Ryan Chalmers, co-Practice Group Leader of the Construction Group and member of the Infrastructure and Corporate/Commercial Groups at Aird & Berlis, discusses the current state of Canada’s construction industry and identifies what he believes the impact of lingering pandemic concerns will be on the lawyers who practice in this area.
Post-pandemic, what is the state of the construction industry in Canada? What does that mean for lawyers?
Prior to the onset of increased inflation and cost-of-living concerns, we had been seeing quite a resurgence in activity in the construction industry (residential, commercial and industrial, and across virtually all sectors), particularly in Toronto and Vancouver. Certainly, this meant more projects coming online, more procurements in the market and more contracts to draft and negotiate.
There are still lingering concerns regarding what pandemic/epidemic relief (time and money), if any, should be included in construction contracts. There are owners who take the position that COVID-19 is now a known factor that can readily be addressed by appropriate mitigation measures; they are taking a harder line to exclude specific relief related to COVID-19. Contractors, on the other hand, are taking the opposite position in connection with COVID-19 and are asking for full relief, should COVID-19 make a resurgence.
As supply chain issues have not yet stabilized and inflation remains a concern, we are increasingly seeing owners take a more measured approach to launching projects while contractors become increasingly weary of fixed-price, date-certain contracts. Owner-side lawyers are being asked to strategize more and more on procurement methodologies and project delivery models, working with owners to address these issues in order to (1) properly manage and allocate risks, but also to (2) ensure that projects continue to be delivered with as little upheaval as possible. Contractor-side lawyers, on the other hand, are being asked to take a harder look at contracts to ensure that risk allocation as well as price and payment mechanisms are appropriate (including with respect to commodity escalation protection), and that project delivery models achieve their clients’ goals.
We have seen contractors refuse to bid if the project delivery model is, in their view, inappropriate to the circumstances, and we have seen prices that are very high to account for what is considered to be inappropriate risk allocation.
Anecdotally, we are hearing that owners are increasingly seeing pressure to proceed with construction management or construction management at risk contract models (cost-plus), as the market is just not willing to take on fixed-price risk.
Now that 2023 is nearly over, what issues in construction law have become prevalent?
As discussed above, COVID-19, inflation, supply chain issues and cost-of-living concerns remain at the forefront of the construction industry. What this leads to is a careful consideration of whether a project is economically viable; whether the budget set for a project is (or remains) appropriate and reasonable; what is the best project-delivery methodology (cost-plus, fixed-price, construction management, construction management at risk, etc.) in the circumstances; and, of course, depending on the responses to at least some of the above, whether or not to bid on a project. There is also the question of whether or not there is enough skilled labour to work on the projects that are in market or are planned to come on stream in the next short while.
While these are not strictly “legal” issues, they play into the heart of each construction project and require construction lawyers to have a wider grasp of the industry. Such knowledge can be used to assist clients in crafting a procurement process that will still invite bidders, despite these challenges; assist clients in achieving their goals for the project; and balance risks in an appropriate and reasonable manner.
Has the hollowing out of downtowns affected the practice of construction law?
At times, yes. In our practice, we have found that, much like owners and construction contractors, construction law is about relationships. Those relationships are strengthened when we’re able to sit across a table, look into each other’s eyes, and discuss the risks of a construction project and how best to manage and allocate for them in a contract. Trust is a big component of the construction bar, which is not large. Construction solicitors are an even rarer breed. Reputation, earned through integrity and consistency, is key to successful relationships at the construction bar. While this can be earned without ever seeing opposing counsel, or by simply talking on the phone, sitting in a room, hammering out risk mitigation and contractual risk allocation is by far the best way to establish a reputation and earn trust.
With fewer lawyers having in-person meetings and essentially working remotely full time, developing these kinds of reputations and relationships (even with Zoom and Teams) is more difficult, especially for younger construction lawyers striving to make a name for themselves.
Without a connected construction bar, in our experience, contract negotiations tend to last longer, there is often misunderstood positions, and resolutions to what should be relatively minor issues become more elusive.
Is Canadian law considered contractor-friendly? Why or why not?
It really depends on the type of project and the project delivery methodology. Public-private partnerships (P3) have, in the last few years, been viewed by the market as owner-friendly. Owners have tended to allocate a significant amount of project risk to contractors, and relied on the size of the projects to entice the market to accept these risks. Contractors and their lenders were willing, generally, to accept and have accepted these risks. However, in recent years, there have been notable market participants expressing increasing concerns with the amount and nature of the risks being transferred to the private sector. This has led some public owners to review their contracts, listen carefully to the market, and take a more nuanced approach to risk transfer and management. This process is still underway, but the willingness to listen and react to the market (even without fully agreeing to everything the market is seeking) is, in our experience, leading to renewed interest from the contractor community to participate in these types of projects.
With more standard-type projects (residential condo construction, municipal infrastructure, or private-sector construction industrial development) proceeding by way of, for instance, design-bid-build and using industry standard documentation, such as the CCDC suite of documents, the starting point for the contracts would be considered contractor-friendly. The extensive use of Supplementary Conditions (usually crafted by the owner) to re-balance the documents is a must from any owner’s perspective, and shows that these documents, at least from an owner’s perspective, are considered tilted in favour of contractors. This isn’t to say that an owner should be looking to rewrite the standard documents in such a way that it ends up 180 degrees from where it originally started. Instead, an owner should be looking at making appropriate adjustments to the contract so that proper construction risks are allocated to the contractor and, where necessary, project-specific changes are made to reflect the specific circumstances of the project.
Our role as either owner’s counsel or contractor’s counsel (in addition to acting in the best interests of our clients) is to make sure that appropriate risks are borne by the appropriate party. When we act as owner’s counsel in the private sector, this begins right away in assisting clients to choose the most appropriate form of project methodology. This is followed by assistance in crafting a procurement approach and documentation that will result in obtaining the most responsive bids/proposals, resulting in a fair and appropriately balanced contract. When we act as contractor’s counsel, our role is to work with our clients to ensure that they understand the risk allocation in the given project’s context. We assist in crafting suggestions to put to the owner, addressing inappropriate risk allocation and ensuring the owner is getting value for money.
It does not serve anyone on a construction project for any contract to be so one-sided, so we work with our clients to achieve a balanced document.
Do you have any other insights on construction law (and by extension procurement law) in Canada?
In this economy of tightening belts, we are seeing – especially in the private sector – a decreasing use of robust procurement practices. This is unfortunate. In our view and in our experience, time and money spent up front on a well-thought-out and properly executed procurement strategy will, each time, give rise to a better project, headed by the best contractor and for a more accurate price.
When we act for owners and are engaged in advance of procurement documentation being drafted, we are able to offer significant insights to assist the owner in getting the most “juice” out of the procurement. This typically starts with a frank discussion with the owner about their goals for the project, i.e., What does the end of the project look like? What are the objectives the owner wants to achieve? What does a healthy contracting relationship look like for the owner? The answers to these questions help us craft a robust procurement process with the end result in mind.
Too often, procurement documentation is drafted by consultants who are not specialized procurement lawyers. This has the tendency of producing documents which are more “off the shelf,” leading to generic and untailored results for individual projects. While this is appropriate for the traditional “legal” aspects of the documentation (i.e., think boilerplate-type clauses, such as how bidders are to ask questions and limits of liability), it does not lend itself well to finding the best contractor for a specific project, nor for achieving the best pricing for a specific project. Sophisticated procurement and construction counsel are able to work with owner clients to understand an owner’s specific concerns and desires for a project, work with the owner’s architects and engineers to determine what the best general contractor/design-builder’s experience looks like, and assist in determining what submission requirements and evaluation criteria should look like so that the owner ends up with the best contractor for the project.
Procurement lawyer specialists are able to use procurement law and the significant levers it can provide to owners to get at exactly what the owner needs to accomplish with the project. We start at the end of the project and work back towards the beginning. The owner’s goals inform the risk allocation of the contract, as does the delivery methodology, contracting approach and project-specific circumstances. Risk allocation and project-specific circumstances inform the procurement submittal requirements. In turn, the procurement submittal requirements inform the evaluation criteria. This process ensures that everyone’s eyes are on what will make the project successful, not just what will result in a bidder being chosen. Construction procurement is not only about getting to a preferred bidder, but also getting to the best bidder for the project as a whole.
When acting for contractors, procurement lawyers and construction lawyer specialists are able to “read between the lines” of an owner’s procurement documentation and assist clients in asking the right questions during the procurement phase. Construction lawyers are able to craft careful suggestions for improving an owner’s contract and to develop bids that are both responsive to an owner’s procurement documentation and reflective of a deep understanding of the contractual matrix.
Construction lawyers are simply one part of the greater construction project team. However, when deployed strategically, they can be very effective when it comes to achieving great results and getting a project to the finish line.
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Ryan Chalmers is co-Practice Group Leader of the Construction Group and member of the Infrastructure and Corporate/Commercial Groups at Aird & Berlis LLP. He advises on, drafts and negotiates concession, design-build, operation, maintenance and rehabilitation agreements as part of major infrastructure projects across Canada. Ryan also regularly provides strategic advice to clients on services agreements for various engineering-related matters.