If you are thinking about hiring a General Contractor to tackle your next renovation project then having a signed contract to protect yourself is essential.

Why?

Well, lets just say that not all contractors are created equal. For a variety of reasons.

…And if the pool of contractors in your area is limited, or your vetting process is simply not up to snuff you may find yourself in a prickly situation someday soon.

…I’m sure you’ve heard stories over the last few years where the homeowner paid the deposit and the contractor is suddenly unreachable.

…Or maybe they’re using that money to finish someone else’s job.

…Or perhaps they did show up and start. Maybe they nearly finished! But they made such a mess of it that you’re going to have to find a more qualified contractor to not only finish the project, but to also correct all the shortcomings in workmanship from the guy before.

…Suddenly you’re paying twice to complete the same job.

…And the real kicker if you decided that a contract wasn’t needed wasn’t necessary, or heavily favored the contractors, there is really little you can do.

Listen, by taking the next 10 minutes to learn about some basic construction contract terminology, and how it applies to you, the customer I’m certain it will at the very least give you more confidence to navigate the process for your next hire than if you instead glossed over this article.

Hopefully, I’ve gotten your attention. Okay? Good… Let’s begin.

1. Change Orders

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

2. 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”.

3. Holdback Retainage

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.

• When the contractor has completed all work and corrected any deficiencies they can make a claim for the release of Holdback. This is assuming all written proof or payments (Lien Waivers – See #8) are up to date.

4. 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.

5. 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.

6. 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 .

7. 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 comprehensive scope of work is the best way to ensure accurate pricing from a contractor.

8. 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.

9. Lien Waiver (Statutory Declaration)

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.

10. 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.

BONUS – 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.

Conclusion

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.

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