Imagine you are the contracts manager for a main contractor engaged to  build a 10-storey office building under a single practical completion date. Whilst the construction works are in progress, to your surprise the architect issues an instruction so that the first two floors of the building are completed and be handed over ahead of schedule. You were told that that a large tenant had just signed a multi year lease and will need its space earlier for some major internal fit out works. This is one of the possible scenarios of an early partial occupation. What should be your thought process in dealing with this scenario? Are there any existing standard conditions that cater to such arrangement and if yes, will it provide a fair and equitable compensation for any disruptive related expenditures? 

This article is part 6 of a series of articles comparing the main contract standard conditions of the SIA form published in 2016 and the PSSCOC published in 2020. This article specifically deals with the scenario of early partial occupation. Early partial occupation is an event where part of the construction works are instructed to be completed earlier so that such part can be handed back to the Employer for its occupation or use. It is an impromptu arrangement that was not planned at the inception of the contract but rather introduced during the construction period. Usually phase completion would have been structured and included in the contract had such arrangement been anticipated and planned in advance. 

Early partial occupation should be avoided if possible due to the myriad of risks that parties had to negotiate within a compressed time frame that could have been avoided with advance planning. As the saying goes, if you fail to plan, you plan to fail. Most standard conditions of contract could only offer a framework of procedural steps to be taken if and when it arises. These procedural steps are by no means guaranteeing a mutually satisfactory resolution of early partial occupation. The nature and breadth of risks are influenced by the specific set of circumstances giving rise to early partial occupation. To this end, the SIA form and PSSCOC offer a very different approach, particularly in its presentation amongst others. The SIA form sets out a centralised provision to deal with the subject of early partial occupation which can be found in its Clause 26. The PSSCOC does not have an equivalent centralised provision to deal with early partial occupation. By contrast the PSSCOC decentralised its early partial occupation mechanism to various provisions based on the subject in hand. By way of example there are various provisions that deal with “phase of Works” such as the subject of liquidated damages, extensions of time etc. Early partial occupation is inserted in these provisions but described separately as “part of the Works”. It should be noted that under Clause 17.3(1)(c) of the PSSCOC, the concept of early partial occupation is introduced and defined as “part of the Works”. The approach of either centralised or decentralised also affects the clarity in interpretation apart from manner of presentation. In general, the centralised approach adopted by the SIA form provides ease of reference and interpretation since the objective meaning of the mechanism is described within the appropriate context. 

To understand why early partial occupation could be ‘contractually messy’, the next section of this article illustrates the difference between phase completion and early partial occupation.

Phase Completion vs Early Partial Occupation

It appears that early partial occupation is the antithesis of phase completion where the latter is planned in advance and the former is usually introduced on an impromptu basis after contract is formed. When and how the construction works should be executed affects both the Employer and the main contractor in a variety of ways including logistics, structure of insurance coverage, application of liquidated damages and extensions of time, project cashflow, commencement of defects liability period, methods of valuation of variations, transition of site responsibility as it relates to occupier status etc. If there are requirements for any project to be completed in different geographical segments with varying commencement and/or completion dates, these are very often planned in advance and communicated to the contractor for inclusion in the contract conditions. Each geographical segment is described as ‘phase of works’ and administered with a standard approach. That is why both the SIA form and PSSCOC have a common approach where each phase of works is treated like a separate and distinct contract of its own. By way of example, Clause 25(2) of the SIA form states there is an element of severability for each and every phase where these had to be regarded as separate and distinct contract. As each phase of works has its own time for completion, extensions of time are administered on a phase by phase basis. Likewise each phase has its own liquidated damages stipulated in case of delay. From the contractor’s perspective, the risks and commercial imperatives arising from such arrangement are considered and included in the tender pricing. As an example, the contractor would have to arrange for water and power supply for each phase as well as planning of site access route based on these phasing requirements so that the completion of one phase of works does not disrupt the continuation of other remaining phases of works. 

In the case of early partial occupation where such advance planning is not available, the administration of contract, amongst others becomes an issue. By way of example in the absence of an agreed liquidated damages for parts of the works that is subject to early occupation, how should damages be calculated in case of delay? The same problem also applies to the remaining parts of the works that are not subject to early occupation. It is challenging for parties to agree on a new liquidated damages arrangement as there is very limited commercial motivation for the main contractor to negotiate in good faith and agree. This could easily result in a stalemate.

The existing provisions of contract can be helpful in prevention of stalemate. As mentioned earlier, the SIA form’s Clause 26 which deals with the event of early partial occupation/ re-entry sets out a mechanism in respect of liquidated damages arrangement. Under Clause 26(4)(d)(iv), the main contractor’s liability for liquidated damages shall be reduced proportionally based on the certified value of the occupied parts relative to the certified forecast value of the whole of the works. It should be noted that this clause does not give rise to a fresh liquidated damages applicable to the parts of the works which is subject to early occupation. It is only applicable to the remaining part of the works under construction after the said early occupation had taken place. In other words, if the early occupation parts constitute 30% of the value of the entire works and the original liquidated damages was $10,000/day, the remaining parts of the works shall now be under a fresh liquidated damages of $7,000/day. If the parts meant to be occupied earlier are in delay, there is a question of what should be the liquidated damages applicable? Clearly, this clause does not adequately address all issues which explains why such early partial occupation strategy should be avoided if possible. This once again provides a clear contrast with phase completion which was planned in advance where the contractual mechanism is both clear and unambiguous. Under under Clause 16.2 of the PSSCOC, a similar approach applies where the liquidated damages applicable to the remainder part of the works (exclusive of any early occupation part) shall be derived on the basis of relative proportion.

Early Partial Occupation – Contractor’s Consent And Associated Certification

It should be noted that the land or premises upon which the construction works are intended to take place effectively belongs to the Employer. The main contractor is merely engaged to carry out such works within a limited duration for the benefit of the Employer. Therefore, the main contractor’s consent is not required for the purposes of early partial occupation. However in exercising its prerogative, the Employer should also be mindful that the main contractor is entitled to recover any compensation, damages or additional payments as a result of such early occupation. Therefore the Employer has the ultimate authority but at a cost if exercised in a belligerent manner. The PSSCOC and SIA form duly recognise the Employer’s right in this regard. Under the SIA form, the provision that deals with occupation with consent is dealt with separately from the occupation without consent. This is to provide clarity of differences in treatment and the consequential effects. There are no such separation of provision under the PSSCOC.

The occupation of part with consent is provided for under SIA form’s Clause 26(2) whereas the occupation of part without consent is found under Clause 26(3). Apart from having separate provisions, the terminology used are different as well. The Architect issues ‘Certificate of Partial Occupation’ when the occupation is done with the contractor’s agreement whereas such certificate is named ‘Certificate of Partial Re-Entry’ when the same is done without contractor’s agreement. In reality the main contractor is unlikely to contest the very act of partial occupation by the Employer per se but rather the lack of agreement on either the associated compensation or the contractual effect of such occupation. By way of example under Clause 26(1)(c)(ii), it is stated that in case of occupation without agreement, the Employer may proceed with re-entry and commence occupation only if, amongst others a Delay Certificate shall have been issued and remain operative. This suggests a scenario where the main contractor is deemed to be in culpable delay for the whole of the works and the Employer may decide to proceed with early occupation of part of the works instead of waiting for the entire works to achieve practical completion. Under such scenario, it is likely that the main contractor would contest that it is in culpable delay and by contrast takes the position that it is entitled to extensions of time. Therefore in order to reserve its legal position, it had to in principle not agree to the operations and effects of the Delay Certificate issued which by extension mean the rationale behind the need for early occupation of parts. 

When comparing the SIA form’s Clause 26(2)(b) and Clause 26(3)(b) as regards the Certificate of Partial Occupation and Certificate of Partial Re-Entry, the former include an approximate value of the occupied part as well as a forecast value of the whole of the works upon practical completion whilst such valuation is noticeably absent under the latter certificate. This suggest that in the case of non consent, there is likely a lack of agreement on the valuation of cost to complete the occupied parts including any associated disruptive expenditure arising from the instruction of early occupation. It should be noted that these certificates shall be issued when the Employer proceed to enter and reoccupy the parts in question. These certificates are not supposed to be issued much later on a retrospective basis. Under occupation without consent where quantum of compensation is not agreed, the Certificate of Partial Re-entry is therefore not expected to include any information on valuation since it is expected not to be mutually agreed at the point of issuance. 

Under the PSSCOC, in the absence of a centralised provision for early partial occupation, there are no unique certificates to distinguish occupation with agreement or occupation without agreement. Certificate issued under such early occupation is in the form of a regular substantial completion certificate identifying the parts concerned. Under its Clause 17.3(1)(c), occupation of part of the Works is inclusive of the scenario where such arrangement had not been agreed by the contractor. Instead of putting the responsibility on the certifier like the case of SIA form, the PSSCOC puts the discretionary option of applying for such certificate on the contractor. The descriptions used is such that the contractor ‘may request for such certificate’ as opposed to ‘the Superintending Office shall issue such certificate’. Without a distinct terminology used to describe the certificates issued under early partial occupation, it perhaps could help to provide some room for parties to negotiate after occupation. Some may prefer such approach but others believe that this is effectively kicking the can down the road.

Timing of Issuance of Instruction For Early Occupation of Part of the Works

One of the key issues to be considered for the Employer and its consultant is the timing of issuance of instruction to the contractor for the purposes of early occupation. Whilst it is generally true that it should be issued ‘as soon as possible’, it is also useful to understand some of the financial and contractual consequences if the main contractor is informed belatedly. After all, decisions are often subject to trade off. To understand the issue of timing of instruction, one should firstly consider the consequences of compliance with an instruction issued by the certifier appointed under the contract.

Under Clause 17.3(1)(c) of the PSSCOC, early occupation is effected by way of an ‘instruction’ issued by the Superintending Officer (SO) and Clause 2.5 governs the meaning and effects of ‘instructions’ by the SO. Whilst there is no express reference to a time frame within which such instruction ought to be issued, it is interesting to note that both Clause 25.1(3)(b) and Clause 25.2(b) entitle the main contractor to loss and expense compensation to the extent that it complies with the SO’s instruction for early occupation of part of the works. Such event under these clauses is deemed ‘excepted risk’. Therefore, in considering timing of issuance of any instruction, one should be aware that the later the instruction is issued, the likelier such delay could exacerbate financial losses sustained by the contractor. As mentioned earlier in this article, logistic arrangements need to be facilitated to enable early occupation, and these often comes with financial consequences. As regards project with shorter construction period, whilst there is less room for late issuance of such instruction, the need for early occupation is also diminished. This is because, early occupation generally applies to large project with long construction period where there is compelling incentive to occupy part of the space earlier than schedule, despite the contractual ramifications. Whilst decision makers tend to favour taking longer time in order to deliberate the issue in hand methodically and thoroughly, the “financial ramification clock” is simultaneously ticking. 

The scenario is slightly different under the SIA form since there is a contractual distinction made between early occupation with consent and without consent. As alluded to earlier in the preceding section of this article, under occupation of part without consent, Clause 26(1)(c)(ii) stipulates that the Delay Certificate shall have been issued and remain operative. This suggest that the project is already in culpable delay, at least from the perspective of the Architect. Therefore, the likely motivation for early partial occupation under such scenario is where the Employer could benefit from early occupation of certain parts that is reasonably completed whilst waiting for the practical completion of the remaining parts. Given that the parts subject to early occupation is already completed, an instruction can be issued to effect such early occupation almost immediately whilst providing a reasonable time for the outstanding works to be cordoned off as well as provision of safe ingress and egress of the occupied parts. Such instruction is also like to be reactionary in nature taking into consideration the state of completion of the works. 

On the other hand, where the early occupation is done with the view of securing an agreement with the contractor, such instruction should be done much earlier. Such effort is proactive rather than reactive. As noted in the beginning of this article in respect of a hypothetical example where certain levels of building are instructed to be completed ahead of schedule, it is prudent to even have a series of discussions with the contractor prior to the issuance of instruction. This is to agree on various important issues such as the logistic arrangement to segregate the early parts from the remaining parts, prevention of disturbance to the on-going works, overall costs payable associated with such instruction, settlement of any outstanding delay and application of extensions of time etc. The breadth of issues to be discussed is naturally wide ranging and there is a need for the Employer to be willing to provide some financial incentive beyond a mere compensation or reimbursement based approach. Some may argue that if such agreement can be achieved in advance, parties may be better served to enter into a supplemental agreement so as to reset the contractual relationship with a clean slate. This supplemental agreement option is indeed a cleaner and clearer way forward than relying on the existing provisions under the contract.

Liquidated Damages Applicable To Parts Subject To Early Partial Occupation

It is noted that under both the SIA form and the PSSCOC, there are no express provisions governing application of liquidated damages for parts of the work that are subject to early occupations. The existing provisions under both these contract forms typically provide for liquidated damages applicable for the remaining of the works (outside the early partial occupation). Under both SIA form and the PSSCOC, the fresh liquidated damages for the remaining works are derived based on proportionate reduction of original liquidated damages based on relative value of the remaining works. As alluded to earlier in this article, if the early partial occupation is a reactionary initiative for project already under culpable delay, the issue of liquidated damages for parts subject to early occupation is no longer relevant. However, if the early partial occupation is a proactive measure, it would appear logical for there to be a liquidated damages applicable in case the early partial occupation do not materialise as a result of delay. One of the possible difficulties in setting  liquidated damages for early partial occupation could be the principle of delay to an early endeavour. Suppose the original completion date of a part of the work is 31 December 2024 but brought forward to 30 June 2024 due to a planned early partial occupation. If such part of the works are eventually “delayed” and completed on the original completion date of 31 December 2024, as originally agreed, did the Employer actually suffer any losses or damages under the existing terms of the contract? Such damages could be evident if parties entered into a supplemental agreement varying the original conditions but the reliance of original conditions alone might be challenging.

Conclusion

The issues raised above are by no means exhaustive as it relates to the subject of early partial occupation. There remains a variety of issues worthy of discussion on this topic. However it is hopefully evident that the initiative of early partial occupation is not straightforward even with existing provisions governing the associated mechanism. The intricacies of various commercial issues are unfortunately beyond what could reasonably be regulated by existing contractual mechanism.




Koon Tak Hong Consulting Private Limited