Collaborative contracting is a relatively new contracting model used in construction projects that is supposed to signify a cooperative and partnership driven working relationship between the Employer and contractor. This new approach aims to address some of the shortcomings often found in traditional contracting model that is said to be adversarial in nature where parties operate based on a zero-sum game. This article is Part 1 of an article series that reviews collaborative contracting from a commercial perspective. This article series provide a general overview of the unique features of collaborative contracting including examining some practical challenges in its implementation. These articles aim to provide readers with a balanced and nuanced understanding of this relatively new contracting model.

To comprehensively understand collaborative contracting, it is important to both know ‘what it is’ and ‘what it is not’. Firstly, whilst collaborative contracting is rooted in spirit of cooperation and partnership, there are no relaxation to obligations pertaining to time, costs and quality of the project. In other words, collaborative partners are still entitled to take legal actions in case of breach of contract to recover remedy. Cooperation should not be conflated with concessions. Secondly, whilst there are provisions to encourage collaboration, any lack of collaboration amongst participants during the course of the works does not entitle either party to terminate the contract for ‘abandonment’ or to argue that the contract is frustrated. In other words, the spirit of collaboration is a ‘good to have’ as opposed to ‘must have’. Lastly whilst there are provisions under Singapore’s public sector contract form that inculcate a collaborative environment through the implementation of ‘partnering workshops’, the success of such initiative is entirely up to the temperament of the participants. There is a limit to which a contract can regulate one’s ability to genuinely collaborate particularly when the project is under stress.

Notwithstanding the practical issues raised above, collaborative contracting is a worthwhile concept that should be considered seriously. So what are the unique features of collaborative contracting as compared to traditional agreement? In Singapore the details of collaborative contracting can be found in the Public Sector Standard Conditions of Contract (PSSCOC)  published in 2020 that incorporates its Option Module E. Apart from the public sector local contract form, NEC4 Engineering And Construction Contract that incorporates ‘Y Clauses’ is an alternative international contract form that is available for adoption in Singapore. Whilst there are certain differences between these two forms, there are overarching common features for collaborative contracting. The common features for collaborative contracting include amongst others, adoption of key performance incentives, inclusion of express provision for parties to act in a ‘spirit of mutual trust and cooperation’ and adoption of ‘early notification register’. These features will be elaborated further in this article series including other consequential amendments to standard provisions. 

Firstly as regards provisions for key performance incentives/ indicators (KPI), it aims to align the incentive structure for both parties. This is in contrast to traditional contracting where the commercial interests of both the Employer and contractor are usually at odds where the loss of one party could represent gain for the other party. Consequently contracting parties often prioritise looking after their self interest in the absence of common goal. However, it is important to note that the specific details of incentive structure, payments for achievement of goals, objective and quantifiable measurements of incentive scheme are to be negotiated and discussed between the parties. The above mentioned contract forms do not impose any specific requirements  or any proposed mechanism on the parties. 

Secondly as regards express provision for parties to act in a ‘spirit of mutual trust and cooperation’, whilst it provides clarity to the intentions of the parties it remains debatable on how it can be legally enforced. There are occasions where such provision is compared with the doctrine of good faith or fiduciary duty. However there is a lack of concrete legal precedents to suggest that these are of similar or comparable legal doctrines. 

Finally as regards early notification register, it allows both parties to mutually notify one another in case of emergence of events that may adversely affect the project. Upon notification, both parties will have the opportunity to collaborate in mitigating such notified risks. Such notification effort is in addition to the existing notification obligations or condition precedents prior to any claims for extension of time or additional payments.

In order for one to better appreciate the characteristics of collaborative contracting, it is important to have basic understanding of the general features of both the contract forms of PSSCOC with Option Module E and NEC4 mentioned earlier. This will be elaborated in the next section immediately below.

General Features of PSSCOC Option Module E and NEC4 

The eight edition of PSSCOC for construction works published in July 2020 is commonly used for traditional design-bid-build projects. Parties may switch to collaborative contracting by bolting on Option Module E to the PSSCOC. The PSSCOC with Option Module E was first used in Singapore in 2018. This option module essentially provides a list of clauses for additions and amendments to existing provisions included in the said PSSCOC. There are two versions of Option Module E available for selection namely one with SIDP and the other one without SIDP. The SIDP refers to Singapore Infrastructure Dispute-Management Protocol where parties agree to a Dispute Board (DB) comprising a panel of individuals with expertise in construction dispute. This appointed panel has the authority to mediate, render an opinion and/or adjudicate parties’ disputes arising under the contract. 

Whilst the NEC4 was published in 2017, its formal adoption in Singapore was first announced in 2024. The NEC suite of contracts was first developed in 1993 and had been used in various large scale projects across the regions including Hong Kong and London. A set of Y Clauses was developed to harmonise Singapore legislations with the provisions within NEC4 including incorporation of Security of Payment Act, Contracts (Rights Of Third Parties) Act as well as Insolvency, Restructuring And Dissolution Act etc. Relative to the PSSCOC, NEC4 offers more contractual flexibility to the parties by allowing selection of Main Option Clauses (Option A to Option F), Dispute Resolution Clauses (Option W1 to Option W3) and Secondary Option Clauses (Option X1 to X22), amongst others. The variety of contract and commercial permutations meant that parties utilising NEC4 are expected to be ‘sophisticated consumers’ who are well aware of their risk profile and commercial preferences. 

When comparing PSSCOC Option Module E with NEC4, the latter offers more procurement pathways to the contracting parties such as Option A to Option F under Main Option Clauses. NEC4 therefore provides different degrees of commercial alignment between parties beyond the agreed set of KPI. This may be welcomed by parties who favour a higher extent of alignment in financial interests in support of collaborative contracting. The details of Main Option Clauses under NEC4 as regards Option A, B, C, D, E and F will be examined in further detail under Part 3 of this article series. In general, these are types of procurement pathways available under NEC4 which have fairly significant impact on the extent to which parties may be incentivised to collaborate.

Given the variety of procurement pathways available under NEC4 which is quite distinct from PSSCOC Option Module E that includes relatively limited options, which approach is more conducive to collaborative contracting? Some may argue that having additional options may involve more upfront negotiations and extra resources expended to administer a relatively complex contract. These efforts in some way may defeat the very fabric of collaborative contracting. Those who take this position are likely to favour PSSCOC Option Module E. On the other hand, others may view KPI as ‘supplementary bonus’ which may not be sufficient to align the parties’ core interest if there are no pain/gain sharing as regards the contract sum. Those who subscribe to such approach are likely to favour the NEC4. In any case, the availability of both NEC4 and PSSCOC Option Module E provides more collaborative contracting choices to construction industry in Singapore as a whole. 

Spirit Of Mutual Trust And Cooperation vs Good Faith/ Fiduciary Duty

One of the more elusive provisions found under collaborative contracting is the requirement for parties to act in a ‘spirit of mutual trust and cooperation’. Whilst this phrase is found in both PSSCOC Option Module E and NEC4, there are considerable difficulties in determining how can this be legally enforced or what amounts to a breach of such spirit? Some have attempted to draw parallels between ‘mutual trust and cooperation’ with doctrine of good faith and/or fiduciary duty. The reason for such comparison is because the latter doctrine can be found in other areas of law e.g. the responsibility of a director to his company, the relationship between a lawyer with his client etc. Under these circumstances, there are fairly structured principles on how a fiduciary is expected to place the interests of his principal ahead of his own and also avoidance of conflict of interest. However these fiduciary relationships are quite different from that of contracting parties undertaking a business transaction. Where two business entities enter into a commercial agreement, such agreement is fundamentally a business deal that is agreed upon based on profit maximisation and self interest. Good faith doctrine on the other hand is diametrically opposite in direction from such economic view. The court in general is not ready to interpret a term where parties are expected to negotiate based on their self interest but curiously are also expected to place the counter party’s interest ahead of its own. In the case precedent of Walford v Miles, it is said that the duty of good faith is ‘inherently repugnant’ to the adversarial position of the parties involved in negotiation. 

Further it is also worth noting that the partnership and collaborative relationship is without prejudice to compliance with existing obligations under the contract. By way of example, even if the contractor notifies the Employer through early notification register of any delaying event, the contractor’s entitlement to any extension of time and/or loss and expense compensation is subject to its compliance with conditions precedents and other relevant disclosure requirements stipulated under the contract. There is clearly no relaxation of existing obligations just because the contracting parties are ready to work together in a collaborative manner. Therefore, it is challenging to imply fiduciary duty that supersedes self interest when much of the conditions imported from traditional contracting continue to prevail. 

Types Of Key Performance Incentives/Indicators (KPI) And Challenges In Administration

KPI is defined under NEC4 as Key Performance Indicators whilst PSSCOC Option Module E refers to Key Performance Incentives. Notwithstanding the difference in label, these are substantively similar under both contract forms. The use of KPI is one of the key features of collaborative contracting since it is aimed at encouraging positive behaviours or inducing positive outcomes by means of financial rewards. KPI is therefore an application of behavioural economics by combining elements of financial or economic principles with psychology.  

As alluded to earlier, there are no standard KPI or default set of mechanisms imposed on the parties. Parties are free to agree on different types of KPI including associated incentive payments depending on their project specific priorities. KPI can be used on a wide variety of matters including stakeholder management, productivity of resources, schedule/programme reliability, health and safety record etc. The basic rule is that KPI should be objectively measurable or quantifiable whereby incentive amounts will be paid to the contractor upon achievement of the defined goals or targets either throughout the project or upon project completion. Whilst the Employer is primarily responsible for establishing a set of KPIs for the contractor at the outset, additional KPIs could be negotiated and agreed between parties after contract formation for inclusion into the agreement. 

It may be intuitive that most contractors are incentivised to include as many KPIs as possible due to the additional income opportunities. However it should also be noted that generally there are requirements for the contractor to report to the Employer or its agents at agreed intervals on the status of KPIs. In this regard, the report shall include measurement of prevailing status for each KPI including forecast of achievements upon project completion. These KPI reports can be used as ‘project status report’ that provides contemporaneous data on the contractor’s performance under the contract based on a set of objective benchmarks. Where the contractor falls short on certain KPIs in which targets are unlikely to be met, early notification to the Employer as well as recovery plan are expected from the contractor. This KPI report is quite unique compared to the regular report typically provided by the contractor under traditional contracting. The format and content of regular reports are usually shaped by the contractor and may offer view points or perspectives that are sympathetic to the contractor’s position. For every ‘delay’ indicated in the regular report, the contractor may include an ‘exculpatory reason’ which makes it challenging to conclude objectively whether the contractor is performing as required under the contract. The KPI report however include a set of mutually agreed performance benchmark. An accurate and concise KPI report should allow readers to appreciate how the contractor had performed contemporaneously at a glance without delving into every bit of subjective granular detail. Where the contractor simultaneously produces its regular reports in conjunction with the KPI reports, every conflict or discrepancy between these two sets of report may be revealing for purposes of document discovery under any future arbitral proceedings.

As alluded to earlier in this article, the inclusion of KPI does not necessarily alter the procurement pathway for the project. Procurement pathway options such as design and build, traditional design-bid-build, lump sum contract, remeasurement contract etc are fundamental ways to allocate commercial risks between the parties. The general idea is that risk should be allocated to the party that is in the best position to manage it. KPI on the other hand, aligns commercial interest between the parties by offering incentive payments for achievements of certain measurable goals that are prioritised by the Employer. It is important to note that whilst KPI offers supplementary income opportunities to the contractor, there are usually no damages associated with non achievement of any KPI goals. In fact under Option X20.4 of NEC4, the contractor stand to gain incentive payment if there are improvements to any goals that were previously unmet. On the other hand, there are real financial risks shouldered by either party in the adoption of any given procurement pathway. By way of illustration, the contractor may end up expending more costs under lump sum contract than remeasurement contract if the risks undertaken materialised. 

So what are the specific types of KPI can could be considered under collaborative contracting that may induce meaningful outcomes? The considerations are largely shaped by what the Employer considers essential for the project to the extent that it is willing to expend additional monies to motivate the appropriate outcome. These variables in turn are greatly influenced by the characteristics of the project. By way of illustration, if the project involves an occupier of corporate real estate space looking to surrender part of its leased space to its landlord in advance in order to reduce operating expenses, speed of construction is of paramount importance. The sooner the Employer is able to have the designated floors reinstated back to its original condition and terminate its lease, the more it could save in terms of rental avoidance. Therefore, it is conceivable that there may be KPIs that relate to accelerated completion measured in number of days/ weeks ahead of planned completion date with incentive payments available for the contractor. This in essence motivates the contractor to treat programme ‘float’ as the project’s float rather than its own float. The incentive amount could reasonably be derived by taking a percentage of expected rental savings so as to establish ‘gain sharing mechanism’. Such projects are labelled as ‘space optimisation initiative’, where the complexity often involve migrating business units and/or critical infrastructure from the floors that are subject to advance lease termination to other remaining floors. Apart from increase in occupation density of the remaining floors, much of the critical infrastructure e.g. CRAC system, UPS, computing servers had to be migrated, thereby giving rise to risk of business disruptions. In this regard, the need for speed had to be balanced with delicate and careful execution of construction works. Therefore there could be KPIs relating to health and safety as well as adherence to specific approved construction methodology. These ‘balancing KPIs’ are important but may require finesse in its implementation. If the incentive amount for certain KPI is disproportionately larger than other ‘balancing KPIs’, the intended effects may be neutralised. Further, it should also be noted that health and safety is fundamentally the contractor’s baseline contractual obligation. There has to be appropriate language included in the contract to affirm that any KPI that intends to expedite or accelerate project completion shall be without prejudice to the contractor’s responsibility to comply safety rules and regulations.

Partnering Workshops

Clause E5.0 of PSSCOC Option Module E exclusively provides high level guidance on the organisation and participation of partnering workshops by all parties involved in the project. Whilst contract terms can effectively define rights and obligations of the parties, it remains to be seen whether it could similarly govern the parties’ willingness and ability to collaborate. Although there are no universal formulae that foster spirit of collaboration, there are a few pointers that parties should consider. 

Firstly, certain organisations that are hierarchical in its social norms may function differently from firms with ‘flat’ organisational structure. Under the former, the presence of senior leadership may inhibit the rank and file personnels from speaking freely which in turn compromises the ability to collaborate. If a partnering workshop is engaged with excessive formality and nicety, the ability to have frank and honest discussion could well be compromised. 

Secondly, although partnering workshops should not be a source of additional administrative workload by having full fledged minutes of meeting, any agreements forged in these workshops should still be documented. All parties should be clear-eyed whether any compromise or concessions made are ‘without prejudice’. Therefore parties should be judicious about the manner in which the discussions in partnering workshops are documented.

Lastly, parties should consciously determine the difference in functions between regular meetings and partnering workshops. Meetings and workshops that are scheduled back to back may end up being a spillover session with no clear distinction in purpose and significance. Parties may consider whether it is necessary to stipulate different participants between regular meetings and partnering workshops. Whilst there are pros and cons to this separation approach, one’s competence is generally shaped by his/her character and nature as a person. That is why there are task oriented individuals and relationship building individuals.

Conclusion

The issues examined in Part 1 of this article series pertaining to general features of collaborative contracting contract forms, the adoptions of KPI, the implementation of ‘spirit of mutual trust and collaboration’ as well as partnering workshop reveal that having the right conditions alone is insufficient to ensure its success. In fact, it is quite challenging to define in precise terms what ‘success’ under collaborative contracting mean. Under ordinary circumstances, the implementation of any novel idea will usually start with baby steps. However, collaborative contracting is generally meant for mid to large scale projects rather than minor works. Therefore parties who are optimistic of the benefits of collaborative contracting should be mindful that there is still an unavoidable learning process. Further interesting issues will be examined under Part 2 and 3 of this article series that may be helpful in illuminating collaborative contracting from different angles.




Koon Tak Hong Consulting Private Limited