Ch. 11 - Specific Contracts & Clauses

Question 1

Fixed-Price contract

Answer 1

(aka stipulated sum contract or lump sum contract) a contract in which the goods are provided and services are performed for a lump sum amount, including overhead and profit. Owner has no right to direct the contractor on construction and no right to inquire about actual cost of the work. Costs rarely stay fixed throughout the project, should use fixed-price as starting point with the intention of it changing by the end of project. CCDC 2 is most common and best known starting point.

Question 2

Cost-Plus contract

Answer 2

(aka cost reimbursable contract) provides the contractor with payment for the labor, equipment, and material expenses incurred on the project plus a percentage for profit and overhead, sometimes to a guaranteed maximum. Often used when the scope of work is uncertain but the owner wants to proceed with the project - puts costing risks on owner. Owners should be aware of contractors using transfer pricing. Drawbacks include lack of built-in price control and properly labeling responsibility for correction of deficiencies or replacement of defective equipment. CCDC 3 most popular.

Question 3

Unit Price contract

Answer 3

contract that requires the owner to pay a stipulated amount for each unit or quantity of work performed (e.g. $100 per cubic meter of concrete in place). popular for road building, earthmoving, and pipeline projects. Beneficial for project with uncertain requirements. CCDC 4 most popular. Owner can reduce risk in paying premiums by requiring unit pricing for unanticipated or extra work. Contractors should be careful not to inflate unit pricing too much as it may force owner to cut work rather than add work.

Question 4

Alliance Agreement

Answer 4

creates a close relationship between all parties on a construction project. The level of compensation for each party depends on the success of the entire project, and there is often a specific provision prohibiting litigation. Owner pays contractor on cost-plus basis with a loss/profit available at the end based on performance. Trust and loyalty between the owner/contractors/subcontractors

Question 5

Design-build contract

Answer 5

owner generally contracts out the design, construction,and inspection, often to a single party with little or no input from the owner, who may hire consultant to help ensure quality. CCDC 14 most popular - doesnt directly deal with owner control.

Question 6

Public-Private Partnership (3Ps)

Answer 6

used for public projects, like highways, hospitals, water & waste water treatment plants. The public agency contracts private companies to design, construct, finance, and operate these projects on a long-term basis. Public and private sectors share risk, responsibility, and reward and the end product is a net benefit to the public.

Question 7

Licensing Agreement

Answer 7

provides a grant of rights to a licensee to use a right held or owned by a licensor. Licenses can be exclusive or non-exclusive. Particularly important on the software industry - many licensors want licensees to use their product which dictates their compensation from percentage of sales. Licenses can be granted for both intellectual and real property. Most important clause is the grant provision that defines the scope of the rights given to the licensee.

Question 8

professional service agreements

Answer 8

Used to engage the service of a professional or firm of professionals in a project. Can be made on a cost-plus, fixed-price, or percentage basis. Similar to employer-employee agreements. work & outcomes defined. prices may vary. Liability clauses included to protect professional. Field review clauses require great clarity or risk being problematic down the road.

Question 9

Transfer pricing

Answer 9

a way contractors increase their profits by transferring costs to the owner. E.g. if a trailer is needed on a job site for 12 months, rather than renting from an outside source, the contractor could purchase the trailer, rent it to the project as part of cost-plus agreement. After 12 months, the OWNER has effectively paid for most of the trailer but the contractor owns it.

Question 10

Target Price contract

Answer 10

one incentive formula to deal with cost-plus contract price control, which ensures that the cost is fixed if the cost of construction exceeds a certain amount (the target); but the contractor and owner share any savings below the target, according to a predetermined formula, such as 50/50 or 60/40.

Question 11

Guaranteed maximum price (GMP) contracts

Answer 11

type of target price contract which is a hybrid of fixed-price and cost-plus agreements that require the contractor to absorb all costs of construction above the target. Guarantees the the total price wont exceed the agreed amount and allows owner to audit contractor’s costs if contractor appears to be claiming any portion of the cost savings.

Question 12

Limitation of liability clause

Answer 12

important clause in professional service agreements. Defines the limits of available claims against the professional, usually to the limits of the professional’s insurance. Critical element is the limitation on time in which parties can commence legal action.

Question 13

Exclusive license

Answer 13

grants the licensee (the party gaining the rights) the exclusive right to use the rights held by the licensor (the party granting the rights).

Question 14

License

Answer 14

A grant of rights to use

Question 15

Penalty Clauses

Answer 15

are UNenforceable in Canadian courts

Question 16

liquidated damages clause

Answer 16

Are enforceable by the way in which the amount is determined. Accurate pre-estimate of the damages suffered as a result of the late performance.

Question 17

Warranty

Answer 17

contractual promise to repair defects in the goods and services provided for a specific period of time after the goods and services were provided. Often limited on location of service, obligation of the purchaser to provide notice, and certain costs that must be carried by the purchaser. Manufacturer’s warranties may be longer than contract warranties. Protects purchaser from defects during warranty period and seller against liability after warranty period.

Question 18

Exclusion clause

Answer 18

clause that purports to completely exclude the damages or remedies available to the innocent party upon the occurrence of specified events. Must clearly define the exact event to be exempted or limited to be enforceable. Construe these clauses strictly against those who drafted them and resolve ambiguities in favor of the other party.

Question 19

Limitation clause

Answer 19

purports to contain or limit the damages or remedies available to the innocent party upon the occurrence of specified events. Can be used to reallocate any type of risk including limiting the right to claim certain types of damages. Subcategory of exclusion clauses but interpreted the same in court.

Question 20

Consequential damages

Answer 20

refer to lost profit and other damages that are unrelated or only indirectly related to the claim being made. limitation clauses limit claims for consequential damages to control prices from including unreasonable costs.

Question 21

Dispute resolution provision (DRP)

Answer 21

a clause that defines the process to be followed in resolving disputes between the parties to a contract in advance. Steps include:

1) Notice of the claim
2) opportunity to remedy the breach
3) negotiation under some time constraints
4) refereed process (sometimes) that may/may not be binding.
5) If the claim is still not solved, may require binding arbitration, which is not a popular option to get to.

Question 22

Notice of claim provision

Answer 22

a clause that defines the process to be followed for giving notice of and info in respect of a claim under a contract. Notice must generally be given within reasonable time because many contracts contain strict time limits for bringing claims because the breaching party wants the opportunity to remedy or mitigate the breach at an early stage, rather than being told after the remedy is complete that a claim is being bought.

Question 23

Bankable contract

Answer 23

a contract with terms acceptable to the lender financing one of the project participants.

Question 24

Bankability

Answer 24

an issue when the borrower doesnt have sufficient assets or assured cash flow to secure a loan from the lender. Applies to ALL other contracts on the project. Achieved when the lender is satisfied that the project will be successful such that the borrower will profit from the project and be able to repay the loan plus interest.

Question 25

Concession

Answer 25

long-term payment obligation. Used in 3Ps. Risk on both the private party and their lender.

Question 26

standard form contracts

Answer 26

created by industry groups/association for convenience based on experience. Good starting point for legal obligations. Specifics need to be added or else higher risk.

Question 27

Construction Management contracts

Answer 27

Owner hires construction manager to deal with all the trades but does little or no physical work on the site and simply manages workers. No general contractor, owner enters contracts directly with trades with the construction manager signing these contracts on behalf of the owner. CCDC split into 5A & 5B to specify whether or not the construction manager becomes at risk at some point.

Question 28

CCDC 5A

Answer 28

acceptable standard contract for small projects, where the construction manager is acting solely as a manager.

Question 29

CCDC 5B

Answer 29

construction manager provides construction services on a cost-plus basis or is at risk.

Question 30

Alliance agreement includes

Answer 30

1) “no blame” clause which operates between all parties
2) a clearly defined gainshare/painshare
3) a clear understanding of the roles of participants
4) clear definition of scope
5) exclusivity clause all work within the scope be done under the alliance agreement
6) a time frame for agreement
7) other commercial aspects including insurance, third-party liability, indemnities, dispute resolution
8) the composition, voting rights and requirements, and procedures for an alliance board

Question 31

Scope of work in contract

Answer 31

A clearly defined scope reduces ambiguity and subsequent claims during a project. Often done through detailed specs and drawings.

Question 32

Contract Time

Answer 32

Each party must perform obligations in timely manner. A well-planned schedule is key to avoid confusion and delays during the project.

Question 33

Contract Changes

Answer 33

changes should be well documented and not just conducted orally, as this change will undermine the applicability of the original contract. Provide notice for changes. Will help reduce conflict and claims.

Question 34

Contract damages and bonuses

Answer 34

Canadian law doesnt require that every clause give damages to one party for late performance accompanied by a clause that provides a bonus for early performance.

Question 35

Contract termination

Answer 35

usually occurs after all parties have performed their obligations but can happen mid-project, most often caused by a fundamental breach of contract. Some contracts contain wording to ensure multiple unremedied minor breaches provides ground for termination or for termination of convenience, as long as notice and proper compensation is given.

Question 36

Contract Indemnification

Answer 36

protects parties against each other’s negligence. Shifts risk. Indemnity only as good as the financial strength of the party providing the indemnity.

Question 37

Project finance

Answer 37

Owner pays for project usually through combo of cash reserves and a lender. Project consultant assists owner in developing feasibility study, provides a design that meets the project’s needs, works with owner and lawyers to create contract documents that bankable, and provides appropriate contract administration services.