This is part 4 of a series of articles comparing the main contract standard conditions of SIA form published in 2016 and the PSSCOC published in 2020. In previous article of part 3, a comparison was made between these very forms with respect to the subject of valuation of variations. This article however examines the procedure of claims set out in each contract so that one can be better informed on how to be prepared. Most construction contracts stipulate a set of rules that regulates every aspect of claims administration in order to provide structure to the process. Whilst most view these procedures as hurdles, these can also be treated as roadmaps to improve navigation and enhance claims quantum. Since the SIA form is predominantly used for private sector construction projects whilst the PSSCOC is mainly for public sector construction projects, these forms exhibit quite a different payment claim procedural framework. 

Whether or not certain instructions or directions issued to the contractor give rise to variations can be a subject of debate. If variations are established, whether there are entitlements to the contractor to claim additional payment and/or extensions of time are also issues that attract considerable amount of contentions. In order to delve into a reasonable amount of depth, this article only focuses on established variations that give rise to entitlement to additional payment. Even when a contractor is in principle entitled to additional payment for variation works, it is still required to navigate through a procedural framework stipulated under the contract before it is remunerated. A solid understanding of this framework and the ability to utilise it to one’s advantage will be some of the key issues discussed in this article. By way of example, there is a perennial debate on the degree to which the contractor should disclose its profitability in respect of the project in hand. Whilst it is understandably a commercially sensitive topic, an appropriate amount of disclosure may be advantageous in view of the claims procedure. The next section will deal with this issue in further detail with special focus on the difference in treatment between the SIA and the PSSCOC.

Element of Profitability 

As pointed out earlier, a contractor’s profitability in respect of a particular construction contract can be commercially sensitive. Profit provides an indication of how keen the contractor was to win a particular tender and the type of strategy that was utilised to secure the project. By way of example, a contractor may offer a deep one off discount in order to win a tender, by squeezing its profit margin to a minimal level with the intention of recovering its profit through subsequent variations that are likely to be instructed. The contractor may view that the tender documentation is done poorly which could result in multiple design changes during the construction period, all of which are profit opportunities. It is therefore natural that the contractor may be reticent about disclosing its profit level and also where had those profits been allocated in the pricing schedule. Given such sensitivity, most standard forms of contract do not have mandatory requirement for the contractor to disclose its profit. 

The PSSCOC as an example, has no requirement for profit disclosure and therefore it is not an element of consideration in the subject of claims of payment for variations. The SIA form however has a different approach where the contractor’s profit is an element of consideration in respect of the procedural requirement for additional payments for variations. However, it is not entirely easy to navigate the SIA’s procedural framework in this regard. Firstly, Clause 5(1) of the SIA which is an important part of the procedural framework that facilitates valuation of variations, requires the contractor to disclose each rate and price the percentages attributable to labour, material, plant and overhead expenditure. Whilst the contractor is not required to state the specific amount of its profit for each component, such breakdown of components is deemed to be inclusive of profit. On the other hand, Clause 12(4) of the SIA form which deals with valuation of variations refers to the element of profitability. In these references, it appears that the valuation mechanism shall have regard to the contractor’s profitability. In other words, the valuation should be done with the knowledge or at least some awareness of the element of profit. There are a few examples within Clause 12(4) to support this interpretation. 

Firstly Clause 12(4) states as a general principle that the variations shall be valued as closely as possible to the contractor’s prices without regard to any alleged element of high or low profitability in those prices. However in Clause 12(4)(a)(i) thereafter, the contractor’s rates and prices shall be applicable when variation works shall have been instructed at times and locations which shall have been readily absorbed into the contractor’s programme on the same basis of commercial profitability as the original scope of works. Whether or not certain works could be readily carried out on the same basis of profitability requires certain knowledge of the contractor’s profit margin. If the contractor’s original profit margin is 10% of the contract sum and the variation works instructed could not objectively be carried out at the same 10% profit margin, then such variation works should not be valued based on Clause 12(4)(a)(i). Unfortunately, if Clause 5(1) is taken into consideration, the contractor is not required to divulge its specific profit amount which appears to be at odds with the operations of Clause 12(4)(a)(i). So how should a contractor navigate these procedures? It should be noted that Clause 12(4)(a)(i) requires the contractor to be paid for variations based on its contract rates and prices, which usually is not favoured by the contractor. This is because those rates and prices may have been squeezed commercially due to tender competition. Therefore, in order for variations to be valued based on more advantageous approaches, the contractor must be able to demonstrate that variations could not be carried out on the same basis of commercial profitability. It is in the contractor’s interest procedurally to state a profit level for its rates and prices so that it could be objectively proven that variation works cannot be carried out based on certain commercial profitability. In the absence of the element of profitability, the burden is on the contractor to demonstrate why Clause 12(4)(a)(i) is not applicable. 

Clause 12(4)(c) also appears to support the interpretation that certain awareness of level of profitability is required under the SIA form. This clause in general provides additional compensation to the contractor beyond that of Clause 12(4)(a), which is favoured by the contractor from a commercial perspective. In order to benefit from Clause 12(4)(c), there are certain procedural requirements that had to be complied with including establishing the level of commercial profitability of the contractor’s pricing.  In order for this clause to be utilised, the variations shall not be readily absorbed into the contractor’s programme on the same basis of commercial profitability as the original works. Likewise any items of works with comparable unit rates and prices must differ in its costs or commercial profitability for the purposes of variation works. In terms of valuation methodology, Clause 12(4)(c) provides for adjustments to prices to account for any increase or decrease in commercial profitability. Again, this particular methodology requires one to be aware of the existing commercial profitability of the contractor as it relates to the original works. 

There is also an express provision under Clause 12(6) of the SIA form which deals with loss of profit in valuation. This is perhaps the most explicit provision so far under the SIA form which recognises that valuation should account for loss of profit that may be incurred by the contractor. This clause states that if the contractor is entitled to additional payment for compliance with an instruction issued under Clause 12(4)(c) amongst others, such payment shall be equivalent to decrease in profitability of the contract works resulting from such compliance. Once again, for a determination to be made on payment equivalent to decrease in profitability, there should be an awareness of such profitability.

The clauses in the SIA form cited above are important from a procedural standpoint because these set out a compelling reason as to why the contractor should state a profit level in preparation for claims. Even if there is no active effort on the part of the Employer or its consultant to seek profit related information, it is in the interest of the contractor to volunteer such information. The burden of proof is on the claimant, ie the contractor in so far as payment claims for variations are concerned. If one is able to comply with the procedural requirement, the better it is positioned to utilise the relevant clauses to its advantage.

Variation Not Carried Out In A Similar Condition Relative To Original Scope of Works

There are multiple assessment options stipulated under valuation of variations clauses in standard forms of contract. There are in general four such options with first tier utilising contract rates and prices. The fourth and last tier compensates the contractor based on its actual cost incurred plus a certain percentage of profit and overhead. In determining which tier is to be adopted, one of the key considerations is whether the varied works is executed under similar conditions to the original scope of works described in the contract. By way of example, if changes to concrete works is instructed after all concrete works under the original scope is completed, such additional works could not be readily absorbed into the contractor’s prevailing programme. Therefore additional compensation should be afforded to the contractor for remobilisation of concreting plant and machineries as well as any disruption to the existing flow of work. The contractor’s ability to demonstrate that the variation works is out of sync relative to the prevailing work flow is one of the key procedural requirements for additional payment for variations. To this end, the SIA and PSSCOC approach this issue quite differently. 

Under Clause 20.1(b) of the PSSCOC, if the varied works is not executed under similar conditions of the original scope of works amongst others, then the contractor shall be compensated based on extrapolated contract rates, which is essentially tier 2 of the assessment option. Purely from a financial perspective, a contractor would likely to prefer tier 2 to tier 1 as a means of additional payment. Therefore the contractor would have incentive to demonstrate that the varied works is not carried out in similar condition relative to the original scope of works. However what are the specific procedural requirements to demonstrate that works are not carried out in similar conditions? Clearly the phrase ‘similar condition’ can be subject to different interpretations. If a contractor is originally planning to install floor tiles to a building based on one building level per day, but only to be disrupted by change in types of tiles that reduces its productivity to a quarter of a level per day, does this qualify for extrapolated contract rates? One who is critical of the contractor’s claim may argue that the contractor is not prevented from carrying works under similar condition even though its revised work plan is not entirely identical to its original intention. Apart from the ambiguity in definition of the word ‘similar’, it is also unclear what specific documents should be produced by the contractor to fulfil the claims procedural requirement. 

On the other hand, Clause 12(4)(b)(i) of the SIA form states amongst others that if varied works shall not have been readily absorbed into the contractor’s programme, then Clause 12(4)(c) shall be applied with additional allowances added to the prices and rates. In this case, specific reference is made to the contractor’s programme which is an approved document of which its veracity should not be in dispute. Under Clause 4(2) of the SIA form, the Architect is required to approve programme submitted by the contractor and such approval can be taken into account in any dispute concerning planned sequence of works. Therefore the SIA form is more specific as compared to the PSSCOC approach. In reality however, programme takes a fairly long period of time for approval and when it is finally approved, a revised programme is already created to reflect the dynamic work sequence changes occurring on site. If a contractor under the SIA form does not have an up to date prevailing programme or that its last approved programme is factually superseded by site progress, it could be a procedural nightmare as it relates to additional payment for variation works. 

On the other hand it is understandable that certain practitioners may instead favour the PSSCOC approach because it allows flexibility. Not making specific reference to a programme means the contractor could rely on other documents to demonstrate whether or not varied works are executed under similar conditions. These documents include monthly progress reports, interim payment certificates, minutes of meetings, or even correspondences between relevant parties. Most of these documents are retrospective in nature unlike a programme which is typically prospective in view point. 

Advance Agreement to Cost of Variations

Whilst a contractor could comply with the procedural requirements by submitting the relevant prescribed documents, there is no guarantee that the certifier will value the varied works to the satisfaction of the contractor. Therefore instead of disputing over the payment amount after the varied works are completed, there is an alternative approach of having an advance agreement to the cost of any variation works before execution. This is procedurally provided for under the PSSCOC through its Clause 19.3. However there is no equivalent provision under the SIA form. 

Under Clause 19.3 of the PSSCOC, the Superintending Officer (SO) may before the issuance of his instruction for variations require the contractor to submit a quotation for the proposed works. The SO may before or after the issuance of his instruction accept the contractor’s quotation. Upon the acceptance of such quotation, the contractor shall neither be subject to valuation of variations mechanism under Clause 20 nor any further compensation for loss and expense. In other words, the amount indicated in the quotation shall be deemed full and final compensation for the varied works once it is accepted by the SO.

Based on the wordings of Clause 19.3 it appears that the option of agreeing to quotation ahead of the works can only be initiated by the SO rather than the contractor. The intention behind this arrangement is perhaps to avoid a complete bypass of the existing valuation of variation mechanism under Clause 20.1 of the PSSCOC by the contractor. This is because in submitting quotations, the contractor is not obliged to utilise its rates and prices included in the contract. In the event that there is no agreement to the quotations submitted, the default mechanism under Clause 20.1 should still apply.

Whilst the contractor may frown upon the idea that it does not have the right to initiate Clause 19.3, the quotation approach may not always be procedurally advantageous to its position. Although some may favour having upfront valuation certainty, it can be tricky if the contractor quoted an inadequate sum for the works due to reliance on inaccurate information provided by the SO. Clause 19.3 prohibits any further payment beyond the accepted quotation. By way of example, it is not uncommon for the SO to issue as built drawings to the contractor that purportedly represents the existing space where the additional works are intended to be carried out so as to facilitate submission of quotation. These as built drawings may have errors even if the SO had shared those information in good faith. Therefore from a procedural standpoint, if and when the contractor is required to submit a quotation, it may be worthwhile for the contractor to qualify in detail the basis of its quotation in case of misrepresentation. It could strengthen its case if the contractor believes that it is entitled to claim for additional payment beyond the accepted quotation.

Although there is no equivalent provision under the SIA form, the contractor is nevertheless required to submit its cost breakdown for the proposed variation works within seven days from the receipt of the Architect’s instruction. This is stipulated under Clause 12(5)(b) of the SIA form. In this submission, the contractor is required to demonstrate that the said costs breakdown is built up from the contract rate and prices for the varied works, including a milestone of stages necessary for completion of such works where required. If the contractor fails to provide such cost breakdown, the Quantity Surveyor under Clause 12(5)(c) may proceed with its own valuation for the purposes of interim progress payment. 

There are a few key observations in respect of the SIA approach as regards how it differs from the PSSCOC. Whilst the contractor is required to submit its costs breakdown seven days after receipt of an instruction, it is not for the purposes of advance agreement but rather to facilitate interim progress payments of associated costs for such works. At the point the cost breakdown is submitted, it is likely that the contractor’s calculation is made prospectively, i.e. prior to commencement or completion of the varied works. However, the Quantity Surveyor is likely to make its own assessment retrospectively, i.e after the works are completed. This difference in time frame between each assessment is likely to give rise to discrepancy in amount valued especially if the varied works are complex. It is also curious to note that the contractor is expected to provide its cost breakdown based on built up from its contract rates and prices. It is unclear how the contractor should proceed if it takes the position that a fair assessment should be made beyond the contract rates and prices, such as using actual prime cost incurred by the contractor or even prevailing market rates. Typically if the contractor make its own assessment based on actual prime cost incurred, the final cost breakdown can only be derived after the works are completed based on actual resources deployed working at actual level of productivity. This breakdown therefore could not possibly be submitted within seven days upon receipt of the relevant instruction.

Conclusion

In conclusion, the SIA form appears to demand more from the contractor as regards payment claims for variations from a procedural standpoint, as compared to the PSSCOC. To this end, the contractor is apparently required to disclose more information such as its profitability, its prevailing programme etc in order to fulfil the relevant procedural requirement for variations related payment. The contractor should therefore put in place a comprehensive claims managements process for avoidance of claims deteriorating into disputes. Ultimately it is unwise to have a single claims management process that is agnostic about the form of contract used for the project in hand. The process should be in sync with the contract form being used.




Koon Tak Hong Consulting Private Limited