5 Keys To Avoiding Construction Litigation
Construction litigation often arises from poorly drafted or misunderstood contracts, so a solid construction contract is the cornerstone of a successful project. As a contractor, having clear, compliant, and comprehensive agreements is essential to avoid costly disputes and safeguard your business. Whether you're tackling a home renovation or a large-scale infrastructure build, understanding and addressing common contract pitfalls is key to protecting your reputation and bottom line.
Specifically, these are five frequent contract issues contractors face and how to address them to minimize risk and avoid litigation.
1. Fixed-Price vs. Cost-Plus Construction Contracts
One of the most common contract issues is failing to define whether the agreement is fixed-price or cost-plus. A fixed-price contract gives the project owner cost certainty, while a cost-plus contract reimburses the contractor for costs plus a markup, allowing more flexibility.
The problem arises when terms are not clarified, leading to disputes over costs, contingency funds, or overruns. For example:
Is the provided estimate a binding fixed price or a guideline?
Who is responsible for overruns?
How are unused contingency funds managed?
How to avoid this: Always document whether the agreement is fixed-price or cost-plus. If you are not using a formal construction contract, put these terms in writing. Partnering with a construction lawyer ensures your contracts are clear and enforceable, eliminating guesswork and mitigating risks.
2. Misunderstanding Construction Laws
Construction laws, such as Ontario’s Construction Act, govern everything from lien rights to prompt payment requirements. Common errors contractors make include:
Assuming lien laws can be waived.
Modifying holdback percentages or lien periods against legal standards.
Using contracts from other jurisdictions (e.g., U.S. contracts with unenforceable lien waivers in Canada).
Ontario’s prompt payment rules and mandatory adjudication processes make compliance more critical than ever. Failing to adhere to these regulations can lead to disputes with subcontractors or suppliers.
How to avoid this: Use contracts specifically designed for Canadian projects, ideally in the province where the project is located, and ensure compliance with provincial legislation. Work with a construction lawyer to review your agreements. Refer to resources like the General Contractors National Advisory Council’s checklist, which covers CCA and CCDC standard contract documents for Design-Build, Construction Management, and other contract types.
3. Large Upfront Payments
While significant upfront payments may seem like a way to secure materials or reduce risk, they can backfire if the project goes awry. If a contractor underperforms, recovering those payments can be challenging.
How to avoid this: Minimize upfront payments where possible. When deposits are required:
Pay suppliers directly instead of the contractor.
Request performance bonds or letters of credit as security.
Clearly outline in the contract how and when upfront payments will be used.
4. Lack of Clear Delay Provisions
Delays are a common challenge in construction, yet many contracts don’t adequately address them. This oversight can lead to disputes over liquidated damages (pre-agreed penalties for delays) or unclear remedies.
For example, vague provisions like “liability for delays only if the owner suffers a financial loss” create ambiguity and hinder enforcement.
How to avoid this: Include detailed delay provisions during contract negotiations. Address questions such as:
Will the contractor owe liquidated damages for delays?
Are there caps or limits on these damages?
Is the agreed amount the sole remedy for delays?
Collaborate with your lawyer to ensure delay clauses are clear and enforceable.
5. Vague Warranty Terms
Warranty clauses often specify durations but omit key details like:
When the warranty period starts.
Whether it covers the removal and replacement of defective items.
Who covers shipping costs for repairs.
For instance, appliances purchased months before project completion may have expired warranties by the time the owner begins using them.
How to avoid this: Clearly define warranty terms in your contracts, including start dates, coverage details, and responsibilities. A construction lawyer can help draft warranty clauses that align with industry standards and protect your interests.
Do Not Make These Common Mistakes, Consult a Construction Lawyer When Drafting Any Contracts to Avoid Litigation
These mistakes are just a snapshot of the issues that can lead to construction litigation. Often, problems don’t surface until something goes wrong on a project. By carefully drafting contracts through your legal counsel and addressing these common pitfalls upfront, you can save time, money, and frustration later.
Consulting with the experienced construction lawyers at Gionet Fairley Wood LLP will ensure your contract is solid and compliant with local laws.
***The information provided in this blog is for general informational purposes only and should not be construed as legal advice. If you have legal questions, we strongly advise you to contact us.