Construction Contractors Face Higher Risk On Projects

The British Columbia construction industry is undergoing a period of sustained stress. Dramatically decreasing market demand has resulted in an erosion of project equity across the province. As equity positions deteriorate, the viability of many projects is increasingly in question, particularly those that were marginally capitalized from the outset.

This erosion of equity has predictable consequences. Across British Columbia, projects are experiencing an uptick in developer insolvencies and Companies’ Creditors Arrangement Act (CCAA) filings, often mid-construction. These filings are no longer confined to fringe or speculative developments; they are increasingly appearing on conventional residential, mixed-use, and commercial projects.

For contractors and trade contractors, this environment presents acute risk.

Contractors Are Exposed When Projects Fail

When a project encounters financial distress, contractors are typically among the most exposed stakeholders. Unlike lenders, contractors advance labour and materials without the benefit of comprehensive security. While the Builders Lien Act provides powerful remedies in theory, those remedies can be sharply constrained in practice when a project is under water.

Most notably, secured lenders take priority over lien claimants for all funds advanced prior to the filing of liens. Where construction financing has been substantially advanced and the value of the project has declined, there may be little or no realizable equity remaining to satisfy lien claims.

In those circumstances, lien rights, though technically preserved, can become effectively meaningless. This reality has become more common as declining values intersect with highly leveraged projects.

Practical Risk Mitigation Strategies

In this market, contractors cannot assume that statutory remedies alone will provide adequate protection. Proactive risk management is essential.  Some practical tips for managing your risk follow include:

a) Ensure the Lien Holdback is Secure

The lien holdback remains one of the most reliable protections available to contractors. Funds placed into a properly maintained holdback account are impressed with a trust for the benefit of lien claimants. Unlike general project funds, holdback monies are insulated from many competing claims.

Contractors have a statutory right to request information about the existence, amount, and administration of the holdback. In stronger markets, this right is often overlooked. In the current environment, it should be exercised routinely and early.

Failure by an owner or prime contractor to properly establish or fund the holdback account may give rise to personal liability and trust claims—often more effective than lien enforcement against a distressed project.

b) Avoid “Pay-If-Paid” Clauses

“Pay-if-paid” clauses shift the risk of owner default entirely onto trade contractors. In effect, the trade contractor becomes an unsecured financier of the project, without control over the owner’s solvency or the construction loan.

While courts have historically shown some reluctance to enforce pay-if-paid clauses, that reluctance is not a guarantee. Properly drafted pay-if-paid provisions are increasingly likely to be enforced, particularly where the contractual language is clear and unambiguous.

In the present market, accepting a true pay-if-paid clause may expose trade contractors to total non-payment in the event of a project failure. Wherever possible, such clauses should be resisted, limited, or converted into pay-when-paid provisions with defined outside payment deadlines.

c) Monitor Receivables Aggressively

Delayed payment is no longer merely an administrative inconvenience; it is a risk signal. Contractors should assume that any unpaid receivable is at risk, particularly on projects showing signs of financial stress.

This requires a disciplined approach to receivables including:

• Prompt invoicing
• Strict adherence to payment timelines
• Early escalation of overdue accounts
• A willingness to suspend work where contractually permitted

Passive tolerance of late payment can result in meaningful exposure by the time financial distress becomes apparent. In this market, liquidity discipline is as important as pricing discipline.

Conclusion

The current construction downturn in British Columbia has shifted risk decisively onto contractors and trades. In this environment, declining equity values, increased insolvencies, and the priority afforded to secured lenders significantly reduce the practical effectiveness of lien rights on distressed projects.

Contractors who adapt by enforcing holdback rights, avoiding unfavorable risk-shifting clauses, and aggressively managing receivables will be far better positioned to weather this cycle. Those who do not may find that, when a project fails, their legal rights exist only on paper.

This article originally appeared in Construction Business. It was co-written with Norm Streu, associate counsel with the law firm Harper Grey and past chair of the Vancouver Regional Construction Association.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.