THE RENEWAL OF TRUST IN
RESIDENTIAL CONSTRUCTION
Commission of Inquiry into the Quality of
Condominium Construction in British Columbia
Submitted to the Lieutenant-Governor in Council
Government of British Columbia
by Dave Barrett, Commissioner
June 1998


Chapter Two: The Framework of
Residential Construction
Continued

IV. The Role of the Developer/Builder

Real estate development is the business of servicing land and constructing buildings to meet the needs of residential, industrial, commercial, and mixed-use occupancy.

"The nature of the real estate development industry can be summarized as widely varied in its composition and sub-markets, highly cyclical, highly competitive, and inherently complicated ... the industry has almost no legal barriers to entry. Anyone can create a development company, buy land, hire a battery of consultants and contractors, obtain financing, and follow through the approvals process to put up a building."

Urban Development Institute

The developer or builder purchases land (either with existing structures on it or raw, unserviced land). Rezoning commences through municipal planning departments then goes before city council. Often a separate, limited company is created for the project. Bank financing is sought (generally representing 60% of the total cost of the land, plus servicing and other costs related to preparing the property for construction). If necessary, demolition of existing structures takes place. Often the bank will require presales before construction can commence. It is at this stage that a developer will apply for warranty coverage and negotiate with CMHC on mortgage insurance if deemed desirable for the project.

The developer must pay development cost charges (DCCs) to the municipality, based on the amount of land and the number of units to be built. As well, each of the building permits, explained in the municipal inspection and approval process section above, must be requested and paid for. In a typical 40-unit condominium, valued at $5 million, the permits and DCCs may represent 5 percent to over 15 percent of the total cost, depending upon the municipality.

The residential construction industry in British Columbia is highly competitive. It presents few barriers to entry, and has been characterized as volatile. It has a high rate of business failure; a tendency for "low bid/low quality" construction; and builders who exhibit a wide range in skills and abilities from very low to very high. Many developers, who have not maintained a long-term presence in the market, are simply investors who create numbered companies for each project, and leave when project is complete.

There was a general consensus that the industry urgently requires a registry of qualified developers, builders, and contractors. As well, it requires a general upgrading of skills and accreditation of those on the job site.

"...do you have a half-ton, do you have a ladder, poof, you're a contractor, that's what it takes."

Dave Robertson, BC Construction Association

The absence of performance standards in the development community and hence, the lack of qualifications for builders, contractors, and sub-contractors, has, in part, allowed this crisis in quality construction to develop. There are some quality builders in the community, but the performance by a number of unqualified and irresponsible builders has saddled the industry with a loss of public trust and a significant problem to remedy.

There appears to have been a gradual erosion of standards and quality in the residential building industry. In addition, there has been a loss of the collective wisdom surrounding the production of a quality product, even while the standards of marketing, financial management, legal acumen, and government liaison have improved. The developer is ultimately responsible, if not legally, ethically and morally, for ensuring that their product -- a residential dwelling -- does not leak and eventually, rot.

The need for industry regulation has been identified by numerous presenters, with industry self-regulation being suggested by some. The Commission rejects this proposal, as a need for third-party regulation has been established by the scope and magnitude of the problem. The Commission proposes an Advisory Council, with broad representation from industry and consumers, be established as part of the important Research and Education arm of the Homeowner Protection Office.

The Commission rejects the assertion by industry associations that opportunities for alerting the public, and bringing to bear greater operating discipline were not available to them. Beginning in the early 1990s, the industry associations were aware of the problems, but, other than internal discussions and work on task forces and committees, they failed to alert the public or to apply any meaningful pressure on their members to improve standards.

"We would also suggest -- with great regret -- that the low level of public confidence means that our industry has missed the opportunity to form a self-regulatory body. While we firmly believe that our industry is capable of forming a highly effective self-regulatory body, we feel that consumers, industry critics, and the general public would not be willing to accept it as an objective organization acting in the best interest of all British Columbians."

David Podmore, Greystone Construction

  Recommendation #22: That the residential construction industry be regulated under public authority through a Regulatory and Licensing arm of the Homeowner Protection Office.

"None of us knows exactly who to trust. We want to be sure that we're not hiring the same people that caused these problems in the first place. So I would like to see a public list of people who are credible ... because we can't really afford to go and hire the same people who caused the problems in the first place."

Shawna Fitzgerald, Condo Owner

  Recommendation #23: That all renovation contractors performing building envelope reconstruction greater than $2,000 per unit or $10,000 for single-family and duplexes, be licensed and regulated by the Homeowner Protection Office.

The Commission believes that financial support for the people most in need should be provided by the developers and builders, although it is recognized that bridge financing of these resources will initially need to be funded by provincial and federal governments.

  Recommendation #24: That developers and builders pay a special levy of $1,000 per unit to be built in the coastal climate region of BC. This levy to finance the Reconstruction Fund available to homeowners facing repairs and most in need as a result of poor quality construction.

 

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Copyright © 1998: Government of the Province of British Columbia