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ALGONQUIN COLLEGE – Construction Project Management

LAW1000 – Law and Contracts for the Construction Industry

ASSIGNEMENT - 1
(Rev – 2)

Project Communication Skills

COURSE: LAW1000 – LAW AND CONTRACTS FOR THE

CONSTRUCTION INDUSTRY

SUBMITTED BY
RRRRR
Student ID: 07657467
Submitted on 31-Jan-2021

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ALGONQUIN COLLEGE – Construction Project Management
LAW1000 – Law and Contracts for the Construction Industry

TABLE OF CONTENTS

1. INTRODUCTION....................................................................................................................3
2. STIPULATED PRICE CONTRACT CCDC-2........................................................................3
3. COST PLUS CONTRACT CCDC-3.......................................................................................4
4. A TURNKEY PROJECT.........................................................................................................5
5. COMPARISION......................................................................................................................6
6. RECOMMENDATION............................................................................................................8
7. REFERENCE...........................................................................................................................8

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ALGONQUIN COLLEGE – Construction Project Management
LAW1000 – Law and Contracts for the Construction Industry

1. INTRODUCTION

A contract is an agreement between two or more parties that create a mutual legal
obligation in return for a consideration. Similarly, a construction contract binds two or more
parties to agree to perform construction on a project as per agreed terms and conditions.
These contracts are a set of general and special conditions that address topics such as the
scope of work, payments, schedule, and quality to address each party’s rights and
obligations [2]. There are many types of construction contracts available in the industry, but
in this assignment, we will discuss two types of standard contract forms as per the Canadian
Construction Documents Committee (CCDC):
 Stipulated Price contract (CCDC-2)
 Cost Plus contract (CCDC-3)
For this assignment, we will analyse both the type of standard form contract and a
recommendation that will be generated for a suitable contract for a Turnkey project.

2. STIPULATED PRICE CONTRACT CCDC-2

A stipulated price contract is also called a lump sum or fixed price contract. It is the
industry-standard form of prime contract between a prime contractor and owner, that
establishes a single, pre-determined fixed price, or lump sum, for the project. The Prime
contractor assumes all the risks of project costs and hence can be expected to ask for a
higher mark-up to anticipate unforeseen problems.

The contract outlines the high-level administrative requirements and procedures needed
for construction projects, including the role and authority of the consultant, procedures for
changes in the work, work by other contractors, insurance requirements, prerequisites for
Ready-for-Takeover, dispute resolution procedures, early occupancy by the Owner, and
more [1]. The contract also assumes monthly payments for substantial performance of work
and makes reference to provincial payment legislations. There is a provision for interest

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ALGONQUIN COLLEGE – Construction Project Management
LAW1000 – Law and Contracts for the Construction Industry

rates that shall apply in case any party fails to make payments by the due date. The
Contract also ensures succession to the benefit and the binding to the party’s respective
heirs, legal representatives, successors, and assigns.

The stipulated price contract should be used if the scope and schedule of the project are
appropriately defined to allow the prime contractor to fully estimate project costs,
schedule, and risks. If the actual costs of labor and materials come out to be higher than
estimated, the contractor’s profit will be reduced. If the actual costs come out to be lower,
then the contractor’s profit increases. Either way, the cost to the owner is the same [2].
There are provisions provided for future change to project scope and contract price, a pre-
defined procedure and approval need to be followed for the Change Orders and Change
Directives.
The contract also has provisions for contractor delays and liquidated damages. General
conditions also include provisions for making good of any work being rejected by the
consultant or damaged by the contractor.

The advantage of a stipulated price contract is that the project price will remain the same
and the contractor will have a greater incentive to control the project costs. The major
disadvantage the project is expensive as the contractor’s price will have a mark-up added
corresponding to assuming all the risks and uncertainty in the project.

3. COST PLUS CONTRACT CCDC-3

Cost-plus contracts are often used when the scope is not clearly defined at the time of
estimate. For example, when the project design is still being finalized and the owner wants
to begin construction. In a cost-plus contract, the owner agrees to pay the cost of the
performed work as per a pre-defined cost-plus basis. The contractor proposes a cost-plus
mark-up price which includes all trade subcontractor work, labor, materials, and equipment,
plus a compensation amount for the contractor’s overhead, risk, and profit. In this contract

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ALGONQUIN COLLEGE – Construction Project Management
LAW1000 – Law and Contracts for the Construction Industry

type, the owner assumes all the risks of future cot changes due to change in scope, if actual
costs are lower than estimated, the owner keeps the savings. If the actual costs are higher
than estimated, the owner needs to spend more. The contract also has a provision to
include a cap on the guaranteed maximum price. The most common cost-plus contracts are
[2]:

 Cost Plus Fixed Percentage – Compensation of overhead and profit is based on a

percentage of the actual cost [2].
 Cost Plus Fixed Fee – Compensation is based on a fixed sum independent of the final
project cost [2].
 Cost Plus Fixed Fee with Guaranteed Maximum Price Contract – Compensation is
based on a fixed sum of money. The total project cost to the owner will not exceed
an agreed upper limit [2].

The advantage of a cost-plus contract is that the project will result in what was intended,
even if the scope of work changes completely. However, there is a higher risk of project
costs run high due to unforeseen changes. The major disadvantage of this type of contracts
is that it gives little to no incentive for the contractor to control the cost and additional
supervision from the owner is required to ensure efficiency and productivity.

4. A TURNKEY PROJECT

A turnkey project is a type of project that is constructed completely by the contractor to be

sold to the owner. As described by Duncan Wallace (1984), a Turnkey contract is “…. a
contract where the essential design emanates from, or is supplied by, the Contractor and
not the owner, so that the legal responsibility for the design, suitability and performance of
the work after completion will be made to rest … with the contractor …. 'Turnkey' is treated
as merely signifying the design responsibility as the contractors.”
A Turnkey contract include three components:

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LAW1000 – Law and Contracts for the Construction Industry

 The design component: A turnkey contract required the design of the facility by the
contractor. Even though certain aspects are already defined in the contract or even
when the scope is only construction of the facility, contractor need to prepare
detailed design. For example, owner will advise the output of performance of a plant
he need, It is up to the contractor to figure out the design in order to achieve the
output.
 The technology component: Techniques, know-how, patents, etc need to be
provided by the contractor. Although in certain cases contractor may use the
technology of a third party under its own contractual arrangements. Contractor will
be responsible for choosing the technology which need to be used in the design base
don the criteria designed in the contract.
 Supplies, construction and erection component: A turnkey contract require the
contract to take the obligations of the material supply, construction and erection.
Although Contractor has to select the material, supplier, subcontractors and
constriction methods. However, owner can impose restrictions on use of specific
supplier or subcontractors during the project.

5. COMPARISION

As name suggest, by the turn key it is meant that the owner just have to turn the key of the
facility to for it to start producing. Apart from this almost all the obligatiosn are with the
contractor such as:
a) The contractor has scrutinized all the owner’s requirements and is responsible for
delivering the work as per owner’s requirement. – Details of the owner’s requirements
to be inserted under Article A-3 in both CCDC 2 as well as CCDC – 3, however CCDC-3
also require contractor disclose various cost calculations / schedules, which are not
required for turnkey project as Contractor is suppose to provide a lump sum price for
the work.

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LAW1000 – Law and Contracts for the Construction Industry

b) The contractor’s works are to include any work that is necessary to satisfy the
Employer’s Requirements, or is implied by the contract and all works that are necessary
for stability or for the completion, or safe and proper operation, of the works, hence a
lump sum price inclusive of the requirements, either mentioned or implied, to be
provided by the contractor. – CCDC – 2 asks for Lump some pricing in Article A.4, while
CCDC-3 asks for specific schedule of prices for each head of the work.
c) When completed the works must be fit for the intended purposes defined in the
employer’s Requirements – hence no additional work or costs are expected – CCDC-3
asks for contractor’s fee over and above the cost, which is not the case for a turnkey
contract.
d) The Owner is not responsible for any error or omission of missed requirement while
estimating the price of the project – This is same for both type of contacts, both CCDC-2
and CCDC-3 details out all the requirements in form of general and specific conditions.
e) There are limited expectations that the owner will be responsible for the correctness of
certain provisions of the contract – In Stipulated price contract the contractor assumes
all the responsibility however in Cost plus contract, owner may ensure additional cost in
case certain information is not correct in the contract.
f) Some sort of financing is expected from the contractor and the payment is expected to
be paid on substantial performance of the work – This requirement is same for both
CCDC-2 and CCDC-3 contract.
Since in a turnkey project, the contractor shall assume all the responsibilities from design,
suitability, construction, and performance. This is essentially similar to the Stipulated price
contract. However, we will analyse both the type of contracts on various parameters to
understand which type of contract is suitable for a turnkey project.

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ALGONQUIN COLLEGE – Construction Project Management
LAW1000 – Law and Contracts for the Construction Industry

6. RECOMMENDATION

Based on the above comparison, a stipulated price contract is recommended to be used for
a turnkey project provided following factors:
 Where scope is fully detailed and no or limited changes are anticipated in the future.
 Where time permits the project design to be completed prior to tendering the
construction contract and commencing construction.
 Where all the responsibilities and risks to be transferred to the Prime contractor.
 Where the construction project is relatively simple, I.e., Multiple stakeholders are
not involved in decision making.
 Where there would be little innovation advantage gained in design improvements by
including the builder in the design discussions
 Where there is a relatively small risk of dispute between the designer and builder, or
related cost overruns or delays, that could otherwise be mitigated by involving the
builder in the design discussions.

7. REFERENCE

Following is a list of references utilized while studying and analysing content for this report.
1. https://www.ccdc.org/document/ccdc-2-2020/
2. https://www.aiacontracts.org/articles/183501-four-common-construction-contracts-
you-need-to-understand-
3. https://www.constructioncanada.net/dawn-of-the-super-contract/
4. https://procurementoffice.com/selecting-the-appropriate-contract-structure/
5. https://www.thebalancesmb.com/common-types-of-construction-contracts-844483
6. https://globalarbitrationreview.com/guide/the-guide-construction-arbitration/3rd-
edition/article/construction-arbitration-and-turnkey-projects

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