This article examines loss and expense provisions under two of the more commonly used standard forms of construction contract in Malaysia i.e. Agreement and Conditions of ‘Pertubuhan Akitek Malaysia’ (PAM) 2018 (With Quantities) and Standard Form of Contract of ‘Jabatan Kerja Raya’ (JKR) or Public Works Department (PWD) incorporating Bills of Quantities. This is Part 3 of a series of articles comparing various key provisions of PAM and JKR/PWD contracts. As PAM contracts are mostly used for private sector funded projects whilst JKR contracts are meant for public sector projects, a comparison of loss and expense provisions can be useful in shedding light on how such claims are handled differently between these two sectors. There are many contractors in Malaysia that manages both private and public sector projects but may not be conversant with the differences in loss and expense provisions between PAM and JKR contract forms. Consequently, loss and expense claims are approached in an identical manner regardless of contract form used. Understanding the nuances of contract provisions is vital because failure to comply with certain strict requirement may result in loss of right to claim notwithstanding any merit in the contractor’s case. It should also be noted that the presence of express contract provisions governing loss and expense as found under both PAM and JKR forms meant that the contractor is able to refer any dispute relating to such claims to statutory adjudication regime under Construction Industry Payment And Adjudication Act (CIPAA) 2012. This is affirmed under the case of Syarikat Bina Darul Aman Berhad & Anor v Government of Malaysia [2017] MLJU 673. Therefore, knowledge of loss and expense provisions not only preserves rights to claim but also facilitates project cashflow.

Loss and expense provisions can be found under Clause 24 of the PAM contract and Clause 44 of JKR contract. Loss and expense is a common source of disputes in construction contract for the following key reasons. Firstly, any of the contractor’s entitlement to loss and expense is dependent on the occurrence of certain primary events such as delay, disruption or prevention caused by the Employer that materially affects the project programme possibly giving rise to schedule overrun. Some of the more common examples of these primary events include issuance of instruction for variations, delay in providing access to site and other excusable delays which would ordinarily qualify for extension of time. In other words, loss and expense can be characterised as ‘secondary’ (or quantum issue) where its entitlement is premised on the establishment of the corresponding primary event (or liability issue). Therefore, loss and expense clauses should be read in conjunction with other pertinent ‘primary’ clauses such as variation clauses and extension of time clauses. How loss and expense provisions are interwoven with other primary event clauses are often under appreciated. Secondly, even where the contractor is allowed to claim for loss and expense under express contract provisions, there is rarely a clear definition as to what amounts to loss and expense compensation, including the types of financial recovery that is permissible under such provision. Contractors advancing such loss and expense claim would generally refer to relevant textbooks, case precedents or literature to establish the heads of claims that are considered industry norms e.g. prolongation costs, disruption costs, loss of profit etc. Therefore the ambit of compensation is often subject to debate. Finally, notwithstanding the lack of clear contractual definition of loss and expense, the contractor is usually required to provide various supporting documents, vouchers, calculations, interim reports, contemporaneous records, site diaries etc in a timely manner, some of which could be commercially sensitive and somewhat invasive from a business privacy standpoint. Therefore, these onerous disclosure requirements could end up being a ‘fishing expedition’ with no clear delineation of boundaries. 

Given the above, it is critical that the contractors appreciate loss and expense provisions in light of these challenges and be ready to administer claims accordingly. Where necessary and possible, these standard conditions may be negotiated particularly when included in a recurring basis under commonly used contract forms. In the next few sections of this article, some of the key components of loss and expense provisions will be examined, so as to facilitate any effort to either negotiate and/or administer of loss and expense claims.

Condition Precedents

Condition precedents are requirements that must be fulfilled by the claimant failing which the right to claim will be lost. As regards loss and expense claims, such condition precedent involves notification to the Employer of the contractor’s intention to claim within a prescribed duration. Under Clause 24.1(a) of PAM contract, the contractor shall give written notice to the Architect of his intention to claim for loss and expense within 28 days of the date of Architect’s Instruction (AI or CAI i.e. Confirmation of Architect’s Instruction as the case may be) or the occurrence of matters materially affecting the regular progress of works as listed in Clause 24.3, whichever is earlier. Such written notice shall also include an initial estimate of such claim supported by the necessary calculation. The giving of such notice shall be a condition precedent to any entitlement to loss and expense that the contractor may have under the contract and/or common law. The condition precedent under PAM contract is two fold, where the second mandatory notification requirement comes under Clause 24.1(b). Under Clause 24.1(b), the contractor shall within 28 days after the matters listed in Clause 24.3 have ended, send to the Architect and Quantity Surveyor complete particulars and calculations of his claim for loss and expense for substantiation. Again, failure to comply with the second condition precedent shall cause the contractor to lose his rights to claim. 

There are several notable characteristics of the condition precedents under PAM contract. The trigger to claim for loss and expense is when ‘regular progress of works has been or is likely to be materially affected’ as opposed to ‘the completion of the works is or will be delayed beyond the time for completion’. The latter scenario caters to extension of time provision under Clause 23.1 where there is likely an impact on practical completion date. The wording in Clause 24.1 appears to suggest that even if the project schedule is disrupted but not necessarily resulting in delay to completion, e.g. loss of productivity giving rise to disruption cost, there may be a case for loss and expense compensation. However what adds complexity to disruption as compared to delay is that delays are typically events that warrants certification by the Architect, thereby reducing ambiguity whether excusable delaying event had occurred. On the other hand, there are no certificates of disruption issued by the Architect in his role as a certifier. The contractor ought to be mindful of his burden of proof in this context. Another notable characteristics of PAM’s condition precedent can be illustrated using this hypothetical example – assume the regular progress of work is disrupted due to the absence of confirmation of design details of certain floor finishes for a period of two weeks. By the end of the second week of delay, an AI was issued to confirm the change in floor finishes from material A to material B. However material B was not available in the market immediately and involve a production period of six weeks before it could be delivered to site. From the contractor’s perspective, the total disruption to the regular progress of works is for a period of eight weeks. However the Employer may take the position that the disruptive matter ‘ended’ in two weeks as soon as an AI was issued to provide the requested outstanding design details. Therefore there is a significant difference between the date upon which the disruptive AI was issued as compared to the end of the period of disruption. Contractors should be alert as to when the commencement date of 28 days ought to be calculated from pursuant to condition precedent under Clause 24.1(b). The risks however is that during the day to day correspondences between rank and file staff on these ‘operational issues’, there may be a lack of appreciation of some of the nuances of loss and expense provisions resulting mislabelling of disruptive event.

The condition precedent for loss and expense claim under JKR contract is structured quite differently from that of PAM contract. Under Clause 44.1 of JKR contract, if at any time during the regular progress of the works or any part thereof has been materially affected by reasons of delays as stated under Clause 43.1 (c), (d), (e), (f) and (h) and the contractor has incurred direct loss and expense beyond that reasonably contemplated and for which the contractor would not be reimbursed by a payment made under any other provision in the contract, then the contractor shall within 30 days of the occurrence of such event give notice in writing to the Superintending Officer (SO) of his intention to claim for such loss and expense with an estimate of the amount of claim. Under Clause 44.2 of JKR contract the contractor shall within 90 days after practical completion of the works, submit full particulars of all claims for direct loss and expense under Clause 44.1 together with all supporting documents, vouchers, explanations and calculations which may be necessary to enable the direct loss and expense to be ascertained by the SO and be added to the contract sum. Under Clause 44.3 of JKR, any failure to comply with the requirements set out above shall mean that the contractor is not entitled to claim for loss and expense and the Employer shall be discharged from all liability in connection with the claim. 

There are a few unique requirements that had to be fulfilled in conjunction with JKR’s 30 days notification condition precedent under its Clause 44.1. Firstly, there is an express requirement that the contractor ‘has incurred’ direct loss and expense in addition to material impact on regular progress of works. This is different from the requirement under PAM contract where the contractor ‘has incurred or is likely to incur’ loss and expense. Whether or not the contractor has incurred loss and expense can potentially be both a question of fact and question of law. It is unclear what may be the litmus test of whether or not the contractor has indeed incurred loss and expense. Should it be when the relevant additional resources were deployed in response to the event? Should it be when the relevant subcontractor has issued an invoice to the main contractor for the implicated activities? Should it be when the main contractor had paid for such invoice issued by the relevant subcontractors? These questions are relevant in that it may alter the date from which the 30 days notification requirements ought to be calculated, which in turn determines whether the right of claim is lost. Secondly, it is also a requirement under JKR contract that the progress of work has been materially affected ‘by reasons of delay’, which is different from PAM contract where there may be a case for loss and expense compensation even if the project schedule is disrupted but not delayed. Therefore the list of grounds that entitles to loss and expense compensation under JKR contract is referred to the grounds for extension of time under Clause 43.1. Whilst it may not necessary mean that JKR contract excludes any disruption costs under loss and expense claims, it may indicate that any disruption cost is recoverable when accompanied by excusable delay to practical completion. The second fold of condition precedent under JKR contract appears more generous than PAM contract in that the 90 days requirement to submit full particulars of loss and expense claim commences from practical completion of the works, rather than the end of the concerned event. One possible explanation for such time frame is that it allows the SO to certify extension of time to establish the occurrence of primary event prior to assessing the quantum of associated compensation. Therefore, there is perhaps less urgency for the contractor to furnish the SO with full particulars of its loss and expense claim. Another advantage of JKR’s provision is that there is no need to determine what amounts to the ‘end of the compensation event’ which was a challenge under PAM contract as alluded to earlier.

Grounds For Claim

As pointed out in the introduction of this article, loss and expense claim is usually a secondary matter (or quantum issue) that only need to be determined after the primary event (or liability issue) is established. Such primary events are usually time related where it may have caused delay to schedule and/or disruption to progress of works. As alluded to earlier under JKR contract, grounds for claim for loss and expense under Clause 44.1 are generally referred to the list of events that entitles to extension of time pursuant to Clause 43.1. Therefore the JKR contract adopts a singular list approach whereby events listed therein provides entitlement to both extension of time as well as loss and expense. On the other hand, the PAM contract takes a different approach whereby it sets out a list of events that form grounds for loss and expense that is separate from another list that forms grounds for extension of time. The grounds for loss and expense claim can be found under Clause 24.3 and are labelled as ‘matters materially affecting the regular progress of works’. Separately, grounds for extension of time are listed under Clause 23.8 and labelled as ‘Relevant Events’. Such dual list approach may be indicative of PAM contract’s recognition that there may be a case for loss and expense claim even in the absence of extension of time. 

Whether a contract form adopts a singular list or two separate lists, it is fairly common to find a limited number of events which are grounds for extension of time but do not provide entitlement to loss and expense compensation. By way of example, certain neutral events such as inclement weather and force majeure incidents are such that neither party is at fault in delaying project completion. Under these limited circumstances, both parties are required to share risks. As regards the contractor, it is expected to shoulder its own loss and expense in exchange for the grant of extension of time. On the other hand, the Employer cannot recover liquidated damages for the period of delay from the contractor. Both JKR and PAM contract take the same approach where there are provisions for such neutral events.

When comparing grounds for loss and expense claims between PAM and JKR contract, there are several notable differences which underscore the need for bespoke claims administration practices between public and private sector construction contracts. Under Clause 24.3(a) of PAM contract, where the contractor is not provided within 14 days after the award of the contract two copies of the contract drawings and two copies of the unpriced contract bills (or tender document) there may be a case for loss and expense claims if the regular progress of works is likely to be affected or has been affected. There is no equivalent provision for such ground of loss and expense claim under JKR contract. One possible explanation for PAM contract’s approach is that there are scope of works related information included in the tender documents and contract drawings that are necessary for the contractor to commence its planning activities including procurement schedule, method statement and works programme etc. Failure to provide these information may cause material disruption to regular progress of works. Others however may disagree and question whether it is reasonable for such ground to form the basis of loss and expense claim for three main reasons. Firstly, whether the tender process was carried out via physical copies or electronically, the tenderers are likely to make copies of tender documents and drawings in order to facilitate its own subcontract tender exercise that are likely to occur concurrently. Secondly, the tender documents and contract drawings do not necessarily account for the final accepted tender sum and penultimate scope of works. There are usually multiple tender addendums, post tender addendums, responses to tender questionnaires and qualifications, supplementary drawing sketches, revised tender offers, correspondences pertaining to negotiations resulting in commercial discounts during tender interviews etc that are circulated during procurement process that formed part of the contract document. Therefore it is unclear how the absence of superseded original tender document may cause material disruption to the regular progress of works. Finally, under Clause 3.5 of PAM contract, the contractor is under an existing obligation to produce a baseline work programme within three weeks after contract is awarded. Therefore the contractor is expected to be ready and able to independently commence with its initial planning activities upon award of contract.

The second unique ground for loss and expense claim pertains to Clause 24.3(l) of PAM contract where there may be basis for such claim if the regular progress of work is materially affected by reason of the execution of work for which a provisional quantity is included in the contract bill which in the opinion of the Architect is not a reasonably accurate forecast of the quantity of works required. Again, there is no equivalent provision under JKR contract. A likely scenario that would qualify for such loss and expense claim is where a provisional quantity for pile length for foundation works is significantly lesser than the actual pile length required to achieve the specified pile capacity. In such a case, additional piling equipment as well as labourer may need to be mobilised and to work over an extended period of time to cope with such unanticipated additional scope of works. This could give rise to prolongation costs, disruption costs amongst others. Therefore it appears fair and equitable for the Employer to compensate the contractor accordingly since the contractor had relied on the provisional quantity represented by the Employer via its consultants. On the other hand, others may take the position that whilst the nature of provisional quantity is such that both parties share risks, compensation of loss and expense appears to extend beyond such risks sharing principle. Under typical remeasurement contract with provisional quantities, the Employer pays for actual work done and the contractor is relieved from the financial risk from lump sum pricing. However in order to establish some form of commercial certainty, the contractor is not paid based on daywork rates or actual cost plus fixed overhead. Instead the contractor is paid based on rates and prices included in the pricing schedule or contract bills. This is affirmed under Clause 11.6(f) of PAM contract. In other words, the rates included by the contractor represents ‘mini lump sum’ where it should be inclusive of all labour, plant and material necessary to execute the described works. Where the contractor is paid for additional quantities, the rates applied to such incremental quantities ought to include labour, plant and material relevant to the works. Payment for loss and expense in addition to contract rates appears to deviate from valuation principles for provisional quantities. This could be one of the reasons why JKR contract does not include the same provision.

Contractors undertaking both private and public sector projects that utilise PAM and JKR contracts ought to be aware of these differences in their treatment of loss and expense claims. This awareness in turn may influence the ways in which claims of loss and expense are quantified including the relevant types of documentations that may support such quantification. These issues will be examined in the next section of this article.

Quantification Of Claims And Disclosure Of Supporting Documents

One of the common features of the condition precedents of both PAM and JKR contract is that the contractor shall provide an initial estimate of the amount that it intends to claim within a prescribed duration. The contractor thereafter is required to follow up with supporting documents to substantiate the amount claimed with the possibility that the final amount presented may be different from the initial estimate. As the assessment of amount claimed is performed by the certifier, it is entirely possible for the certifier to request for further information and arithmetical reconciliation if the final amount claimed is significantly higher than the initial estimate provided. As alluded to in the introduction of this article, as there is an absence of contract definition of types of compensation recoverable under loss and expense, this tends to complicate the effort to ascertain the type of documents that ought to be disclosed. Therefore it may be in the interest of the contractor to be as accurate and comprehensive as possible in the submission of its initial estimate, as surprises tend to lengthen the assessment and payment processes. One of the more popular case precedent that is relevant to this issue is Hadley v Baxendale, in particular the rule under its ‘first limb’. Damages within this category are typically categorised as ordinary losses naturally arising from the breach that is within the contemplation of the parties at the time of contract. The general principle of this case is that the aggrieved party is entitled to recover damages that are foreseeable. Loss and expense is effectively compensation payable by the Employer due to its act of prevention, or breach. 

During tender process for construction projects, pricing details that are submitted for purposes of bid evaluation are information that are within the contemplation of the parties around the time of contract. It falls under the ‘first limb’ in so far as these pricing details may be required for assessment of quantum of compensation. On the other hand, supporting documents that contain supplementary costs information that were not previously disclosed may be challenged as being unforeseeable and outside the parties’ contemplation. What should or should not have been foreseeable is often debatable if it is argued after the dispute has arisen. Therefore, contractors should be conscious that pricing details included in its tender submission has dual purposes – (1) to facilitate bid evaluation, (2) quantification of any potential loss and expense. Although issue of compensation and breach are least likely to be in the forefront of the contractor’s mind during the time of tender, one should be mindful that ‘only the paranoid survive’. In particular a significant part of preliminaries costs within tender price are effectively time related costs whereby such costs correlate positively with construction duration e.g. overhead of project specific staff, insurance costs, performance bond costs, rental cost of plant and equipment (e.g. tower crane, mobile crane, scaffolding etc), site maintenance and security etc. These typically falls under prolongation costs which is one of the more common heads of claims under loss and expense. The contractor should take the effort to voluntarily share its prolongation costs run rate to the Employer by extracting the total time related preliminaries costs over the original construction duration. In other words, the pricing breakdown in tender sum should be as precise and accurate as possible, reflecting its actual cost. This may be helpful in deriving a reasonably accurate initial estimate within the prescribed time frame. 

On the other hand, an advance estimation of disruption costs may be challenging based on pricing breakdown of tender sum. The contractor may consider voluntarily sharing its productivity for various trades of works in its method statement that relates to number of resources required to complete certain trade of work over a defined duration. This in turn may be helpful in case the productivity is reduced due to various grounds of claim for loss and expense. The contractor may therefore demonstrate quite readily the additional resources that are required to either revert back to its original productivity or to conform with the approved works programme (i.e constructive acceleration).

Conclusion

Comprehensive understanding of loss and expense provisions can be facilitated when one compares and contrasts various relevant clauses between two different contract forms. This in turn enables implementation of a robust claims administration practice which often involve examining when, how and why certain documentation and information ought to be disclosed to the Employer. Whilst contractors should not tender for project with the aim of claiming loss and expense, it should not be reduced to an afterthought.



Koon Tak Hong Consulting Private Limited