The use of structural steel frame for buildings offers various engineering benefits relative to the option of reinforced concrete frame. Whilst the engineering decision is primarily made by the Employer and its consultants, the commercial risks are disproportionately observed down the supply chain, particularly between the main contractor and its subcontractor. The Employer may favour the use of structural steelworks for amongst others, the speed of construction, cost effectiveness and long span beams with column free internal spaces. On the other hand the main contractor may view structural steel works as an avenue of financial gains if adopted with alternative design. The pursuit of financial gains by developing alternative designs after award of tender can be risky given the need to design and construct simultaneously.

Commercial opportunities can be found in certain construction trades where the contractor is able to offer alternative designs or solutions whilst fulfilling the specifications and regulatory requirements. Structural steelworks are generally viewed as one of those construction trades with significant profit opportunities. The Employer is usually indifferent about the granular details  of the structural steel components such as the types of weld, choice of nuts and bolts, thickness of flanges etc as long as the design is overall safe, supports the design intent and fulfils statutory requirements. From the regulatory front, the statutory authorities generally understand that creativity and innovative solutions are available in a free market where industry players are able to utilise their technical knowledge to offer novel solutions where there are financial incentives to do so. Therefore there are usually certain design latitude afforded including choice of steel material if it can be objectively demonstrated that such alternatives are compliant with existing codes without compromise to safety. By way of example, in Singapore the BC1:2023 provides use of alternative structural steel material.

Given the commercial opportunities, it is common for the main contractor to provide its pricing based on the consultant’s design and to offer an alternative steel solution either fully or partially after contract is awarded. Under most standard forms of construction contracts, there are provisions for contractor to offer alternative solutions even under traditional procurement route of design-bid-build. With the adoption of alternative design, the main contractor effectively takes on design responsibilities to the extent such alternative departs from the original design. 

In the next few sections of this article, the commercial risks of structural steelworks that could culminate in disputes will be dissected from various angles. These include the dichotomy of lump sum main contract with remeasurement subcontract, the nature of alternative design for structural steelworks, the criticality of structural steelworks as it relates to construction programmes etc.

Lump Sum Main Contract With Remeasurement Subcontract

Structural steelworks are usually used in certain building and infrastructure projects where the project requirements are clear, design is substantially developed and therefore the contract is procured on a lump sum basis. This can be contrasted with remeasurement contracts where the actual scope of works is uncertain, the design is provisional and actual quantity of works that had to be executed is derived based on an estimation. In construction of a building using structural steel frames, it is highly likely that the project will be procured under a lump sum arrangement since the design of such building, the constructible floor area allowed and its financial viability are almost fixed, defined and certain. Most real estate developers would only commence construction works for such projects when every important detail is ironed out with certainty. Where main contractor is engaged under lump sum contract, it will be paid based on a fixed contract sum unless there are certain design variations occurring during construction period that could give rise to additional payments. From the Employer’s perspective, lump sum contract offers certainty in construction costs by allocating most of the implementation and execution risks to the main contractor. The main contractor that usually has greater knowledge and competence in managing execution risks can often identify whether or not the design provided as well as the schedule stipulated are overly conservative. These gaps may indicate additional profit making opportunities. Where such opportunities exist, the main contractor may be of the view that the project could be completed even earlier under original schedule and the design has too much “safety factor” or “buffer”. Therefore the main contractor may be comfortable with having a remeasurement subcontract where it only pays the subcontractor for the actual work done based on pre-agreed unit rates and actual quantities. It should be noted that most structural steelworks are outsourced by the main contractor under a subcontract arrangement as the fabrication and manufacturing overheads are significant. 

Generally most lump sum main contracts will have its subcontract procured on a lump sum basis as well. This is due to the natural desire to have a back to back coverage between main contract and subcontract subject to the relative value of subcontract works. However the structural steelworks subcontract are usually procured on a remeasurement basis, being an exception to this general rule. This is because during construction, detail design may be subject to change in order to accommodate evolving site conditions. These include change in the type of welding used, change in choice of bolt for steel connections to improve tensile strength, or even the change in size of structural steel members fabricated off site prior to installation. These changes affects the fabrication process, ease of handling and transportation, the number of workers required on site for final installation etc, all of which directly affects actual costs and pricing. Therefore, structural steelworks are often procured on a remeasurement basis as the final cost could vary significantly as compared to the original subcontract sum. Where the main contractor is to offer alternative design to the Employer and its engineer, remeasurement contract is the favoured option since any reduction in structural steel weight and its associated cost savings could only be accrued as additional profit if payment is made to the subcontractor based on actual works done. 

The risks allocation principle is significantly different between a lump sum contract and a remeasurement contract. Under lump sum contract, it is usually stated under the general conditions, preambles to pricing schedule, technical specifications etc that main contractor’s price shall be inclusive of all implementation and execution risks. In specific terms, it is stated that ‘the prices shall be inclusive of all ancillary, other works and expenditures whether or not specifically mentioned in the contract documents which shall indispensably necessary to bring the construction works to completion or which may contingently become necessary to overcome difficulties before completion’. Occasionally, it may also include phrases such as ‘all welding shall conform to the prevailing code of practice and standards, in addition to other special requirements noted in the drawings and/or specifications’. It is therefore highly likely that a good amount of works that do not entitle to additional payment under lump sum contract would otherwise be payable under remeasurement contract. Given the commercial gaps between the main contract and the corresponding structural steelworks subcontract, it is fair to say that such procurement arrangement could be a fertile ground for potential disputes.

Alternative Steel Design With Commercial Opportunities

Funds for research and development are often channeled to areas with considerable room for improvement that comes with clear opportunities for economic gains. Structural steelworks represent such an area in the construction industry where the is a compelling case for constant improvement and innovation. The following is a mathematical illustration of this point. Assume a hypothetical project to construct a commercial building with a contract sum of $200million and the main contractor may have an estimated net profit of 2% which amounts to $4million. Typically, the civil and structural costs for such project could constitute 30% of the contract sum, which amounts to $60million. If the main contractor takes the position that structural design is not “efficient” and could trim the weight of the steelworks by merely 5%, this could lead to potential gain of $3million. Such gain alone could almost double the projected net profit. It should be noted that most structural steelworks are paid generally based on its weight under industry adopted standard methods of measurement. The opportunities of alternative solution for structural steelworks goes beyond merely offering peripheral design tweaks such as different nuts and bolts or types of welding. Very often, a new steel material could give rise to weight savings that in turn translate to multiple fronts of savings such as reduction in material cost, shorter time expended on welding, lower foundation costs due to smaller loading imposed, savings in transportation costs etc.  

There is a constant competition amongst structural steel manufacturers to vie for market share as they are alive to the economic opportunities illustrated above. As a rule of thumb, when new structural steel members are developed and introduced to the market, these could potentially be lighter than the conventional steel members by some 30% to 40% to justify the research and development cost as well as the subsequent marketing cost. The steel manufacturers could charge a higher unit rate for its new steel product but any cost increase may be cushioned by the overall reduction in steel weight.

One may query why the consultant structural engineer appointed by the Employer to design its project not adopt the newer and more efficient structural steelworks solution to begin with? It is entirely possible that those latest design or solutions may have been proposed and adopted by the consultant engineer. In such a case, the main contractor may not see much incentive to offer alternative design. However, there are various scenarios where the consultant engineer’s design development time frame is compressed, denying them much opportunities to explore new solutions. This is because under design development process, the Employer typically spends an inordinate amount of time first and foremost with its architect to explore various design and space layout options that maximises financial returns. Once a decision is made to adopt certain architectural design option, there is almost a “rush” to proceed to tender. It should be noted that structural design can only be meaningfully developed once the architectural design is finalised, since the structural frames are designed to be supportive of the architectural layout and space allocations. Therefore under time pressure, consultant engineer would naturally adopt “tried and tested” design solution that complies with existing design codes and performance standards. Further, the commercial arrangement of professional fee for a structural consultant engineer is usually based on the percentage of the estimated construction cost, rarely with any financial incentive for new design solution. This gap is therefore “capitalised” by the main contractor during construction period, but not without considerable risks. This will be further elaborated in the next section of this article. 

Design Development During Compressed Construction Period

Any alternative proposals by the main contractor are usually governed by certain standard provisions included in the contract form. These provisions include adoption of either full or part of the proposal, sharing of actual cost savings between the Employer and the main contractor, the assumption of design responsibilities by the main contractor in respect of the adopted design alternative etc. It should be noted that an approved alternative structural steelworks remained an integral part of the building as a whole. Therefore any modification to structural works can affect other trades such as mechanical and electrical system and vice versa. If and when an alternative proposal is approved, the main contractor is still expected to submit various detail parts of its design for further approval during the construction period. This is to ensure that the different systems within the building remain in sync with one another. 

To this end, there are several issues that the main contractor had to juggle simultaneous. Firstly, the actual design development for the approved alternative design will be developed further only after the letter of acceptance is signed by the parties, formalising the main contractor’s engagement. At the point of approval of the alternative solution, the level of detail is sufficient for pricing but insufficient for actual construction. Therefore, further construction drawings would be produced for this alternative design during construction period. This meant that the detail design development will be undertaken by the main contractor in conjunction with its structural steelworks subcontractor in parallel with the construction works. It is worth noting that this is a fairly challenging endeavour that is usually undertaken exclusively by established main contractor. In essence, the detail design is being developed with the clock ticking. By way of example, as the site construction work progresses, such as the completion of foundation works, the connections to those foundation interface becomes time critical. Therefore the detail design of the interfacing structural members had to be approved in time in order to ensure that the works continue without any stoppage or disruption. Likewise as the procurement of nominated subcontract works for building facade is completed and ready for award, the interfacing details between structural members with the facade panels had to be approved in time. It is akin to a constant relay race occurring on site in real time with immense time pressure and the coordination between trades had to be near perfect. Any slippage could potentially delay the construction works including ripple effects to adjacent construction trades. 

Secondly, as with any construction projects, variations to design are expected to occur from time to time for reasons unrelated to the adoption of alternative structural steelworks. From the main contractor’s perspective, to the extent that any of these variations affect the structural steel works, any prior approvals to those affected parts had to be reviewed and updated for further approval. By way of example, if the ceiling height for certain rooms is increased, the mechanical and electrical services hidden above the false ceiling may need to be re-oriented and such change could affect the need for penetration of services through certain structural members or the location of joints between steel members. This could further increase the time pressure and complexity of works. It will also give rise to the circular argument of whether those variations are necessitated by the adoption of alternative steel works or are these initiated by the Employer or its consultants by their own volition. This distinction matters when it comes to entitlement to extensions of time and additional payments. 

Thirdly, by the time the final alternative design is approved by the Employer for the structural steelworks, it might have already gone through several iterations of design options that could take weeks or months. Whilst these design reviews by the Employer are on-going, the structural steelworks subcontractor may not have entered into a binding agreement with the main contractor. This is because the need for the concerned steel manufacturer as a subcontractor is not guaranteed until the alternative design obtains full and final approval. Nevertheless the said subcontractor is likely to assists the main contractor with the production of proposed alternative design drawings, including the required details to facilitate such design reviews. From the subcontractor’s perspective, there is every commercial incentive to assists with such design reviews despite the lack of a formal letter of award issued by the main contractor. As the proposed design evolves through each iteration, the subcontractor’s basis of pricing ought to “catch up” with the prevailing design, superseding any earlier quotations of unit rates and prices. As pointed out in the earlier section of this article, the structural steelworks subcontract is usually procured on a remeasurement basis whilst the main contract is usually under a fixed price lump sum model. The subcontractor may take the position that even if its quotations are not quite up to date with the latest design option, it is immaterial since payment will be made on a remeasurement basis according to actual work done. However, the main contractor may have a different risk appetite since it is under a lump sum contract. Due to the conflict of interest between both parties, there could be situations where both the main contractor and subcontractor would dispute over what should or should not have been included under the submitted unit rates of structural steelworks. It should be noted that the scope of works included in each unit rate under remeasurement contracts are fixed based on the description of the preambles. This is despite the fact that the quantity of works may be subject to change. In this regard, the unit rates are often seen as “mini lump sums”. This is often a commercial detail that could easily be overlooked by the parties during negotiation which can be a source of potential dispute. 

Upstream Construction Trade With Multiple Downstream Dependent Subcontractors

As a matter of sequence and logic of construction works, the structural steelworks are carried out at the earliest stage of the construction project after foundations are completed. The structural steel framework becomes the support structure for the subsequent architectural, mechanical and electrical works to be carried out. Therefore when the main contractor is developing the detail of its alternative design in parallel with its other construction activities, it is often alive to the fact that any delay at this stage can have magnified and disproportional consequences. Its delay is capable of causing a ripple effect down the construction supply chain including builders works, facade works, mechanical and electrical works etc. Every mistake becomes more costly than usual.

Whilst the main contractor may endeavour to accelerate and catch up with any delay by deploying additional resources, it may come at a cost. Such cost had to be balanced against the potential gains of proposing alternative structural design. Further, if and when multiple subcontractors carrying out downstream activities are affected, there could be a case against the main contractor in respect of loss and expense claims and/ or damages. The main contractor also had to grapple with the potential overall delay to the original practical completion date, that may result in liquidated damages being imposed by the Employer. The main contractor therefore is often walking on thin ice metaphorically. It is contractually stuck between the rock and a hard place. This is another reason why proposing alternative design, whether structural steelworks or otherwise comes with a very real risk and should only be undertaken with absolute confidence. However, it should also be balanced with the fact that general contracting in and of itself is not a business activity without risk. The only relevant question is whether the risk is worth the reward.

Conclusion

Whilst the main contractor and its subcontractor may be motivated by financial gains in proposing alternative solution, in reality the industry as a whole benefits as well from innovative and improved systems. It cannot be over emphasised that the Employer enjoys the cost savings as well and the society as a whole gains from a more sustainable construction method. Unfortunately, at this juncture the “burden” of such innovation is disproportionately concentrated at the lower end of the supply chain. There appears to be opportunities for a more fair and equitable contractual arrangement in respect of alternative design solutions so that every party “pays its fair share” of the price of innovation. When creativity is met with punishing costs, the spark of motivation gets dampened.




Koon Tak Hong Consulting Private Limited