December 29, 2009

Outlook 2010

Stimulus funding delay a silver lining

Canada in good shape versus U.S.

DAN O’REILLY

correspondent

The incoming year should be a better one for the construction industry than 2009, says one of Toronto’s leading construction lawyers.

That assessment is based on a number of scenarios, says Kenneth Eccleston, counsel with Fasken, Martin DuMoulin LLP, and a specialist in construction law for 20 years.

With this country’s financial regulatory controls, a long bureaucratic approval process, and the lengthy time required for engineering and environmental studies, the so-called “shovel-ready”’ federally funded infrastructure projects are just now coming on stream.

While that might have been frustrating, it has actually placed the Canadian construction industry in a good position when compared to its American counterpart. In the U.S. most of the federal stimulus money has already been spent, he points out.

And as those public-sector projects get started, a number of private sector projects that were temporarily delayed because of the recession are coming back on stream.

As just one example, he points to the large recladding of First Canadian Place by Brookfield Properties.

“We actually might be hit with a double whammy,” says Eccleston, referring to the cumulative impact of low interest rates and government and private-sector spending combined with a general up-tick in the economy, which the Bank of Canada has suggested is now underway.

While “labour markets always lag behind capital markets” and unemployment will probably remain high for some time, that’s less of an issue for the construction industry. There will probably be more trades working in 2010 if the economic revival keeps on track, Eccleston predicts.

However, as the construction industry looks to the future, it also needs to reflect on the very tough challenges it has faced in the past turbulent 18 months and not forget the lessons learned during that time.

“Personally I don’t know of any projects that failed in Canada.”

But projects were put on hold and some contractors did go out of business, although most were smaller contractors who “live from job to job and can be vulnerable at any time.”

While it wasn’t widespread, some owners and developers and their financial backers also tried to exploit the economic crisis at the expense of contractors.

“There have been numerous cases in which I have been asked to consult in which owner/developers and prime contractors have approached subcontractors asking that each take a uniform percentage reduction in the stipulated price each had tendered for their project work.”

In support of this proposal, the owner/developer may trot out financial arguments related to the evaporation of equity, lack of funds from the lender or lost potential development profit on the project, says the lawyer, pointing out the requested reduction can total 10 per cent.

“It is unrealistic to consider that a 10 per cent cut in hard construction costs will save a project. In instances like this, contractors are being asked to participate in the risk capital process. But they’re not risk capitalists, they’re contractors.”

The lawyer’s advice to subcontractors when asked to take a cutback?

“I’d simply resist overtures to give back monies. Owners and developers don’t divulge financial information when times are good.

“And if they’re going to push for concessions when times are hard, are they going to return those concessions when the economy turns around?”

The time for negotiation is during the bid process and once a contractor or subcontractor has signed a stipulated lump contract that negotiation has been completed, he says.

Another consequence of the recession has been a significant rise in claims under the breach of trust provisions of the Construction Lien Act. This is a particularly important issue the industry needs to pay more attention to, especially as all monies received from a project are impressed with trust.

A contractor can continue to pay its subcontractors amounts due under their contracts without fear of being in breach of the trust provisions of the Act so long as those amounts are due under the contract for services and materials supplied to the project.

In their efforts to juggle expenses some contractors use those monies to pay everyday expenses or co-mingle trust accounts from various projects. However, this is a breach of trust and they can be held personally liable if financial problems arise.

Contractors need to keep separate accounts for each project and only pay monies owing on a project from the corresponding account, warns Eccleston.

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