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Procurement Perpectives: The complex administration of construction contracts

Stephen Bauld
Procurement Perpectives: The complex administration of construction contracts

It has always been a concern of mine as to how municipal contracts are issued in Canada. One pervasive problem arises at the very foundation of municipal government. Specifically, the administration of construction contracts in Canada at the municipal level is the balkanization of Canadian municipal government.

In terms of metropolitan areas, Canada has only six that would be considered large on an international scale, having a population of one million or more.

I would suggest the point to all this is fairly simple, strategic procurement is not about coming up with ways to spend more money. It is primarily about finding ways to reuse, or more efficiently use, existing assets so as to avoid spending more money. Reduce, reuse and recycle are appropriate considerations even in relation to construction. New expenditure should be incurred only when it can be proven to be the most cost-efficient option.

That decision then depends on the degree of risk that a municipality or other owner assumes and is willing to take on during any given construction project. The more direct and extensive its involvement in the construction process, the greater the risk it assumes.

By removing itself from direct responsibility for involvement in the actual construction of the improvements, an owner-municipality can mitigate this risk. An owner is totally involved in the project when the improvement is made solely upon his own account. By contracting away specific portions of the work, the owner removes himself from the risks associated with executing the improvement. There are many ways in which an owner may contract out the work that is to be done.

The owner-let contract is the most basic system of project organization and it is by far the most common form of project organization. Under the owner-let contract system, the owner engages the services of a general contractor to build an improvement according to an agreed plan. The risks related to the making of the improvement are divided between the owner and the contractor according to the terms of the contract, particularly the pricing formula.

Construction contracts are among the most sophisticated and complicated of contracts. While they embody the usual terms comparable to those found in any production agreement, they often will incorporate a vast array of engineering and architectural drawings and complicated building specifications, all of which describe in detail the work to be performed under the contract.

The method of payment is rarely straightforward with payments often being advanced on an instalment basis, with the amount of each instalment being determined in accordance with a scheme of payment certification. Even the calculation of the actual price that will eventually be paid by the owner is often complex.

Simply defined, a contract is a legally binding and therefore enforceable agreement. Every contract contains either express or implicit promises regarding the future performance of both parties. However configured, construction contracts serve a common range of functions.

They identify the parties, describe the scope of the work that is to be carried out, establish the time frame (or reference points such as working days) during which it is to be executed, they state the cost or provide a formula for fixing the cost of the work to be done, set out the payment provisions governing the time and manner of making payments and they specify the range of incidental rights and entitlements to which each party is entitled.

This is in addition to the basic right of the owner to a completed project and the contractor to receive payment of the contract price.

The goal of the contract is to enable parties to derive the maximum individual benefit from the transaction. All these factors contribute to the complex administration of construction contracts in Canada.

Stephen Bauld is a government procurement expert and can be reached at Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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