As regards loss and expense, the most notable difference in approach between the SIA Building Contract and the Public Sector Standard Conditions of Contract (PSSCOC) is that only the latter included an express provision addressing such claim. Does this mean that any main contractor that entered into the SIA form is therefore “not permitted” to claim for loss and expense? The answer is no.  This article aims to provide explanation as to why and in doing so provide certain perspectives on the different approaches between these two forms of contract.

This article is part 2 of a series of articles comparing the SIA form against the PSSCOC form. Part 1 of this series compares the role of  certifier appointed under these two different forms. Similar to part 1, this article refers to SIA form published in 2016 and the PSSCOC published in 2020 for the purposes of discussion and comparison. One of the key functions of a certifier is to independently assess and certify claims for additional payment. A certifier’s power is invariably dependent on the scope of his authority as prescribed under the contract. Part 2 of this series examines the extent to which loss and expense claims are allowed under these different forms, which in turn will affect the functions of the certifier.

In examining the different contractual treatments of loss and expense, it is imperative that one is precise and accurate on what specifically is being claimed. In reality loss and expense are presented based on specific heads of claims. Different heads of claims under the broad umbrella of ‘loss and expense’ could be treated differently depending on the forms of contract used. Therefore, this article highlights the relevant types of heads of claims with particular emphasis on how claims could be labelled strategically. Finally, depending on the form of contract used, the same type of heads of claim could be treated differently based on the root cause of the trigger event. This is because different contract is drafted based on different risk allocation philosophy.

SIA vs PSSCOC – entitlement to loss and expense claims

Any main contractor’s entitlement under PSSCOC to loss and expense claims are expressly provided for under, amongst others clauses 22 and 23 therein. These clauses set out causative events of loss and expense where claims are permissible, sufficiency of contractual compensation as well as condition precedents to be fulfilled prior to advancing such claims.  On the other hand, there are no express provisions under the SIA form. Main contractors under the SIA form have traditionally advanced their loss and expense claims as general damages pursuant to their common law rights. Where the main contractor suffers damages due to any contractual breach, damages are meant to place the main contractor in the same position as if the contract had been performed. In this context, loss and expense are the damages to compensate the aggrieved party. Certain provisions that are not expressly stated under the contract may well be implied in law. 

To this end the PSSSOC limits the main contractor’s ability to pursue damages under common law by virtue of its Clause 22.2 which deals with sufficiency of loss and expense. Under this clause, the main contractor shall amongst others, not be entitled to recover any loss, expense, costs or damage except in accordance with the express provisions under the contract. Whilst some may understandably argue that this clause is restrictive by limiting the avenue and procedure of claims, others may disagree and are in favour of express provisions. This is because the adoption of expression provision allows loss and expense claims to be managed with greater degree of upfront certainty rather than allowing the problem to fester and deteriorate with the passage of time. Also, the certifier will then be authorised to certify payments associated loss and expense incurred and substantiated to facilitate main contractor’s cashflow. By contrast, the Architect who is also the certifier under the SIA form is confronted with such restriction of power by virtue of Clause 31(12). Under this clause and in the absence of expression provision, the certifier shall have no power to decide or certify claim arising from breach of contract. Consequently the main contractor’s avenue for recourse can either be through commercial settlement or legal action such as arbitration.

Loss and expense can be classified under various heads of claims including amongst others (1) prolongation costs such as on-site overheads, off site/ head office overheads, idling cost, financing costs, (2) disruption costs such as loss of productivity, price escalation, acceleration costs and (3) other miscellaneous costs such as cost of preparation of claims and loss of profit. It should be noted that some of these heads of claims have positive correlation with period of construction and quantity of works. In other words, the longer the period of construction and quantity of works, the higher these costs could be. 

If and when the main contractor had to operate the site for a longer period of time due to breaches of contract on the part of the Employer or its agent, the main contractor’s claim for compensation such as prolongation cost may well be justified. It should also be noted that under the pricing section of the contract document, the main contractor usually indicates its preliminaries costs which would similarly include its on-site overheads, head office overheads, as well as the rentals of certain plant, machineries and equipment which in turn constitute idling cost. Therefore loss and expense claims are often associated with claims for additional preliminaries. 

In this regard, Clause 5(1) of the SIA form requires the main contractor to provide a breakdown of its prices and unit rates to indicate the proportionate amount attributable to amongst other, plant and overheads expenditure. Further Clause 5(2) requires the main contractor to indicate in its preliminaries costs amongst others, items of expenditure that require adjustment based on quantities of work (or ‘Q’) and time required to carry out those works (or ‘T’). Whilst these breakdowns and disclosures are aimed to facilitate valuation of variation of works or measurement of the works, these lines of expenditure are essentially identical to those heads of claims under loss and expense. 

The upshot to these observations is that whilst there are no express provisions per se for loss and expense under the SIA form, Clause 5 therein provides an avenue to claim for certain heads of claims which are effectively loss and expense. Admittedly, these Clause 5 provisions are not meant to address compensations arising from the Employer and its agents’ breach of contract but rather as valuation tools in respect of variations instructed under the contract. Whilst instruction of variations are not breaches of contract, it does give rise to loss and expense claim. By way of example, under Clause 22.1(a) of the PSSCOC, variations are one of the reasons for loss and expense. Therefore the operations of Clause 5 under the SIA form under prescribed circumstances can arguably be seen as an informal express provision for loss and expense claims. The ability to utilise an express provision of contract provides the certifier with the relevant authority to assess the claim under the interim progress payment regime thereby facilitating cashflow. It behooves the main contractor to be conversant with the different claims avenues available and be able to label the claims appropriately.

SIA vs PSSCOC – treatment of different heads of claims

In this section of the article, a comparison is made between SIA and PSSCOC to understand whether the various heads of claims are treated differently under the respective forms. As regards PSSCOC, Clause 22.2 which deals with sufficiency of loss and expense stated that the main contractor is entitled to recover through express provisions any loss, expense, costs or damage whatsoever resulting from any disruption, prolongation or other material effect to the regular progress or completion of the construction works. The wordings are rather broad with no apparent restriction of claim to any specific type of heads of claims or category of expenditures. It is noteworthy that apart from making specific references to prolongation costs and disruption costs, the PSSCOC additionally refers to an open ended phrase of ‘damage whatsoever’. 

By comparison since the SIA form does not include any express loss and expense provisions, it therefore makes any default recovery of damages to be pursued via the main contractor’s common law rights. In the absence of any restrictive clauses, the main contractor is open to claiming any heads of claim subject to the usual standard of proof under civil proceedings. It bears repeating that any claim for damages is financial compensation arising from breach of contract by the Employer or its agents. Therefore such claims are outside the certification powers of the Architect and could not be assessed and paid under the contractual interim progress payment regime. Unlike the PSSCOC, the SIA does not restrict the commencement of arbitration for recovery of damages before practical completion of the construction works. Whilst that may theoretically offer some comfort as it relates to cashflow concerns on the part of the main contractor, in reality arbitration may not always provide speedy recovery of compensation. 

As alluded to earlier, the main contractor that prefers to claim under express provisions of the contract could refer to Clause 5 of the SIA form. It should be noted that not all heads of claims are permissible. Clause 5(1) only refers to plant, equipment, overhead expenditure that are included in the unit rates and prices, with the corresponding proportionate amount expressly identified. Further the expenses must be caused by instruction of variation of works. Pursuant to Clause 5(2) other preliminaries types of expenditures that are not already included in unit rates but are instead allocated in the preliminaries section of the pricing schedule should be identified with the letter ‘Q’ or ’T’ for these heads of claims to be admissible. Therefore whilst Clause 5 offers substantive loss and expense claims to be assessed and paid under certification regime, the types of heads of claims are relatively restricted. In view of this unique mechanism under the SIA form, it raises the question of whether the main contractor under the PSSCOC could similarly claim for additional preliminaries through their unit rates and prices. If possible, this effectively allows one to bypass Clauses 22 and 23 of the PSSCOC by the inclusion of preliminaries type expenditures in unit rates and prices as an alternative path to recovery of loss and expense. To this end, Clause 20.5 authorises the certifier to decrease any unit rates that are deemed excessive by replacing such rates with one that is in line with fair market value. Therefore Clause 20.5 in a way prevents one from evading the requirements under Clauses 22 and 23.

SIA vs PSSCOC – unforeseen ground condition

One of the more contentious causes of loss and expense relates to unforeseen ground conditions due to the significant financial impact and potentially severe delaying effect. Typically both the disputing parties take the position that the risk was so unpredictable and the effects are so crushing that they should not bear the brunt of its ramifications. Therefore an examination of how the SIA form and PSSCOC deal with unforeseen ground condition helps to illuminate the differences in approach to loss and expense respectively. In general only the PSSCOC includes express provisions that allow the main contractor to claim for loss and expense arising from unforeseen ground conditions albeit under prescribed circumstances. On the other hand, in addition to not having expression provision, the SIA form appear to allocate such risk to the main contractor.

Unforeseen ground condition in and of itself is quite a unique type of risk. Where projects involve constructing underground structures such as foundation works or building basement levels, the Employer usually commissions a third party geotechnical surveyor to carry out sub-soil investigation. The associated report is then disseminated to the tenderers with the usual disclaimer on the reliance on any information included therein. These reports have its limitations as the presence and extent of underground boulders, cables, abandoned pipes and other relevant obstructions can hardly be conclusively identified. As the element of unpredictability persists despite best effort on due diligence, the risks allocation philosophies under different forms of contracts become particularly relevant.

Clauses 5, 22 and 23 under the PSSCOC are instructive to understanding how loss and expense arising from unforeseen ground conditions are addressed. Clause 5 stipulates, amongst others that the main contractor’s entitlement to loss and expense is allowable only if the adverse physical conditions could not have been reasonably foreseen by an experienced contractor. This is a question of fact. If the obstruction exist at a level that is beyond the typical depth of bore holes, there may be a strong argument that the adverse condition was not foreseeable. If the tender period was insufficient for any reasonable attempt to carry out supplemental sub soil investigation, there may be a case to made in favour of the main contractor. Therefore tenderers of public sector projects which may involve considerable underground works are advised to be cognisant of the requirements under Clause 5 and be both proactive and communicative with its risk assessment. Clauses 22 (g) recognises that adverse ground condition is a contractual ground for loss and expense claim whilst Clause 23 sets out the relevant procedure to comply with in making such claim.

Article 8 and Clause 13(1)(b) of the SIA form stipulate that main contractor’s prices and unit rates are deemed to be inclusive of all works, including those that may contingently become necessary to overcome difficulties and bring the works to satisfactory completion. These provisions appear to deny any of the main contractor’s claims for damages for overcoming difficulties, which arguably include underground obstructions even if such work may not have been expressly identified in the contract document but are necessary to complete the project. It is unmistakable that these provisions are broadly worded to cover a wide range of scenarios pertaining to adverse site conditions. It places the onus on the main contractor to include all such risks in its pricing. Critics of these provisions argue that the contractor should not be expected to price for risks that are not foreseeable as it effectively encourages tenderers to blindly inflate their prices to cater to an event that could not be reasonably assessed. In any case, it is up to the tenderers to negotiate these provisions to their satisfaction which may involve certain form of risk sharing that is similar to the approach under the PSSCOC. The Employer would be motivated to compromise if any concession is matched with an appreciable reduction in construction cost.

SIA vs PSSCOC – how the differences in loss and expense approach affect main contractors’ claims administration and practices?

The advancing of loss and expense claims, the associated claims assessments and if necessary defending against those claims are part and parcel of construction business. Every contractor should put in place a claims administration system at the outset of every project and not only when the project runs into trouble. Every project are typically inundated with various contemporaneous records, site diaries, minutes of meetings, correspondences, interim reports, revised drawings and part prints, instructions etc. To most untrained casuals, these documents are mere paperwork but in reality these are evidence. How these records are organised and presented are influenced by the type of contract used. Given the differences in loss and expense approach between the SIA form and the PSSCOC illustrated above, this section of the article examines how should one’s claims administration system be structured accordingly.

The PSSCOC has a very detail and strict claims procedure which can be found in its Clause 23. Under Clause 23.1(1), the contractor shall give notice in writing of its intention to make any claim for additional payment within 60 days after the event giving rise to such claim has first arisen. Such notice  which is a form of condition precedent, shall specify the event and its consequences. The failure to serve any such notice will detrimentally affect the contractor’s entitlement to such claim. Whilst theoretically it should not be difficult for the contractor to serve such notice within 60 days, how the notice should be worded can be delicate and challenging. This is because in reality, multiple events usually happens on site concurrently and it may be premature to commit with absolute certainty in respect of cause and effect. The contractor could encounter underground boulder in the midst of its building foundation works whilst there are simultaneously changes to the structural design due to alterations to architectural layout as a result of modifications to end user requirements. The site diaries may include documentations that could be managed separately between the different disciplines such as architectural, civil and structural as well as interior design. The situation could further exacerbates under Clause 23.3 where the contractor is required within 30 days of its initial aforesaid notice, to provide detailed particulars to further substantiate its claim. At this stage, the contractor faces a tight balancing act. If it changes the description of event that causes the claim, it may have exceeded the 60 days condition precedent time frame included under Clause 23.1(1). If it continues to commit with the initially described event, it may compromise the legitimacy of its claim if the evidence does not corroborate with the event. After the initial report filed within 30 days of its notice, it may further required to produce additional interim reports as well as a final report within 30 days of the end of the effects resulting from the event. These interim and final reports serve to funnel the contractor into a concrete, defined and particularised cause of event. If the claim is denied by the Superintending Officer and subsequently gets resolved under arbitration, the contractor’s lawyer’s flexibility to plead its case differently may be limited. In view of these mechanisms, the contractor’s interest could be well served if its claims administration adopts some fluidity and flexibility in its presentation of claims. The elaborate and detail mechanism of Clause 23 would also mean that its claims are audited and reviewed frequently to ensure not just compliance with all conditions precedents but also sufficiency in contemporaneous records.

The SIA form on the other hand do not have an express loss and expense provision and therefore is relieved from a highly structured regime found under the PSSCOC. Any contractor who decides to pursue damages under arbitration for loss and expense are not shackled with condition precedents, production of multiple reports, surrendering various accounting records etc. Whilst this may be viewed as advantages in terms of fluidity and flexibility in claims process, it could also back fire resulting in sloppy and half hearted claims administration in the absence of upfront discipline. On the other hand, contractors who decide to pursue additional preliminaries due to increased in quantity of works and construction period that entails could refer to Clause 5 as alluded to earlier in this article. Clause 5 under the SIA is fundamentally different from Clause 23 of the PSSCOC in terms of claims approach. The former utilises unit rates and prices provided by the contractor under the contract whereas the latter is based on actual costs incurred in so far as it can be substantiated by contemporaneous records. If a project is extended from 12 months to 18 months due to additional works, the contractor’s site security costs will be additionally compensated by $50,000 based on the original price of $100,000 under Clause 5 of the SIA form. On the other hand, the contractor will need to produce actual receipts, invoices or other accounting records at the appropriate intervals to claim what it actually incurs under Clause 23 of the PSSCOC.

Conclusion

The SIA and PSSCOC presents a very different approach in respect for claims for loss and expense. Whilst having express provisions for loss and expense appear to portray upfront certainty in respect of such claims, any onerous condition precedents and demands for record keeping may nullify the perceived advantage. On the other hand, the absence of express provision could be a blessing in disguise if one favours flexibility and fluidity in claims administration. 

Koon Tak Hong Consulting Private Limited