Occupants of any internal units of commercial building are expected to carry out some construction activities throughout its usage of that space. This could be the initial fitting out works of office units at the inception of the lease, or even retrofitting works in the midst of its occupation by installation of new equipment to improve the performance of that space. Occasionally, the occupant may also carry out restack works to increase density of the spacing between workstations or meeting rooms. Restack works could also refer to the reshuffling of locations of various business units to improve workflow or to fulfil certain regulatory compliance requirements. Given the magnitude and variety of construction activities expected, the procurement and contractual risks commonly associated with building construction projects are also applicable to the above mentioned fit out works. Whether those construction activities pertains to fitting-out, retrofitting, or restacking in respect of an internal commercial space, these works share a fairly similar set of procurement challenges and contract risks. For ease of reference, this article shall use the term fit out works to refer to these collective types of construction activities.

Unique Nature of Fit Out Works

The appreciation of procurement and contract risks of fit out works begins with an understanding of the unique nature of these works. The occupants referred to in this article means amongst others banks, financial institutions, insurance companies, law firms or technology companies which tend to occupy a significant amount of commercial real estate space. These occupants are also referred to as ‘the Employer’ in the context of construction contract, in that they directly engage architects, engineers, interior designers, fit out contractors etc to carry a significant amount of fitting out works over a period of time. 

These fit out works could be driven by various business imperatives. These could range from leasing of additional real estate space to accommodate business expansion or to consolidate all business units located in multiple buildings into one single “campus” that now spans across multiple floors in a single building. It could also be reduction of commercial space arising from business contraction or work from home policy. It may also stem from the need to change office environments to facilitate a more collaborative “open” working environment concept. Occasionally it could refer to construction of physical barriers between different business units or introduction of engineering redundancy for compliance with regulatory requirement due its mission critical banking activities etc. Whatever the underlying reasons it may be, these fit out works typically involve amongst others supply and installation of new walls, floors and ceiling finishes, system furniture, fittings and equipment, as well as mechanical and electrical services to accommodate a revised internal layout. Beyond the traditional builders works, it could entail the creation of “technology room” that may require computer room air conditioning (CRAC) units, uninterruptible power supply (UPS) units which could involve installation of new raised floors.

These fit out works are often carried out in a “live” environment namely within an occupied building with limited hours within which these construction activities are permitted. Works usually had to be carried out after regular office hour or over the weekend. Additionally there are various rules administered by the building management office or its managing agent that principally regulates the manner in which the works are to be carried out so as to minimise disturbance to other building tenants. Unlike the traditional construction of a new building where the main contractor retains much control over the way its site is managed, a fit out contractor by contrast is not provided with much latitude or flexibility. Certain grade A commercial building with high profile tenants may have even stricter requirement where the specific construction activities planned by the fit out contractor is required to be shared with the building management office in advance so as to facilitate timely communication with neighbouring tenants. This is to avoid scenarios where certain hacking works are carried out during ‘peak period’ of neighbouring tenants when they may be working in their offices throughout the night, resulting in complaints and even abortive work.

The usage of commercial real estate by the Employer often lags behind its evolving business needs. By way of example, if an investment bank decides to retrench a significant number of its employees in response to an unexpected bearish market condition, it may execute its plan swiftly. This result in the need to surrender a significant portion of its real estate space back to the building owner and to restack the workplace of remaining staff. The corporate real estate manager of such bank may have limited amount of time to execute those construction activities as these initiatives can be announced in a sudden surprise. The compressed construction period poses a unique challenge to fit out works as compared to construction of a new building which typically would entail months if not years of preceding due diligence period. Therefore corporate real estate fit out works are often required to be operationally ‘nimble’. 

Given the unique features of corporate fit out works and the special circumstances within which it operates, it would be beneficial to review some of the procurement and contract risks that it is confronted with.

Standard Form of Contract for Fit Out Works

There are various standard forms of contract used in the construction industry across different jurisdictions. By way of example of Singapore, the Public Sector Standard Conditions of Contract (PSSCOC) is widely used in public sector projects initiated by the government. On the other hand, the private sector projects in Singapore often rely on other standard forms of contract such as the SIA form and the REDAS form. These standard forms of contract are often modified to suit the bespoke needs of the project in hand. Whilst these forms of contract are drafted in fairly general terms to ensure its flexibility in being used for multiple types of projects, these forms are drafted in anticipation of a more conventional project. Such conventional project would typically refer to the construction of a building or certain infrastructure erected on any land. The main contractor in this regard is given possession of site by a certain commencement date of the contract period and is typically provided with a reasonably uninterrupted site access, management and control. The contract would also specify a contractor administrator or a certifier, who is empowered to supervise the main contractor’s works and is also the arbiter in case of certain disputes. The corporate fit out works however is different from such conventional projects and all parties involve should be aware of the limitations in using such standard forms of contract. 

Particularly in Singapore, there is no standard contract form that caters specifically to corporate fit out works. Therefore parties often use the conventional forms of contract with significant modifications, which arguably defeats the original purpose of having standard forms of contract. For the purpose of this article, a few notable examples will be raised to highlight the mismatch between the conventional forms of contract as it relates to characteristics of corporate fit out works.

Firstly, most conventional standard forms of contract would have provisions for adversity that may be encountered by the contractor in respect of sub-surface and ground conditions. These provisions anticipate a typical construction of a building on any given land where certain hardship, difficulties and challenges may be encountered by the contractor during the construction works. These challenges may include presence of underground services, subterranean boulders or marine clay that could give rise to significant additional costs and time to carry out the works. These provisions would typically specify the manner in which risks are to be allocated between the contractor and the Employer. These risk allocation philosophies in turn gets incorporated into other relevant provisions such as valuation of variations or entitlement to extensions of time. However in the context of corporate fit out works, these issues are not applicable. 

Secondly, the same conventional standard forms of contract anticipates significant number of plant, machineries and equipment used in construction site which are either owned by the contractor under certain financing arrangements or leased from a third party. Consequently, there are provisions of contract that stipulates that such plant, machineries and equipment that are deployed on site shall be deemed vested in the Employer throughout the construction period. On the other hand, interior fit out works rarely involve heavy plant, equipment and machineries due to the nature of the works and the confined tenanted space in a commercial building. One may argue that these provisions could quite simply be ignored if it is not applicable. However, the contract documents of projects are often circulated to other third parties such as financial institutions or insurance companies to procure bond or insurance coverage. Any simplistic desktop analysis of these documents could unnecessarily elevate the risk profile of the projects, causing an avoidable rise in project costs. 

Whilst there is an existence of provisions that are not applicable to corporate fit out works as illustrated above, by contrast there is an absence of provisions which ought to be in place that are specific to fit out works. The effects of such absence will be elaborated in the following sections of this article. 

Risk vs Reward – Liquidated Damages

Most business transactions are exemplifications of the balance between risk and reward. The transacting parties often assess what is the potential gain or reward in exchange for the risks that it had to shoulder. Corporate fit out agreements in a business sense is no different. As regards risks, the fit out contractor had to contend with the possibility of, amongst others being in culpable delay and consequently get imposed with liquidated damages. Liquidated damages are genuine pre-estimate of losses that may be caused by the party in default as a result of delay in completion. In the context of corporate fit out works involving investment banks, financial institutions etc, any delay to completion that deprives these firms from using its business premises may result in significant damages. This is particularly so if the estimation of losses are measured based on the loss of revenue in which case could amount to millions of dollars. On the other hand, the contract sums for fit out works varies considerably depending on the nature of the works where some of the lower end of the spectrum could only be a few hundred thousand dollars. Assuming a fit out contractor makes 10% profit for these smaller scale works, it could hardly justify any potential losses as a result of delay to completion. 

Unfortunately in using the conventional standard forms of contract, the recourse for the Employer for any delay is typically in the form of liquidated damages and the disproportionality between risk and reward can be a problem. Whilst admittedly the concept of liquidated damages is useful in most traditional construction of buildings in that it provides certainty in amount of damages payable without the onus of proof, that could also be an impediment in the context of fit out works. Liquidated damages provisions work hand in hand with other provisions in standard form of contract such as extensions of time. Consequently any amendments to liquidated damages provisions may be cumbersome given the spillover effect on other provisions. The following section of this article will illuminate the effects of extensions of time provisions and how its application may give rise to anomalies as regards fit out works.

Anomaly in Delay and Extensions of Time

To appreciate the the limitations of conventional extensions of time provisions in the context of fit out works, it will be useful to set out a general overview of a typical extensions of time mechanism. A contractor is entitled to extensions of time when the delay to the project is excusable based on the grounds provided for under the contract. Once an extension of time is granted, the original completion date is extended and be replaced with an extended completion date. The extended time is usually granted based on a certain number of calendar days. In the context of fit out works, the measurement of calendar days may not be suitable in certain occasions. This is due to the restrictions on the timing during which construction activities are allowed in an occupied commercial building. 

As alluded to earlier in this article, carrying out construction works in a ‘live’ building environment entails various challenges especially when one is expected to comply with the regulations administered by the managing agent of the building. In certain grade A commercial building with prominent tenants from technology companies, law firms, investment banks etc, there is an expectation that their working hours are extended well into the night.  The building management regulations are therefore influenced by the needs of such tenants. For a regular weekday, construction activities could be allowed just before midnight and shall cease by 5:00am the following morning. As such the fit out contractor could only work productively for approximately five hours in a given weekday. However, certain works may need to be executed continuously within a single session that may take beyond the five hour durations based on a certain productivity that would justify the associated mobilisation and demobilisation costs. Under such circumstance, these works can only be carried out over the weekend, where construction activities may commence around midnight on Friday and not end until the subsequent Monday 5:00am. This continuous duration is more conducive for certain works to achieve meaningful progress.

Given the restrictions depicted above, it may be a problem if the original completion date falls on a weekday say Tuesday and the contractor is granted five days of extension of time which extends the completion date to Sunday. Assuming the outstanding works cannot be accommodated within the typical weekday 5-hour block, the contractor can only utilise the two days over the weekend to achieve the originally planned productivity. In this case, the contractor is actually not benefiting from the five days extension of time at no fault of its own. This may expose the contractor to liquidated damages for outstanding works beyond the extensions of time granted. As such, the typical extension of time provision in standard forms of contract does not precisely address such nuances at present moment. 

Challenges in Attracting Competitive Tender

Whilst fit out works may present certain unique contractual challenges illustrated above such as extension of time and liquidated damages, in reality these considerations are not at the forefront of most contractors’ mind when considering whether to carry out such works. The key consideration for most contractors, rightly or wrongly is the potential of profitability of fit out works. In this regard, the primary rule of thumb is the magnitude of the works or the contract sum. This is because a modest percentage of profit of a large sum is still quite an attractive proposition. Whilst the scale of fit out works can be large financially, particularly during the commencement of a lease in a new building, the more frequent fit out works that occur in the midst of the lease are those with more modest scale such as restack works or retrofitting works. These works may range from a few hundred thousand dollars to several million dollars, which is modest in the context of construction projects. It can be a challenge to attract competitive bids during procurement of such modest fit out works. 

Therefore corporate real estate managers representing the Employers had to be creative to attract sufficient competitive tenders. This is not merely to obtain competitive pricing but also to build up a diverse source of contractors, vendors and suppliers to improve redundancy and also to avoid putting all eggs in one basket. It would not be in the interest of the Employer to only have one regular contractor carrying out all its works. Apart from from the likelihood of paying a premium due to lack of competition, the Employer may be left in the lurch if the regular contractor becomes unavailable for various reasons, in particular if the restack work in hand is especially urgent. Working in a ‘live’ commercial building with confined space and restricted construction hours entail quite a steep learning curve in the beginning. It also takes time to build a reservoir of good will and productive working relationship with the building’s managing agent. It is usually not advisable to engage a fit out contractor that is completely new to the Employer and the building’s managing agent for a larger scale fit out works. Therefore, the strategic approach is to leverage on the smaller fit out works as opportunities to incrementally build the necessary institutional knowledge. This is critically important if the Employer anticipates a large fit out work in its pipeline of projects in a not too distant future.

Apart from smaller scale restack projects not being commercially attractive, even certain mid size fit out project could face difficulties in attracting interest and participation from the market players. This is so when the project in hand is subject to strict design standards. Certain large financial institutions may implement regional or even global design standards. These standards can be highly prescriptive in terms of choice of specific corporate colour for internal furnishings, model and brand of system furniture, choice of glass partitions etc. Very often these design standards are created in ensuring consistency in its aesthetic appeal that cater to certain branding objectives. Therefore, the fit out contractor will be given a list of designated suppliers to procure the relevant material and finishes with standardised pricing. In this regard, the latitude within which the contractor will be able to carry out its procurement from its very own sources is limited. It follows that there is certain limit to its profit margin. Contractors typically thrive financially when it is given certain flexibility to find creative ways to source and construct the works and yet still meet the stipulated performance specification. Therefore design considerations may conflict with commercial interest occasionally if one fails to assess its corporate real estate strategy holistically.

Conclusion

The unique features of corporate fit out works may give rise to certain contractual and procurement risks as illustrated above. When planning and strategising for corporate fit out works, it pays to appreciate the risks discussed above and be thoughtful in devising a pragmatic implementation solution.


Koon Tak Hong Consulting Private Limited