As a Quantity Surveyor and Construction Project Manager, I have been called to numerous construction projects, particularly small single-family home builds, where the owner-contractor relationship has often become rocky and, at times, has ended up in court. In many cases, I’ve found that the root cause is the absence of a well-drafted agreement. Too often, self-drafted contracts—typically created by the contractor for the owner’s signature without input from a qualified industry expert—lead to confusion, disputes, and legal issues. Choosing standardized construction contracts in Canada can significantly reduce these risks.
Construction contracts in Canada, such as those prepared by the Canadian Construction Documents Committee (CCDC), can enhance the successful delivery of projects. They may minimize the risks associated with the project and address this issue. CCDC develops, produces, and reviews standard construction contracts, forms, and guides that are fair, balanced, and recognized by the industry.
In this article, I will briefly discuss the most common and standardized types of construction contracts in canada, highlighting their advantages and disadvantages to help the construction project owner avoid or minimize challenges later in the project.
In the residential industry, there are typically five main types of construction contracts in Canada:
- Stipulated Price Contracts
- Cost-Plus contract
- Time and Material Contract
- Construction Management Contract
- Design-Build Contract
1. Stipulated Price Contract
A Stipulated Price Contract, also known as a lump sum contract or Fixed-Price Contract, is a type of contract in which the contractor agrees to complete the project for a specified amount. In the Canadian Construction Documents Committee’s arsenal of standard contracts, the Stipulated Price Contract is referred to as CCDC 2.
This type of contract is suitable for projects with a well-defined scope before the contractor provides its price, which should be fixed. When the project scope is not clearly defined and is subject to change as the Owner keeps expanding it (scope creep), even a fixed-price contract will lead to increased costs, delays, and potential disputes.
Advantages:
- Fixed price provides cost certainty for the owner
- Reduced risk for the owner, as the contractor bears the risk of cost overruns
- Encourages contractors to be efficient and complete the project quickly
Disadvantages:
- Potential for disputes over scope changes, which can lead to cost overruns and delays
- Limited flexibility for changes or modifications
- The contractor may be inclined to cut corners to maintain profit margins
2. Cost-Plus Contracts
A cost-plus contract, also called a cost-reimbursement contract, is a type of contract in which the owner reimburses the contractor for all costs incurred, plus a profit fee. In the CCDC’s arsenal of standard contracts, the Cost-Plus Contract is referred to as CCDC 3.
This type of contract can benefit projects with uncertain requirements or complex technical challenges. The Owner is responsible for establishing a process to approve and control costs, carefully reviewing and verifying invoices to ensure accuracy and compliance with the contract, and questioning any unclear or unjustified costs.
Advantages:
- Flexibility for changes or modifications
- Incentivizes contractor efficiency, as they are reimbursed for actual costs
- Owner has more control over project decisions
Disadvantages:
- Require a High level of the Owner’s involvement
- Uncertainty over the final cost, as costs can escalate quickly
- Potential for abuse, as the contractor may inflate costs and/or fees
- The owner assumes the risk of cost overruns.
3. Time and Materials (T&M) Contracts
A T&M contract is one in which the owner pays the contractor for actual time (at an agreed-upon fixed rate) and materials. This type of contract is suitable for small projects or projects with an uncertain scope, such as ongoing renovations. Like the Cost-Plus Contract, CCDC 3 is also the best standardized type of contract.
This type of contract is suitable for relatively small projects, such as home renovations without a finalized scope and specification requirements. T&M contracts offer flexibility for both the owner and the contractor, as changes can be made relatively easily without renegotiating the entire price as the project progresses.
Advantages:
- Flexibility for changes or modifications
- Reduced administrative burden, as costs are tracked and invoiced regularly
- Owner has more control over project decisions
Disadvantages:
- Uncertainty over the final cost, as costs can escalate quickly
- Potential for abuse, as the contractor is not motivated to complete within a reasonable time
- The owner bears the risk of cost overruns
4. Construction Management
A Construction Management Contract is an agreement where the Owner appoints a Construction Manager to serve as the Owner’s Agent. Under CCDC, there are two types of Construction Management Contracts: CCDC 5A – Construction Management Contract for Service and CCDC 5B – Construction Management Contract for Service and Construction.
CCDC 5A is a standard contract between an owner and a construction manager for services where trade contractors perform the work. The owner directly hires trade contractors and retains responsibility for their management, supervision, and progress. The construction manager acts as an advisor and oversees the contracts between the owner and the trade contractors. CCDC 5A is designed for situations where the owner wants to collaborate closely with a construction manager to complete a project. The construction cost can be structured in various ways, such as cost plus or fixed price. CCDC 17 can be used to appoint trade contractors.
CCDC 5B, called Construction Management at Risk, is a standard contract between an owner and a construction manager for services and construction, where the owner engages a construction manager to provide expert advice and guidance during the design and planning stages, including cost estimates and procurement strategies during the pre-construction phase and responsible for managing the actual construction work, ensuring it’s completed according to the contract requirements.
The construction cost can be structured in various ways, such as cost plus, fixed cost, or Guaranteed price (at risk), if the Construction Manager guarantees a maximum price for the project and assumes some of the risk associated with the project.
The Construction Management type of contract is suitable for large, relatively complex projects.
Advantages:
- Guaranteed maximum price, providing cost certainty for the owner
- Incentivizes contractor efficiency, as they bear the risk of cost overruns
- Owner has more control over project decisions
Disadvantages:
- Complexity, requiring specialized expertise and resources
- Potential for disputes over scope changes or cost overruns
- The contractor may prioritize cost savings over quality or performance
5. Design-Build Contracts
A design-build contract is one in which the contractor is responsible for both designing and constructing the project under a single contract and for a fixed, predetermined price. CCDC 14 — Design-Build Stipulated Price Contract is a standardized agreement between an owner and a design-builder. This type of contract is ideal for projects that require a high level of integration between design and construction.
Advantages:
- Single-point responsibility, reducing finger-pointing and disputes
- Streamlined communication, as the designer and builder are the same entity
- Potential for cost savings, as design and construction are integrated
Disadvantages:
- Potential for design errors or omissions, which can lead to costly rework
- Limited owner control over design decisions
- The contractor might prioritize construction over design, resulting in design compromises.
When selecting a construction contract, it’s essential to consider the project’s unique requirements, risks, and constraints. By understanding the advantages and disadvantages of each contract type, both owners and contractors can make informed decisions to ensure the project’s successful completion.
What’s your experience with construction contracts? Share your insights and lessons learned in the comments below!