Introduction The Canadian Construction industry uses a set of standard form contracts to come to an agreement. The type of standard form contract chosen for the particular project depends on the requirements of the intended parties. The standard form contracts are usually used as it gives a starting point for negotiation and the language used would be common to both parties and is nationally accepted. These standard forms get updated periodically to address most of the common issues and hence would make it easier to negotiate.
Some of the most common standard forms are CCDC2-2008(Stipulated Price Contract), CCDC3-1998(Cost Plus Contract), CCDC4-2011(Unit Price Contract), CCDC 5A and 5B-2010(Construction Management Contracts), CCDC14-2000(Design Build Stipulated Price Contracts) etc. The purpose of this document is to compare the CCDC2-2008 and CCDC3-1998 standard contract forms and conclude which of the two would be better suited for a contract for Turnkey type project.
A “Turnkey” project in construction refers to a project where the contractor bears the whole responsibility from design to completion. The contractor delivers a completed/functioning product to the customer ready for use. (Lesson 2: Contracts In Construction Industry) It is important to examine key clauses in both types of contracts to get a better understanding of their differences. This paper is going to focus on key clauses such as Dispute Resolution, Environmental, Governing Regulations and Insurance.
Stipulated Price Contract (CCDC2-2008) VS Cost Plus Contract (CCDC3-1998) A stipulated price contract also known as a lump sum contract is used where a contractor agrees to perform the scope of work for a predetermined amount whereas a cost plus contract is based on reimbursement of labor and materials used plus a fee or percentage for contractors overhead and profit. (Lesson 2: Contracts In Construction Industry) According to section 8. 2. 1 in both CCDC2 and CCDC3 a project mediator is appointed within 30 days of the contract being awarded in cost plus contract whereas 20 days for a stipulated contract.
(CCDC2 & CCDC3). A Project mediator helps to resolve disputes and negotiations are documented to prevent future disputes and further delaying the project. In this instance the stipulated price contract would be able to resolves disputes sooner than cost plus contract due to the fact that a project mediator is appointed sooner. Another difference in these contracts is the responsibility of property. In section 9. 1. 2 of CCDC2 the responsibility of determining the location of all underground utilities, structures and surrounding falls under the contractor.
(CCDC2 & CCDC3) Any damages to the property at place of work are required to be fixed by the contractor with their own funds. But in cost plus contracts these responsibilities of inspection of place of work falls under the owner other than the damages caused by the contractor or anyone the contractor is responsible for needs to be fixed by the contractor. A contractor is also responsible for the initiation, maintenance and supervision of all safety precautions and programs in connection with the performance of work in a stipulated price contract whereas in cost plus price contract the responsibility falls to both the owner and the contractor.
(CCDC2 & CCDC3) Another key difference according to section 10. 1. 1 in both CCDC2 and CCDC3 is that the contractor pays all customs, taxes and duties during the performance of the work and is included in the cost of work in a cost plus contract, but in a stipulated price contract the contractor has to estimate the taxes, duties and include it at the time of bid. (CCDC2 & CCDC3) This might lead to a cost over run in the stipulated price contract.
In a stipulated price contract, the contractor is responsible for the procurement of permits, licenses, inspections and certificates whereas in a cost plus contract the compliance of contract documents with laws, rules, regulations and such are done by the owner. Also, in a stipulated price contract the contractor is solely responsible for proper performance of work and provides a one year warranty from date of substantial performance of work. The warranty obligations are the same as cost plus contracts but the contractors enforce the warranty obligations to the subcontractors and suppliers who deal with the customer directly as well.
(CCDC2 & CCDC3) The contractor bears all the risk of cost escalation of materials and labor and poor estimation in a stipulated price contract when in cost plus contract, the contractor only needs to recover the cost of carrying out the work. According to Pecker and Abramson, in cost plus contract, the contractor is more involved in the pre-construction stages where the contractor can provide valuable services like feasibility analysis and estimating for the owner to come up with a project scope, but in a stipulated price contract, the design and scope is done before procuring the contractor.(pg. 2).
There are both advantages and disadvantages of using either contract types. In a stipulated price contract, the owner would have a clear understanding of the total cost of the project barring unforeseen changes. This would help the owner to get a construction loan from a financial institute. But in this type of contract, the contractor will include the contingency cost into the initial cost and thus the owner might end up paying more for the product than it actually costs.
In cases where the cost escalation of materials and labor becomes very high during the project, the contractor might sacrifice on the quality of the product to bear the unforeseen expenses. In a cost plus contract, the owner is faced with an open ended and in determined construction cost. The contractor does not have any incentives to reduce the cost of construction. In fact it would be beneficial for the contractor to increase construction costs as their payment would increase proportionally as per the term.
According to Pecker and Abramson, a project in a cost plus contract might complete early as the general contracting can start prior to the whole designing being done. (pg. 3) Conclusion After looking at both the contract types in depth, it is clear that the stipulated price contract also known as the lump sum contract is the most suitable one for a turnkey type project in construction. The price in a turnkey project fixed at the time of signing. The construction company/contractor is forced to stay within the budget and held responsible for exceeding it.
The buyer knows the exact cost of the project as per the term. This scenario is only possible in a stipulated price contract where the contractor/construction company agrees to a predetermined cost for the scope of work. A cost plus contract is not advisable for a turnkey project as the contract is based on reimbursement of labour and material used plus an incentive in the form of percentage of the cost as profit to the contractor. It is very unlikely to predict the cost of the project in this form of contract and thus an estimation of fixed price at the time of signing a turnkey project would not be very accurate.
Also the fact that the contractor is solely held responsible for the completion of work and the one year warranty after the completion of work in a stipulated price contract relates to the turnkey project theory, where a completed/functioning product is delivered to the customer ready for use. The ability to receive a loan from a financial institute in a stipulated price contract due to the fact that the price is predetermined would be beneficial to the buyer in a turnkey project.
In spite of the negatives of a stipulated price contract, such as; the delay to the start of construction due to design phase compared to cost plus contract, reduced quality of the product by the contractor because of poor cost estimation, cost escalation due to the contingency cost included by the contractor at the time of bidding t, it is still the standard form contract that delivers a fixed predetermined price which is essential for a turnkey project.
Some of the mentioned negatives could be controlled through competition, previous experience and report of the chosen contractor which protects the buyer from exaggerated cost. The cost plus contract is usually used when the customer is in an urgency to complete the project, would need the contractors input in the design phase and a predetermined fixed cost is not necessary to start the general contracting work. Thus, after analysing these advantages and disadvantages, the stipulated price contract is the most suitable for a Turnkey Project.
REFERENCES 1) Abramson & Pecker PC. Understanding Contractual Pricing Arrangements –Fixed Price, Cost Plus, and Guaranteed Maximum Price. Retrieved from http://www. pecklaw. com/images/uploads/communications/Client_Alert-Understanding_Contractual_Pricing_Arrangements. pdf 2) CCDC2-2008 Standard Contract Form. Retrieved from https://bb. embanet. com/bbcswebdav/pid-496521-dt-content-rid-166323_1/courses/
ALG-LAW1000/ALG-LAW1000_ImportedContent_20110412124204/Standard%20Form%20Contracts%20Stipulated%20Price%20Contract/ccdc2e.pdf 3) CCD3-1998 Standard Contract Form. Retrieved from https://bb. embanet. com/bbcswebdav/pid-496522-dt-content-rid-166325_1/courses/ALG-LAW1000/ALG-AW1000_ImportedContent_20110412124204/Standard%20Form%20Contracts%20Cost%20Plus%20Contract/ccdc3e.pdf 4) Lesson 2: Contracts in the Construction Industry. Retrieved from https://bb. embanet. com/webapps/blackboard/execute/displayLearningUnit? course_id=_9425_1&content_id=_496472_1&target=blank