Civil engineering and infrastructure projects that are carried out underground such as construction of train tunnel and the associated train stations are extremely complex and challenging for two main reasons. Firstly, the nature and extent of works are largely unknown despite the best endeavours in due diligence and soil investigations prior to commencement. The initial engineering design of a tunnel from point A to point B could be a straight line but may end up in a zig zag pattern due to the requirement of diversion to avoid existing subterranean pipes and services, building foundations or even boulders. The actual works carried out by the contractor could end up being much more than originally contracted for resulting in budget overrun and delays. The second reason for the complexities and challenges of such project is the difficulty in deciding how to fairly allocate commercial risks between the parties. If the underground risks are fully allocated to the contractor, the excessive risks may give rise to unrealistically exorbitant pricing. To the extent that such risks do not materialise in the actual execution, this could be imprudent waste of financial resources. On the other hand if the risks are completely shouldered by the Employer, the contractor may not be incentivised to seek the most cost effective way of overcoming those challenges. Some may question whether the Employer is in the best position of assuming the execution risks when it is not physically carrying out those works. Therefore there is a general recognition that an element of risks sharing is necessary. But the question is how? 

The building construction projects exhibits the opposite profile as compared to underground infrastructure works, although these are usually categorised and conveniently bundled under the same construction industry. As regards building construction, apart from substructure foundation works, most of the superstructure works can be determined more accurately based on its architectural and structural design. As an example, the amount of concrete slab to be constructed will be exactly the same as shown on the structural engineering drawings, unless there is a conscious decision to change the design. Therefore, the level of uncertainty is low and manageable resulting in a less contentious risk allocation between the contractor and the Employer. Contractors are usually not averse to taking on a lump sum contract by getting paid based on a fixed price given a defined scope of works. Even if the Employer is inclined to allocate the entire execution risk to the contractor for a building construction project, the price increase is likely to be manageable. 

It should be noted that most standard forms of contracts used in the industry are largely influenced by the risk profile of building construction projects especially in Singapore. This begs the question of whether the conventional contract form used in Singapore such as PSSCOC, SIA form and REDAS form are suitable for construction of underground train stations and tunnels? The issues raised above will be examined in further detail in this article.

Challenges Of Underground Construction Works

The train tunnel traversing across a densely populated urban landscape can be an engineering feat considering the subterranean depth through which works had to be carried out. By way of example in Singapore, the deepest tunnel is located 43 metres underground or roughly equivalent to the height of a 14 storeys building. It can be tricky when engineering works are carried out under such depth particularly when soil movements could cause uneven settlement if done without adequate protection, ground treatment and stabilisation. It is not difficult to envisage the catastrophe that this may cause to structural integrity of existing surrounding buildings when deep excavations are conducted in densely populated environment. However some of these depths are out of necessity and intentional. The rationale behind such depths are amongst others for avoidance of existing building foundations, services cables in operation, nature reserves and also the fact that train stations had to be sufficiently deep to be effective as a bomb shelter in case of war and emergencies. 

Excavation or tunnelling works become proportionally more challenging  with the increase in depth especially with adverse soil conditions such as marine clay. According to literature, marine clay could cover more than 25% of the area of Singapore and is often associated with poor soil properties that are not suitable for engineering requirements. Marine clay is often characterised as having “toothpaste” like texture and properties. This complicates engineering and design of underground works. The associated challenges include difficulty in identification of depth of diaphragm wall sufficient to reach the main load bearing stratum, additional monitoring instrumentation required to detect soil movement, potential presence of subterranean structures that requires revision in design calculations of loading and structural support. Unlike conventional building construction where execution risks can be reduced considerably with sufficient design, underground engineering works could only be designed based on best information available prior to construction. Therefore, even under traditional design-bid-build procurement route, the engineering consultants are usually expected to improvise its design as construction works unfold. Consequently the contractor is also required to adjust and amend its construction methodology and sequence of works to cater to these underground surprises. 

In order to minimise disturbances and uneven settlements to the ground level surface, tunnels are usually constructed through the underground bedrock which is usually far deeper than conventional basement of buildings. A tunnel boring machine had to be deployed so as to excavate a tunnel through hard rock surfaces using its robust cutter head. Once a certain manageable boring length is achieved, a prefabricated reinforced concrete ring is installed to form a tube encasing to solidify the excavated tunnel. Whilst this method solves one problem, it inadvertently creates another problem. This is because tunnel boring machine launch site had to be identified so as to detect the location of bedrock, excavate shaft to allow the boring machine to be deployed into the intended underground level, remove excavated material from the tunnel and transport the reinforced concrete ring into the designated positions within the tunnel. These launch sites are a necessity in order to support the operations of a tunnel boring machine. Where there is an absolute necessity, certain privately owned lands or properties may be subject to compulsory acquisition in order to facilitate the establishment of such launch sites. This in turn creates legal issues where owners implicated by such acquisitions may resort to legal recourse or involve in an extended commercial settlement negotiations. Whilst these issues are not technically construction risks, it inevitably complicates the timing for commencement of construction works resulting in the entire train network to be constructed in multiple phases. 

Much of the uncertainties and risks associated with underground train stations and tunnel constructions heavily influences the ways in which these engineering construction contracts are procured including the choice of an optimal procurement pathways.  

Procurement Pathways – Lump Sum vs Remeasurement vs Cost Plus

The choice of procurement pathways for construction contracts are primarily focused on the most commercially sensible way of acquiring and paying contractors for its goods and services. It is an art of finding a fair allocation of risks between the parties. Risks are ideally allocated to the party that is in the best position to manage such risks. If certain risks can be best mitigated by proper decision making during design development, the Employer is usually in the best position to assume those risks. On the other hand, if certain risks are best mitigated by way of the most appropriate method of execution of works on site, the contractor is in the best position to assume those risks. When risks are allocated wrongly, the consequences are quite obvious in that the price payable becomes extraordinarily exorbitant in exchange for a suboptimal outcome.  

When the definition of scope of works are certain and the design are fully developed, most Employers favour a lump sum contract, where contractor is paid a fixed price based on a defined duration. Where the scope of works are defined, the tender price differences between contractors are mainly due to unit rates offered rather than quantity of works. The contractor that offers the most competitive unit rates is usually the one with the most efficient plan in deploying its manpower, machineries, equipment and other related resources to manage and execute the project. Therefore, the most efficient and resourceful contractor usually emerges victorious under lump sum competition. Overall resource efficiency and productivity become the few key differentiating factors between contractors in determining their entrepreneurial success. This in turn motivates the contractor to continuously drive efficiency and productivity. This lump sum procurement however does not work very well when the definition of scope of works is uncertain or that the quantity of works is provisional at best. If the contractor is expected to provide lump sum price despite the uncertainty in quantities of works, it will inevitably include a price premium for such risk. A participating contractor has no other choice but to gamble. The contractor that wins the tender may not always be the most productive in this case as it could be the contractor that had underestimated the actual scope of works, thus quoted a cheaper price. The Employer therefore needed another procurement pathway that places less emphasis on the tender price since it is a guess work at best. 

The next best alternative to lump sum contract for underground engineering works appear to be cost-plus contract where the contractor is reimbursed for the actual costs incurred for the resources deployed plus an agreed percentage to account for profit and overhead. The risk in this case is allocated to the Employer in that the contractor is not required to gamble its tender price with premium pricing, and the Employer consequently only had to pay for the actual works done. This however removes the incentive to be efficient, productive and prudent from the contractor’s equation. By contrast the contractor is motivated to carry out more works than necessary since its profit is often expressed as a percentage of its actual cost. The higher the reimbursement for cost, the higher its profit will be. The Employer therefore finds itself in yet another compromised financial position where it had to pay more than necessary whether under a lump sum or a cost-plus contract.

The remeasurement contract appears to be a middle ground in terms of procurement pathway relative to the extremes of lump sum contract and cost-plus contract. This is because a remeasurement contract is effectively a hybrid of both lump sum and cost-plus elements. Under a remeasurement contract, the quantities of works are provisional since it can only be accurately determined upon actual works done. On the other hand, the unit rates submitted by the contractors are “mini lump sums”, where it encompasses a blend of labour, plant and materials as described in the preambles of the schedule of unit rates. By way of example, the unit rates for soil excavations may be described as inclusive of excavators, labourers, planking, strutting and formwork to support excavated site, disposal of excavated materials off site, keeping excavated sites free from water accumulation by installation of pumps etc. Therefore whilst the actual volume of soil to be excavated may vary depending on site conditions, the unit rates are fixed in so far as the cost of various types of resources that are required to directly carry out excavation works. It is quite simply a balance between the interest of the Employer and the contractor. Whilst the Employer continues to pay for actual work done, the contractor is also incentivised to be resource efficient and productive.

Procurement Pathways’ Impact On Standard Conditions of Contracts

The choice of procurement pathways has a significant impact on the standard conditions of contracts. This is because the conditions of contract should give effect to the philosophy of risks allocation embodied in the procurement pathway of choice. By way of example in Singapore, both the design and build option and traditional design-bid-build option being separate and distinct procurement pathways have separate sets of standard conditions of contract. Likewise in the UK, the ICE suite of standard conditions of contract are largely remeasurement contracts to reflect the engineering nature of the projects. On the other hand, the JCT suite of contracts are usually lump sum since it caters to building construction projects in the UK. Unfortunately, there are no notable suite of contract forms in Singapore to specifically cater to underground engineering works despite the scale and magnitude of tunnels and train stations projects in Singapore. Therefore the current practice is either to modify existing contract forms such as the PSSCOC to suit the engineering peculiarities or to adopt and modify ICE contracts to cater to local requirements. To the extent that these modifications are extensive, it may alter the nature of the standard contract forms to being bespoke contracts. One of the primary advantages of standard contract forms over bespoke contracts is the efficiency of having consistent conditions which avoids extended negotiations or uncertainty in the way it may be interpreted. The risks of altering conditions in standard contract forms is that it may have inadvertent ripple effect on the operations of other related provisions.

So what are the specific provisions within standard conditions of contract that are affected by the choice of procurement pathway? If an underground engineering project is contracted on a remeasurement basis, any increase in quantity of works e.g. length of tunnel, volume of excavated earthworks, depth of pile length etc over and above the provisional quantity is not a variation under the contract. This is different from an increase in quantity of works under lump sum contract which would usually qualify as a variation under the contract. A variation is quite simply a change from the agreed scope of works that may entitle the contractor to additional payment and/or extension of time. If there is no agreement on the fixed volume of works due to its provisional nature, then there can be no quantity related variation. In other words, the burden is not on the contractor to request for an ‘instruction’ from the Engineer or Superintending Officer if the works carried out differ from the provisional quantities. The contractor simply gets paid based on actual works done, in accordance with an agreed unit rate. This avoids the administrative burden of  requiring the contractor to issue a notice that may act as a proviso prior to any of its entitlement to payment. 

Under most standard forms of contract, the establishment of variation is important since it is notionally a contractual gateway to other forms of entitlements such as additional payment or extension of time. Therefore variation has often been framed as one of the contractual grounds for these entitlements. However under remeasurement engineering contracts, whilst additional works above provisional quantity is not strictly speaking a variation, it could entitle the contractor to “additional payment” and additional time. It should be clear however, the “additional payment” in this remeasurement context is additional in so far as it exceeds the provisional contract sum that is derived based on an estimation as opposed to a fixed lump sum. 

The situation can be viewed differently in respect of duration for construction works or time for completion. Remeasurement contracts do not have a provisional time for completion. The construction period is fixed and any works completion beyond the stipulated duration could constitute culpable delay which give rise to liquidated damages liability. This dichotomy of provisional quantities of works but fixed time for completion can be viewed as a contractual anomaly. Some have argued, quite validly that time for completion can only be as accurate as the quantities of works. In this case a provisional time for completion should equally apply. Others have disagreed in that even under lump sum contract, the time for completion are generally not derived based on a precise mathematical calculation based on how much time it would reasonably take to execute a defined scope of works. By contrast, the time for completion is usually derived based on other external considerations such as when the project had to be completed to fulfil a handover requirement imposed by third parties. The contractor would therefore need to price the works based on the level of resources required to fulfil those time stipulations. In view of the above time consideration under remeasurement contract, there are two important elements in respect of extension of time. Firstly, whilst actual scope of works exceeding provisional quantity does not constitute variation per se, it should be considered a ground for extension of time. Secondly, if the time for completion is fixed but derived based on an estimated quantity of works, any extension of time should not be deemed as an Employer related event but rather a neutral event such as inclement weather condition which should not attract further entitlement to loss and expense. This is because the actual quantity is after all not initiated by the Employer, unlike the case of a variation due to design change. Therefore the actual payment received by the contractor based on actual quantities of works should be derived based on multiplication against its unit rate which in and of itself is a “mini lump sum” as alluded to earlier. 

What about situations where the additional quantities of works are carried out under circumstances that differ from what was contemplated by the parties? What if the construction of underground train stations require additional excavations, additional underground strutting support and soil treatment due to encounter with marine clay or major underground obstructions. Should there be occasions where there may be justifications for the unit rate be extrapolated in order to cater to these extraordinary circumstances and hardships? Or is this merely the case where the risks associated with lump sum unit rates materialise and there is no reason for the Employer to underwrite the contractor’s lapses in its commercial judgment? At what point should “additional quantities” be considered variations?  Clearly there are no obvious answers to the above rhetorical questions and these are ultimately matters that should be negotiated between parties to understand the limits to which variations provisions should be triggered. There are however certain objective comparison benchmarks that could be of assistance such as the approved construction programme, the associated resource schedule, the approved method statement for execution of construction works and any accepted contractual qualifications. For a remeasurement contract to be effective as a risk sharing mechanism, it has to act as a doubled edged sword that cuts both ways.

Conclusion

The unique risks and challenges to underground engineering works give rise to the need to find a fair and equitable sharing of risks. To this end, the parties choice of any given procurement pathways should be matched by an appropriately worded standard conditions of contract. This is because, various standard provisions such as definition of variations, valuation of variations, additional payment and extension of time may vary considerably depending on the risk sharing profile adopted by the parties.




Koon Tak Hong Consulting Private Limited