This is part 2 of an article series examining prefabricated prefinished volumetric construction or ‘PPVC’ from a contractor’s perspective. The overarching purpose of these articles is to offer commercial and risks assessment on how should main contractors and subcontractors approach PPVC projects. Based on an earlier article in part 1, it is rather evident that most PPVC projects fundamentally changes the way one should assess contractual risk due to some of its unique characteristics. By way of example, whilst the procurement choice of whether to adopt traditional design-bid-build or design and build are decisions made by the Employer based on its requirements and risk appetite, most PPVC projects would inevitably require contractors to undertake a significant part of the design responsibilities by default. It is almost a given that if the Employer adopts a PPVC approach, much of the design development in particular detail design would have to be undertaken by the contractor. This is largely driven by the nature of fabrication, manufacturing and off site assembly details that are part and parcel of PPVC design development. In this regard, contractors with limited in-house design capability will have to be cognisant of such challenge if it participates in any relevant tender exercise.

In this article, there will be further assessments to understand the extent to which PPVC approach may change or even disrupt the traditional way of contract administration. By way of example under conventional non-PPVC projects, once a baseline construction programme is accepted by the contract administrator, it becomes the basis of supervision and monitoring of progress of works. Whilst the contract administrator may instruct the contractor to revise its programme with remedial measures in the event that the works do not conform with the baseline programme, there is no financial punitive action. The contractor is only liable for liquidated damages in the event that the works remain incomplete upon the expiry of the practical completion date. This does not appear to be the case for PPVC project that adopts the public sector standard conditions of contract (PSSCOC) that incorporates Option Module D. Option Module D authorises the Employer to call on advance payment guarantee if the contractor has failed to execute the works in accordance with the accepted baseline programme, amongst others. As contractors for PPVC projects are expected to request for advance payment due to a significant initial capital outlay, the arrangement for such advance payment guarantee is fairly common. In other words, from a contract administration view point, the accepted baseline programme may carry an additional financial significance. This issue along with other contract administration matters will be further examined in the next few sections of this article.

Construction Programme

As alluded to in the opening of this article, PPVC projects are largely procured under a design and build pathway. Further, for contractors that provide advance payment bond in exchange for advance payment to fund a significant initial capital outlay may be confronted with an additional financial pressure in case it deviates from the accepted baseline programme. According to Clause D2.2(c) of Option Module D of PSSCOC for Construction Works (or its equivalent under Option Module B2.2(c) of PSSCOC for Design & Build) any deviations from such accepted baseline construction programme may be one of the grounds for the Employer to call on the advance payment bond or guarantee. It is noteworthy that under non PPVC project that involve provision of unconditional bond (or also generally known as performance bond), deviation from baseline programme does not usually constitute an express ground for calling of such bond. Whilst deviations from accepted programme may be an early indication of possible completion delay, such delay has not technically materialised and therefore there is no breach of contract. Even if the the works remain incomplete at the practical completion date, there may be ground for completion date to be extended. In other words, deviation from programme during the construction period in and of itself does not signify a forgone conclusion that contract condition is breached. There are legal safeguards in place for the contractor to resist the calling of bond where it is unconscionable or tainted by fraud, signifying that the calling of bond is not a contractual measure that can be taken lightly. Some may argue that the nature of PPVC projects which involve considerable critical works carried out off site may offer justifiable reasons for this new ground enabling calling of bond. The elevated gravity for any deviation from accepted programme may conceivably be a point of negotiation for informed contractors (and rightly so) due to the practical challenges in its enforcement.

To be clear, not all form of deviations from the accepted programme may be reasonable ground to call on the advance payment bond. To be successful in the calling of such bond, the deviations from programme had to be extremely serious that it cast doubts on whether the works will be completed within the time for completion, or that the contractor had failed to proceed with the works in due diligence and expedition. By way of context, an identical ground can be found in Clause 31.1(1)(c) of the PSSCOC justifying a cause to terminate the contractor’s employment for default. This will provide an indication of the severity with which the deviation from programme had to be before it could justify either a case to call on a bond or to terminate the contractor’s employment. What constitute sufficiently severe deviation remains a subjective, debatable and fact sensitive matter.

Proponents for having an express ground to authorise the Employer to call on advance payment bond for deviations from accepted programme are likely to point to the fact that PPVC projects are mostly carried out off site within a controlled manufacturing environment. The level of influence that the Employer and its agent can exert on the contractor’s work progress is therefore limited relative to traditional on site works. Further some of the fabrication details and methodology could be highly proprietary to the contractor and its module units fabricator. If there is tangible deviation of accepted programme, there are considerable difficulties for the Employer to engage any third party contractors to carry out remedial works and to complete the remaining works. In the worst case scenario, the Employer may need to abandon much of the work already done if the replacement contractor could not productively utilise those works due to difference in production and fabrication methods. The design responsibilities of the contractor further compound these problems since there is perhaps an issue of intellectual property right to be considered when engaging third party contractors to take over any remaining works. Therefore some may support the calling of advance payment bond as a strong deterrent against a problem which the Employer is particularly vulnerable to. 

Construction Method Statement As Part Of Contract Document?

Under traditional non PPVC project, whilst contractors are typically required to submit their construction method statement for the Employer’s consideration and assessment, such written proposal is rarely included in the contract document. This is because amongst others, the sufficiency and adequacy of the proposed methodology are risks to be undertaken by the contractor. In the event that the site conditions necessitate a revision to the accepted method statement, it should not be deemed as a variation under the contract that entitles any time extension or additional payment. This practice however may be debatable under a PPVC project for the following reasons. 

As alluded to in the preceding section of this article, off site manufacturing may cause the Employer to have less visibility and therefore control over the progress of works as compared to traditional site based construction works. In a bid to address the associated risks, the Employer has additional contractual tool or lever to enable the calling of advance payment bond in case the works deviates from the accepted programme. As the calling of bond is not a measure to be taken lightly, there ought to be objective standards to be benchmarked against in order to establish legitimate deviation from accepted programme. This is partly to ward off any argument that the call on advance payment bond by the Employer is unconscionable. In order to fortify such objective standards, it may be in the interest of the Employer to incorporate in the contract document a fully developed design which in turn includes its method statement. Such method statement includes all fabrication details, sequence of manufacturing and the expected productivity cycle. This provides certainty in measurement if and when the progress of works falls behind the accepted programme. The traditional concern of additional payment claims or application for extension of time due to unforeseen site is less applicable in a manufacturing and controlled environment.

From the contractor’s perspective, the inclusion of method statement in contract document provides the objectivity in measurement of extension of time, loss in productivity and abortive cost incurred if and when design changes are initiated by the Employer or its consultant in the midst of the production and manufacturing process. However it should also be noted that much of the construction works are outsourced by the main contractor to multiple subcontractors with various trade specialties. It is also likely that the PPVC fabricator may be a separate and distinct entity from the main contractor. At the point when the main contract terms are negotiated, including setting out the agreed construction method statement, much of the subcontractors may not have been identified or engaged. Since the production of PPVC module units involve coordination of various trade contractors, the absence of input from these subcontractors in agreeing a contractual method statement may pose a challenge. In this regard, the main contractor is expected to be strategic in its use of letter of intent vis-a-vis the relevant trade contractors and specialist subcontractors to ensure a holistic method statement is available for evaluation and acceptance. This method statement can in turn be incorporated in both the main contract document and various subcontract documents to ensure a back to back arrangement. It should also be noted that not the entire of a PPVC project is modularised where there could still be residual works that are carried out using the traditional in situ method e.g. foundation works, excavation works, hardscaping and landscaping works etc. Therefore, the method statements to PPVC units that may be included in the contract document would not be inclusive of all these residual in situ scope of works.

PPVC Fabricator vs Main Contractor

In Singapore, the PPVC modular units are manufactured in multi storey manufacturing facility known as Integrated Construction and Prefabrication Hub or ICPH. These ICPH are build on state land on a 30-year lease term and operated by private enterprise procured through public land tender. To date, there are six ICPH operators where these facilities are automated and mechanised to meet the industry’s demand for PPVC modular units, precast building components etc. On the other hand, to date based on publicly available data, there are at least 37 main contractors with PPVC project experience in Singapore. Clearly not all main contractors have the capacity, wherewithal and commercial desire to operate an ICPH. Given these realities, it is highly likely that a main contractor that do not already operate an ICPH would have to outsource the prefabrication works to an ICPH operator. As a matter of due diligence and prudence, such main contractor tendering for PPVC project ought to ensure that the ICPH operator do not have conflict of interest by also participating in the main contract tender. This is because some of the ICPH operators are also main contractor in their core lines of business. 

As there are significantly less ICPH operators than main contractors, it appears that the commercial bargaining power tend to favour the ICPH operators. To date, a significant portion of PPVC approach is driven by government initiative through its land sales conditions for selected government land sale sites. Under Building Control (Buildability And Productivity) Regulations 2011, there is minimum level of use of PPVC at 65% of the total super structural floor area for certain designated sites. Therefore main contractors tendering for such projects are likely to outsource more than half of its contract sum to its selected ICPH operator. In other words, the ICPH operators not just have a larger commercial bargaining power, but also great control and influence over the progress of the works. This challenges the dynamics of relationship between main contractor and subcontractor where the former traditionally enjoys a great commercial bargaining power as well as control over the project. This disruption therefore raises the question of whether the main contractor should continue to shoulder bulk of the project risk if it does not commensurate with the commercial reward? If the main contractor decides to shoulder the same level of risk, is it in the same position to manage those risks as before? 

In reality some of the risks management concerns of the Employer in respect of PPVC project’s main contract is similar to the main contractor’s concerns under its subcontract with ICPH operator. As alluded to in the earlier part of this article, in a bid to mitigate those risks, the Employer incorporated additional contractual tool such as the ability to call on advance payment bond in case the progress of works deviates from the accepted programme. By the very same token, the main contractor when confronted with a diminished bargaining power and control over the progress of works might be incentivised to find ways to pass on those contractual risks. One of the options available for the main contractor’s consideration include the adoption of general damages for ICPH operator’s delay as opposed to liquidated damages. Whilst the main contractor had to prove the quantum of damages sustained prior to recovery, it allows the main contractor to be reimbursed for the actual losses suffered in case of culpable delay that would otherwise be extensive and difficult to pre-estimate. These losses include main contract liquidated damages, loss and expense claims from implicated subcontractors, as well as the main contractor’s very own loss and expense all of which are fact sensitive. If the incumbent ICPH operator’s delay becomes extraordinarily severe, the main contractor may have to switch to an alternative ICPH operator with a different proprietary system and the need to fabricate a new set of moulds. Such delay related damages may become hard to pre-estimate if subcontract liquidated damages were adopted.

Definition of Completion In PPVC Project

Under traditional non PPVC project, the contractor is required to achieve substantial completion or practical completion by the stipulated completion date. The word ‘substantial’ suggests that whilst the building is fit for occupation and ready for handover, it may not be entirely and wholly completed. In fact it is quite common for a list of minor outstanding works to be issued to the contractor together with a substantial completion certificate where such minor works are to be completed after practical completion. The idea is that these minor works do not materially affect the Employer’s beneficial occupancy of the building concerned. Such leeway in definition of completion is somehow absent when it comes to any product or goods that are transacted on a day to day basis. By way of example, when a car is handed over by the manufacturer to its buyer, it has to be entirely completed and ready for use. The manufacturer is not expected to continue to work on a list of minor outstanding works of the car after handover. The distinction in definition of completion between construction works and goods is relevant in the case of PPVC project because of the modular units. By way of context under the America’s legal system, prefabricated building modulars could be treated as general products such as cars or refrigerators where the Uniform Commercial Code or UCC applies. However some have also argued that given the provision of services in the production of highly bespoke prefabricated modular services, the American common law should apply instead. Such distinction in legal treatment affects the definition of completion because the common law allows more flexibility in its substantial completion doctrine. 

Whilst Singapore’s common law is based on a different legal system from the American law, the basic principle as regards concept of completion for PPVC modular units ought to be clarified during tender negotiations for practical reasons. This is because the definition of completion affects the fundamental question of whether a party had performed its obligation under the contract. Performance of contract in turn affects any entitlement to payment and the determination of whether the contract conditions had been breached. As PPVC modular units are fabricated and manufactured in a controlled production facility much like general products such as refrigerators and cars, it is a radical shift from the traditional in situ construction. The idea is that standardisation in production facility improves consistency in quality and productivity. However whilst traditional in situ construction applies the substantial completion doctrine, what constitute completion for PPVC modular units? This question is perhaps more relevant in respect of the subcontract between the main contractor and its ICPH operator/ modular units fabricator than it is to the Employer. With the adoption of Building Information Modelling (BIM), the specification and dimensions of PPVC modular units can be highly prescriptive and accurate given the data rich digital 3D modelling. ICPH operators therefore is required to fabricate based on these prescriptive design. If the PPVC modular units delivered to site could not be appropriately installed in conformance with the site conditions due to irregularity in dimensions, who should be contractually responsible?  The ICPH operator may rightly argue that as it is only expected to manufacture based on design provided, the contract is performed as soon as the goods are transported from its facility much like any general products. Even if the duty of conformance with site dimensions is expressly delegated by the main contractor to the fabricator, is any on site ad hoc modification works to rectify any dimension non conformance issues considered ‘minor outstanding works’ that could be carried out after practical completion? Do these minor outstanding works materially affect the Employer’s beneficial occupancy of the concerned building? These are not merely theoretical issues or academic concepts because it determines the question of delay culpability and liability for damages. With the advent of standardisation in production of PPVC modular unit, any irregularity in dimensions may be replicated to multiple similar units causing a systemic production issue. Ultimately where the main contractor is required to certify completion to its fabricator, there has to be a clear set of requirements to be accomplished before the subcontract works is deemed completed.

Conclusion

Given the peculiarities and unique characteristics of PPVC projects, there may be a case for the creation of a set of particular conditions for its use. Based on the observations made above, such particular conditions may be more pressing and pertinent at the subcontract level than it is for the main contract. These particular conditions could be bolt on to the subcontract standard conditions if and when the project involves PPVC approach. 




Koon Tak Hong Consulting Private Limited