Mechanical, electrical and plumbing (MEP) works are usually carried out at a subcontract level with a very unique risk profile. To this end, there are certain commonly recurring themes of MEP related contractual disputes. This article examines the rationale behind these common MEP disputes which may be helpful to contracts managers, legal counsels and quantity surveyors responsible for advising MEP subcontractors. 

So what are the reasons behind MEP subcontract works’ unique risk profile? Firstly, most MEP subcontract works are surreptitiously procured under a ‘design and build’ or at least ‘partial design and build’ model. This holds true regardless of the typical ‘supply and installation’ label used to describe such MEP works. A typical MEP subcontractor has significant responsibility in producing site coordination drawings, combined services drawings in order to fulfil a set of specification that is performance based. Secondly, unlike most subcontract works with relatively short and limited time for completion, MEP subcontracts are one of the first few subcontract packages to be awarded and do not complete until practical completion of the main contract works. Therefore, whilst MEP subcontract sum merely accounts for 30-40% of the main contract sum, its construction period is disproportionately longer. Thirdly, most building design development efforts are chronologically led by the architectural discipline, followed by structural discipline and trailed closely by MEP discipline. Financial feasibility of any commercial construction project are determined by the amount of real estate space available either for sale or for lease which in principle is an architectural matter. The architectural design also determines how aesthetically appealing the project may be to potential buyers and investors. On the other hand, the structural and MEP design works are aimed at supporting and facilitating these architectural objectives. Given this design sequence, the time frame available for design decision making for MEP works are typically compressed. This is because the duration between the ‘freezing’ of architectural design and award of main contract can be relatively short. Therefore a lot of MEP design decisions are unfortunately made during the construction period, resulting in variations which are avoidable. There are quite a lot of misplaced expectation that the MEP subcontractor will deal with these design decision making in parallel with construction works. 

Given the unique characteristics of MEP works described above, the administration of MEP subcontract are often fraught with delay risk, design risk and disruption risks. In the next few sections of this article, the issues raised above will be expanded further so that an informed MEP subcontractor could navigate cautiously in the contractual minefield.

Design Responsibility And Performance Based Specification

As a practical matter, it is relatively easier for electrical cables, ventilation ducts, water pipes etc to accommodate architectural layout as well as structural columns, slabs and beams. Therefore MEP subcontractor often find itself being responsible for “proposing” MEP services layout plan and to “verify” the actual dimensions on site. In other words, the tender drawings issued to MEP subcontractors are qualified as being “for reference only” despite the fact these drawings were the basis of its subcontract sum. These proposals of layout, verifications of site dimensions are often exhibited in the form of combined services drawings, site coordination drawings and shop drawings. Whilst one may argue that these drawings are ultimately subject to approval by the MEP consultant engineer, these approvals are often made with qualifications that the MEP subcontractors are not relieved from its responsibilities of compliance with the relevant building codes. These qualifications can be found in the ‘approval stamps’.

Do coordinations of services necessarily attract design liabilities? Yes in most cases where such coordination is consequential to performance of the final product. By way of example, if the pipes are not installed with the necessary gradient in compliance with the building codes to enable the flow of fluid by means of gravity, the MEP subcontractor can hardly rely on the argument that it is merely a subcontractor following the engineer’s design. This is because the MEP subcontractor are required to provide a services layout drawing based on actual site dimensions which often affects the gradient of the relevant pipes. The amount of space or void left for MEP services are often derived after the ceiling height and location of columns as well beams are in place. In other words, MEP considerations are dealt with only after architectural and structural requirements are addressed. This is in line with the traditional sequence of design development which was alluded to above. Any congestions in space alloted could affect the effectiveness of MEP services in terms of cable layouts, conduit runs etc. If the MEP subcontractor has responsibility beyond workmanship issue, there is a strong argument that it has inadvertently assumed design responsibility.

As part of the MEP tender process, subcontractors are often required to populate specific information such as the brands, models, dimensions, country of origin, weight, horsepower, flow rate and other prescriptive data of various MEP equipment proposed. This information could be populated in a schedule of technical data, apparently to allow the consultant MEP engineer to evaluate whether the tender submitted is in compliance with the project requirements. Some may argue that these submissions are in fact binding and exemplifies the MEP subcontractor’s fulfilment of performance based specification or design brief stipulated by the consultants. The MEP subcontractor are therefore liable if the proposals submitted are found to be non compliant with the design brief. Whilst the MEP subcontractor could seek remedy from the equipment manufacturers if the equipments are faulty, whether the choice of the equipment proposed is suitable and appropriate appear within the MEP subcontractor’s scope of responsibility. 

The above could be contrasted with a builder works subcontractor who unlike an MEP subcontractor, do not typically assume any design responsibility. The former does not produce any drawings and are in fact expected to receive construction drawings issued by the architect or structural engineer. The builder works subcontractor is expected to build strictly in compliance with these drawings issued. If these construction drawings do not have sufficient information for commencement of construction works, a Request for Information (or RFI) is often issued by the builder works subcontractor to the relevant consultant for further particulars. In this regard, the delineation of design responsibility and workmanship responsibility is clear. 

Programme, Definition of Completion, Testing And Commissioning

The subcontractor’s risk exposure increases the longer it is required to carry out works on site. During construction period, there are risks relating to coordination with other subcontractors for site resources and access such as  use of scaffolding, cargo lift, storage space etc all of which invariably affect its productivity. If and when the preceding trade subcontractor is unable to complete its work on time, there are also contract administration risks in relation to application for extension of time that often comes with rather onerous condition precedents that had to be complied with. As alluded to earlier in this article, amongst various subcontract trades, the MEP trade is arguably one with the longest construction period. This is because there are various long lead items that may require placement of orders in advance as well as the need to carry out coordination of routing of MEP services during the finalisation of construction drawings. In addition to that, the MEP subcontract is usually one with the latest subcontract completion date, almost identical to the main contract completion date. No building can be considered completed and fit for occupation until and unless the testing and commissioning is carried out for all relevant MEP parts subsumed under the building management system. Some of these parts such as the fire fighting system are considered essential health and safety consideration prior to statutory certification. 

In view of the above, the MEP subcontract works usually achieves its subcontract practical completion when the MEP system is capable of being operable and functional in its entirety. This is particularly so when the construction project involves commercial building. The burden in this regard is considerably high. This is because if the system as whole fails to function, there may be various contributing factors, some of which are objectively outside the purview of the MEP subcontractor. By way of example, if the operating software embedded in the building management system contains system error, this could adversely affect the testing and commissioning outcome. Whilst the MEP subcontractor is usually not responsible for the third party software, it is nevertheless implicated by the withholding of practical completion certificate for its MEP subcontract works. This affects the MEP subcontractor by way of extended exposure to liquidated damages, as well as delay in the release of its retention monies. 

So what are the pre-emptive measures available for MEP subcontractor that genuinely believes that its responsibility is only on a ‘supply and installation’ basis? The scope of works section of most MEP tender document usually include a comprehensive list of works that the MEP subcontractor is responsible for and by the same token provides an indication of what constitute ‘completion’. These documents should be reviewed carefully to ensure that it matches with the expectation of the MEP subcontractor. Another important document in this regard is the subcontract programme that is to be produced by the subcontractor at the inception of the agreement. Subcontract responsibility that is strictly within the confines of ‘supply and installation’ should be reflected in the programme. This is particularly so with adequate distinction made against the main contract master programme of which it usually include an activity for testing and commissioning leading to practical completion. Such timeline distinction, when read with the appropriate specification and scope of works may be of assistance in case there are disputes associated with completion of works.

Liquidated Damages For MEP Subcontract

As alluded to earlier in this article, whilst the time for completion for MEP subcontract is significantly longer than other conventional subcontract trades, the MEP subcontract sum is usually a modest fraction of the main contract sum. Most MEP cost for a typical building construction project accounts for merely 40% of the overall construction cost but almost 90% of the main contract construction period. This disproportionality matters when one makes an assessment of the commercial trade off between risk and reward. In an ideal world, the risks exposure should commensurate with the prospect of profit. To this end, the MEP subcontractor would be well served if it negotiates effectively to mitigate its risk associated with liquidated damages in view of issues relating to definition of MEP works completion as well as a relatively long construction period. One may not be able to negotiate effectively without a comprehensive understanding of the concept of subcontract liquidated damages especially how it differs from main contract liquidated damages.

First and foremost, liquidated damages is a genuine pre-estimate of losses that an aggrieved party suffers in case of project delay which is recoverable from the party in breach. This sum of money is defined and agreed in advance so that the recovery of financial compensation could be done without the hassle of proving and determining the actual loss. A main contractor in culpable delay is liable to the Employer for main contract liquidated damages. If such delay is caused by its subcontractor, the main contractor recovers such losses contractually from the subcontractor in default. The mechanism by which the main contractor could recover such losses from the subcontractor can be tricky due to conflicting interests. 

From the main contractor’s perspective, any delay to subcontract trades which are on the master programme critical path is capable of delaying the entire project schedule. Such delay in turn exposes the main contractor to full main contract liquidated damages. The MEP subcontract is likely to be one of those trades that are on such critical path due reasons mentioned earlier in this article. Therefore it is naturally in the main contractor’s interest to either include an MEP subcontract liquidated damages that is comparable to the main contract liquidated damages or at least to impose general damages on MEP subcontractor. These ideal measures for the main contractor will provide corresponding protection on a back to back basis. 

On the other hand, the MEP subcontractor is unlikely to agree to a sum equal to that of main contract liquidated damages given that the quantum of its subcontract sum is a fraction of the main contract sum. The cumulative main contract liquidated damages accrued over a short period of delay could easily erase all profit included in the MEP subcontract. The risks in this regard can have a crushing effect on the viability of the commercial deal. It is therefore in the MEP subcontractor’s interest to negotiate a separate subcontract liquidated damages that is proportional to the financial magnitude of the MEP scope of works. By way of mathematical illustration, let us assume a scenario where the main contract sum is $50million with a main contract liquidated damages of $15,000/day. Therefore, its MEP subcontract sum, could be around $20million (i.e. 40% of the main contract sum). By proportion, the MEP subcontractor could negotiate at a target liquidated damages of $6,000/day (i.e. 40% of the main contract liquidated damages). Additionally, the MEP subcontractor could consider proposing a maximum liability cap on total liquidated damages to 10% of the MEP subcontract sum, i.e. $2million. Whilst these proposals are not uncommon market practices, any success to these negotiation target is largely dependent on bargaining power.


Price Fluctuations, Off Site Works And Cashflow

Cashflow is one of the most important issues confronting any contractor since it is the financial life blood of any project. Under most standard forms of construction contract, contractors are entitled to progress payments when  either works are progressively completed on site or at least when building materials are delivered to site. As regard the former, there is usually a 10% retention of amount payable whilst the latter attracts a 20% retention of amount payable, all of which are subject to a maximum cap of 5% of contract sum. The nature of MEP works can often give rise to cashflow disadvantage under these rules. This is because some of the long lead major equipment are manufactured off site and only delivered to site towards the end of the project when these are ready for site installation. Therefore, assuming there is no agreement on any advance payment, the MEP subcontractor could be out of pocket by financing the works until it is finally entitled to progress payment. 

Some of the raw materials of MEP works such as copper, steel, aluminium etc that are used for pipes, ducts, cable trays are vulnerable to price fluctuations. These price volatility are difficult to be mitigated because most MEP subcontractors do not have sufficient visibility of the projects in their pipeline that allows for bulk order in advance in order to hedge price swings. In addition to that, some construction sites could be fairly congested with restrictions on the contractor’s ability to deliver material to site for storage. This denies MEP subcontractor the ability to secure interim progress payment under the rules mentioned above. Therefore, in the absence of any advance payment, the MEP subcontractor are usually expected to have access to sufficient working capital to finance the MEP works. As a matter of construction sequence of works, most MEP works are not ready for site installation until completion of structural works as well as a significant portion of architectural works. Therefore even if the MEP subcontractor is ready and able to proceed with the works on site, this can only be done in tandem with site progress. 

Post covid pandemic, most construction contracts have included certain allowances for advance payments and price fluctuation provisions. In Singapore, these allowances are typically government led initiative with focus on ready mixed concrete as it is more widely used as a construction material in the industry as a whole. Private sector Employer led initiative are not as widely practised due to the preference for fixed price lump sum contracts.  Therefore MEP subcontractors’ ability to benefit from price fluctuation provisions remain limited. 

One of the contractual avenues available to MEP subcontractors to address its cashflow concerns is Option Module B included in the Public Sector Standard Conditions of Contract (PSSCOC) used in Singapore. As the Employer does not have a direct contractual relationship with the MEP subcontractor, this arrangement has to be facilitated through the main contractor. Under this option, payments may be certified for goods not delivered to site but subject to the discretion of the Superintending Officer (SO). In order to avail itself to such interim payments, the MEP subcontractors has to demonstrate that it has made payments for such off site materials by producing relevant receipts and invoices. Further, these materials must be shown to be intended for inclusion in the permanent works. In this regard, the onus is on the MEP subcontractor to demonstrate that it is able to clearly and safely secure the storage of such goods and materials, so as to avoid unnecessary commingling with materials intended for other projects. This is an important consideration for the Employer in order to ensure that the title or ownership of the paid goods are effectively transferred to the Employer. Therefore, these goods and materials are also required to be visibly marked and identified. Clearly the administrative tasks associated with such payment for off site goods and materials can be burdensome and has to be justifiable in consideration of the potential payments receivable. This in turn requires advance planning and are unlikely to be achievable if approached on a last minute and ad hoc basis. The MEP subcontractor should have these arrangements negotiated and included in the subcontract terms in case there is overwhelming financial justification to do so.

Conclusion

The MEP subcontractor’s ability to appreciate its unique risk profile and to administer its contracts accordingly are key to dispute avoidance and commercial prudence. Most construction contracts are standardised in order to promote upfront certainty and efficiency. It is extremely rare for contract forms to be drafted in a manner that caters to the unique risk profile of any specific construction trades. The MEP subcontractors should therefore be more vigilant and proactive in negotiating particular condition that addresses some of its inherent needs and concerns.




Koon Tak Hong Consulting Private Limited