This article provides a general overview of the concept of preliminaries in respect of its functions as a commonly found costs component in the construction industry. Whether a quantity surveying consultant who is estimating the construction cost of a building project, or a tenderer who is preparing its bid price or a subcontractor who is making its claim for additional preliminaries that it has incurred, everyone appears to have a slightly different perspective of what preliminaries actually entail. This is because whilst indeed a common feature in pricing of construction works, preliminaries can mean different thing to different people and thus may be approached differently depending on circumstances.

In general, preliminaries is known as the overhead costs incurred by the contractor to facilitate its running and operation of the construction site. Such overhead cost typically include plant, machinery, equipment, site perimeter hoarding, utility bills, site safety and security staff, site office, scaffolding, site cleaning, maintenance of ingress and egress to site, protection to completed works, provision of shop drawings and as-built drawings etc. Such overhead cost usually excludes the completed building or construction end product. Using the analogy of a cookie business, preliminaries excludes the costs of the direct ingredients to bake the cookies but includes the indirect overhead costs to facilitate the running of the business such as the cost of electricity, rental, marketing, advertisement, transportation etc. Whilst the distinction between direct costs and indirect costs is conceptually clear, the more granular aspect of classification of costs can be subjective. In the context of construction costs, such distinction has very real implications and could result in disputes. One should have a good grasp of the basic concept of preliminaries first in order to understand how it may occasionally appear vague.

Scope and Coverage of Preliminaries Costs

Tender documents prescribes amongst others, the manner in which the tenderers shall populate their pricing breakdown. The selected tenderer’s tender document subsequently formed the basis of the contract document between the parties. In order to have an accurate understanding of the definition of preliminaries and what such expenditure covers, it is imperative that one examines the actual tender document and how the contractor decides to distribute its pricing therein. In reality, tender documents are prepared by cost consultants or quantity surveying firms engaged by the Employer. Whilst the definition of preliminaries in general is widely understood and accepted in the industry, the granular details may differ from project to project. Therefore in dealing with issues that require one to accurately understand the scope and coverage of preliminaries, it is advisable to always refer to the actual contract document. Very often, tenderers may choose to distribute their pricing breakdown in a different manner from the format given in the tender document for various strategic reasons. Therefore certain pricing sections in the tender document may have certain tenderer’s annotation or remark such as ‘included’, which means that such items of work had already been included in the tender sum but are allocated elsewhere in the tender document.

To accurately understand what constitute preliminaries costs, one is required to be familiar with certain sections of the tender document that is of particular relevance. The preliminaries costs is usually found in the very first part of the pricing section of the tender document. This pricing section can be called ‘schedule of works’ or ‘bills of quantities’ depending on the procurement nature of the contract. The preliminaries costs should always be read in conjunction with the standard conditions of contract as well as preambles to schedule of rates and/or schedule of works. This is because apart from preliminaries section which would usually provide a list of items which constitute preliminaries costs, there are other sections of the tender document that similarly stipulates the scope and coverage of unit rates and prices. It is not uncommon to find that some of these sections may mistakenly include overlapping provisions that could give rise to duplicative claim in future. 

The SIA Building Contract 2016 that is widely used in Singapore, has a unique feature in this regard. Clause 5(1) therein stipulates amongst others that the contractor is required to provide a breakdown of its unit rates submitted with percentages allowed for labour, materials, plant and overheads expenditure. On the other hand Clause 5(2)(a) which deals with preliminaries requires the contractor to annotate those items of expenditures with the alphabet of either ‘Q’, ’T’ or ‘F’. Q means such items may require cost adjustment due to changes in quantities of work. T means such items may need cost adjustment due to changes in time to carry out the work. F means those items that shall be fixed in cost despite any changes in time or quantity in that regard. Further, Clause 5(2)(b) requires a precise indication of all categories of expenditure contemplated by those Q, T and F items which shall not be included in other unit rates. When construed in its entirety, Clause 5 appears to ensure that there should be no overlap in cost coverage between unit rates of the construction works and items of expenditures in preliminaries. By way of example, since Clause 5(1) anticipates allowances for plant and overheads expenditure amongst others within the unit rates of various construction works, then by operation of Clause 5(2)(b), the very same plant and overheads expenditure should not be included in preliminaries. This expectation however may not be realistic since one could often find plant, machineries, equipments and overheads expenditure listed in the preliminaries section prepared by quantity surveying firms. This is because there are various plant and machineries that may be used for the entire project as opposed to be dedicated only for certain trades of works. By way of example, tower crane and mobile crane may be used to hoist building materials within construction site whether the works in hand pertains to structural works or any other general builders works. Therefore, from a pricing perspective it may not be practical to expect a percentage allowance of plant within the unit rate of say concrete. However if the tenderer decides to exclude the cost of plant from the unit rate of concrete and instead allocate such cost under preliminaries, the tenderer may reasonably be doubtful as to whether it may be adequately compensated in case of variations instructed to carry out additional concrete works. This is because it is not unusual for the valuation of variation works to utilise the unit rates of construction works concerned without any inclusion of preliminaries. Given the realities presented above, certain seasoned contractors with sophisticated tendering teams may decide to distribute their cost breakdown in a strategic manner which can then affect the coverage of preliminaries expenditure concerned. It can never be over emphasised that one should always refer to the actual contract document when dealing with issues that involve preliminaries. 

Apart from standard conditions of contract, another relevant section of the tender document that is worth examining in conjunction with preliminaries is the preambles to the schedule of rates. In general, the preambles refers to the explanatory notes of what should be deemed included in the contractor’s prices and unit rates. These preambles are often presented based on individual construction trades depicting what are deemed included in the unit rate on a supply and install basis. If the construction contract involves supply and installation of concrete works, the associated unit rate would usually be deemed to include all plant and heavy machineries required to install the concrete works such as batching plant, concrete tank, conveyor, paver, pump, crane etc. These very items can often times be allocated under preliminaries as well. This is because these plant and heavy machineries could be leased for the purposes of the project and the contractor would prefer to be paid via preliminaries for its mobilisation cost, demobilisation cost and be charged on a time basis due to the nature of its rental. In other words, the preambles of the schedule of rates may cause overlapping allowances with the preliminaries in the pricing section. Once again, whilst the general idea of preliminaries is well understood in the industry, the devil is in the detail.

Pricing Preliminaries – Consultants’ Perspectives vs Contractors’ Perspectives

As illustrated in the previous section of this article, the manner in which the contractor chooses to distribute its costs in respect of preliminaries related expenditure can be fluid. It may be influenced by the preambles, standard conditions of contract, cashflow or other strategic considerations. From the contractors’ perspective, pricing of preliminaries is an art rather than science. Whilst one may argue that the tenderer ought to allocate its pricing strictly in accordance with the format presented in the tender document for avoidance of ambiguity, it is often the conflicting provisions within the very tender document that contribute to the problem. 

The perspective of a consultant quantity surveyor in respect of preliminaries can be quite different from that of a contractor quantity surveyor. This is because the deliverables expected from them are quite different. A consultant quantity surveyor primarily produces cost estimates whereas the contractor quantity surveyor produces an actual bid price. The pricing accuracy of a bid price is more consequential than an estimate. As regards an actual bid price, a 5% above the lowest tenderer may result in a lost of business opportunity. On the other hand as regards a cost estimate a 5% above the lowest tenderer can still be considered as an estimation that is fairly respectable. To this end, the perspective and approach in respect of the costing of preliminaries can be vastly different. 

From a perspective of a contractor quantity surveyor, the pricing of preliminaries is often approached from a bottom-up method or what is also known as first principle method. Under this approach, every line item of expenditure will be calculated separately, such as the rental of tower crane, the salaries of head office staff, the cost of scaffolding and hoarding, allowances of electricity and water costs etc. Anything and everything that may be required by the contractor to operate a construction site will be included in this first principle method, including any other lines of expenditure that may not be listed in the tender document. In addition to that, the calculation will take into consideration the proposed construction method and programme where there are supplementary information such as whether the site office, perimeter hoarding, site access etc are to be shifted from time to time to accommodate the progress of works on site. These costs are also calculated as part of the preliminaries. Finally when the gross amount is derived, the contractor will make strategic decisions as to how it chooses to distribute the gross amount taking into consideration cashflow demands. A contractor who is extremely motivated to win the tender may even include pockets of potential sums of discounts in its preliminaries in anticipation of price negotiations. The calculation will then be complete when the gross amount is subject to these strategic adjustments.

On the other hand, the perspective of a consultant quantity surveyor is relatively different and somewhat straightforward. A consultant would typically derive the preliminaries costs in a cost estimate based on a percentage of the direct construction works. This percentage usually ranges from 10% to 20% and varies based on complexity of works or execution risks that may entail additional resources. In general the higher the complexity, the greater the percentage allowance will be made for preliminaries cost in the consultant’s estimate. This approach is also known as top-down method. This difference in approach may pose a challenge during the production of tender report where the consultant is required to perform cost reconciliation between different tender prices as compared to the consultant’s pre-tender cost estimate. This is because such comparison will not yield any meaningful insight if it is not performed on a like to like basis.

Pricing Preliminaries – Main Contractors’ Perspectives vs Sub-contractors’ Perspectives

The manner in which a main contractor approaches the pricing of its preliminaries which was elaborated extensively in the preceding sections of this article differs from its subcontractors. Unlike the main contractor that is overall in charge for the operations of the project site for the entire construction period, the subcontractors’ involvement is usually over a shorter period of time. This subcontract period is typically determined based on the time frame within which the subcontractor’s trade is planned to be carried out based on the main contractor’s master programme. Therefore, the main contractor would have a good grasp what are the site office space, scaffolding, machineries, storage space, equipment etc that are available during this time frame that could be used by the subcontractors. From a commercial standpoint, the main contractor would include the subcontractor’s share of the preliminaries costs in its contract sum vis-a-vis the Employer. The subcontractor therefore should be selective in what it chooses to include in its preliminaries since a considerable amount of resources will be provided for more economically by the main contractor. The subcontractor however is still expected to provide other machineries, equipment  and associated overhead expenditure that are unique to its trade and specific to its needs.  In other words, the percentage of preliminaries costs in a subcontract sum is usually lower than that of the main contract sum. 

Whilst the main contractor is expected to allocate its preliminaries resources to various subcontractors with relative ease given the roadmap provided by its approved master programme, things can get complicated in reality. Its is quite common for the main contractor to reorganise its schedule and sequence of work based on the challenges that arises on the ground. It follows that there may be occasions where a particular subcontractor is expected to commence work whilst the other subcontractor carrying out a preceding trade is still on site finishing up its works. This presents bottle neck in terms of availability of resources and could result in dispute and claims for additional payments. It is therefore quite common for the main contractor to include a disclaimer under its subcontract terms for the subcontractor to be responsible for all resources that are considered “indispensably necessary” to carry out the subcontract works. 

The Employer usually do not interfere with the private arrangements between the main contractor and subcontractors as regards the allocation and availability of on site resources which are included in the preliminaries costs. However, in instances where the Employer decides to nominate subcontractors to the main contractor, the Employer would inevitably be involved at least from the initial procurement standpoint. Under the procurement of nominated subcontractor, it is the Employer and its team that issue tender document and negotiates directly with the subcontractors before making its nomination to the main contractor. In doing so, the consultants who prepares the subcontract tender document would draft the scope and coverage of the subcontractor’s preliminaries costs which would subsequently formed the subcontract agreement. Whilst there may be some form of commercial benefits to the Employer in nominating subcontractors, it also exposes risks of claims to the Employer in case the subcontract document that it prepared resulted in gaps and inadequacies in respect of preliminaries resources. These gaps are not uncommon because the Employer and its consultants are not in the best position to have visibility on how the resources are deployed on site, particularly when construction programme are modified regularly. Therefore in order to address this situation, the nomination instruction by the Employer or its agent is usually supplemented by contractual avenue for the main contractor to raise any objections to nomination. These objections are usually premised on certain prescribed grounds stipulated under the main contract. These grounds for objections are effectively double edged sword. Whilst it allows the main contractor to raise objection to protect itself, any failure to do so in a timely manner may prejudice the main contractor’s right to claim for additional payment if it subsequently takes issue with the subcontract terms.  These issues are less relevant in the case of a domestic subcontract where the procurement of subcontractors are primarily within the control and purview of the main contractor.  

Preliminaries Allowance in Remeasurement Contract vs Lump Sum Contract

The manner in which preliminaries costs are distributed and derived could also be affected by whether the construction contract is structured as a lump sum contract or a remeasurement contract. In general a lump sum contract is an agreement to carry out a defined scope of works at a fixed price. On the other hand, remeasurement contract can be described as an agreement to carry out a provisional scope of works that will be valued and paid based on agreed unit rates. One of the reasons for having these two contrasting commercial arrangements is due to the different level of certainty in respect of the nature and magnitude of works to be done. Most infrastructure works such as provision of underground utility pipes or foundation works are often confronted with unknown adverse subterranean conditions which makes it challenging to quantity the scope of works with absolute certainty. Such works are usually structured as a remeasurement contract. On the other hand, a contract to construct a building based on a defined set of specifications and drawings are usually lump sum by nature.

Anecdotal evidence shows that the percentage of preliminaries cost under a remeasurement contract is usually lower than that of a lump sum contract. This is because the contractor is incentivised to include bulk of its costs, including site overheads and other traditional preliminaries related expenditure in its agreed unit rates for the construction works. These unit rates are multiplied against quantity of work done which then formed the basis of payments to contractor. Where the actual works carried out is higher than originally anticipated, the contractor gets compensated accordingly including preliminaries related expenditure. By including those preliminaries costs in the unit rates, the contractor avoids the hassle and effort to claim preliminaries separately if and when it believes that the perceived additional works warrants supplementary compensation. Claims for additional preliminaries have often been associated with loss and expense claims. By way of example, under the public sector standard conditions of contract in Singapore, loss and expense is defined as claims for, amongst others, costs of an overhead nature that are actually and necessarily incurred on the site. Where claims for additional preliminaries is reasonably classified as loss and expense claims, it invokes certain additional contractual obligations that it imposed on the contractor. These obligations are effectively condition precedents, where its fulfilment is a mandatory requirement prior to any successful claim. These conditions precedents involve amongst others, the requirement to give notice within a stipulated time period after the event giving rise to such claim is deemed to have occurred. There is a need to continue to provide detailed substantiating particulars within further time frame after the notice is given and to finally provide additional particulars by the end of such event. Where required, the contractor is also mandated to provide unfettered access to additional information on an open book basis to support such claims. Whilst these notices and disclosures may be rooted in good intentions, it is undeniable that it represents additional administrative burden to the contractor that could reasonably be avoided by seeking payments through unit rates. It should also be pointed out that any quantities of work included in a remeasurement contract are provisional. Any works carried out above and beyond provisional quantities are not variation of works per se. It follows that the certifier appointed under the contract is not expected to issue any instructions for these so called additional works. Therefore, the contractor may well receive payments for additional preliminaries through unit rates without the usual contractual formality that is associated with variations works and loss and expense claims. 

One may ask if a contractor under lump sum contract could derive the same benefits by distributing its costs in the unit rates rather than to itemise it separately under preliminaries section? One should appreciate that the contract is administered differently under lump sum arrangement as compared to that of remeasurement. Firstly, there are no provisional quantities included in lump sum contract. In fact, there are no quantities at all under lump sum contract as the contractor is required to measure the quantity of works by itself during tender and be responsible for such self measured quantities. If the actual quantities of work turn out to be higher than what was measured by the contractor, there is no entitlement to additional payment. The contractor would only be entitled to payment for additional works if the certifier issues an instruction to vary the design by increasing certain quantities of work. In such a case, the schedule of rates submitted by the contractor would become the basis of valuation of such variations. If the contractor submits a disproportionally high unit rates, it may well result in larger sums of omission if and when the certifier decides to instruct an omission to the concerned scope of works. Therefore, the unit rates function as a double edged sword under lump sum contract. Consequently, contractors under lump sum contract have reason to continue to reflect its preliminaries cost accurately, in which case may well be higher in percentage than under a remeasurement arrangement.

Conclusion

The preliminaries cost serve a very unique function under construction contract and draws different perspectives from different contracting entities. Whilst it is well understood as a general concept, the intricacies of preliminaries are often embedded within the details of the contract. 

Koon Tak Hong Consulting Private Limited