Chapter 2: The Anatomy of a Construction Project
2.1 | What business practices within the construction industry are relevant to the operation of the Act?
Commentary: to understand the operation of the Builders Lien Act, it is necessary to understand the legal and economic environment that surrounds a major construction project.
Typically, large numbers of persons will contribute to the project. Their relationships are defined by “chains” of contracts that link them together. Pictorially, these relationships resemble a pyramid similar to the one set out in Figure 1. This is sometimes referred to as the “construction pyramid” or simply “the pyramid.” At the top of the pyramid is the owner/developer along with the construction lender who provides financing for the project. At the next level down are persons engaged directly by the owner. This may include architects, engineers, and the head contractor. Further down, the pyramid broadens out with one or more layers of subcontractors and sub-subcontractors. At any level of the pyramid a person may purchase building materials and hire workers.
2.2 | Are all large construction projects structured this way?
The truncated pyramid
Commentary: no. In some cases, the owner/developer also wishes to act as project manager. Instead of having a head contractor. This owner will contract directly with various parties who would otherwise be subcontractors. This arrangement might be referred to as a “truncated pyramid.”
[See Figure 2]
2.3 | Does the Act employ special terminology to describe the relationships of the parties?
“Engaged by” and “engaged under”
Commentary: the Act uses the word “engaged” to indicate that two or more parties are in the same chain of contracts. One person is “engaged” by another when they contract directly with each other. The person who does the engaging is closer to the top of the pyramid. Thus to say “A is engaged by B” means that “A” and “B” are in a direct contractual relationship and “B” is closer to the top of the pyramid.
The Act uses the words “engaged under” where the parties are in the same chain of contracts and they have either contracted directly or are linked through one or more intermediate parties. Sometimes for greater certainty, the Act uses the expression “engaged by or under.” Again, the person who does the engaging is closer to the top of the pyramid.
[See Figure 3]
2.4 | What are some of the financial implications of the pyramid structure?
The flow of money and credit
Commentary: in the construction pyramid, money flows from the top to the bottom. On a major project, the owner will normally finance it by borrowing from an outside lender whose interest is secured by a mortgage over the project. Typically, the mortgage money is advanced in stages which correspond to the various stages of completion of the project.
The advance by the mortgage lender is usually timed to coincide with the point at which the head contract entitles the head contractor to receive a progress payment from the owner for the most recent work performed. On receiving such a “progress payment,” contractors will use some or all of the payment to pay the persons immediately below them in the pyramid, who will in turn pay those who are below them. Thus, the money flows from the top of the pyramid to the bottom.
Since these payments are almost always made after the work that they pay for has been performed, credit is extended from the bottom of the pyramid to the top.
[See Figure 4]
2.5 | How does the Act apply to smaller projects?
Commentary: the dynamics of small projects such as home repair and home renovations are different from those of large projects. Builders lien legislation, although it applies with equal force to small projects, most often is seen as a collection device to assist the repairer or renovator in recovering amounts owed. Securing money owed to those who supply work and materials to the renovator is usually secondary.