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How subcontractors can mitigate risk in their contracts

Nathan Medcalf
How subcontractors can mitigate risk in their contracts

At a risk management seminar in Ottawa in late February, Dan Leduc, a partner at the law firm Norton Rose Fulbright LLP outlined several different ways in which trade contractors might simply use the contracts imposed on them as potential “push backs” or claims for change orders as provided for by the CCA 1 2008 form of subcontract.

The seminar took place at the Ottawa Construction Association’s inaugural construction symposium and trade show.

In his presentation, Leduc was able to demonstrate how the wording in that standard form of subcontract can be grounds for a request for a change when there are schedule adjustments, given that the typical wording for a change order speaks to an adjustment in Contract Time, how there is often no express provision for a deficiency holdback to be taken and that the process of certifying progress draws does not lend itself to such a holdback over and above the statutory lien holdback, and how Issued for Construction (IFC) Drawings cannot form part of the definition of Subcontract Documents without a change order.

“I’m not giving you legal advice,” said Leduc, a member of the association’s board of directors who has been practising construction law for 27 years. “I want to talk to you about these issues from my perspective if I were an electrical contractor, working at the fictional company, Leduc Electric.”

Leduc continued: “A general contractor (GC) compiles bids from the subcontractor (sub) and the sub bids the work based on an estimate for labour and material. The GC will do 10-20 per cent of the work while the subcontractor will do 80-90 per cent of the work. A GC operates on margins and change order mark up and the subcontractor operates in the profitability of its own estimate.

“GCs are taking a bundle of risk and contractually driving it down on the subcontractor. So, the subcontractor, an entity with the least amount of control on the project over something like scheduling — because they can’t schedule the other trades — will be exposed on liquidated damages in a disproportionate measure.

“These are some of the dynamics in terms of risk I see day to day when I deal with my subcontractor clients.”

“Typically, when I start a job at Leduc Electric, we get a tender schedule from the GC at the outset and it is usually useless. It has no critical path; it hasn’t been thought through. It certainly isn’t resource-loaded. It’s just a little schematic for me to think about when things are about to happen.”

Sometimes, Leduc said, general contractors decide to change the schedule.

If that schedule doesn’t match a subcontractor’s contract completion date, then there is an adjustment to the contract time, which means subcontractors are entitled to a document that has power to change the contract; this is called a change order.

According to the CCDC 2 -2008 Stipulated Price Contract, which is the standard prime contract between the owner and the prime contractor: “A change order is a written amendment to the contract prepared by the consultant and signed by the owner and the contractor stating their agreement on:

A change in the work

The method of adjustment or the amount of the adjustment in the contract price, if any

The extent of the adjustment in the contract time, if any”

“A change order can deal with an adjustment in the contract time, so when there is a schedule revision, that would be an adjustment to the schedule. It is the only way I can adjust my contract time as per the contract.

“The wording lends itself that any adjustment requires a change order. I wouldn’t demand a change order for every adjustment. If the GC changes how I do my work, I am going to ask for a change order. If it is going to affect my critical path, my peak labour, my material delivery, I’m asking for a change order.”

Leduc pointed out that an IFC is a drawing or document complementary to the contract. Sometimes, an IFC will conflict with a subcontractor’s prime contract.

“IFCs are not a contract document,” Leduc said. “As a subcontractor, they are not part of my scope. At Leduc Electric, when we get IFCs, I ask for a change order. I need a change order. The only way you can amend my contract is with a change order.”

“I’m not saying I would get a change order every time; I’m just reading you the contract.”

The Ontario Association of Architects (OAA) states that the IFC is not part of the contract. “In many cases, the changes will only have negligible effects, but if something does go wrong on a project, it can be used in a claim against the architect,” Leduc said.

Not every construction document is a contract.

Leduc also reduces risk at Leduc Electric in the following way. “I don’t accept the terms of an unqualified bid, but rather, I submit a qualified bid,” he said.

“Typically, you are stuck with the contract you bid on. Use the contract you bid on to fight for what you need. Intelligence is the ability to adopt to change. Stephen Hawking said that. You have to change the way you do things.”

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