Avoiding construction claims – Top five ways to stay out of court

Caroline J. Smith, McKercher LLP

Construction claims can be costly, time-consuming, and damaging to business relationships. For owners, contractors, and subcontractors alike, the best strategy is to avoid disputes in the first place. This article describes five ways to stay out of court.

Use a Good Contract

It is important to use a written contract signed by both parties. A good contract sets clear expectations, reduces misunderstandings, and provides a roadmap for resolving disputes. It should address scope of work, price, schedule, change procedures, events of default, and the payment process. Many construction contracts also specify a method for resolving disputes, such as arbitration.

Purchase orders may include many of these useful terms, but if they are not signed by both parties, there can be a dispute about whether the terms apply. Including terms as part of an invoice is even riskier: by the time an invoice is issued, it is usually too late, both legally and practically, for those terms to take effect.

Use Bonds

Bonds can provide valuable protection in the event of default or non-payment. The main types of bonds available for construction projects are:
Bid bonds – can protect the owner or contractor if the chosen contractor or subcontractor refuses to enter into the construction contract.
Performance bonds – can protect the owner or contractor if the contractor or subcontractor defaults in the performance of the work.
Labour and material bonds – can protect subcontractors and suppliers if the contractor fails to pay them.

Deal with Changes Proactively

Changes to the scope of work are a common source of disputes on construction projects. It is, therefore, important to deal with changes proactively. This means establishing clear procedures for handling changes, including a process for documenting changes, determining the cost and schedule impacts of the changes, and seeking approval from the owner or project consultant. It is essential to ensure changes to the scope of work are authorized in writing, especially if they will result in additional costs or affect the project schedule.

Keep the Required Builders’ Lien Holdback

Lien holdbacks are required by The Builders’ Lien Act (Saskatchewan). Under this legislation, owners, contractors, and subcontractors must retain a lien holdback – typically 10 per cent of the payment made or the value of services or materials provided. A lien holdback is held in a separate trust account. Lien holdbacks are used to protect both lien claimants and payers. They ensure there is money available for unpaid contractors, subcontractors, and suppliers to claim against. They also allow payers to pay out money during the project without liability so long as they comply with the requirements of the legislation. It is important to be aware that lien holdbacks generally cannot be used to cover the cost of addressing deficiencies or completing work.

Consult a Lawyer Early

By involving a lawyer at the beginning of a project, potential issues can be identified and addressed before they escalate into costly disputes. A lawyer can help identify and mitigate risks, provide guidance on contractual terms, advise on compliance with relevant regulations, and assist in negotiating disputes.

By following these five strategies during construction projects, parties can prevent disputes, protect their interests, and preserve their business relationships.

McKercher LLP
374 Third Avenue South
Saskatoon, SK
(306) 653-2000

McKercher LLP