Construction Law in BC: How Tariffs, Contracts, and Costs Impact Construction Projects

Tariffs can have a significant impact on the construction industry, influencing everything from material costs to contract terms. Understanding how these changes affect different types of construction contracts is essential for contractors, developers, and homeowners alike.

In this episode of FH&P Lawyers Law Talks, host Clay Williams sits down with construction law experts Shane Gardner and Brett McClelland to break down the effects of tariffs on construction contracts. They explore the key differences between stipulated price and cost-plus contracts, how risk is allocated in each, and what builders and property owners should consider when navigating these changes.

Clay: Welcome to another edition of FH&P Lawyers Law Talks. I'm Clay Williams, a partner at FH&P Lawyers, and I've got two special guests with me today. We are recording on Tuesday, March the 4th. This is a big day. This is the day that the tariffs came down. So we've got a really interesting topic for you today.

We're going to be talking about tariffs and how they might affect your construction contract. So I've got with me Shane Gardner. Always a pleasure Shane, And I've also got Brett McClelland. Now, first of all, a little plug. So, both these guys, along with me are members of our construction team here at FH&P Lawyers.

So we do have a team that's ready, willing and able to assist with all your construction issues. So, let's get into it. And, boy, we're getting a lot of calls and people freaking out about, well, what are the tariffs? How is that going to impact our construction contracts? What are some of the issues that we should be looking at in signing these construction contracts? And, so I thought, you know, let's start maybe with a bit of the basics and, then we'll kind of lead into, you know, some of the things that, that, that the tariffs might cause on existing and some contracts and things to look at in your contract. But let's start with the basics.

Shane, you know what? What don’t you talk to us a little bit about the different types of contracts so that we've got that basic history and then we'll, we'll move it in? I'm thinking let's start with the stipulated price and you know, and cost plus.

Understanding Different Types of Construction Contracts 

Shane: Yeah. So, first and foremost, I think most people can agree right now that there's a lot of uncertainty out there. Understanding the difference between a fixed price—or stipulated price, as you would call it—and a cost-plus contract is paramount in most cases. But it's also important to know that tariffs can affect either of them, and there's a lot of risk allocation involved.

Depending on the terms of the contract, it can really affect the way you do business, whether you're a contractor in the commercial or residential context or a homeowner contracting with a contractor.

Going back to the basics, the first point you made was about a stipulated price contract. These types of contracts will have similar terms as a cost-plus contract. For example, they may include a timeline for construction and terms centered around the scope of work. You always want to have a clearly defined scope of work.

The biggest difference is that a stipulated price contract has a fixed price for that scope of work. So, for example, "We will install a fence in your backyard for $10,000." That fixed price is what defines the nature of the contract.

On the opposite side of the spectrum, you have a cost-plus contract. Sometimes, you’ll see a hybrid between the two. In a cost-plus contract, there’s still a defined scope of work, but instead of a fixed price, the contractor provides an estimated cost. That estimate is usually included in the contract with a disclaimer stating that it’s not a binding term. It essentially says, "This is just an estimate; you can't hold me to it, but I’ll do my best to meet it."

Instead of a fixed price, the contractor earns a management or construction fee, typically a percentage of the total cost of construction. That’s where the contractor makes their profit.

So, that’s the general difference between the two, but outside of pricing, most of the contract provisions remain the same.

Clay: In my mind, a stipulated price contract is easier to understand. When something happens that increases the price of your contract, it’s clear how it works. We’ll talk more about that, but it’s the cost-plus contract that I find more interesting.

You mentioned that you're still preparing a budget—usually. I mean, I hope you are. Although, in the residential world, sometimes it's the Wild West. But typically, you are at least preparing a budget.

What are the responsibilities of the person actually preparing that budget?

Shane: Yeah. So, the budget and the estimate can sometimes be conflated, but generally, from the perspective of a homeowner, they might say, "Okay, I have $100,000 to complete this backyard renovation project. Here’s the scope of work I want done." Sometimes, that scope is accompanied by a design to ensure everyone is on the same page.

With the budget, the available funds are clear, and then it’s the estimator’s duty to come in. Maybe the homeowner has their own estimate, or it's the contractor directly providing one. Either way, the contractor has a duty to ensure the estimate for that scope of work is reasonably accurate.

On one hand, the estimate is not typically a binding term of the contract—unless the court deems it to have contractual effect. On the other hand, the homeowner is not handing out a blank check.

So, when the homeowner says, "I have a budget of $100,000," the contractor needs to acknowledge that and work within those constraints.

Clay: Right, and if the contractor accepts the budget, they can access that money and proceed with the project.

Shane: Exactly. And then there’s an obligation. The courts are very clear—just as there are implied terms about workmanship quality and meeting industry standards, there is an obligation on contractors to provide a reasonable estimate with a certain degree of accuracy.

Clay: So can you eyeball it?

The Importance of Accurate Estimates and Budget Communication

Shane: Yeah. I mean, it depends on how good you are at eyeballing. Let me get some guys who've been in the industry for 30 years—I'm sure they can hammer that pain point pretty quickly. But regardless of whether or not you're comfortable doing it, you have to make sure you do your homework. And I think there's a little bit of industry-specific variability in there. Like, I know we've all dealt with digging files where they're doing some excavating—it’s difficult to see underneath the dirt. You don’t want to do estimates ahead of time. But estimates are a very powerful tool.

Clay: You're so right. We've all dealt with those "getting out of the hole" cases that end up costing so much more than the estimate.

Shane: Yeah. So, I mean, the main thing is you want to make sure you're doing due diligence on both sides. If you're on the homeowner's side, you want to say, "Look, I've got my budget, and I've conveyed it to the contractor. I've told them how important it is." Perhaps that's all you have, right? A lot of people, especially in today's climate—with prices going up, material tariffs, whatever the case may be—cash is tight. So you tell your contractor, "This is all I’ve got. Here’s the budget. It’s defined."

A contractor might come to you and say, "Okay, well, I’ve got an estimate for this project at $100,000." But if you read the fine print, it says, "This is an estimate only." So, really, they don’t want to be treated as if it's a fixed price. It’s still a cost-plus contract. They don’t want to be held to that estimate. But that’s where issues arise—do they have to stay within that? Not in a fixed-price context. What reasonable level of deviation is allowed? Or is there going to be a point in the project where the courts will give contractual effect to that estimate? Essentially, at some point, you have to put a cap on it, right?

Most contractors or homeowners who have been through a project can appreciate that once things unfold, unforeseen costs come up. Suddenly, you're over budget. So what do you do from there? The estimate says it’s an estimate only—I can’t hold them to it.

Clay: Yeah, they might say, "Hey, I proceeded with this on the basis that it was going to cost about this much money." So, is there a rule of thumb? And I guess we should be careful—we're mainly talking about the residential world here.

Shane: Yeah, that’s correct.

Clay: So in this case, contractors are building a house for their client. They provided a budget, and—yeah, I always thought there was a bit of a conflict of interest in those types of contracts because you're taking your percentage on the amount.

Shane: Yeah, exactly. That’s part of the consideration. Courts don’t want a blank check approach either. On one side, a contractor should be able to give contractual effect to the terms of the contract. If they say, "This is an estimate. It’s not a fixed price. I don’t want to assume the risk. And if I didn’t have this provision protecting me, I wouldn’t have gotten into this contract," that’s fair. They can’t see underground, for example.

On the other side, the homeowner says, "Well, I need some degree of certainty. I can’t just give you a blank check. I only have so much money—where do we go from here?" It really is a case-by-case analysis. But you’re absolutely right—there’s an obligation on both sides.

Clay: Is there a rule of thumb? Like, if a contractor comes in and says, "Well, I need more money. I’ve spent $100,000, and now we're at $150,000," is there any general guideline for that? Or is it case-by-case—why did the cost increase? Did they do a reasonable job estimating the budget?

Shane: Based on our view of case law, there seems to be a standard deviation or rule of thumb of about 5% to 20%. Of course, that’s up to the judge's discretion, and case law changes. But from our review of cases, that’s the general ballpark.

Of course, this depends on the type of construction contract. You’ve got two main silos—fixed price and cost-plus. With a fixed price, the contractor assumes the risk. On the cost-plus side, that’s where estimates and budgets come into play.

Let’s say, for example, you're in a cost-plus contract. As a homeowner, you’ve only got $100,000, but your contract states, "This is an estimate." Now, halfway through the project, costs have hit $130,000, and you still have 20% of the work left. At that point, you meet with the contractor and say, "Look, I’m out of money. We need to either cut back on the scope of work, find a way to reduce costs, change materials—whatever the case may be."

Worst-case scenario, the contractor just keeps going with the original scope, doesn’t listen, or there’s a miscommunication. And like any other dispute in life, there’s probably some level of that involved.

The Value of Clear Communication in Construction Projects

Clay: Communication seems to be a key factor because, as you said, once you're into a project, any changes can cost a lot more money. Homeowners might make different decisions about finishes, but as long as there's clear communication, they can better understand what’s happening and adjust accordingly.

Shane: Absolutely. Communication is key. If you're the homeowner, you need to make it clear if you've maxed out your budget. Worst case scenario, if the project keeps moving forward and you run out of ways to resolve cost disputes, the courts may step in. Even if you’re working under a cost-plus contract, where there’s no fixed price, the courts might interpret the original estimate as a binding cap. At the end of the day, there's only so much money available.

Clay: So, in layman's terms, a cost-plus contract can become a fixed price?

Shane: Essentially, yes. A cost-plus agreement can function like a fixed-price contract in certain situations. Courts are cautious about this distinction, though, because a true fixed-price contract doesn’t allow for cost deviations unless additional terms—like clauses for material cost increases—are included.

Clay: Right, I think Brett’s going to cover that next.

Shane: Exactly. If, at some point—say 70% through the project—the homeowner and contractor agree to cap the budget and adjust the scope, a court might decide that the original estimate now becomes a binding term. At that point, deviations would be limited. That’s why communication is so important for both homeowners and contractors. Keeping budgets updated and maintaining transparency is critical to completing the project successfully.

Clay: So, if you're a homeowner and things are going over budget, what’s the key takeaway? Should you be upfront about how much money you have left and get an agreement in place?

Shane: 100%. Above all else, avoid the "ostrich approach"—don’t just bury your head in the sand. Be upfront, be vocal, and work with your contractor. Most contractors we work with are skilled professionals who are open to collaboration. Disputes usually happen when there's a communication breakdown. If costs are getting out of hand, get ahead of it. Keep records, make sure everyone is on the same page, and maintain clear reporting. Most disputes arise because things went beyond the expected budget, and no one properly documented the changes. So, stay proactive—track costs, communicate often, and be transparent about your budget.

Clay: We’ve just come through a pandemic, and we’ve seen how disruptions can impact projects. We’ve heard cases from both sides—contractors struggling with supply delays and price increases. And now, here we are again. Today is March 4th, and new tariffs have been announced. I’m not sure yet what’s being impacted, but surely it’s going to affect some building materials. What does that mean for homeowners and contractors?

The Impact of Tariffs on Construction Projects

Brett: Honestly, I think we should start calling today “T-Day” because it’s going to shake things up. A tariff, by definition, is a duty imposed on goods imported into Canada—that’s straight from the federal government’s website. Right now, we don’t know exactly what tariffs will be imposed, but it’s safe to say they’ll have an effect on material costs moving forward.

Clay: I heard chocolate!

Brett: I’ve heard chocolates, motorcycles, bourbon…

Clay: I think I don't need any more chocolate.

Brett: We need all of those things, but we might not actually have to worry about those in a construction context, right? We're in a construction context. What you're really going to be worried about is the cost of materials such as steel or aluminum or anything like that. If you have a CCDC contract, you should not really fear because, right within that contract, under Section 10.1, there is a whole clause called Taxes and Duties.

Clay: And I'm just going to jump in there because, for our listeners, there really is a difference between the commercial world and the home-building world. And what you're talking about is CCDC or standard contracts that are prepared by the…

Shane: Canadian Construction Documents Committee.

Clay: Thank you. Yeah, which are used especially in the bigger, bigger projects, but in home building—well, you know, it's the Wild West, I always say. So you're talking about the standard form contracts in the commercial world?

Brett: Yeah. So in the CCDC, these contracts have been compiled with input from people in the construction industry itself—engineers, architects, and lawyers—over the last 30 or 40 years. So this is not the first time tariffs have come up and been a threat. There is a provision specifically in there that deals with it, which essentially says in a stipulated price, lump sum, fixed-cost contract—whatever you want to call it—the contract price shall include all taxes and customs duties in effect at the time of the bid, and any increase or decrease in cost to the contractor due to changes in taxes and duties after the time of the bid closing shall increase or decrease the contract price accordingly. That's right in there. Built right in.

Okay, what do you do if you don't have that?

The Risks of Non-Standard Contracts in Construction

Clay: I'm going to jump in there again because, boy, we see a lot of contracts that aren't CCDC contracts. And just for our listeners to appreciate—a CCDC contract is a great contract. I think it's a very fair contract. But it's a long contract. And so there are a lot of—even our clients—who feel that it's just too much for a smaller commercial project. And local contractors are leery of signing these things because they're so long, so there are a lot of contracts out there that are home-built by the contractors themselves.

Brett: Yeah, and those bespoke contracts are the ones that you're really going to want to take a very, very close look at because you might not have turned your mind to a duty being imposed on goods that you had prepared your budget for. Yeah, neither of you might have considered that. And that's something you really want to address, as Shane was saying, through open and honest conversation. Because you said sticking your head in the sand like an ostrich…

One could also say you were just lying in the weeds to get a benefit, right? You're just waiting until you jump out at the end. And you said, "You really owe me this much." Yeah, that's what the contract says. You were going to pay me or build for me at that price or for however much. So yeah, both parties can really benefit or lose out on the same exact point.

Shane: That's a good point. I mean, from the fixed-price context, that's some of the risk you take on unless you have some of those beneficial terms in there, right? So for the listeners, you want to be careful about what's fixed and what's added in addition to those fixed prices. If there are going to be some adjustments based on—not necessarily unforeseen variables—but variables that are outside of your control, those might come down the pipeline for the project during the build.

Clay: Yeah. So don’t sign anything new without really reading and understanding what’s in there.

Brett: And even in the cost-plus contract context, you know what you need to buy, right? Tariffs are coming in. Do you buy that now? Are you going to hold all of those goods in storage? Who's going to pay for that storage? Who's going to insure all of those goods that are sitting in a warehouse somewhere? Are you doing that preemptively, or are you mitigating the potential damage that's going to come up later?

If you just sit around and decide not to do anything until you need that specific item and then order it, and all of a sudden it's 25% more—what then?

Shane: Yeah, I think that's a good point. So again, if you're listening to this podcast, let's say, for example, you're someone right now who's in the middle of a cost-plus contract on either side of the contract. I think the most important thing you can do is like you said, get on the phone, get on email, review the project, do an accounting, and look at how the tariffs are going to change the cost of materials or the cost of installation, whatever the case may be. Who knows what the trickle-down effect of these things will be—whether it’s just going to be limited to the price of goods increasing, whether services are going to increase, or what it's going to do to the economy. So if you get on the phone, talk to the other person, and maybe you can hash out an additional agreement about buying the material upfront. If you buy the material upfront, then maybe I'll pay the increased storage cost because, at the end of the day, it's still going to benefit me more than waiting to purchase the material at a later date. That way, you can kind of work on it in the context of your budget. Maybe the budget can be adjusted a little bit, depending on what the outcome is going to be from the conversation about being upfront. I mean, yeah, I think that's the number one key.

Brett: And especially if you're going to go into a new contract, think about that. Turn your mind to that. Address that right now.

Understanding Supplemental Conditions in Construction Contracts

Clay: I also wanted to bring up supplemental conditions.

Brett: That'll change everything.

Clay: Even with a CCDC contract, which sounds very fair and well thought out—boy—then there are often pages and pages of supplemental conditions, which, you know, notwithstanding what is in section six or paragraph six, dictate what’s actually going to occur. So be very careful with that. So when entering new contracts, really understand that. Now, you're going to talk about flow-downs, is that right?

Brett: Yeah, flow-down provisions. Again, with a CCDC contract—or really any contract—if, say, you are the subcontractor, you really want to make sure you get your hands on, if you can, the prime contract that deals with the relationship between the owner and the person you're contracting with. Because they might try to download all of the rights and responsibilities they have under that contract onto you, and you haven't even seen it.

They basically just incorporate it by reference, and those terms are now something you are signing yourself up to without actually having seen or turned your mind to agreeing to. But it's very common in the construction context when you have multiple parties flowing down underneath the owner—the general contractor, the subcontractor, the sub-subcontractor, the sub-suppliers. You want to be aware of that, and you should really review any contract you have right now or ones you're considering entering into. Understand where you, as a party, stand in that risk flow.

Shane: Right. So, for example, if the prime contract has some fixed price, you want to make sure what portion of that is allocated to you, even though your contract might not have it. That way, you can save yourself from the prime contractor saying, "Well, this is how much of the budget has been afforded to you or how much of the stipulated price is available." So I'm sorry, but yeah, that's just the way it is.

Clay: There are reasons to have flow-down terms in a contract, but I think it's important to ensure that you know what’s coming and understand the risks you're accepting.

Brett: Yeah, there are very valid reasons to have flow-down provisions. Because if the owner gives the general contractor a scope of work and says, "This is what I want you to tackle," and then all of a sudden, the general contractor hires a subcontractor who just comes in and decides to do a standard fly-by-night electrical job that doesn't meet the regulatory codes the owner has set for the general contractor, obviously, nobody's going to be happy. That's not what anybody wants. Everybody wants the contract to be completed, everybody to get paid, and everybody to go on their merry way.

Understand that a contract is really an allocation of risk that the parties have agreed to. The court doesn’t really want to jump in and switch it all up if there’s any other possible way to resolve things.

Clay: Sounds great. Anything else you want to add about tariffs or budget obligations and constraints?

How to Mitigate Uncertainty in Construction Contracts

Shane: I think, more importantly, just highlighting the main point of this discussion. They say that the stock market is like a health bar for the economy, right? Obviously, it’s only one measure, and you wish you could have a more tangible measure of other aspects of it. But I think everyone can agree there’s a lot of uncertainty right now.

And I think that if you're in a contract, despite having terms in place, you might still feel uncertainty with your project or the contract in general. So to help alleviate that, I think it’s important to take a look at your contract, talk to the people you've contracted with, make a plan on how you're going to deal with things together, and try to reduce some of that uncertainty by talking it out—just like we’re doing here. Build more certainty in the contract so that the project can continue because it is vital to you and the economy that we keep pushing through to the best of our ability.

Clay: Communicate, communicate, communicate, I guess.

Brett: So review your contracts and talk to the parties you’re dealing with. Best-case scenario, you don’t have to come talk to litigators.

Shane: Communicate, communicate, and communicate! I'm sure my partner would love to hear that from me right now!

Clay: All right. Well, I'm sure we’ll be talking about tariffs and construction contracts further as more facts come to light. So until next time, this is FH&P Lawyers.

Construction law can be complex, especially when external factors like tariffs impact your contracts. Whether you're a contractor, developer, or homeowner, understanding your legal rights and obligations is crucial. Our team at FH&P Lawyers specializes in construction law and can help you navigate contract disputes, risk management, and regulatory changes. Contact us today!

Disclaimer: This material is provided for informational purposes only and should not be construed as legal advice on any subject matter. Consult with a qualified lawyer for advice on specific legal issues.