Developing a complete contract
What makes for a good contract? It provides full
information on what is to be done, how and when it will be done, the
cost and payments required, and the warranty provided. It clearly
defines all aspects of the business relationship between you and your
contractor in relation to the project.
A good contract treats both parties fairly. You get assurance that
you’ll get what you agreed to, on the schedule agreed to, and at the
price agreed to. The contractors gets their obligations clearly spelled
out, and assurance that you will pay in full and on time.
Most often, once you and your contractor have reached agreement on what
is to be done and want to proceed with the project, your contractor will
prepare a standard draft contract for you to review. Review this
document carefully to ensure it accurately reflects what you want and
have agreed to.
If your project is high value or complex, you may want a lawyer to review the draft contract.
If you don’t agree with or understand aspects of the draft contract, or
if details are missing, do not sign it. Discuss and resolve these issues
with the contractor and have the contract amended as needed before you
sign. Remember, once you and your contractor sign the contract, its
terms are legally binding on both of you.
Essential Contract Information
Most contracts include two kinds of information.
First, the contract defines what you and the contractor have agreed to.
This includes basic information such as:
- who the contractor is
- what the contractor is responsible for doing, what work you will do yourself or have another contractor do
- if sub-contractor are to be used, who is responsible for hiring them, paying them and ensuring their work is done properly.
- who is responsible for obtaining necessary building permits and inspections
- when the work will be done (start and estimated completion dates)
- how much you will pay the contractor for the work
- when payments are to be made
- what warranty the contractor provides for the work
Second, the contract sets out basic business
requirements the contractor must meet in order to protect in the event
of an accident and to comply with the laws in your province. To do this,
the contract should specify that your contractor:
- has adequate business liability insurance
- is enrolled in your province's Workers' Compensation program, or if exempt, has provided documentation proving this exemption
- agrees to payment holdbacks in accordance with your province's lien legislation
- has a Business or GST/HST Number
- is bonded if your province requires bonding
- has a license number if your municipality requires contractors to be licensed
The contractor should also warrant that any
sub-contractor they engage to work on you project will also meet these
business requirements.
Disputes and Defaults
What about disputes between you and the contractor?
For construction and larger renovation projects, contracts commonly
specify that mediation or third-party arbitration is required when
disputes cannot be resolved.
It is also common for contracts to include provisions that allow either
party to be released from the contract if the other party defaults in
specific ways. For example, the contractor defaults if he or she
declares bankruptcy or abandons your project. Similarly, you default if
you declare bankruptcy or fail to pay the contractor.
How prices are determined
Contractors typically use one of four methods to set the
price of a project. The method used for your project should be clearly
laid-out in your 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 (the contractor), and a second (separate) contract
between the owner and the person who is doing the design work (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 — this must be clearly
stated. Fixed-Price Contracts are suited to small repair or renovation
projects that are straightforward and easy to plan. Any changes or
adjustments to a fixed-price contract require 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 this: instead of the owner signing one contract
for design and a separate contract for construction, the whole project
is covered in a single document. 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.
Unit Price Contracts
A Unit Price Contract is based on a given rate per unit
of measurement. For example, backfill or decorative stone can be charged
by the cubic meter or by area.