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Use Effective Construction Contracts to Prevent Surprises

No remediation project ever stays 100% according to plan. Often, the scope gradually widens as the work unfolds–hence the term ‘scope creep’. And, sometimes, this can cause a project’s budget to skyrocket by the completion date. In the July issue of Insurance People, Andrew Ross, COO of SPECS, says it’s not unusual for a contractor to finish the job and then submit an extra invoice for additional work that the construction owner wasn’t told about in advance: “All of a sudden the reserve is insufficient because there’s an additional charge that nobody was expecting.”   

In fact, according to the Top 10 Obstacles to Project Success of 2010: Global Survey Results prepared by MüTō Performance Corporation, changes to proper scope are the leading cause of project failure globally. That being said, there are ways to better implement construction cost control, while setting proper expectations before the work begins.

It starts with a contract. As Ross goes on to explain, “the Canadian Construction Documents Committee (CCDC) construction industry contracts are a good way of ensuring there are no surprises in a project and that everyone is clear about expectations.”

What goes into a contract?

Prior to any remediation work, details of the project need to be defined. This involves establishing general conditions, the scope of work, and specifications within the tender document. Once a price and work schedule is settled with the successful bidder, a contract is drawn up. That contract incorporates the tender document as the description of the work, as well as a written agreement around payment terms, contractual obligations, and other contractual items between the construction owner and contractor.  An independent contract construction consultant, like SPECS, is involved as a construction owner representative to bring an impartial and trained eye to help oversee the process.

Contract Benefits

Each element of a contract is a key factor to keep costs in check by ensuring clarity in the work, the pricing and the process:

  • General conditions outline exactly what contractor is responsible for, including items like permits, fees, licenses, inspections, and cleaning the site. The conditions should have a clause as to the like kind and quality of materials and level of workmanship in relation to what they were prior to the loss. This establishes a baseline for change orders and assumptions.
  • The scope of work outlines the action required, the item of work, and location where the action is to be completed, so that there is no doubt as to what is supposed to happen. Upgrades can be identified more easily, which is crucial, as these extend timelines and cost when outside of the original plan. Thoroughly itemizing the work limits repairs to those items damaged by the event. In addition, not all contractors do the same work. Details may be left to interpretation if not defined clearly in a scope.
  • Specifications accurately describe in detail the type, quality, and quantity of any materials and assemblies listed to be repaired or replaced in the scope of work. While glaring omissions can cause large jumps in project costs, smaller items can also add up and impact budgets. That is why specifications need to be particularly detailed: from the size, model, colour, dimensions or components of an assembly, right down to the things like the number of coats of paints to be used. As with general conditions, the specifications can establish proper allowances through comprehensive assumptions, as well as keep change orders in check.
  • The written agreement between the owner and contractor, which is the CCDC document, solidifies the terms of the contract, and ensures all parties understand and are in accordance with the work set out in the tender documents. It is also advisable to include how any work not covered by the three aforementioned documents will be handled, thereby providing a transparent process for dealing with additional costs. When expectations are set in advance, there are fewer grounds for dispute, such as the potential for construction defect claims.  Besides helping to control costs and timelines, detailed documentation creates a useful paper trail in the event of disputes or if litigation occurs.

Ross sums it up best, “By using a CCDC contract, there’s a legal, structured process in place that precludes any extras unless they’re previously identified, priced, documented, and approved.”