A signed contract is among the first steps involved in commencing a construction project. Learning about the essential components of a contract, and how the terminology applies, will give you the confidence to navigate the process smoothly.

I’ve compiled a list of 20 common construction contract terms you’re likely to come across on your next project.

Budget (Estimate) – An approximation of the expected cost to complete the work as outlined in the scope of work.

How this translates to your project:

• You need to know that the cost to complete the scope of work aligns with the financial commitment you’re willing to make. You may need to reduce scope, select less expensive finishes, etc. to stay on budget.

• A budget can be created in several ways; using data from a previous project similar in size and scope (least accurate), deferring to a subject matter expert (Infinite Design Services) well versed in multiple projects of varying size and scope (more accurate), by having a subject matter expert complete a full quantity takeoff based on the project size, materials used, and cost of labour (most accurate).

Building Permit – A building permit is a document issued by the Municipality who is responsible for enforcing the Ontario Building Code in your area. A building permit is necessary when you wish to construct, renovate, demolish or change the use of a building.

How this translates to your project:

• You can review your Municipality’s Building Department website or call them directly to find out when a Building Permit is required. Never authorize work without checking if a Building Permit is required first.

• Your designer will be able to identify all of the permits required for your project and how to obtain them.

• Ensure it is clearly outlined in the contract who is responsible for obtaining the Building Permit, and who is responsible for scheduling all required inspections.

Change Order – A change order is a written document authorizing a change in the work, an adjustment in the contract value, or the contract duration. A change order may include additional cost or time; or less cost or time.

How this translates to your project:

• Expect changes to occur in every project. They can include changes to the original scope of work, material substitutions, or additional scopes of work made by client request or from unforeseen circumstances arising during the course of a project.

• In the event of an unforeseen circumstance ensure your contractor clearly outlines how they will notify you and who is responsible for what. 

• Each change order regardless of circumstance should be documented in writing indicating the additional cost or time; or reduced cost or time Expressed authorization by you needs to be given before a change order proceeds.

Construction Documents – Construction documents encompass all drawings and specifications associated with a construction project. The drawings are detailed plans illustrating how to construct the physical areas within the project boundaries.

How this translates to your project:

• Your project is built to the details and standards contained in the construction documents.

• You may hire a Designer who prepares the drawings and specifications based on your project needs.

• You may enter into a Design-Build agreement with the contractor in which case they’ll work with you to develop the project parameters and execute the construction activities accordingly.

Contract Type – Parties to a construction contract select from one of several traditional methods by which the contract is priced. The two mostly commonly used are Lump Sum and Cost Plus. Lump sum / Fixed Price contracts have a fixed dollar amount to complete all aspects of the project. Cost Plus / Time and Material contracts are an arrangement, where the contractor agrees to keep records of their labor and material costs. The owner agrees to pay for all the submitted costs plus a markup, which can be expressed either as a percentage or as a lump sum.

How this translates to your project:

• If the contractor makes a mistake in the estimate of labor and/or materials under a Lump sum agreement, the contractor bears the loss. This contract type provides you (the client) with the most certainty.

• If the project is completed faster than anticipated in a Time and Material agreement, the savings will be passed on to you. Conversely, if the project takes longer to complete than expected the additional expenses will be passed on to you. There is less certainty for you (the client) with this contract type.

• Time and Material contracts can sometimes include a capped maximum amount that can be charged by the contractor. This is referred to as an amount “Not to Exceed”.

Deficiencies (Punch list) – Deficiencies are defects in finishes, materials, and fixtures as well as incomplete or unacceptable work which do not meet requirements set out in the contract documents (drawings and specifications). The list of deficiencies is compiled during the final stages of a project by the owner or designer and issued to the contractor for correction.

How this translates to your project:

• You or your designer, and the contractor should walkthrough the jobsite reviewing the work completed, quality of said work, and the absence of defects in finishes, materials, and fixtures. Record any defects and incomplete or unacceptable tasks. This will form your Punch List.

• Ensure all items on the Punch List are corrected before final payment is made to the contractor. An amount of 5 to 10 percent of the contract value should be allocated for the completion of deficiencies in the Schedule of Values. Do not confuse this with Holdback, which is separate.

Holdback (Construction Lien Act) – In Part IV – “Holdbacks” of Ontario’s Construction Lien Act, the holdback is 10 percent of the total contract value required to be withheld from payment. It exists to protect a client from liens against their property by the contractor, subcontractors, or suppliers resulting from lack of payment for goods supplied or services performed.

How this translates to your project:

• Check that the contract stipulates a holdback deduction of 10 percent from each progress draw (invoice), which you (the client) retain until the job is completed. The holdback is deduced from the subtotal of each invoice before HST is added.

Payment Schedule (Progress Draws) – A payment schedule includes the dates at which payments are made by one party to another.

How this translates to your project:

• Make sure that the payment schedule for your project is based on the contractor’s performance and these performance milestones (ie: rough-ins, framing, drywall, flooring, etc.) are written in the contract.

• Payment should be only made when materials are delivered or progress is completed on site. Never let your payments get ahead of the contractor’s work. The exception to this is an initial deposit of 10 to 20 percent required for material orders. 

• Suppliers in some cases will request a deposit of up to 50% to order raw materials and/or start production. Examples where this may occur include kitchen cabinets and countertops. The remainder would then be made payable subsequent to delivery and installation.  Never pay the entire amount of a contract up front.

Procurement – Procurement is the act of obtaining goods or services.

How this translates to your project:

• Ensure the acquisition of materials is clearly defined in the contract.

• The contract should clearly outline who responsible for paying the suppliers.

• Request finish samples, model or part numbers in writing. Sign off on all finishes, fixtures, appliances, etc. before they are ordered by the contractor. You want to be sure you’re getting what you’re paying for and not a substitution that may be inferior.

Progress Update – Communication of a project’s progress at regularly scheduled intervals as agreed to by the contractor and owner. Details the progression of tasks, reaching scheduled milestones, project delays, opportunities and risks related to budget and schedule.

How this translates to you project:

• You should be in constant communication throughout the project with your contractor. How you choose the best method of communication (ie: phone, email, text messages) and the intervals at which your receive updates.

Schedule – A list of work tasks assigned a start date, finish date, and thereby a duration. The schedule is composed of specific work tasks and project milestones that must be completed on time to meet the substantial completion date.

How this translates to your project:

• Your contract should include a section or appendix with the project schedule detailing the start and end of specific work tasks, milestone dates, and the date of substantial completion.

• Project milestones are a great way to monitor construction progress. They can include important delivery dates, inspection dates, the substantial completion date, or any task of significance in a project that if not met would likely compromise the schedule. They are a key indicator of a scheduling be on or off course.

• There is fluidity in specific work tasks, so do not expect every task to start and finish on the exact date shown in the schedule. Project milestone dates being missed will .

Schedule of Values – The schedule of values is an itemized list of work each assigned a dollar value. The sum total will equal the total contract value.

How this translates to your project:

• The contract should include a breakdown of material and labour costs for every task (ie: drywall, painting, plumbing, electrical). Every progress draw (invoice) must show a percentage of each task being billed. This makes it much easier for you (the client) to evaluate the work performed on site to the percentage being billed. If the percentage billed does not match the work performed, request that the percentage be revised.

Scope of work – A scope of work is a written statement or list of tasks defining the actual work to be performed.

How this translates to your project:

• The scope of work must be included in the contract documents; either in a drawing or a separate document. A detailed scope of work is the best way to ensure accurate pricing from a contractor.

Specifications – Specifications are a detailed statement of the materials, installation methods, and quality of work expected on project.

How this translates to your project:

• Ensure it is clearly outlined in the contract what materials and finishes are being supplied for your project. A clause should be included in your contract stating that different materials, referred to as substitutions or alternatives, cannot be supplied without your written approval.

Substantial Completion – The date certified by the owner and/or designer when the work is sufficiently complete, in accordance with the contract documents, and the owner may occupy the space to use as intended.

How this translates to your project:

• This is a milestone date on your schedule where you take possession of the finished space. Typically, this will be after final inspections are passed by the Building Official, ESA Inspector, and Fire Marshall.

Statutory Declaration (or Lien waiver) – A Statutory Declaration is a sworn statement from the contractor given to the owner as a condition of receiving payment for the second and subsequent progress draws (invoice). It is confirmation by the contractor that they have paid their subcontractors or suppliers who might otherwise place a Lien on the property due to lack of payment. The Statutory Declaration along with Substantial Performance is required before the release of holdback per the Construction Lien Act.

How this translates to your project:

• By receiving written proof of payment (Statutory Declaration or Lien waiver) from the contractor with every progress draw (invoice) it transfers liability from you to the contractor if they do not pay their subcontractors or suppliers in full.

Substantial Performance – Substantial Performance is determined by a sliding percentage of the value of work completed using a calculation commonly referred to as the 3-2-1 Rule. The terms Substantial Performance (referenced in the Construction Lien Act) and Substantial Completion (referenced in the Ontario Building Code) are often used synonymously, but this is not correct.

How this translates to your project:

• When the contractor has met the financial requirements from the 3-2-1 Rule, the contractor can make a claim for the release of Holdback. This is assuming all written proof or payments (Statutory Declarations or Lien Waivers) are up to date.

Warranty – A warranty is a written promise (or guarantee) by the contractor to repair or replace a defective product or correct defective workmanship. It protects the owner against defects or failures within an established warranty period.

How this translates to your project:

• The contractor is to provide you with a warranty letter (project guarantee) at the close out stage of your project. This will outline the warranty period, typically 1 year, and who should be contacted in the event of a warranty claim.

• Also, request the operation manuals and care and maintenance information for all of the materials, finishes, fixtures, and appliances supplied by the contractor.

Working Hours – Working hours include any of the hours in a day in which construction activities are being performed.

How this translates to your project:

• Contractors typically operate during normal working hours on weekdays. Ensure their working hours are clarified in the contract.

• If work needs to be completed outside of their normal working hours, understand the reason why and ensure you proactively communicate this with your neighbours or tenants to hopefully avoid complaints.

• City by-laws (ie: noise, construction, etc.) typically enforce the permitted hours of construction activities. If breached, you could get a stern warning or be faced with a fine from the City’s By-law Officer.

• If the contractor wants to start earlier than or work later than the City’s by-laws this should be an immediate red flag. Sporadic working hours during the project should also be an immediate red flag.

Workplace Health and Safety – The Province of Ontario’s Ministry of Labour provides many guidelines and notices designed to prevent work-related illness and injury. Construction projects should be safe workplaces and site safety is everyone’s responsibility. That being said accidents happen and it is important to be prepared when the do.

How this translates to you project:

• Align your expectations with that of your contractor regarding clean up at the job site. You want the job site left in broom swept condition at the end of each day.

• The contractor should be posting a plan in the event of an injury or emergency on site. There should be a method of procedure posted on every job site mapping out the location of first aid kit(s), fire extinguisher(s), a muster point, the nearest hospital, and emergency contacts.

• Know the contractors containment and clean up procedures especially if the premises is occupied by yourself or a tenant during construction.

• You do not want to be liable should an injury occur on your premises as a result of construction related activities. Ensure your contractor is registered with WSIB Ontario which provides benefits, compensation and return-to-work services as a result of a work-related injury or illness. Their subcontractors should also be registered.

• Ensure you contractor has adequate General Liability Insurance which covers against claims for injury or property damage to others arising from the contractor or construction activities Their subcontractors should also have General Liability Insurance.

Whoa you made it!

There are all 20 of the construction contract terms that you should familiarize yourself with.

Knowing these terms and how they apply to your project will go a long way when finding, qualifying, and awarding a General Contractor for your next project.

On to the next one!