manufacturing Equipment
• Division 46 – Water and Wastewater Equipment
• Division 48 – Electrical Power Generation

Plumbing, HVAC and fire sprinklers were all found under “Division 15 – Plumbing/Mechanical” in the old format. Within MasterFormat™ 2004 those disciplines each have their own divisions (21, 22 and 23 respectively). While the most recent version of MasterFormat™ must be purchased,  one can view the 2016 version layout of MasterFormat™ in the the following document: MasterFormat ® Numbers & Titles [PDF].

Drawings Associated with Contracts

The first contract awarded on a project is usually between the owner and the architect. The architect is responsible for collecting information pertaining to the owner’s vision of the finished product and creating a set of drawings that match those visions. The drawings will encompass all the visual concepts of the project, including plan, section, and elevation views, and show the placement of all the important components of the project. They are augmented by the specifications created through collaboration between the owner and various other entities such as civil, mechanical, and electrical engineers, to name a few. The first complete set of drawings produced, sometimes called “bid drawings”, is normally for budget and bidding purposes and contains enough information to allow contractors to formulate bids for their work. Once contracts have been let, any subsequent additions or changes to the bid drawings will involve change orders, and the bid drawings become construction drawings.

Permits

Drawings and specifications are submitted by the owner to the Authorities Having Jurisdiction over the project (e.g., city or municipality) for plan checking en route to obtaining a building permit. Once subcontractors have been chosen, they will obtain permits for their contractual work before the work can start. The permits will identify the intervals that require inspection and testing. As an example, a plumbing permit requires inspections at groundwork, rough-in, and finishing stages. A building permit may require initial geotechnical reports for the building site along with inspections of the formwork for the footings/foundations prior to them being poured, as well as, at minimum, inspections at the “lockup” (doors, windows and roofing installed) stage and final occupancy (“finished”) stage. Although most architects and engineers have a high degree of knowledge in their fields, they may often err in their interpretation of important aspects of local bylaws or codes, and the subcontractor is ultimately responsible for making sure that all codes and bylaws are followed. This point is always included on the drawings. Any discrepancies between the plans and codes must be brought to the attention of the administrator (e.g., architect or engineer) responsible for that part of the project and will often result in a Change Order to provide code compliance.

Requests For Information (RFIs) and Change Orders

It is important to note that a subcontractor is expected to follow the plans as closely as possible. To deter from them may put that subcontractor in a position where they are now “non-compliant” with their contract, which could have serious repercussions. As well, if another trade’s work is negatively affected, it will likely incur a “backcharge” to the subcontractor. This is a charge against the subcontractor that represents the extra cost to the other trade resulting from the subcontractor’s unapproved change. When subcontractors intend to use a different product from what was specified, or take a different route, say with piping, they must get approval from the Project Manager by using a standard form known as an RFI (Request for Information) or RFC (Request for Clarification) which are basically the same. The request will include reason(s) for the proposed change and must specify whether there will be any cost savings or extra costs to the subcontractor. The affected parties will look at the request and either deny it, grant it unconditionally or grant it with provisions through a Change Order. An example of such a provision might be where a subcontractor contemplates a change in piping strategy with an estimated cost saving of $1,000. A condition of agreement by the project manager may be that  the owner be entitled to half the savings, in this example $500. The slang term used in industry for these provisions is known as “horse trading”. On large projects there are usually regular site meetings involving a representative from each subtrade and the project manager that deal with such issues. This also involves the constant recording and upgrading to the contracts to keep abreast of such changes.

As-built Drawings

Whenever there is a change in actual installations that deter from what is on the drawings, it must be noted on the original drawing by the subcontractor and submitted to the architect or engineer responsible for that area of work, so that it can be redrawn and included in a set of final drawings called “As-builts”. As-builts represent all the building’s components in their final location. As-builts become an invaluable tool in commercial buildings where services are below ground or hidden behind walls and ceilings. Many pipes have incurred damage during renovations because their true location hasn’t been identified on the drawings. Whenever piping runs are relocated, original drawings are altered by using a product such as Liquid Paper™ to erase the original location. The revised locations are then redrawn by the subcontractor and brought to the attention of the draftsperson by highlighting the area affected.

Shop Drawings

A standard component of the subcontractors’ contractual commitment to the owner is the creation of a set of detailed drawings that show all the components being supplied and installed by the subcontractor that has been awarded the contract. These are known as ”shop drawings”. The original drawings and specifications that were used for the bidding process contain written references to products that the owner wishes to be provided with. The subcontractor will then task the suppliers with producing a picture or visual presentation of each component. For instance, an architectural drawing may show a sink labelled as “S-1”. The original specifications will indicate that it may be a single compartment stainless steel sink, by a certain manufacturer, of certain dimensions, and include a certain style faucet. The shop drawing for S-1 will usually be a page from a manufacturer’s catalog showing the specified sink with its dimensions and finishes and will be accompanied by a page showing a manufacturer’s faucet and pertinent information. Shop drawings are especially important when it comes time to install the fixtures. The convention used on the architectural drawings for an “S-2” sink may look the same as that used for the S-1 and may also involve the same sink but could have a different faucet or simply different handles than the S-1, so the shop drawings are used to differentiate between them and ensure that the right products are installed at their various locations.

Warranties and guarantees

In British Columbia, new homes must be protected from defects in materials and workmanship through the requirements found in the Homeowner Protection Act Regulation. This legal requirement guarantees that owners of new homes have recourse for remediation from some, but not all, unfortunate occurrences once they take possession. In general, there is a minimum 12-month period where any defects in materials or workmanship must be remedied by the affected subcontractor. This legislation is not all-encompassing as there can be many exclusions, such as material, labour, or design supplied by the homeowner. To view the regulations, go to the Homeowner Protection Act Regulation – Section 10.

Insurance

Subcontractors must provide proof of liability insurance before being awarded a contract. Such insurance is known as Commercial General Liability Insurance (CGL) and is essential for skilled trades and construction-related businesses. CGL usually covers damages awarded against subcontractors and helps pay legal defense costs, regardless of the lawsuit’s outcome.

Without commercial liability insurance, a subcontractor would be responsible for paying any liability costs out of their own pocket.

Surety Bonds

When you as a subcontractor accept a job, you are obligated to complete it. A surety bond, or contractor bond, will pay someone else to complete a job if your business does not complete it. If your business has a surety bond, it gives potential customers confidence that you will finish the job and that they will receive financial compensation if you go out of business, or do not finish the job for other reasons. In some cases, a surety bond in the minimum amount of $10,000 is a requirement for the obtainment of a contractor’s license, such as in gasfitting or electrical work. Surety bonds for a specified amount can be purchased from most major business insurance experts.

Now complete Self-Test 1 and check your answers.

Self-Test 1