Most standard forms of construction contract require an independent certifier to be appointed to make temporary but binding decisions on critical matters that may be contested by both parties. Under Agreement and Conditions of ‘Pertubuhan Akitek Malaysia’ (PAM) 2018, such independent certifier refers to ‘Architect’ whilst under Standard Form of Contract of ‘Jabatan Kerja Raya’ (JKR) or Public Works Department (PWD), the Superintending Officer is the independent certifier. This is Part 4 of an article series comparing and contrasting various key provisions of PAM and JKR/PWD contracts. These comparisons help deepen one’s understanding on effective administration of these contract forms by taking into consideration their unique characteristics. Whilst most contractors in Malaysia may have utilised PAM contracts for their private sector projects and JKR contracts for public sector projects, most contractors do not necessarily have a distinct contract administration system for each contract form. This article series provide analysis on various provisions under both contract forms that may be helpful not just in contract administration but also negotiating amendments to standard conditions if necessary.  

Contract certification regime refers to issuance of various types of certificates such as practical or substantial completion certificates, monthly progress payment certificates, final account certificates, delay certificates, termination certificates etc. Certificates are essentially formal documents through which a contract administrator communicates his determinations or decisions to the contracting parties on various critical issues. Therefore, whether the contract administrator is labelled as an Architect or Superintending Officer, he is generally considered a ‘certifier’ due to his certification functions. Apart from certifications, that are other formal means by which a certifier conveys his assessments such as his written approval to baseline programmes, or instructions to suspend works to carry out certain inspection or investigations etc. When parties are in contentions over certain issues involving claims, payments or compensations, the related determinations, rejections or certificates by the certifier are generally subject to challenge. Therefore as a matter prudence, every contract administration system ought to have a clear record not only the certificates but also submissions, communications, supporting documents, calculations etc leading to the issuance of these certificates as well as responsive to those certificates. If and when parties commence legal proceedings, the dispute resolution provisions under construction contract typically allow the certifier’s decision to be reviewed subject to certain prescribed limitations. This explains why the certifier’s decisions are often described as being of ‘temporary finality’. When the certificates are challenged, there are generally three elements that are scrutinised namely (1) substance or reasoning behind the decisions (2) any independence or impartiality (or the lack thereof) exhibited by the certifier in making the decision in issue and (3) whether the manner in which the disputed certificates were issued complied with the prescribed procedural requirements. These elements will be further elaborated in the next few sections of this article. The overarching principles on the above mentioned issues do no differ significantly between PAM and JKR contract. The devil however is in the detail. 

One of the practical challenges confronting any certifier is the fact that he is expected to be reasonably skilled in a diverse set of issues such as delay analysis, valuation of variations, quantification of loss and expense, interpreting contract terms, deciphering engineering specifications etc all of which do not traditionally fall within the expertise of an architect or a senior executive within government agency that would assume the role of Superintending Officer. This begs the question of whether the certification functions of an individual certifier is practically too broad to be reasonably discharged by a single construction practitioner? In this regard, one may find that contract forms typically have provisions to allow the certifier to delegate some of his functions either to a separate professional or a representative. This article will examine whether delegation of function effectively delegates certification authority. In other words, apart from the contractually named certifier, can someone else also be responsible for issuing certificates? These queries in turn will have important consequences on whether the certificate in contention was issued in a procedurally compliant manner. This determination affects the contractual validity of the certificate in issue.

Independence of Certifier

Contract administrator is typically engaged and appointed by the Employer to design the project and/or to represent the Employer’s interest by ensuring that the works carried out are in compliance with prescribed quality and design intent. In other words, the contract administrator is effectively the Employer’s agent. Under Articles of Agreement of PAM, it is expressly stated that the Employer has caused drawings and Contract Bills showing and describing the work to be done to be prepared by ‘his’ Architect and Consultants. Under Clause 4.1(a) of JKR contract, the Superintending Officer named in the Appendix reserves the right to act on behalf of the Government for matters relating to specified provisions and under Clause 3.1 the Superintending Officer shall be responsible for the overall supervision and direction of the works. As the contract administrator supervises the contractor’s works to ensure compliance with specification, he clearly does not act as the contractor’s agent. In view of the above, is it reasonable for the contractor to expect the contract administrator to be objective and impartial in his assessment of various critical but subjective issues such as issuance of delay certificates, practical completion certificate, grant of extension of time etc? 

To understand the query raised above one has to be aware that the contract administrator assumes dual function namely (1) the Employer’s agent (2) an independent certifier. Whilst the Architect or Superintending Officer acts in the interest of the Employer in supervising the contractor’s works, he is also required to be independent, impartial and neutral in his concurrent role as a certifier. In particular the element of impartiality and independence of a certifier is provided for under common law in Malaysia as well as expressly stated under the respective contract forms. By way of illustration, under Clause 23.10 of PAM contract, when the Architect reviews application for extension of time, he shall fix a later Completion Date if in his opinion such later Completion Date is ‘fair and reasonable’ having regard to any of the Relevant Events amongst others. Under Clause 43.1 of JKR contract, the SO shall as appropriate issue a certificate of delay and extension of time giving a ‘fair reasonable’ extension of time for completion of the works. In reality, it is a delicate balancing act for any certifier to simultaneously protect the interest of the Employer whilst being fair and balance in the discharge of its certification function. This is why the subject of independent certifier is a fertile ground for dispute and contract mismanagement. 

The reason for any confusion between the role of an agent for the Employer and that of an independent certifier may be due to under appreciation of the nature of certification functions and its inherent subjectivity.  The ambiguity is exacerbated by the absence of an exhaustive list of responsibilities which require the certifier’s independence. Notwithstanding that and as a general rule, the contract administrator acts as an independent certifier when he is assessing matters that lead to the issuance of certificate or its equivalent. In particular such certificate typically brings about time and/or costs implications to both the project and parties. By way of illustration using PAM contract, the Architect acts as an independent certifier in assessment of extension of time due to the fact that the outcome of his assessment leads to either issuance of Certificate of Extension of Time pursuant to Clause 23.4 and/or Certificate of Non-Completion pursuant to Clause 22.1. This principle is equally applicable to the Superintending Officer under JKR contract. In the event where the extension of time is denied, the schedule overrun results in the contractor being liable for liquidated damages i.e. cost implications to the contractor. On the other hand if the extension of time is granted, then contract time for completion is lengthened i.e. time implication on contractor’s schedule.

So what exactly does it mean to be ‘independent’? It is quite common to find the contractor arguing that the variation order instructed by the Architect for design changes caused excusable delay to the project schedule. In other words, the Architect in acting as the Employer’s agent may have initiated design changes for reasons completely unrelated to the contractor’s performance but had to now confront with the fact that he may have been the cause of delay. Any grant of extension of time therefore is an admission of his culpability on project schedule overrun. The independence in this regard requires the certifier to be completely objective by removing the desire for self preservation from his consideration in the course of carrying out assessment. In reality, this expectation is much harder than one may ordinarily expect. The certifier should also provide the contractor with reasonable opportunities at least within the timeline prescribed to submit its claim and substantiate its position. 

Certification regimes incorporated in construction contract is critical in ensuring that any dispute between the parties does not grind the progress of works to a halt. Certificates issued by the certifier which are of temporary finality typically govern critical and potentially contentious matters such as recovery of liquidated damages, extension of time, progress payments etc. The requirement for the certifier to act fairly and independently can be viewed as a form of legal ‘safeguard’ in ensuring the contractor is treated fairly. However, the enactment of Construction Industry Payment And Adjudication Act 2012 is perhaps a tacit recognition that the legal requirement for a certifier to be independent may not be entirely adequate particularly as regards swift resolution of progress payment disputes. Therefore, statutory adjudication regime is available to the contractor in case payment dispute arises.  

Certifier’s Power To Delegate

As alluded to earlier the scope of expertise expected from a certifier appear broader than what one may reasonably find in a professional architect or a senior executive within government agency that may assume the role of a Superintending Officer. Therefore both PAM and JKR contract have provisions to allow the certifier to delegate part of his duties, power and authorities. PAM and JKR contract have different approaches on the issue of delegation by the certifier as illustrated in the following paragraphs.

Under Article 3 of PAM contract, the term ‘Architect’ shall mean a ‘person’ or an ‘individual’ as opposed to an architectural firm or an organisation. This distinction is important. The subsequent Article 4 refers to both Structural Engineer as well as Mechanical and Electrical (M&E) Engineer where the Architect may from time to time delegate certain duties and authority of the Architect where appropriate to the said engineers.  The following Article 5 is similar in that it refers to ‘Quantity Surveyor’ where the Architect may also delegate certain of his duties and authority as appropriate. Article 6 refers to ‘Specialist Consultant’ with similar provision for delegation of duties and authority by the Architect. Admittedly, the term ‘Specialist Consultant’ lacks specificity where depending on the nature of the construction project it may well refer to Lighting Consultant, Acoustic Consultant, Facade Engineering Consultant etc. Whilst these provisions under PAM contract rightly allow the Architect to delegate certain functions that are generally outside his scope of expertise to other project consultants, there are no further details as regards procedural requirements to effect these delegations. In particular there are no limitations on the extent to which delegation of duties and authority are allowed, the requirement to inform the contractor on scope of delegation as well as whether the Architect retains the right to review any decisions that were delegated to other consultants. Further, it is also unclear if the Architect is precluded from acting on matters that had been delegated to other consultants. These ambiguities may potentially be further grounds for challenging the certifier’s decisions.  

 Under Clause 3.3(a) of JKR contract, the Superintending Officer may from time to time ‘in writing’ delegate to the SO’s Representative (appointed pursuant to Clause 3.2) any of the powers and authorities vested in the Superintending Officer as listed in the letter of delegation and shall furnish to the contractor a copy of all such written delegation of powers and authorities. Clause 3.3(c) states that if the contractor is not satisfied with any decision of the SO’s Representative, the contractor shall refer the matter to the Superintending Officer who shall confirm, reverse or vary the decision of the SO’s Representative. Finally, Clause 3.3(d) states that the delegation shall not preclude the Superintending Officer from himself exercising or performing at any time any of the delegated powers and duties. Unlike the PAM contract, the JKR contract does not expressly stipulate delegation of duties and authority to other consultants. In fact under Clause 3.2(b) of JKR contract, the SO’s Representatives shall be responsible to the Superintending Officer and his duties are to watch and supervise the works and to test and examine any materials or goods to be used or workmanship employed in connection with the works. The descriptions of the role of the SO’s Representative do not include the specialist functions generally assumed by other project consultants e.g. structural engineer, quantity surveyor, M&E engineer etc where their collective roles go well beyond that of a supervisory function. Therefore, it is likely that the SO’s Representative refers to subordinate or departmental staff of the Superintending Officer within the government agency commissioning the construction works. This raises the question of whether the JKR contract contemplates delegation of duties and authority of the Superintending Officer to other project consultants. If the Superintending Officer decides to delegate his functions to certain project consultants, one may reasonably challenge the procedural validity of such delegation. As certifier is essentially ‘creature of the contract’, he cannot act beyond what is provided for under the contract.

When comparing the PAM and JKR contract as regards the issue of delegation, another notable difference relates to the contractor’s right to ‘appeal’ if he is not satisfied with certain decisions made by individuals who had been vested with delegated certification authority. As alluded to earlier, such right to appeal exist under Clause 3.3(c) of JKR contract whilst the same is not expressly provided for under PAM contract. One possible explanation for such contractual difference is that the PAM contract anticipates delegation of authority by the certifier on issues that are generally outside his scope of expertise as an architect e.g. quantity surveying matters or engineering matters. Therefore, it may not be logical for the Architect to override the experts on matters that are well within their scope of expertise. On the other hand under the JKR contract, the Superintending Officer and SO’s Representative are unlikely to have significant difference in domain of expertise as alluded to in the preceding paragraph. The likely rationale behind any delegation of Superintending Officer’s duties and authority may stem from expedience and organisational efficiency in that an individual officer may not have sufficient capacity to oversee and supervise large public sector project. In fact the Superintending Officer may under Clause 3.2(a) appoint such number of SO’s Representatives as he deems fit. Therefore it made more sense for the contractor to be given the right to appeal against decisions made by junior officers where appropriate.

Employer Interference With Certification

As alluded to earlier, the Architect appointed under PAM contract assumes dual function i.e. the Employer’s agent as well as an independent certifier. Under its Clause 26.1(b) the distinction between these functions is further sharpened whereby if the Employer is found to interfere with or obstruct the issue of any certificate by the Architect, such default entitles the contractor to determine his own employment under the contract. As a matter of context, the events listed under Clause 26.1 are significant grounds of defaults by the Employer that entitle the contractor to terminate his own employment under the contract. Some of these events include severe delay in providing site access, failure to honour interim progress payment certificate etc. Therefore if the Employer’s compromises the certifier’s independence by exerting his influence, it can have severe consequences that it entitles the contractor to be relieved from any further performance under the contract. Why should the Employer’s interference with independent certification be considered such a serious breach that goes to the root of the contract? Although such provision is not commonly found in other suite of standard conditions of contract (including that of JKR contract), there may be good reasons for its adoption. 

Generally any interference by the Employer is subtle and unlikely to unfold in a public manner. Since the Architect is simultaneously the Employer’s agent, it is a common practice for meetings to be organised exclusively between the Employer and its consultants that is chaired by the Architect, generally referred to as ‘Project Consultants Meeting’. In other words, there is almost an expected information asymmetry between the Employer and the contractor on various project related matters including private communications with the Architect on critical issues. However it will not be surprising to find that such right to termination is not quite commonly exercised by the contractor. The burden of proof is on the contractor to demonstrate any of the Employer’s undue influence over the certifier which can be onerous. Therefore, the actual value to such provision could be its deterrence as well as underscoring the need for the certifier to be independent. Notwithstanding that, the contractor could still utilise such provision in legal proceedings through document discovery in a retrospective manner. This is provided that the Employer’s interference with independent certification is pleaded by the contractor as part of its claim arising from termination. 

It is also unclear what may objectively constitute interference with the issuance of any certificate by the Architect. In this regard, could any of the Employer’s action that compromises sense of fair play amount to interference? Some may argue that the Employer’s ability to issue any  rebuttal to the contractor’s claims directly to the Architect without affording the contractor any right to reply or even to be informed constitute interference. Currently, there are no express provisions for the Employer to provide its written responses to the certifier on the contractor’s claims. Therefore, the contractor is unlikely to be copied on any communications between the Employer and the certifier on various claims particularly those in dispute. If and when there are discussions between the Employer and the certifier on these contentious matters, the contractor is is likely excluded from the chain of communication. Again the burden of proving the Employer’s interference can be extraordinarily onerous. Therefore if the contractor invoke his right to determine his employment under the contract, the lack of access to the relevant proof and documentation may put the contractor at risk of being alleged to have abandoned the contract.

Conclusion

The requirement for certifier to act independently, fairly and impartially under construction contract ought to influence the ways in which contractors manage their claims and disputes. Whilst some contractors may have the optimism that they would be treated evenly and fairly on various certification matters, other ‘battle hardened’ contractors may not necessarily share the same optimism. Those who belong to the latter category should therefore be more vigilant and watchful on the manners in which decisions are made by the certifier by ensuring that there is sufficient paper trail leading to the decisions in issue. Occasionally the lack of paper trail and traces of assessment by the certifier on various certification matters may be more revealing than had these information been available.




Koon Tak Hong Consulting Private Limited

Joint venture by contractors is often described as an ad hoc alliance that brings about synergy in that the combined effect of such cooperation is greater than the sum of individual contractor’s competence. A successful joint venture makes strategic sense given that it allows contractors to jointly undertake project larger than their typical risk appetite by cooperating with allies with complementary competence. However such alliance is not without risk if approached with blind optimism. This article is Part 2 of an article series examining tips and traps of joint venture arrangement so as to enable contractors to make an informed decision on how to approach such alliance. In previous Part 1 article of this series, several key subjects of joint venture were examined including the types of joint venture and how such choice may affect the ways in which assets and capital are set up at the inception of the alliance. It was also pointed out that valuation of each joint venture member’s contribution whether in the form of tangible or intangible assets could have significant downstream implications such as splitting of profit, distribution of liabilities and internal decision making mechanism. 

In Part 2 of this article series, there will be further focus and analysis on how contractors participating in joint ventures should ensure that the joint venture agreement which regulates their rights and obligations should be drafted in congruence with the construction contract with the Employer. To this end, the manner in which joint venture members split their roles and responsibilities as it relates to executing the underlying project may have consequential effects on key issues such as claims, payment entitlements and liabilities. As pointed out in article of Part 1, certain joint venture members may contribute intangible assets to the alliance e.g. access to critical business relationship, design and engineering skills etc where it may be challenging to value its initial percentage equity to the joint venture. Additionally, members that exclusively contribute intangible assets may have either low or limited actual physical involvement in the carrying out of the project works. If and when the construction duration is extended and the joint venture requires additional capital infusion, the fabric of partnership between contractors may be tested. Those who contribute mainly intangible assets may have light balance sheet and therefore could either be unwilling or unable to provide continuous financial support to the joint venture. Consequently there could be dilution of equity for members who are unable to participate in fund raising, which could result in acrimonious disputes if the joint venture agreement does not include a thoughtful mechanism to deal with such possibilities. By the very same token, fault based indemnity may not be applicable to joint venture members as they may be required to either directly or indirectly responsible for certain default caused by other joint venture members. This is quite common given the inclusion of ‘joint and several liability’ provision under construction contract typically stipulated by the Employer. 

The next section of this article examines certain key issues that may arise in case of conflicts between joint venture agreement and construction contract of the underlying project. Joint venture agreement should not be drafted in isolation of the construction contract. Where possible it should be premised on a ‘back to back’ arrangement with the construction contract. This underscores the reason why it is not advisable to conclude the joint venture agreement without having a good grasp of the final terms of construction contract.

Alignment Between Joint Venture Agreement And Construction Contract

The requirement for consistency between joint venture agreement and construction contract can be best illustrated as analogous to the relationship between main contract and subcontract. There may be occasions where the main contractor may be responsible for defaults caused by its subcontractors even if the main contractor is not culpable. Therefore, most main contract and subcontract are drafted on a ‘back to back’ basis such that the contract administration of subcontract are effectively in sync with the main contract. By way of illustration, any extension of time granted under the main contract typically is allowed to trickle down to the relevant subcontract and likewise the main contractor is able to recover liquidated damages that it is liable to the Employer from the culpable subcontractor based on subcontract terms. By the same token in negotiating joint venture agreements, contractors should decide how various key provisions under construction contract e.g. liquidated damages, extensions of time, variations, interim progress payments, dispute resolutions etc impact the rights and obligations of various joint venture members. Unlike most standard conditions of contract which have a suite of template agreements that cater to both main contract and subcontract with default back to back arrangement, there are no industry wide ‘standard conditions’ available for joint venture agreements. This is because joint venture agreements tend to be highly bespoke with a wide variety of permutations of types of joint venture legal structure, number of venture partners with differing equity proportions as well as split in roles and responsibilities etc. Notwithstanding the difficulties in ensuring that construction contract and joint venture agreement are in sync, it continues to be a worthwhile effort. The challenge however is that unlike main contractor and subcontractor that are separate and distinct legal entities that are in an arm’s length transaction with each acting in their own self interest, the same may not always be the case for joint venture members. Contractors may participate in an incorporated joint venture where they become shareholders of the very same legal entity whereby their commercial interests are relatively more aligned than unrelated parties’ transactions. Therefore in the interest of clarity, the rights and obligations of all joint venture members ought to be expressly provided for out of abundance of caution. 

By way of illustration and assuming there is proper delineation of responsibilities between joint venture members, any delay to programme caused by upfront construction activities may only be felt towards the end of the construction schedule. This is particularly common where baseline programmes are likely to have more float and flexibility to reposition its critical path. Such flexibility diminishes with the passage of construction period. It is therefore entirely possible that the culpability of an upstream joint venture member can disproportionately affect another downstream joint venture member. If and when liquidated damages are imposed by the Employer, how should the damages be apportioned? Should it be based on the identity of the prevailing member carrying out the works during the period of schedule overrun? Or based on determination made by the certifier appointed under the construction contract? Or be split equally amongst all joint venture members regardless of culpability and percentage of equity? As there are no universally acceptable solutions to these difficult issues, some may suggest that the dispute resolution outcome under the construction contract to be final and binding as it relates to the joint venture agreement. This option can be helpful as it avoids confrontation of awkward issues by leaving it in the hands of a neutral third party. However, not all construction claim may end up in a legal proceeding e.g. arbitration and neither should arbitration be the default dispute resolution option for every construction dispute. The balancing act of finding an equitable approach that is also commercially sensible can be tricky to say the least. However having an aligned joint venture agreement and construction contract can be helpful in avoiding nasty surprises in the midst of the project. 

Whilst the illustration above on the issue of liquidated damages demonstrate how joint venture agreement should include mechanism on ‘burden sharing’, it may be equally problematic in the case of additional payments from the Employer. In this regard, the same line of enquiry applies i.e. how should additional payments e.g. loss and expense compensation, advance payment, variation works payment, incentive payments under pain and gain share commercial mechanism be distributed amongst joint venture members? These issues will be further elaborated in the subsequent sections of this article. In any case, it is fair to say that having a joint venture agreement that is drafted in line with the commercial principles of construction contract is an essential starting point. It is a critical early indication of whether joint venture members are able to both collaborate and compromise. 

Delineation Of Responsibilities Within Joint Venture

As joint venture partners are typically a coalition of contractors with complementary skills and strengths, it is common for the construction project to be carried out in accordance with their unique set of attributes. Where the joint venture consists of members with interdisciplinary skills e.g. architectural and builder works, civil and structural works, mechanical and electrical works, the project may be divided based on their respective expertise. As a matter of sequence of construction trades, one may find that joint venture member responsible for civil and structural works may commence and complete its works earlier than the rest. By contrast, architectural and builders works particularly those involved in internal furnishings are likely to be completed later, typically coinciding with the practical completion of the project. As construction risk fluctuates in tandem with its lifecycle, the risks are therefore not evenly distributed amongst the joint venture members. As alluded to earlier, risks tend to concentrate towards the end of the project schedule with less flexibility in critical path and increase in time pressure to meet statutory inspection. In view of this phenomena, joint venture faces challenges in balancing risks and rewards with contractor carrying out tail end trades may understandably demand for more equity to commensurate with the risks it shoulders. Ironically most architectural and builders works are typically subject to nominated subcontract, which meant that these very risks are actually outsourced to third parties down the contract chain. In view of the unique risk profile relating to interdisciplinary joint venture between contractors, there ought to be an express agreement on how to objectively measure risk and its subsequent effect on equity split. 

There may also be cases where joint venture is formed primarily to share risk of a large project amongst two or more contractors with similar background and expertise. In this regard the project could be divided either geographically based on pre-defined phases of works, or be undertaken concurrently by the joint venture members. Under this scenario there is more even allocation of execution risk as well as an increase in redundancy or resilience. Joint venture of such nature should ensure that the redundancy is not reduced to being duplicative with multiple parties tripping over one another due to confusion in roles and responsibilities. Whilst joint venture members are part of an alliance, it is ultimately an ad hoc cooperation where they could be competitors before and after the joint venture. Joint ventures are not permanent mergers. Naturally, there may commercial sensitivities in working together under one roof as well as conflicts in different business practices, workflow and governance structure. An incorporated joint venture is perhaps a better form of cooperation where a new legal entity is formed with autonomy to implement bespoke contract administration system that is specific to the project in hand. A board of directors comprising representatives from each joint venture member can be instituted to provide strategic oversight to the joint venture without necessarily getting involved in the day to day operational issues. 

It is important to note that the delineation of responsibilities between contractors should not be an afterthought that is informally arranged after project is awarded. It should be clearly documented in the joint venture agreement since this is the basis of construing rights and obligations between various parties. By way of illustration, the extent of entitlements to progress payments between each joint venture member and any cross party indemnification obligations are premised on allocation of responsibilities, amongst others. How construction contract is administered can be heavily influenced by the nature of such delineation of responsibilities which will be examined in the next section of this article. 

Contract Administration – Payment To Joint Venture

Joint venture in general receives its payment and revenue through work done. Occasionally there may be additional revenue from variation works as well as acceleration of works. There may also be payments to compensate for loss and expense in cases where entitlements are established. Whether the joint venture is in the form of a newly incorporated entity or otherwise, there is typically an agreement to set up a designated bank account with upfront working capital contributed by all members based on a pre-agreed percentage split. This is also the account that is communicated to the Employer for purposes of receipt of payments, so as to establish transparency and accountability in cashflow. Under most construction contracts, the contractor is required to temporarily finance the project in that it recovers its expenses through progress payment some one or two months later. Payment is generally derived based on actual work done on site. Under joint venture arrangement, the financing of project involves an additional layer of complexity because joint venture member that carries out certain works using its own plant, machineries, equipment, labourers and construction materials based on delineation of responsibilities may not be compensated directly by the Employer for its work done. This is because payments are typically directed to the joint venture account rather than the specific joint venture member. Much like the relationship between main contractor and subcontractor, the latter does not get paid directly by the Employer for its subcontract works. Therefore joint venture members carrying out significant portion of the works may find itself stretched financially due to the expected time lag between the moment expenses are incurred to its recovery of progress payments. The cashflow problem could be compounded if the progress payments are retained in the joint venture account for working capital purposes and only be split upon finalisation of account. Such approach is often justified on the basis that large projects can be financially burdensome where the joint venture is expected to finance disputed variation works and shoulder prolongation costs without clarity of whether extensions of time will eventually be granted. There are usually provisions for the contractor to comply with the instructions issued by the Employer’s agent notwithstanding the existence of dispute on whether the event is compensable. 

In order to assist with the cashflow burden imposed on the joint venture members, the joint venture agreement could incorporate various types of payment mechanism to disburse funds based on specified grounds. Firstly, the joint venture could reimburse the joint venture member for its costs incurred based on receipts and daywork sheets of resources expended. The joint venture member concerned is likely to charge its goods, services and reasonable overheads to the joint venture at rates and prices below market level due to the exclusion of profit. The joint venture member therefore is able to recover its costs and only be in the position to have access to its share of profit, if any much later. Whilst such arrangement may sound sensible in theory, the devil is in the detail. What constitute profit and cost are often debatable at least from an accounting perspective. For clarity, the joint venture agreement should include specific definitions e.g. gross profit, operating profit, net profit, direct cost of goods sold, operating costs etc.

Alternatively instead of fully retaining progress payments in joint venture account, the progress payments could be split immediately upon receipt based on the respective scope of works carried out by various members. In order to ensure sufficient working capital, an agreed fraction of payments could be retained in the joint venture account. These retained earnings could then be used to finance disputed variations and other prolongation costs where necessary without the need for fresh fund raising.

What is evident from the above is that it underscores the importance not just to appropriately delineate responsibilities in terms of scope of works but also an agreement of the corresponding baseline schedule. These information in turn can be used to construct a projected cashflow or commonly known as the “S-curve” that provides an accurate estimation of capital outlay expected from each joint venture member depending on their allocated scope of works. This helps facilitate an agreement on the magnitude of working capital required in the joint venture account depending on the fund disbursement method adopted by the joint venture.

Contract Administration – Liabilities Of Joint Venture

As regards the issue of liability of joint venture, there are two important elements to consider namely joint venture’s ‘external liability’ as well as ‘internal liability’. As regards external liability, it pertains to joint venture’s outside exposure such as to the Employer, third parties (e.g. members of the public) that could arise out of accidents, acts of negligence etc which result in damages to properties, bodily injuries or even death. It could also include breach of construction contract that may attract liquidated damages, remedial costs for defective works etc which the joint venture will need to be responsible for. On the other hand, ‘internal liability’ refers to acts or omissions by certain member(s) of joint venture that inflict damages to other members within the consortium. As alluded to earlier, most construction contracts include stipulation for joint and several liability where all joint venture members may be held liable for the full compensation even if only one of them that is culpable. Therefore joint venture member’s liability is not limited by the extent to which it had ‘contributed’ to the loss or damages. As the stipulation on the contractors for external liabilities are fairly standard market practices, most contractors are usually aware of its exposure and would manage such risks by procuring the appropriate insurance policies e.g. contractor’s all risks policies which may be inclusive of third party liabilities, workmen compensation policy etc. As regards potential default by the joint venture in respect of its construction contract obligations, the Employer typically require performance bond as well as retention monies to cushion any financial risks. 

On the other hand, how internal liability within the joint venture is managed lacks standard industry practice and should be carefully negotiated for the purposes of incorporating into the joint venture agreement. Certain joint venture agreement may include cross indemnification stipulation where culpable joint venture member may be required indemnify other members for any of their liability in the absence of default. This cross indemnification stipulation can be tricky if the risks in hand are not insurable. In other words, the ability of the concerned joint venture member to shoulder any such indemnification burden is limited by its balance sheet. By way of illustration, contractor is usually required to comply with various advance notification requirements or condition precedents under the construction contract prior to its entitlement to either payment or compensation. The joint venture could lose its right to claim if in breach of such condition precedent. Depending on the way in which responsibilities are delineated, it is possible for the acts or omission of one member to implicate the joint venture as a whole. Even if the joint venture is established as a newly incorporated entity, the Employer occasionally require parent company guarantee to underwrite such risk. This can be problematic for joint venture members that are primarily contributing intangible assets which may not have the financial heft to meet such requirement. In negotiating these issues, contractors may be compelled to reconsider the original rationale behind joint venture formation and whether the risk and reward commensurates. Whilst certain party could have valuable contribution to the alliance, it may not always need to be included into the joint venture particularly when there is a significant disparity in relative financial wherewithal. An alternative ordinary counter party transaction may be an option to consider. 

Conclusion

As pointed out in Part 1 of this article series, joint venture remains an elusive subject of construction law because logical reasoning alone may not always be sufficient in structuring a successful alliance. The decision making process often involves intuition and business acumen. Unfortunately the benefits of forming a joint venture is often more enticing at the outset before parties go through arduous negotiation journey to forming a joint venture agreement. Additionally, there is no blue print on what constitute a comprehensive joint venture agreement. Parties often ignore these critical details at their own peril without a sufficient dosage of paranoia.



Koon Tak Hong Consulting Private Limited

Construction joint venture generally refers to contractors forming an ad hoc alliance by entering into a legal structure so as to jointly undertake a construction project that may be larger than their individual risk appetite. The strategic reasons for forming a joint venture include pooling resources with partners with complementary skills and diversifying project risks. This is Part 1 of an article series examining tips and traps of such joint venture arrangement by way of commercial analysis. Such review may be of assistance to construction practitioners who are either potentially participating in joint ventures or involved in assessing tender proposals from joint ventures. 

Whilst there are ample of academic literature and journals covering the subject of construction joint ventures with the aim of increasing appreciation of such arrangement, it remains one of the more elusive topics. This is because the commercial considerations in reality can be complex where fact based logical reasoning alone may not be sufficient for decision making. Business acumen and intuition are often necessary. By way of illustration, one of the conventional reasons behind the formation joint venture is finding business partners with complementary skills to handle technically challenging project. However, joint ventures by its very nature often involve sensitive trade off such as splitting of profit, sharing of power, authority and control over the operations of the project. Are these trade off worthwhile from a strategic view point if one could alternatively subcontract the technically challenging portion of works to its designated skilled partner? In this regard, joint venture may be preferred to subcontracting as it denies competitors access to such competitive advantage when the skilled partner enters into joint venture exclusively. Therefore in valuing the initial proportion of equity of such skilled partner, various intangible assets had to be taken into consideration including its opportunity costs for the exclusive arrangement. Very often the legal structure, joint venture agreements, claims and contract administration scheme and other legal imperatives are put in place to give effect to such commercial realities. In other words, the joint venture legal framework should be drafted with a good grasp of the underlying business case.

The formation of the legal structure of joint venture tend to be fluid and somewhat unpredictable given that the negotiations of joint venture agreement between contractors are likely to be held concurrently with the tender negotiation with the Employer and its consultants for the concerned project. The joint venture agreement between contractors could not be finalised until the final terms of the construction project is concluded whilst the Employer may be keen to examine the relevant details of joint venture agreement before deciding on whether to award. This circular interdependence and conflicting conundrum requires finesse by the joint venture members in ensuring the joint venture arrangement evolves from a non binding memorandum of understanding to a binding joint venture agreement. Therefore, the ability of joint venture members to work together in handling ambiguity and challenges is put to test at the very early stage of procurement. Joint venture negotiations often occur within a compressed time frame because the initial conception of such alliance usually takes place upon learning about a prospective large project. In the absence of a ‘standard conditions’ for joint venture agreement, the terms and conditions are typically bespoke by nature and sensitive to the commercial dynamics between parties. Given the absence of industry wide blueprint for construction joint venture formation, an overview of the relevant key considerations and negotiation milestones in this article may be a useful source of reference.

Types Of Joint Ventures

There are generally two types of joint venture namely (i) incorporated joint venture and (ii) unincorporated joint venture. As regards the former, a new legal entity is incorporated, typically in the form of private limited company where the shareholders’ (ie. joint venture members) liability to creditors are limited by its share capital. Incorporated joint venture is a separate and distinct legal entity from its joint venture members. The joint venture members are in fact shareholders of this newly incorporated legal entity. When the project is awarded to an incorporated joint venture, the Employer enters into a construction contract with this new legal entity. Company law or corporate law governs the relationship between joint venture members where the specifics can typically be found in the company’s constitution and/or shareholders agreement.

An unincorporated joint venture does not involve the creation of a new legal entity and the joint venture members remain separate and distinct. Their relationship is governed by a joint venture agreement. When the project is awarded to an unincorporated joint venture and assuming there are two members in such alliance, the construction contract is tripartite i.e. between the Employer, joint venture member no.1 and joint venture member no.2. Given the absence of a newly incorporated entity, company law does not apply in this regard. Instead the specific terms of the joint venture agreement become particularly important in identifying rights and obligations governing their relationship. 

It is not within the scope of this article to provide a comprehensive coverage of the characteristics of a private limited company since most contractors are incorporated in the same manner. Therefore contractors should be aware of the associated governance framework including amongst others the (i) functions of board of directors, (ii) how decisions are made, (iii) fiduciary duties during the discharge of director’s functions and (iv) how shareholders may influence the directions of the company by way of its voting rights and associated shareholding. Although company law and company constitution do not provide a full governance framework for the operations of a private limited company, these at the very least offer a basic structure which then allow shareholders or members to further develop it to suit their needs. On the other hand, an unincorporated joint venture lacks such ‘baseline’ governance framework. Consequently it requires more ‘heavy lifting’ on the part of the joint venture members to start drafting the governance framework from scratch. Therefore any drafting of comprehensive governance framework for unincorporated joint venture is likely to take a longer duration. 

The type of joint venture not only dictates the operations of such alliance but also the manner in which decisions are made when confronted with differences in perspective. No matter how optimistic the joint venture members were in the beginning, their business relationship will be tested from time to time with conflicts and disputes. By way of illustration assuming a joint venture undertakes a design and build project, certain member may be responsible for design whilst the other responsible for construction. The liability of each member is not necessarily confined to its scope of responsibility. The construction member may be responsible for damages arising from design negligence and vice versa. This is because the Employer typically require ‘joint and several liability’ provision to be included in the design and build contract. Therefore fault based indemnity do not necessarily apply. Consequently members should ensure that their governance framework  allow collective decision making on certain critical issues.

As alluded to earlier, under an incorporated joint venture, shareholders could refer to Companies Act of Singapore to understand the formation, operation and regulation of such business entity. They should also refer to company’s constitution which is a legally binding document that sets out rules between the company and its members (or shareholders). Joint venture members should additionally put in place a shareholders agreement that is specific to rights and obligations of each member. The interpretations of Companies Act with the benefit of vast case precedents ensures that the relevant governance framework is established, predictable and consistent. 

On the other hand, the unincorporated joint venture does not have an equivalent established governance framework for its members to rely on. Therefore its governance framework exclusively relies on any mechanism included in the joint venture agreement. Some may view this arrangement as being more flexible for members as they do not necessarily need to subscribe to the legal structure of a corporate entity and shoulder the usual compliance burden. Therefore the Employer is likely to pay close attention to the joint venture agreement of a prospective unincorporated joint venture to understand how the members are organised and whether the arrangements present any risks. However the interpretations of such bespoke joint venture agreement may vary. Such untested and bespoke joint venture agreement could consequently give rise to project execution risk.

Valuation Of Initial Equity Of Joint Venture Members

Given that joint venture members may not always agree on every critical issue and it is almost impossible to predict all likely points of disagreement, the decision making mechanism is crucial. A member’s ability to influence decision making is likely to be correlated to its equity, stake or shareholding under the joint venture. The more one contributes, the higher its decision making influence as well as share of profit. Risk typically commensurates reward. This principle appears sensible. Therefore members to a joint venture should appropriately value their respective initial equity based on certain accepted principles. One should resist the simplistic approach of splitting the equity ‘equally’ amongst members before valuing each party’s contribution. An agreement to a sensible valuation principle is a precursor to a successful joint venture arrangement. 

As alluded to in the earlier scenario regarding design and build project, certain members may be valuable to the joint venture due to expertise in specialised design skills for a technically challenging project. Such member is likely to be operating under an engineering or architectural consultancy business model that is light in tangible asset but primarily contribute skills and expertise which are categorised as intangible assets. Therefore, the valuation approach of initial equity of such skill based member should take these qualitative contribution into consideration. Other forms of qualitative contributions include business connections/ networking credentials, compliance with local law on racial/ citizenship composition, intellectual property right etc. Members with intangible assets are likely to partner with members with the opposite balance sheet profile which are entities with more tangible assets such as cash, plant, equipment, inventory etc. After all the premise to a joint venture is essentially finding business partners with complementary competence. However, tangible assets are relatively easier to value than intangible assets. This creates a dichotomy in valuation of different asset classes. Some may take the practical approach that ‘value’ is defined by what others are willing to pay. However in negotiating a joint venture equity, members are unlikely to be able to get an objective fair market value by way of competitive bidding. Therefore most valuation principles may involve certain accounting assumptions that can be subject to challenge. This underscores the complexity of joint venture formation where members are negotiating amongst themselves whilst simultaneously working together to negotiate against the Employer and its consultants. This evolution of joint venture arrangement from procurement to award will be elaborated further in one of the sections in this article.

Although valuation of initial equity can be challenging, valuation of future contributions to the joint venture can be equally daunting too. In case of prolongation in construction duration (whether due to excusable delay or otherwise), joint venture members may be required to inject more assets into the alliance, that may be in its tangible or intangible form. Therefore having an upfront agreement on the valuation approach is not only crucial at the inception of the joint venture formation but also in ensuring its continuity. These continuous injection of assets should be clearly defined as to whether it may amount to increase or decrease in equity and its corresponding influence in decision making process. Some members with minority interest may prefer future injection of assets to be categorised as debt if it does not necessarily change the decision making weightage. Certain joint venture member may not continuously be involved in the project from inception to completion due to the nature of its upfront responsibility e.g. due diligence, demolition works, foundation works, structural works etc. Therefore, its exposure is limited by its duration of involvement. Under such circumstances, if and when the construction duration is extended and asset injection is expected, such joint venture member may have limited scope to contribute apart from cash/ capital. Therefore such joint venture member may face dilution in its equity when project duration is extended unless it contributes cash. Some may argue that if the project is extended due to excusable delay, the Employer should provide compensation for preventing the joint venture from completing the works. Therefore the financial exposure is limited. However one should take into consideration excusable delays that are caused by neutral event e.g. inclement weather where compensation of loss and expense is not expected. Even if the delaying event was deemed excusable, there may be a need to commence legal action e.g. arbitration of which the recovery of compensation is far from certain and may entail further financing of legal expenses. These considerations should also be included in valuation of initial equity of joint venture members.

Asset Infusion Of Joint Ventures

Once the project is awarded to a joint venture, there are various upfront financial commitments that are due before commencement of actual construction works. These include amongst others procurement of banker’s guarantee, construction insurance, downpayment for ordering of various long lead items, mobilisation costs of plant and equipment, setting up of site office and facilities etc. Managing cash flow of construction project is fairly challenging because the contractor is often required to make payments first before recovering its expenses via interim progress payments retrospectively. Therefore, asset infusion into the joint venture need to happen almost immediately which explains why the joint venture set up or formation has to be concluded upon project award. The process of asset or capital infusion varies depending on the type of joint venture i.e. incorporated or unincorporated. 

Under an incorporated joint venture, the new legal entity’s ability to procure banker’s guarantee or insurance bond in a cost effective manner can be challenging because it is effectively a new company without any track record or existing business relationship of its own. Although the incorporation of a private limited company can be completed very quickly say within a few days, the licensing requirement to carry out construction activities may take a longer time, of which it may need to demonstrate it has sufficient paid up capital to undertake the necessary works. These licensing and permit approvals are also required to engaged workers. Therefore the individual joint venture members may be required to provide some form of parent company guarantee to expedite these transactions and approvals where possible. Under most construction contracts, the submission of a baseline programme for approval and procurement of performance bond had to be fulfilled within weeks upon commencement of time for completion. Whilst the award of project may call for celebration, the reality sets in with pressure of immediate deadlines. The above mentioned multiple critical milestones that are scheduled closely to the project award may not be fulfilled if the joint venture formation is not thoughtfully and methodically planned. This explains why the Employer and its consultants are typically interested in understanding the ‘maturity’ of the bidders’ joint venture agreement and can be subject to intense scrutiny during tender negotiation. The Employer often makes a clear distinction between members of the joint venture (which are usually established organisations) from the incorporated joint venture which is a new and independent entity. 

Under an unincorporated joint venture, the members remain separate and distinct entities where no formation of new legal entity is required. Whilst there is no need to infuse capital or assets to a newly incorporated entity, the Employer may find that the typical deliverables under the construction contract such as performance bond can be tricky. Most construction contracts including its performance bond template are drafted with the presumption that the contractor is a single entity. The involvement of multiple entities may require amendments to the standard wordings. By way of example, the obligor of performance bond is the joint venture that carries out the construction works that is also responsible for procuring the bond from a bank (guarantor). Assuming the unincorporated joint venture consists of two members where each member agrees to contribute half of the amount stipulated in the bond, the Employer should always ensure that it has the right to call upon the full sum notwithstanding that only one member is responsible for the default. Although the construction contract usually include joint and several liability provision, such condition does not necessarily bind the bank since the bank is not a party to the construction contract. Therefore the joint and several liability wordings should clearly be included in the performance bond. Additionally the Employer should refrain from using indemnity bond (where proof of default is required) but to insist on unconditional bond where its right to call upon the full sum is independent of financial contribution of each joint venture member and extent of their respective liabilities in relation to the default. Failure to effect these changes may result in grant of injunction on the calling of bond on ground of unconscionability.  

Joint Venture Arrangement From Tender To Award

As alluded to earlier in this article, joint venture arrangements tend to conclude upon award of project as no contractors are likely to incorporate an entity or to enter into a joint venture agreement without an underlying project. However these contractors are simultaneously required to demonstrate how they intend to organise themselves including the governance framework and capital infusion plans in order to secure the project. It is also fairly common for the Employer to stipulate requirements for the contractors concerned to exhibit certain form of structured alliance for them to participate in tender as a consortium. In view of the delicate balance, contractors can consider entering into a non binding agreement such as memorandum of understanding or letter of intent to the extent that details included therein fulfils the Employer’s tender participation requirements. 

The extent of details that ought to be included in such memorandum of understanding is largely dependent on two factors. Firstly, it depends on the duration available for contractors to negotiate on the governance framework, split of responsibilities as well as liabilities and capital infusion plans to the extent necessary. Secondly, such details ought to address the Employer’s concerns on risks of premature dissolution of alliance that may jeopardise the project. The Employer also ought to be realistic that since the details included in such memorandum of understanding is non binding, there may be a limit to which the Employer may rely on such details communicated during tender. Depending on parties’ bargaining power and negotiation leverage, the Employer may stipulate that tenders submitted should be accompanied by a complete and binding joint venture agreement, with allowances for commercially sensitive information to be redacted. Therefore parties are encouraged to discuss these expectations before officially launching the tender process.

Conclusion

Although an incorporated joint venture could often rely on an established governance framework pursuant to Companies Act, model company constitution etc to expedite the joint venture formation, it comes with a trade off. This is because the newly incorporated entity requires a methodical asset infusion plan as well as a separate statutory licensing approval of its own. Therefore any upfront time savings may be negated by post award pre-construction activities. On the other hand the flexibility that members may enjoy under an unincorporated joint venture arrangement may bring about various uncertainties from the Employer’s perspective for purposes of tender evaluation and award. In short, joint venture formation is a bellwether of contractors’ ability to compromise and forge synergistic alliance. It is always advisable to uncover an ill-conceived alliance sooner rather than later.




Koon Tak Hong Consulting Private Limited

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

This is Part 2 of an article series comparing procurement and contracting practices between oil and gas industry and construction industry. In  previous Part 1 of this article series, the supply chain framework of these industries were compared focusing on how standard forms of contract for these industries were drafted to deal with its unique risk profile. Whilst there are obvious technical differences between construction of a building as compared to an oil and gas facility, there are certain core provisions of contract that are common for these two industries e.g. instructions and valuation of variations, extensions of time, liquidated damages etc. Therefore it is not surprising that practitioners from construction industry with a good understanding of such contractual mechanism are likely to have transferable skills transitioning into oil and gas industry. To this end it is interesting to note that the bargaining power between contracting parties are more equal under oil and gas industry relative to construction industry. This is likely driven by demand for specialised skills and expertise of relatively limited contractors in oil and gas industry that are conversant with complex off shore construction works. The consequences of disparity in bargaining power between contracting parties directly influences how risks are allocated under contract forms used in both industries which was evident in Part 1 of this article series.

In furtherance of comparison study between these two industries, Part 2 will focus on other pertinent subjects such as the issue of project completion and the associated complexities in determining whether contract had been duly performed. As pointed out in introduction of Part 1, there is significant distinction in definition of completion between constructing say a Grade A office building as compared to an oil and gas processing and storage facility. Whilst such office building is generally to provide top tier real estate space conducive for businesses to operate, the functional purpose of an oil and gas facility is usually defined by objective numerical metric e.g. capacity to process 100,000 barrels of crude oil per day or storage capacity of 1million barrels of crude oil etc. There is greater degree of objectivity in its functional definition under oil and gas industry whereas practical completion is defined more qualitatively under construction industry. Such distinction in definition of completion give rise to different sets of contract administration challenges including how parties may differ in negotiating their specifications in their respective industries. This will be further explored in the next section of this article. 

Another subject that is of interest relates to a unique indemnity provision known as ‘knock for knock’ that is quite commonly used in oil and gas contracts. Whilst this provision is practical and offers great certainty, such indemnification arrangement is radically different from fault based provisions found under construction contracts. The nature and rationale behind such distinction will be explored in subsequent sections of this article as well. 

Definition of Completion / Testing And Commissioning

As alluded to earlier, the definition of completion differs quite significantly between oil and gas project as compared to construction project, of which the latter appears more qualitative and subjective. It is quite common to find terms such as ‘practical completion’ or ‘substantial completion’ used in construction contracts which suggest that the project is not required to be entirely or wholly completed within the stipulated time for completion. As such determination is inherently subjective, the legal ‘safeguard’ is for such assessment to be performed by an independent certifier who is required to be impartial under the law. Such certification is often accompanied by a fairly elaborate and prescriptive contractual procedures. These procedures include amongst others notification for inspection of works deemed completed, creation of outstanding or minor works that requires follow up post completion certification, identification of scope of outstanding works if project is deemed incomplete upon inspection, release of part of retention monies upon practical completion etc. The rationale behind such prescriptive procedure is to provide structure and clarity to the status of the project notwithstanding the inherent qualitative nature of practical completion. The qualitative and subjective nature of completion for construction project is premised on commercial pragmatism. By way of illustration, a condominium development is deemed practically completed upon issuance of certificate of practical completion by certifier of which all health and safety issues are addressed where the owners are able to enjoy beneficial occupation of their homes. The main contractor need not be imposed with liquidated damages if it undertakes to complete say the remaining outdoor water features and club house within a reasonable time after practical completion. In other words, the project does not need to be wholly completed if  the outstanding works are not disruptive the owners’ beneficial occupation of the condominium development. Therefore due performance of contract is achieved based on standard of practical completion. 

By contrast, the completion of an oil and gas facility is less subjective given that the facility had to function for its intended purpose based on a quantifiable capacity as pointed out earlier. In this regard, there are a series of prescribed trials, testing and commissioning regime that are included in the contract to provide an objective determination as to whether the facility is able to function for its intended purpose. By way of illustration using the earlier example, if the facility is designed to process 100,000 barrels of crude oil per day, the Employer may have valid grounds to impose liquidated damages for delay if the facility is unable to achieve the specified capacity by the expiry of time for completion. The contractor is unlikely to be able to successfully argue that the contract is substantially performed as the facility was able to process 90,000 barrels of crude oil per day. The concept of substantial completion is usually not applicable to oil and gas contract.

Given the distinct concept of completion between these two industries, one of the procurement challenges that is unique to oil and gas contract relates to the nature of technical specifications on testing and commissioning requirements. Whilst standard conditions of contract include clauses for acceptance/rejection of Floating Processing Storage and Offtake (FPSO) vessel or taking over of processing facility, these are generic provisions. The specific trials, tests and commissioning requirements are often included in the technical specifications which are found in other sections of the contract document. The types of testing, commissioning and operation trials could be segmented into multiple milestones ranging from mechanical completion to ‘ready for start up’. For ease of discussion, these are collectively referred to  ‘testing and commissioning’ in this article. The commissioning of project refers to holistic system integration test to ensure that various components that may had been manufactured separately by different suppliers are able to function as one complete unit based on overall design requirements. This is usually above and beyond the conventional factory acceptance tests which are usually performed to individual components. These commissioning regime may involve simulating actual offshore operations, pressure and leak tests, safety test and also compliance with any specific requirements set out under offtake agreement (e.g. oil quality analysis, production performance monitoring, quantity measurement and calibration). Notably the actual processing performance trials will validate whether the facility is compliant with feedstock specification. As pointed out in Part 1 of this series, these requirements may be imposed as part of project financing agreements to ensure that the facility is financially viable upon completion. By way of background, offtake refers to future output of the hydrocarbon production facility which will be purchase by a buyer or ‘off-taker’ under an offtake agreement. Feedstock on the other hand refers to raw hydrocarbon material that are meant to be processed by the proposed production facility e.g. crude oil. 

Where the oil and gas contractor does not have any design responsibility, it is naturally cautious about the rigorous testing and commissioning requirements included in technical specifications. From the contractor’s standpoint, even if the construction works were carried out completely in accordance with the design provided by the Employer or its consultants, the facility may not necessarily function at the intended production capacity for a variety of reasons including design issues. If that is the case, is the contractor expected under the contract to ensure sufficiency or adequacy of the design provided? Even if the contractor holds design responsibility under an engineering, procurement and construction (EPC) arrangement, the testing and commissioning regime that is intended to simulate full commercial operations of the facility may interface with various third parties, including supplier of feedstock, offtaker, etc. What happens if the supplier of feedstock does not have sufficient supply with the necessary quality or standard to fulfil the testing and commissioning requirements? What is the EPC contractor’s responsibility if the offtaker is unable to fulfil its minimum offtake obligations under its agreement resulting in excess storage requirement during the duration of testing and commissioning? Should extension of time be granted to the contractor where delays to completion were deemed excusable? At what point should the testing and commissioning requirement be deemed fulfilled if delays continues for an extended period of time? There are various added commercial sensitivity to the usual enforcement of contract provision since the offtaker may be the Employer’s long term client under the offtake agreement.

The complexities described above on testing and commissioning requirements for oil and gas facility is exacerbated with the absence of an independent certifier under oil and gas contract. Under construction contract where independent certifier is usually appointed, an impartial, temporary but binding determination is available for resolution of issues. Such determination is part and parcel of the certification regime. Any dissatisfied party is free to refer any determination under a certificate to a final and binding dispute resolution forum such as arbitration upon project completion. This certification regime whilst may not be perfect, facilitates progress of work by avoidance of contractual stalemate. Therefore, parties to an on shore oil and gas contract may consider adopting an international construction based contract form such as the FIDIC Red or Yellow Book (but not Silver Book) where independent certification regime is available such as the appointment of an ‘Engineer’. 

In reality, the concept of testing and commissioning of an oil and gas facility overlaps with its commercial operation phase. Therefore when the facility is being ‘tested’ for takeover by the Employer, it is actually producing commercial grade offtake as part of the trial where revenue is simultaneously being generated. The facility may be required to operate commercially for weeks before it achieves condition prescribed that is necessary for testing and commissioning. By contrast, a construction project of say an office building would not be generating rental revenue prior to practical completion. The delineation between construction phase and completion/handover phase under construction contract is therefore more distinct and defined. 

Fault Based Indemnity vs Knock For Knock Indemnity

Fault based indemnity regime is quite commonly used in construction contracts. Under this regime, the party at fault will be responsible for the loss or damage caused including indemnifying the innocent party. By way of illustration, if it is established that the contractor was negligent in its site operation resulting in death or injuries to the Employer’s staff or damages to the Employer’s properties, such contractor will be liable for the claims. Fault based indemnity regime is consistent with terms of agreement which require each party to exercise reasonable skill, care and diligence in performance of its obligations.

On the other hand, off shore oil and gas contracts utilise ‘knock for knock’ indemnity provision where each party shall be responsible for its own property and workforce regardless of who is at fault. In other words, the loss lies where it falls. Under this alternative regime, it is the identity of the party that determines liability rather than fault of party. As no proof of fault is required, such simplicity and clarity avoid risk of long drawn legal battle where each party is looking to lay blame on one another. By way of illustration if the Employer’s support vessel collides with the contractor’s works, the Employer will automatically be required to pay for damages to its own vessel whilst the contractor likewise will be responsible for its works that were damaged. Parties need not expend precious time, costs and effort to prove  say whether the Employer was negligent in navigating its vessel or the collision was caused by the contractor misrepresenting the rightful point of approach for the Employer’s vessel. Whilst it is logical for party at fault to be responsible for claims, identifying the party at fault is never straightforward. This is particularly where parties are continuously relying on one another to coordinate and plan its respective next course of action in a dynamic environment, of which certain neutral event such as inclement weather and sea condition may have dominant influence. Therefore certainty and pragmatism takes precedence over culpability when utilising knock for knock indemnity provision. 

Whether the contract adopts fault based indemnity or knock for knock indemnity, the actual risks are insured and underwritten by the insurance companies. The risk of paying out directly from the parties’ balance sheet is usually so financially overwhelming that there is usually a condition requiring that the relevant party procures the appropriate insurance policy and to produce receipt of payment of insurance premium prior to commencement of work. Therefore whether it is fault based indemnity or knock for knock indemnity, these contractual arrangements could only be implemented because it is commercially supported by the insurance market. The insurance companies see profit incentive in either arrangement. It should be noted that under knock for knock indemnity included in standard conditions for oil and gas offshore project, the insurance company is required to waive its subrogation rights. In other words, even if the contractor is at fault the Employer’s insurer could not step into the Employer’s shoes to pursue recovery from the contractor. 

The characteristics of knock for knock indemnity has often been criticised as creating perverse incentive in that the party at fault is not made responsible for claims thereby inducing excessive risk taking. If this is factually true, it is very likely that the insurance companies would not offer insurance policies in response to knock for knock indemnities. Therefore the concerns over knock for knock indemnity may not be entirely supported by realities. There could be a few reasons for this phenomena. Firstly, accidents or site incidents invariably bring about schedule impact. Notwithstanding any types of indemnity arrangement, the contractor continues to be responsible for timely completion of the project and it has an inherent desire to avoid delay. This is not only due to the deterrent effects of liquidated damages but also the desire to avoid prolongation costs resulting from schedule overrun. Knock for knock indemnity does not exonerate the contractor from its fault for project delay. Secondly, contractor that lacks prudence or have the tendency to be excessive in risk taking will face difficulties in procuring insurance policies in future. Such reputation may also be detrimental in securing future projects. Lastly, the party at fault may not completely rely on knock for knock indemnity to be shielded from all types of losses and liabilities due to certain exclusions depending on the governing law of the contract concerned. By way of example, there may be exclusions for statutory liability, consequential losses or when the act of default does not arise from the performance of existing contract obligation. In other words, knock for knock indemnity should not be viewed as a blank cheque for the defaulting party. 

From a practical perspective, knock for knock indemnity is relevant where the labour, plant and equipments from both the contractor and the Employer interface closely on site for an extended period of time. This occurs under the scenario where the Employer self performs part of the project works. An alternative scenario is where the Employer’s vessel is being repurposed or retrofitted into an FPSO vessel where the Employer’s property is at close proximity with the contractor’s work. On the other hand where an EPC contractor that holds single point responsibility design and constructs a new oil and gas processing facility, there is very limited practical difference between fault based indemnity and knock for knock indemnity. Although the Employer may have a team of representatives based on site for supervision and approval of works, these individuals may be named as ‘insured’ under fault based regime. One of the unique aspects of oil and gas contract is the fact that there may be multiple third parties that are neither from the Employer nor the contractor that may be in close proximity to the works on site. As mentioned in earlier part of this article as regards project completion, there may be offtaker, supplier of feedstock etc that may be on site towards testing and commissioning phase of the project. Under knock for knock indemnity, who should be responsible for damages sustained by these third parties? If and when third parties are implicated, then the party at fault will be responsible notwithstanding that knock for knock indemnity was included in the parties’ agreement. In other words, parties utilising knock for knock indemnity may not always benefit from its supposed certainty and simplicity if the accident implicates any third parties. 

Conclusion

The discussions above illuminate clear distinctions between oil and gas contracts and construction contracts, on the subject of project completion as well as types of indemnities provisions. It is noteworthy that basic principles underlying these contracts are similar and the differences only relate to the applications of these principles. By way of illustration, although what constitute completion under oil and gas contract is unique as compared to construction contract, such difference largely emanates from application of ‘performance based specification’. In this regard oil and gas facility is deemed contractually completed when tests, commissioning and trials are fulfilled. Performance based specification are often viewed as diametrically opposite from prescriptive based specification. In design and build construction contracts, performance based specifications are quite regularly used. Consequently challenges associated with such specification are quite similar to that of oil and gas contract. In design and build of a data center, the works are deemed completed when it is able to function based on its intended purpose, much like the oil and gas facility. In summary construction projects and oil and gas projects may share significant underlying common traits notwithstanding the difference in economic sector classification.




Koon Tak Hong Consulting Private Limited

This is Part 1 of an article series that compares contract management and procurement practices between oil and gas industry with construction industry. Whilst oil and gas industry is considered a different economic sector from construction industry, there are various common contract management and procurement practices between these sectors. In this regard most of the relevant contract and procurement skills of construction practitioners are transferable to oil and gas industry, notwithstanding the distinction in trade activity and economic classification. In particular the thought process as regards choice of procurement pathway, use of standard conditions of contract, risks management philosophy and contract administration challenges are relatively similar between these two industries. Contrary to popular belief, the application of construction law is not exclusive to construction industry. Construction law in essence comprises two main branches of law namely contract law and tort law within the domain of civil law. The principles of contract law and tort law are very much relevant to oil and gas industry. Much like in the construction industry, parties enter into an agreement for the purposes of constructing a facility with a very unique processing function. As part of free market, parties assess their risk profile of such undertaking and make commercial decisions on how risks ought to be distributed between themselves. In doing so, decisions are made on the economic benefits in exchange of risks allocated. Therefore the final agreement is an expression of the ultimate bargain reached between the parties, with provisions for their respective rights and obligations.

To embark on a meaningful comparison of contract and procurement practices between these two industries, it is crucial to understand some of the technical differences between construction of a building or infrastructure to that of an oil and gas processing facility. Whilst the construction of both a building and an oil and gas processing facility are to fulfil a specific function, the latter is arguably more narrowly defined with lower margin of error. By way of illustration, given that an oil and gas facility is designed to extract and process crude oil at a certain productivity cycle or performance requirement, what constitute project completion can be objectively defined based on the above mentioned criteria. On the other hand, whilst the completion of building is often signified by issuance of practical completion certificate by an independent certifier, it is quite common for a list of outstanding minor works or defect rectification works that shall be completed after practical completion. The certifier for a building project will therefore make a professional but subjective assessment as to what constitute beneficial occupation by the Employer (or its tenants) and what could reasonably be tolerated as ‘minor’ outstanding works. The implications of such disparity will be elaborated further in Part 2 of this article series particularly in relation to drafting of specifications included in their respective agreements. 

One common trait in contract management between these two industries relate to the use of standard forms of contract. Although there are still contracting parties in respective industries that continue to utilise ‘legacy’ bespoke contracts, there is an increase in adoption of industry wide standard forms of contract that are led by independent industry groups. By way of example, the oil and gas industry uses LOGIC forms of contract which refers to Leading Oil and Gas Industry Competitiveness which was first established in 1999 in the United Kingdom, which was developed under CRINE (Cost Reduction In the New Era) initiative. The LOGIC standard form is available for main contract and subcontract that cater to both onshore and offshore projects. By contrast as regards construction industry there are comparatively more types of standard forms of contract such as JCT, FIDIC, NEC as well as a variety of model agreements under each jurisdiction to cater to local legislation requirements. In this regard, the development of new editions of standard forms and availability of case precedents on interpretations of various clauses therein appear more established in respect of construction industry. It will be discussed further in subsequent sections of this article on factors influencing the choice of different types of standard forms for both industries including any provisions that are unique in its application to either industry.

Supply Chain And Contracting Framework

Supply chain of construction industry vary quite significantly from that of oil and gas industry where the latter appear slightly more complex and broadly distributed. A comprehensive understanding of supply chain of any given industry forms the basis of appreciating its procurement and contracting practices. Supply chain refers to the network of production entities (or companies) that are involved in the development of raw materials (concrete, steel, glass, stones etc) and provision of logistic to facilitate the assembly, installation and subsequent completion of the final product namely building, infrastructure or processing facility. 

As regards construction industry, it is extremely rare for any one entity to self perform all the required trades of work relevant to a project. Subcontracting is a fairly common practice where the lead contractor (also known as ‘main contractor’ or ‘general contractor’) that enters into direct contract with the Employer (that initiates and funds the project) outsources majority of the works to its subcontractors. Subcontractors in turn are organised by different trades of works (e.g. concreting, facade cladding, carpentry, metal works, mechanical and electrical etc). The main contractor mainly provides construction management, inter-trades coordination, supervision of works and overheads for site operation. As the economic value of completed building particularly those of higher end commercial grade may be affected by its aesthetic appeal, design management and clarity of specification are usually common sources of disputes. Whilst aesthetic may be the root cause, the consequential claims and disputes often manifest in other forms such as schedule delay culpability, liability for liquidated damages, interpretation of specifications, contention over classification of remedial works as opposed to variation works. The cause and effect may not be as evident as it should be. As alluded to earlier, since the main contractor outsources much of the scope of works, it becomes the proxy of claims between actual contesting parties due to contract privity. If the Employer takes issue and rejects certain scope of works, the relevant subcontractor would have to commence legal action against the main contractor over withholding of payments. Therefore supply chain influences contracting framework which in turn affects structures of standard forms of contract. 

The oil and gas industry supply chain differs quite significantly which affects the nature of its contracting framework. As alluded to earlier the supply chain of oil and gas industry can be complex which consists of a chain of processes that are often described in three distinct segments namely upstream, midstream and downstream. Upstream generally refers to exploration, extraction and drilling from oil and gas reserves. Midstream is the next stage of supply chain where the extracted hydrocarbon resources are subject to distillation, cracking, storage and distribution. Finally the downstream segment involves further refinement for creation of finished petrochemical product for purposes of retail distribution. The design and construction of any oil and gas facility may be intended for any one of the three segments or it could fulfil a combination of functions across multiple segments. By way of illustration, a fixed oil rig that operates in shallow waters of no more than 500m is mainly to drill and extract crude oil from seabed and it primarily serves upstream segment of the supply chain. On the other hand an FPSO vessel (otherwise known as Floating Production Storage and Offloading) has certain processing and separation functions capable of fulfilling upstream and partial of midstream segments of the supply chain. Consequently, the design, engineering and construction of oil and gas project is highly bespoke to the specific function that the facility plays within the entire value chain. A project to repurpose an existing vessel into an FPSO vessel is entirely different in its engineering and construction as compared to say construction of a fixed oil rig, although both projects are considered part of the oil and gas industry. Despite the fact that each project are highly bespoke and unique to its specific function, every project is inter-connected in that an upstream project must be able to functionally integrate with say a midstream project so that there is a seamless transmission of oil and gas through these chain of sequential processing facilities. Any change in design of an upstream project may have ripple effect on the design considerations of a related midstream project or even downstream project although these in theory are distinct projects. The complexity is further compounded by the fact that there is very low margin of error in its engineering and design due to transmission of highly volatile, flammable and hazardous substance. 

Therefore, the contracting framework and associated risks allocation philosophies are influenced by the above mentioned supply chain considerations. Certain companies that may have the engineering and design expertise may not have the balance sheet to cushion any economic losses arising from a capital intensive project. The capital intensive nature of oil and gas contracts are often subject to complex project financing. Such project funding complexity often exceeds conventional bank loan arrangements. Equity investors, joint venture partners and debt syndications are likely to impose their requirements on the project agreements to address their risks concerns. Therefore some of the conditions included within the agreement for construction of oil and gas facility might be so fundamental that any breach of it goes to the root of the contract. By way of illustration, the financier might require that the proposed project shall secure offtake agreement to ensure there are ready customers to purchase the end product from the proposed facility immediately upon completion. Such commitments may be crucial for financial viability or bankability of the project. Therefore, ‘time is of the essence’ in such project unlike regular construction project where the completion date could be extended under certain grounds.  

In summary, construction projects may be viewed as a relatively standalone initiative where its risks, purpose and viability are ring fenced from other construction projects. By contrast oil and gas projects are much more interconnected with one another within the web of value chain. 

Use Of Standard Forms Of Contracts In Both Industries

Although supply chain and associated contracting framework of both industries are significantly different for reasons set out above, one of the more notable common trait is use of standard conditions of contract developed by a neutral professional body or trade association within the respective industries. When the standard conditions of these two industries are compared, there are various common provisions used. As alluded to earlier, much of the contract administration skills of construction practitioners are generally transferable to oil and gas industry, with proper understanding of the distinct technical and procurement practices. 

There are good reasons why certain provisions included in standard forms of both industries are substantively similar. These common provisions include amongst others, power to instruct variations, valuation of variations, extensions of time, liquidated damages, notification and disclosure requirements etc. Regardless of whether the project involve constructing a building or that of an oil rig, there are three fundamental objectives that had to be delicately managed namely time, cost and quality. A project had to be completed within a defined duration with cost certainty and the completed project had to perform at the specified level of requirement and prescribed quality. By way of illustration, extension of time and liquidated damages provisions are necessary to manage commitment to project schedule. Likewise power to instruct variations and valuation of variations are necessary to ensure that the project is able to adapt its specification to evolving needs to achieve its intended quality and functional requirements whilst managing cost associated with these changes. Therefore the standard clauses within these model agreements are in essence mechanisms to both balance and fulfil these competing objectives. When issues arise in these projects, there are certain recurring similarities. By examining the project risks profile, there is a recognisable pattern of issues which in turn facilitates the adoption of standard conditions. Parties do not need to negotiate terms of agreement from scratch when overwhelming majority of issues stemmed from few common root causes. A standard condition is considered worthwhile and productive means of contracting if 20% of the clauses are capable of addressing 80% of the recurring issues. 

As alluded to earlier, the variety of standard conditions of contract in the construction industry is relatively more established than oil and gas industry due to similarity in risk profile of construction projects. One of the more unique example of recurring issue for building construction project relate to risk of adverse ground condition. Whilst both the Employer and main contractor may have carried out certain soil investigation prior to commencement of contract, the effectiveness of such due diligence effort is rather limited. However the consequences of such risk materialising can be extremely overwhelming particularly to the time and cost of the project. Therefore different types of standard forms of contract for construction industry provide its own unique risk allocation approach. Where such risks are predominantly allocated to the main contractor, there are no contractual grounds for the main contractor to claim for loss and expense as well as extension of time as the contract sum is deemed ‘lump sum and all inclusive’. Where certain standard forms of contract offers an alternative approach of risks sharing between the Employer and main contractor, there are grounds to claim for extension of time as well as loss and expense if the main contractor provide timely notification and the event is deemed ‘not foreseeable by a reasonably experienced contractor’. Therefore whilst parties entering into construction contract are not expected to negotiate terms from scratch, they will be well served to be reasonably knowledgable about the types of standard forms available and the distinction in their respective risk allocation philosophy. From time to time, parties may introduce particular conditions to vary certain standard clauses to reflect ad-hoc and bespoke arrangement.

On the other hand, the risk profile of oil and gas projects are more unique. Unlike building and infrastructure construction projects that invariably had to be developed on a plot of land (thus the recurring unforeseeable and adverse ground condition), oil and gas facility could either be on shore or off shore. Occasionally it could be a blend of both on shore and off shore where certain off shore processing module may be initially constructed on shore within a controlled environment only to be eventually transported for off shore assembly and integration into a larger facility. Certain oil and gas project may even be more similar to shipbuilding rather than building construction. By way of example, an FPSO or FSRU (floating platform for storage and subsequent regasification of liquefied natural gas) may be repurposed or converted from an existing vessel to incorporate hydrocarbon processing and storage capabilities. Consequently in the application of standard conditions of contract for oil and gas industry, there are versions which cater to both on shore and off shore construction, as well as model agreements that are originally meant for ship and vessel construction. Given the significant physical permutations in the types of project and the variation in associated risks, opportunities for standardisation of terms and conditions is relatively limited as compared to regular construction industry. Notwithstanding that, there are two notable standard conditions available for oil and gas project namely LOGIC contracts and BIMCO contracts (refers to Baltic and International Maritime Council). 

It is also noteworthy that as certain oil and gas projects becomes more niche and specialised e.g. conversion of existing vessel to an FPSO, it demands contractors with a blend of technical expertise including shipping and oil and gas. The availability of such specialised contractors is far more limited than say general contractors in construction industry. This dramatically changes the parties’ bargaining power which will be evident in the drafting of standard clauses included in these model agreements. The BIMCO contracts that generally cater to shipping industry offers a version named CONVERSIONCON (launched in 2022) that caters to repurposing or converting of ship to oil and gas floating processing and storage platform. Clause 21 of this contract deals with the issue of variations. Much like regular construction contract, the Employer or Owner has the right to order variations and for the contractor to be compensated accordingly. However what is also notable and unique is that the contractor likewise has the right to request for variation to the Owner’s design and specification of which the Owner’s written approval to such request cannot be unreasonably withheld. In other words, if the contractor carries out minor variations from the Owner’s issued design and specifications, it is technically not a breach of contract. This is in stark contrast to construction contracts. The contractor may be motivated to vary the design particularly when there are limitations to its ‘local conditions and facilities’ as well as lack of availability of certain materials and equipment for the works. Such contractor initiated variation may result in changes to contract sum which could translate to additional costs and additional time. In other words, the Owner may be required to pay additional cost to the contractor for issues that are traditionally considered to be part of the contractor’s risk.

Whether certain variations requested by the contractor are considered necessary and minor are ultimately decisions made by the Owner’s representative subject to certain reasonableness. Much like the Employer’s representative under construction contractor, the Owner’s representative under CONVERSIONCON is also responsible for the approval of plans, drawings, calculations, including on-site attendance of tests, trials and inspections of the works pursuant to Clause 19. Such approvals are crucial to the contractor in that it facilitates progress of works and cashflow. However, another notable distinction from the construction contract is that the contractor shall have the right to initiate the replacement of certain Owner’s representative if it could be shown that such representative discharges duties in an unreasonable manner to the extent that it is detrimental to the proper progress of the works. By contrast, the Owner does not have reciprocal right to initiate the replacement of the contractor’s representative. This unique arrangement again reflect the equal bargaining power between the contractor and Owner, which is a glaring difference from that of construction contract.

There are also instances where certain suite of contracts that are widely used in construction industry that could be considered for oil and gas project. This is particularly relevant for Engineering, Procurement and Construction (EPC) pathway under oil and gas projects where the contractor holds a single point responsibility. The EPC approach is also described as turnkey contract. By way of illustration, the FIDIC Silver Book may be used for EPC on shore oil and gas project which by origin is meant for international construction project. However, there may be significant modifications required for such contract form to be used for off shore oil and gas projects. Parties should approach any bespoke modifications to standard contract forms with care because change to certain clause may bring about unintended implications to the interpretation of the contract as a whole. The reduction in certainty in the meaning of the clauses may nullify the benefits of adopting model agreements. 

Conclusion

Part 1 of this article series provides a general comparison of contract and procurement practices between construction industry and oil and gas industry. Whilst there are various technical differences between these industries, such differences could be rationalised with a proper understanding of the respective supply chain framework and associated risk profile. Standard forms of contract or model agreements are usually drafted based upon an identifiable recurring pattern of issues arising from these risks profile. To this end, there are basic contractual mechanism that are similar for both these industries. These similarities stemmed from a common need to delicately balance three competing objectives namely time, cost and quality. The very approach of balancing these fundamental objectives may differ between these industries given some of the commercial realities such has bargaining power.




Koon Tak Hong Consulting Private Limited

This is part of an article series which reviews various key provisions included in two of the more commonly used standard forms of construction contract in Malaysia i.e. Agreement and Conditions of ‘Pertubuhan Akitek Malaysia’ (PAM) 2018 and Standard Form of Contract of ‘Jabatan Kerja Raya’ (JKR) or Public Works Department (PWD). This comparison is based on lump sum contract without quantities. There are various contrasting approaches of extension of time provisions under both PAM and JKR contract form. In general PAM contract form is used for private sector construction projects whilst JKR is used by the public sector agencies for its construction projects. The different sources of funding including its consequential public accountability could be some of the key reasons on why its risks allocation philosophy differs noticeably. Such distinction is particularly glaring in respect of the extension of time clauses.

Delay to project completion is one of the more common types of construction disputes where the main contractor is often at odds with the Employer and its consultants over whether or not it should be granted extension of time. The causes of delay are rarely obvious at least at the outset  which explains the need for notifications and disclosure in extension of time clauses. In general the contractor is granted with extension of time so that the original practical completion date could be extended contractually, for the duration during which the contractor is not in culpable delay. The main contractor often view that since the extended completion date provides contractual relief from liquidated damages, the extension of time clause is in place for the contractor’s benefit. In reality, the extension of time clause is meant for the Employer’s benefit. This is because if the Employer by its conduct prevented the contractor from completing the project on time, the Employer could not insist on the contractor’s compliance with the original practical completion date. This is also known as the ‘prevention principle’. The contractor could legally disregard the practical completion date, setting ‘time at large’ following which liquidated damages are no longer applicable. The extension of time addresses this problem by providing a mechanism to enable the liquidated damages to flow from an extended completion date. In other words, the extension of time clause benefits the Employer by preserving its right to recover liquidated damages from an extended completion date. 

One of the key elements of extension of time provision is the list of grounds or circumstances that entitle the contractor additional time for completion. PAM contract refers these grounds as ‘Relevant Events’ whilst JKR refers these simply as ‘events’. Interestingly, there are certain differences in such grounds between PAM and JKR, which will be elaborated further in this article. One should be aware that even if the delaying event in principle entitles the contractor to extension of time, the contractor is required to comply with certain notification and disclosure requirements set out under the contract. These requirements often involve informing the Employer or its agent within certain time frame from the occurrence of the delaying event as well as disclosure of information relevant to such delay. These requirements may be condition precedents to the contractor’s entitlement to extension of time. Again, the notification and disclosure requirements associated with extension of time differs between PAM and JKR contract, of which the latter appear less prescriptive and onerous. Understanding nuances of both PAM and JKR contract is essential to establishing an effective contract and claims administration system that is specific to the contract in used. Parties should avoid administering their contract in a generic manner regardless of contract form for the sake of expedience. In the next few sections of this article, the key differences between PAM and JKR will be highlighted as it relates to extension of time provisions.

Notification And Disclosure Requirements For Extension Of Time

Clause 23.1 of PAM contract set outs certain notification and disclosure requirements which shall be complied prior to any of contractor’s entitlement to extension of time. Under this clause the contractor may apply for an extension of time if it is of the opinion that the completion of the works is or will be delayed beyond the completion date. Under Sub-Clause 23.1(a), the contractor shall give written notice to the Architect of its intention to claim extension of time with an initial estimate of the extension of time that may be required including supporting particulars of the cause of delay. Such notice shall be given within 28 days from the date of the relevant instructions or the commencement of the Relevant Events whichever is earlier. The issuance of such notice shall be a ‘condition precedent’ to an entitlement to extension of time. 

Condition precedent is essentially mandatory requirement that had to be fulfilled failing which the right of claim is lost. In the case of extension of time, if the contractor fails to notify the Architect within the prescribed time frame including the relevant particulars, the contractor’s right to additional time is lost notwithstanding any merit to its claim. The Employer typically justifies the need for such strict requirement by arguing that advance notice enables timely mitigation by the Employer of such delay where possible. 

It is also interesting to note that under Clause 23.1 of PAM, the need to  apply for extension of time arises when the contractor is of the opinion either when the project is already delayed or will be delayed. However Sub-Clause 23.1(a) requires the contractor to notify the Architect (including supporting details) within 28 days from the date of relevant instructions or the commencement of the Relevant Event (whichever is earlier). What if the contractor arrives at such opinion more than 28 days after the occurrence of the relevant event? This scenario is entirely possible in construction project where the event impacts subcontract works but was initially on the subcontract programme float. However during the intervening period, a revision was made to the subcontract programme resulting in change from float to critical path for the material activities. By the time the issue was ‘escalated’ by the subcontractor and for the contractor to be properly notified as well as to opine on the schedule effects, the entire duration could have taken more than 28 days. Some may counter argue that since the contractor is only required to provide its initial estimate for the extension of time required, with the necessary follow up as provided for under Sub-Clause 23.1(b) (which will be elaborated later), such condition precedent should not be overly onerous. On the other hand as the 28 days reference is calculated from the date of occurrence of the Relevant Event (rather than when the contractor ought to have arrived at its opinion on the schedule), the contractor is likely to be conservative by issuing notice out of abundance of caution in order to be safe than sorry. When a project is inundated with an overly conservative list of delaying events, it could be counter productive and ironically be a source of distraction. However the conundrum arises when Clause 23.1 requires that the contractor to make extension of time application if it is of the opinion that the completion of the works ‘is or will be delayed beyond the completion date’. Such standard is quite different from the opinion that delay ‘may’ happen. The certainty with which the contractor’s opinion should have on its programme suggest a significant level of due diligence and investigation expected prior to making an application as well as notification for purposes of extension of time. The reasonableness of the 28 days duration ought to be viewed within the context of such pragmatism.

As alluded to earlier, Sub-Clause 23.1(b) of PAM stipulates that the contractor shall follow up within 28 days of the end of the cause of delay by sending to the Architect its final claim for extension of time including all particulars. This again is a condition precedent in that failure to adhere with such requirement shall extinguish the contractor’s entitlement to any extension of time. In case of breach of condition precedent, the contractor shall be deemed to have assessed the event concerned and concluded that there shall be no delay to the project schedule. Whilst the Employer may justify the stringent requirements at the inception of the delaying event for purposes of timely mitigation, it is unclear the rationale behind a similar requirement at the end of the cause of delay of the event concerned. It should also be noted that ‘end of the cause of delay’ may be argued to be different from ‘end of the delaying effect’. This ambiguity may give rise to difficulty in contract administration. By way of illustration, suppose the Employer caused delay in providing site access to the contractor for a period of one week, but the consequences of such delay continue to be felt beyond that one-week period, say for a total period of three weeks. Should the 28 days time frame under Sub-Clause 23.1(b) be calculated from the one-week or three weeks period? The contractor may only be in the position to provide full particulars after the three weeks period rather than the one-week duration in order to have a comprehensive assessment of the extension of time required.

By stark contrast, the JKR contract takes a completely different approach as regards notification and disclosure requirements for extension of time which is encapsulated in its Clause 43.1. Under this clause, the contractor shall give a written notice upon it becoming reasonably apparent that the progress of the works is delayed. Such notice shall include the causes of delay and relevant information with supporting documents to enable the certifier to form an opinion as to the cause and calculation of the length of delay. 

Firstly, under the JKR contract the notification and disclosure requirements are not expressly labelled as condition precedents. Therefore, those strict requirements that may extinguish right of claim is not applicable. Secondly, the contractor is only required to issue a notice to the certifier for purposes of extension of time when it is reasonably apparent to the contractor that the progress of the works is delayed. In this regard there is no reference to any defined period or even calculation of such period from the commencement of any delaying event. Those difficulties set out in the preceding paragraphs of this article may not be applicable to the contractor under JKR contract. There is also a general requirement to provide particulars to the certifier to enable its identification of cause of delay and the length of delay. This is in contrast to a strict follow up requirement to provide further particulars within 28 days as found under PAM contract. 

Whilst most contractors may understandably be in favour of JKR contract which do not appear to have strict and onerous requirements in respect of application of extension of time, it will not be entirely surprising if some contractors may still prefer the regime under PAM contract. This is due to the element of reciprocity under PAM extension of time, whereby timeline requirement is applicable to both the contractor as well as the certifier. By way of illustration, under Clause 23.4 of PAM the certifier is under a six-week timeframe to notify the contractor of its decision on the application of extension of time. On the other hand, there is no equivalent timeline requirement imposed on the certifier under JKR contract just as there are no such requirements imposed on the contractor. Certain contractors are in favour of visibility on their programme status and exposure to any liquidated damages so as to be the position to mitigate delays in a timely manner. Such transparency may be so crucial to the contractor that they are willing to shoulder the very timeline requirements that may otherwise be viewed as onerous. 

Certifications Under Extension Of Time

As one may notice, there are various certificates issued by the certifier under the construction contract which include certificate of practical completion, progress payment certificate, final certificate etc. Certificate is not mere formality in terms of paper work but an important contractual instrument that signifies discharged of certification function by the certifier on various critical issues under its scope of authority. In this regard, the contractor should expect to receive a certificate if it is granted with any extension of time. There are certain differences between PAM and JKR contract in respect of such certification. 

Under Clause 23.4 of PAM contract, the Architect shall issue a Certificate of Extension of Time “with details” either before or after the Completion Date. Under Clause 43.1 of JKR contract, the certifier shall issue a Certificate of Delay and Extension of Time indicating a reasonable extension of time for completion of the works. Apart from the difference in label used between these certificates, only PAM contract requires details to be included in such certificate. However there are no specific information stipulated under PAM in respect of details to be included in such certificate. Whilst these certificates would ordinarily include general information such as original completion date, revised completion date (and associated extended duration), reference to specific applications of extension of time made by the contractor etc, certifiers may be reluctant to disclose their delay analysis. The delay analysis performed are in fact crucial in that it reveals the methods of assessment used, programmes referred to, critical path impacted by various delaying events including time impact caused and the presence of any concurrent delays. Given that condition precedent imposed on the contractor underscores the need for sufficient particulars from the contractor, it may be rather ironic for the certificate that ensued to be sparse in details. 

Under Clause 23.10 of PAM, the Certificate of Extension of Time may be subject to review by the Architect within 12 weeks after the date of Practical Completion. However such review shall not result in a decrease in any extension of time already granted previously. Whilst the Certificate of Extension of Time under PAM lacks finality, it can only benefit the contractor because any such review shall only result in an increase to time previously granted. There is no equivalent provision under JKR contract for such review. It is also interesting to note that the Architect may review his previous decisions having regard, amongst others whether or not the Relevant Event has been specifically notified by the contractor. In other words even if the contractor failed to notify the Architect regarding certain Relevant Event, which is considered a breach of condition precedent, the Architect may still grant extension of time in any case. It follows that the Architect may be authorised to effectively cure such breach of condition precedent in exercising its certification function under Clause 23.10 of PAM. Others may also view this Clause 23.10 of PAM as a subtle and informal avenue for ‘appeal’ by the contractor. Taking the effects of Clause 23.10 of PAM as well as the condition precedents as a whole, it is not surprising that certain contractors may favour the regime under PAM contract.

Unique Grounds For Extension Of Time Under JKR Contract

In examining the list of grounds under Clause 43.1 of JKR contract which entitles the contractor to extension of time, it is interesting to note that there are certain events listed therein that are unique to JKR contract and are not available under PAM contract. In particular under Clause 43.1(i) if the completion of the works is likely to be delayed or has been delayed due to the contractor’s inability for reason beyond his control and which he could not reasonably have foreseen at the date of closing of tender of the contract to secure such goods, materials and/or services as are essential to the proper carrying out of the works. 

At a first glance, the inability to secure resources appear similar that of ‘force majeure’ which generally mean rare, radical, external and unforeseeable event that prevent performance of existing contract obligations due to circumstances beyond parties’ control. For the fact that there is a separate Force Majeure Clause found under Clause 57 of JKR contract where such ground is not expressly included therein, the contractor’s inability to secure resources could not have intended to be force majeure event. In other words, if the contractor finds itself unable to secure resources due to unforeseeable circumstances that are beyond its control, the contract could not be frustrated and the only remedy likely available is extension of time. It is however unclear what happens if such circumstance is prolonged over an excessive period of time and whether parties still retain the right to terminate the contract as ordinarily found under force majeure clauses. 

Apart from the overlap with events of force majeure, there is another reason why the inability to secure resources can be an event that is problematic in its administration. Where the contractor alleges that it is unable to secure certain resources for purposes of the project, it can be challenging to define with precision what specific event could reasonably fall within such category. If the price of certain concrete material escalated significantly and the contractor finds it impossible to secure the same material at the same commercial terms, it may be argued that this is not quite a neutral delaying event but rather a commercial issue relating to the contractor’s profitability. In other words the change in economic circumstances is affecting the ease with which its obligation can be performed. How radical should price escalation be for such event to qualify for extension of time? Would it not be fair to argue that this event is merely a materialisation of a lump sum contract risk which the contractor had freely undertaken? 

Some may argue that the price escalation of concrete would fall within the purview of Clause 30 of JKR contract which deal with fluctuation of prices where the contractor will be financially compensated by the government. However the same argument could be made for any construction materials, plant, machineries, equipment and even workers where the inability to secure such resources could be due to market scarcity which in turn causes price hikes. It is often difficult to make a legal distinction between economic hardship and ‘act of God’ where the cause and effect in reality could greatly overlap.

Unique Grounds For Extension Of Time Under PAM Contract

There are also grounds for extension of time that are unique to PAM contract which are not available under JKR contract. One such notable example relates to Clause 23.8(u) of PAM where the contractor may be entitled to extension of time if the project schedule is delayed or will be delayed as a result of the execution of work for which a provisional quantity is included in the Contract Bills which in the opinion of the Architect is not a reasonably accurate forecast of the quantity of work required. There are a few reasons why the administration of this provision may be challenging in reality and requires absolute clarity in contract administration. 

Firstly it is unclear what is the magnitude or percentage of deviation between actual quantity executed and provisional quantity included in Contract Bill that would qualify for extension of time under such ground. Secondly, it is important to distinguish additional quantities above and beyond the provisional quantity indicated in Contract Bill from additional quantity instructed by the Architect for purposes of variation. The latter is provided for under a separate ground for extension of time set out under Clause 23.8(h) pertaining to instruction pursuant to Clause 11.2. Such distinction is important because when the contractor encounters additional work beyond the provisional quantity, no instruction is required from the Architect for the contractor to proceed with the additional works. However, occasionally the execution of additional quantities beyond the provisional quantity entails clarification on construction details through the exchange of ‘Request for Information’ also known as ‘RFI’. Thirdly, the time impact arising from deviation from provisional quantity may be affected by the sequence of works rather than just magnitude of work. In other words, there may be instances where the magnitude of works may not be significant (say 5% more than provisional quantity) but the delaying effect arises due to the timing in which such works was discovered and had to be carried out. If such additional works were discovered towards the tail end of the relevant planned construction activities where much of the plant and machineries had been demobilised coupled with progressive commencement of the subsequent planned activities, there may be serious delaying effect. In other words, the delaying effect is not a direct function of quantity of works but rather criticality of works. Lastly, whilst the ground of extension of time is based on the Architect’s opinion of what constitute a reasonably accurate forecast, such opinion is not conceived in vacuum but rather derived based on contemporaneous record such as baseline programme or revised programme which were accepted by the Architect but produced by the contractor. The duration dedicated by the contractor on works with provisional quantity is in turn dependent on the construction methodology and critical path of the relevant programmes. Therefore, if the contractor submits a baseline programme that is more aggressive in its planned duration for works with provisional quantity, such strategy might be advantageous to its future application for extension of time. These obscure details of strategy deployed at the inception of the project can have magnified effect during the administration of extension of time.

Conclusion

Whilst there are fairly notable and distinct differences between PAM and JKR contract as it relates to administration of extension of time, it is very challenging to conclusively determine which regime is ‘fairer’. As pointed out earlier, extension of time regimes with strict timeline requirements can appear onerous from one perspective but simultaneously may be advantageous when viewed from other perspective. What may appear to be burdensome may actually provide clarity and by contrast provisions that are lenient may give rise to ambiguity.




Koon Tak Hong Consulting Private Limited

This is Part 1 of an article series comparing two of the more commonly used standard forms of construction contract in Malaysia i.e. Agreement and Conditions of ‘Pertubuhan Akitek Malaysia’ (PAM) 2018 and Standard Form of Contract of ‘Jabatan Kerja Raya’ (JKR) or Public Works Department (PWD). In order to ensure a like for like comparison, the basis of procurement pathway shall be lump sum contract without quantities i.e. PAM (Without Quantities) and PWD/ JKR Form 203 (with drawings and specifications forming part of the contract). It should be noted that contract forms are usually organised based on procurement pathways of choice because it fundamentally affects some of the key clauses e.g. variations, risks allocations, basis of contract sum etc. 

Liquidated damages is one of the more commonly encountered provision in construction contract. It is a genuine pre-estimate of damages that the culpable party is liable for in case of delay in completion. There are a few aspects of liquidated damages that are unique and notable in its use in Malaysia. Firstly, although Malaysia’s legal system is heavily modelled after English common law, its contracts law is codified under Contracts Act 1950. Therefore construction contracts in Malaysia are subject to Contracts Act 1950, of which there are certain parts of this legislation that are applicable to liquidated damages provision in particular its Section 75. The effect of Section 75 is such that the amount stipulated as liquidated damages in construction contract invariably ends up as the maximum cap or ceiling amount that the defaulting party is liable for. Therefore for those who are responsible for calculating the sum for liquidated damages such as consultant quantity surveyors, they ought to be aware of the legal implication of the arithmetical exercise. In reality, most prudent consultant quantity surveyors will estimate liquidated damages based on a few applicable methods e.g. revenue loss approach, cost of capital employed approach etc and thereafter propose a sum based on an average of different methods of calculation. The reason is because whilst the sum ought to accurately reflect the actual loss projected, it should not be so financially overwhelming that it may end up inflating tender sums offered or even outright rejections to participate in tender. In other words, the legal effects of Section 75 of Contracts Act 1950 may not necessarily be in sync with the commercial practice in the industry. This is because the sums indicated as liquidated damages in tender document may not have intended to reflect the maximum amount of loss that may potentially be incurred by the aggrieved party. What will be evident in comparing PAM and JKR contract, is that the wordings used for non completion damages are influenced by Section 75 of Contracts Act, which will be elaborated further in this article.

PAM contracts are generally used for private sector projects whilst JKR contracts are mainly to cater to public sector construction works. Such difference in nature of project funding may have significant impact on how delay could impact the project and associated damages that may be incurred. Whilst private sector projects tend to be profit driven, public sector projects may not necessarily be commercially oriented. There may not be any revenue generating reasons behind constructing a tunnel or bridge or any publicly funded infrastructure. Such difference in financial nature should reasonably have an effect on liquidated damages provision including the application of Section 75 of Contracts Act. Such awareness may be helpful in tender negotiation for both public and private sector projects.

When the relevant certification provisions under PAM and JKR contracts are compared, it is evident that there are quite distinct characteristics. Notwithstanding that, most contractors that are involved in projects using both contract forms tend to adopt an identical method of contract administration despite these distinctions. The next few sections of this article can hopefully raise awareness on the need for bespoke contract administration practices based on the characteristics of the contract form in used.

Section 75 of Contracts Act 1950 

Section 75 of Contracts Act 1950 deals with compensation for breach of contract where penalty is stipulated. In essence this provision states that in case of contract breach where a stipulated sum is payable, the claimant is entitled to a ‘reasonable compensation not exceeding such amount’, regardless of whether actual damage had been proven. In 2019 the Federal Court clarified the legal position on Section 75 via its decision on ‘Cubic Electronics Sdn Bhd v MARS Telecommunication Sdn Bhd’. For the purposes of this article, three legal findings are particularly relevant namely (1) the amount claimable is subject to the maximum amount stated in the contract, (2) there is no legal requirement for the claimant to prove its actual loss in order to demonstrate what is reasonable compensation (3) the burden of proof is on the defendant to show that the sum stipulated is unreasonable. These principles are relevant because all contracts in Malaysia, including PAM and JKR are subject to Contracts Act 1950 including the court’s interpretation of the relevant parts of the Act. Whilst these binding principles are not expressly spelt out under the liquidated damages clauses of PAM and JKR contracts, these continue to be binding on the contracting parties. Therefore any review of any liquidated damages clause under construction contract forms will not be complete without an understanding of Section 75 of Contracts Act 1950.

Clause 40 of JKR contract deals with ‘Damages For Non-Completion’ which essentially refers to liquidated damages. In general both Clauses 40.1 and 40.2 stipulate the certification procedures prior to any recovery of liquidated damages by the Employer. These clauses do not deal with any matters relating to the sum stipulated for liquidated damages including the burden of proving that such amount is reasonable compensation or the basis of pre-estimation for delay damages. Therefore the drafting of Clause 40 of JKR contract steer clear from the application of Section 75 of Contracts Act 1950 for avoidance of contradiction or conflict. On the other hand, the PAM contract takes quite a different approach. Under Clause 22 of PAM contract on Damages For Non Completion, apart from setting out the certification procedures, it also deals with the issue of burden of proof. Clause 22.2 in particular states amongst others that ‘the parties agree that by entering into the contract, the contractor shall pay to the Employer the said amount, if the same becomes due without the need for the Employer to prove his loss and/or damage unless the contrary is proven by the contractor’. There are a few observations arising from Clause 22.2 of PAM. Firstly, by virtue of the application of Section 75 of Contracts Act 1950 including the Federal Court’s findings in 2019, the Employer (being the claimant for liquidated damages) is already not required to prove its actual loss in order to demonstrate what is reasonable compensation. However such relief appear to be waived ‘if the contractor is able to prove that the sum stipulated is not fair and reasonable’. It should be noted that since the version of PAM contract referred to in this article is dated 2018 (prior to the 2019 decision by the Federal Court), the general position back then was that the claimant must prove the actual damage he has suffered unless its case falls under limited situation where it is difficult to assess actual damage or losses. In other words, the conditions in Clause 22.2 was useful prior to Federal Court’s findings in 2019. However in view of the 2019 decision, the burden of proof is shifted to the contractor (respondent) that the sum is unreasonable. Therefore the unintended consequence of Clause 22.2 is such that the Employer may be forced to resume shouldering its original burden of proof as soon as there is any attempt by the contractor to challenge the stipulated sum. In the absence of the relevant wordings in Clause 22.2, the burden of proof remains firmly with the contractor and it is up to the contractor to satisfy the court of its case on the balance of probability. 

For the Employers who are contractually savvy in utilising PAM contract, it is likely that particular conditions may be introduced to amend Clause 22.2 in light of Federal Court’s findings in 2019. On the other hand, the original unamended Clause 22.2 may now be favourable to the contractors’ position. However from a practical perspective, contractors who enter into  construction contract that utilises PAM standard conditions would be deemed to have accepted the proposed liquidated damages. If the contractor took issue with the proposed liquidated damages included in the tender document, its tender offer would invariably contain certain qualifications or exclusions to the relevant liquidated damages. So how is it that a contractor that was deemed to have ‘accepted’ the liquidated damages, perform an inexplicable volte-face on the reasonableness of liquidated damages as soon as culpable delay is in issue? This sudden change in position may not sit well with certain arbitral tribunal in case of legal proceedings. Out of abundant of caution it may be prudent for the contractor to include statements in its tender offer that its position on liquidated damages is ‘without prejudice to Clause 22.2 of the PAM contract’. 

Certification Mechanism Under Clause 22 of PAM And Clause 40 of JKR

Although it may be easy to specify a sum payable as liquidated damages in case of delay, the actual recovery of such compensation may not be as straightforward. There are a few reasons for this. Firstly, liquidated damages are usually expressed as sum payable per calendar day i.e. rate of damages. In order to ascertain the quantum of damages, it is necessary to first determine the extent of delay to project completion. Thereafter one should establish whether the contractor is entitled to any extension of time for the period of project delay. The contractor may not be culpable for the entire period of project delay if the delaying events are ‘excusable’. The contractor’s entitlement to any extension of time in turn is dependent on, amongst others its compliance with condition precedents included in the agreement. In essence, the Employer is only authorised to recover liquidated damages for the period of delay in which the contractor is culpable. Beyond these sequence of steps, there may be added complexities if the contractor’s employment is terminated prior to project completion. Given the variety of delay analysis issues that require assessments, most contract forms including PAM and JKR set out its own unique certification mechanism to regulate the manner in which the quantum for liquidated damages that the contractor may be liable  for could be determined. PAM and JKR contract have fairly different certification mechanism which will be examined in the immediate few paragraphs below.

Clause 40.1 of JKR contract states as follow – ‘If the contractor fails to complete the Works by the Date for Completion or within any extended time granted pursuant to Clause 43, the [Superintending Officer or SO] shall issue a Certificate of Non-Completion to the Contractor. Prior to the issuance of the Certificate of Non-Completion, the SO shall issue a notice to the Contractor informing the Contractor the intention of the Government to impose Liquidated and Ascertained Damages to the Contractor if the Contractor fails to complete the Works by the Date of Completion or within any extended time granted’. The subsequent first half of Clause 40.2 is particularly relevant – ‘Upon issuance of the Certificate of Non-Completion, the Government shall be entitled to recover from the Contractor Liquidated and Ascertained Damages calculated at the rate stated in Appendix from the period of the issuance of the Certificate of Non-Completion to the date of issuance of Certificate of Practical Completion or the date of termination of this Contract’. 

The following hypothetical example may help to illustrate the application of certification mechanism for liquidated damages. Let us assume a project with liquidated damages of $1000/day that commenced on 1 January 2024 and scheduled for practical completion on 31 December 2024. Suppose part of the contractor’s works were rejected on 1 December 2024 resulting in delay due to various ‘remedial works’ which were disputed by the contractor.

Under the Clause 40.2 of JKR’s certification mechanism, the recovery of liquidated damages shall be calculated from the period of the issuance of Certificate of Non-Completion and that such recovery can only be effected ‘upon issuance’ of Certificate of Non-Completion. In other words, the date of issuance of Certificate of Non-Completion shall fall on 31 December 2024 which was the original Practical Completion Date. There are several glaring implications in this regard. Whilst the parties do not dispute that the project is delayed, it may not be immediately clear whether the contractor is culpable on 31 December 2024. The parties may dispute over the wordings in the technical specifications and whether the works in contention were rightly rejected. The contractor may take the position that the ‘remedial works’ were variation works that entitle additional payment and extension of time. These disputes may take time to crystallise, assessed, reviewed and resolved pursuant to Clause 65 of JKR dispute resolution provision. It should also be noted that under Clause 43 of JKR contract, there are no time restrictions imposed for duration taken for any assessment of extension of time. Notwithstanding that there are likely various outstanding matters that are pending resolution such as the establishment of culpability of the contractor, the Employer shall be entitled to commence recovery of liquidated damages on 31 December 2024. In fact, according to Clause 40.1, the Superintending Officer shall inform the contractor via a written notice prior to the issuance of Certificate of Non-Completion. In other words, such written notice shall be issued any time before 31 December 2024 which indicate that the decision to recover liquidated damages shall be made even before the original Practical Completion Date. The date of issuance of Practical Completion Certificate may not be clear immediately after 31 December 2024, although there may be certain projections made based on revised construction programme. It is therefore entirely possible that the recovery of liquidated damages, on a monthly basis of an average of $30,000/month can be effected progressively prior to the ascertainment of the final quantum of liquidated damages. It is perhaps fair to say that most contractors may not be comfortable to have its progress payments be subject to deductions (or possibly to have its performance bond called) when its culpability is not even ascertained even on an interim basis. This is perhaps an area of negotiation during tender as regards potential amendments to the relevant JKR contract clauses.   

Although there may be cause for concern for the contractor based on the JKR’s certification regime described above, it is also fair to say that the contractor is not completely vulnerable. There are provisions within JKR contract that allow the contractor to mitigate its risk. It is important to note that the contractor is usually in a better position (relative to the Employer) in detecting delaying events in advance and producing documentations to supports its case for any extension of time. This is largely due to its responsibility for the overall management and supervision of the works on site. Under Clause 43.1 of JKR, the contractor shall notify the certifier when it becomes apparent of any delay to the progress of works. Further, the certifier may grant extension of time as soon as he is able to estimate the length of delay, which is dependent on information available for his assessment. In this regard there are usually legal requirements for the certifier to act fairly and reasonably. In other words, the contractor could utilise its access to contemporaneous records and be proactive in mitigating risk where possible.  

The certification mechanism for PAM can be found in Clause 22.1 of which the first half of this provision states as follow – ‘If the Contractor fails to complete the Works by the Completion Date, and the Architect is of the opinion that the same ought reasonably to have been completed, the Architect shall issue a Certificate of Non-Completion. Upon issuance of the Certificate of Non-Completion, the Contractor shall pay or allow to the Employer a sum calculated at the rate stated in the Appendix as Liquidated Damages for the period from the Completion Date to the date of Practical Completion.’ It should be noted that the term ‘Completion Date’ is defined as inclusive of both the original practical completion date or any extended date thereof. Whilst this part of Clause 22.1 of PAM appear to resemble the essence of the previously discussed JKR provisions, there are certain subtle but important differences. Firstly, the contractor shall be made liable for liquidated damages upon the occurrence of two events namely (1) if the contractor fails to complete the works by the Completion Date and (2) the Architect is of the opinion that the works ought reasonably to have been completed. The second event is arguably more notable because it is an indication that the certifier had already made an in-principle assessment that the delay is non excusable, i.e. the contractor is culpable and therefore not entitled to any extension of time. This requirement is not expressly provided for under JKR contract, which may be a cause for concern for the contractor for reasons provided above. Secondly, the liquidated damages is not accrued from the date of issuance of Certificate of Non-Completion but rather from Completion Date. Therefore using the hypothetical example above, it is entirely possible for the certifier to exercise some flexibility by issuing the Certificate of Non-Completion after 31 December 2024. The timing of issuance of such certificate is crucial because it ‘triggers’ the contractor’s liability for liquidated damages, which is an identical feature between Clause 40.2 of JKR and Clause 22.1 of PAM. Where the certifier is accorded flexibility to discharge its certification function later, such latitude facilitates a proper assessment for any entitlement to extension of time. Therefore the contractor may not be liable for liquidated damages prior to being determined as culpable for the delay. It is also noteworthy that unlike JKR contract, the PAM contract under its Clause 22.1 does not allow the Architect to take into account the imposition of liquidated damages in its issuance of payment certificates as well as any set off procedures pursuant to Clause 30.4. This provides considerable cashflow relief to the contractors in contention over culpability of project delay.

Liquidated Damages After Termination

Under English common law, the general position is that liquidated damages is not payable beyond termination of the contractor’s employment under the contract unless there is express agreement between the parties. This is because the contractor has no control over the project completion upon its termination and the Employer could enter into a fresh liquidated damages agreement with the replacement contractor. Clause 40.2 in JKR contract appear to affirm this position given that liquidated damages shall be calculated from the period of the issuance of the Certificate of Non-Completion to the date of issuance of Certificate of Practical Completion or ‘the date of termination of this Contract’. Therefore, it is highly likely that if the contractor’s employment is terminated prior to practical completion, the liquidated damages is accruable until the date of termination of the contract. It should be noted that whilst delay related liquidated damages cease to accrue, other termination related costs and damages continue to apply pursuant to Clause 55 of JKR contract. 

PAM contract appears to take a different position in this regard. Clause 22.1 of PAM states amongst others that liquidated damages shall be recoverable from the Completion Date to the date of ‘Practical Completion’. Although there is no reference to the phrase ‘date of termination’ as found in JKR contract, there is a reference to a defined term of ‘Practical Completion’. Under Article 7(aq) of PAM, ‘Practical Completion’ means the state of completion described in Clause 15.1 which refers to the ‘Contractor’ making an undertaking to complete all minor works that do not prevent the Employer from making full use of the Works for its intended purpose. Although such definition is not inclusive of practical completion by replacement contractor or third party contractor, there is no express agreement between parties for the liquidated damages to cease to accrue after termination. Further, Clause 25.4(d) of PAM which deals with determination of contractor’s employment by the Employer states that the contractor shall allow or pay to the Employer all cost incurred to complete the works including all loss and/or expense suffered until completion of the works by replacement contractor under Clause 25.4(a).  This broad definition of loss and/or expense is likely to include delay related losses i.e. liquidated damages.

Conclusion

It is evident that both PAM and JKR contract differ quite significantly on application of liquidated damages provision. These differences relate to, amongst others the certification mechanism and the extent to which the Employer bears the burden of proof of reasonable compensation. These issues are often overlooked as compared to the sum or amount stipulated as liquidated damages which typically draws more attention during tender. An understanding of such differences may be helpful for effective negotiation during procurement as well as providing clarity to the ways in which contracts ought to be administered.




Koon Tak Hong Consulting Private Limited

This is Part 2 of an article series examining acceleration of works for construction project both from a contractual and commercial perspectives. In general acceleration of works refers to bringing forward original practical completion date(s) through a combination of measures such as deployment of additional resources, re-sequencing of works, revision in design to adopt more time efficient specifications etc. In Singapore, most standard conditions of contract do not have provisions that allow the Employer and its agent to issue instruction for acceleration of works, apart from the Public Sector Standard Conditions of Contract (PSSCOC). This article series highlights the advantages of effecting acceleration by way of supplemental agreement, i.e. for parties to vary certain key terms of their existing contract. In Part 1 of this series, some of the key terms that ought to be included in such supplemental agreement were examined. In Part 2 of this article series, other pertinent issues of acceleration of works will be reviewed. Although acceleration of works is generally considered a schedule related matter, it is in reality a multi-faceted issue. When works are accelerated it may cause ripple effects on other contractual and commercial issues including changes to existing unit rates and pricing, logistical/ phasing considerations, contract administration of existing delaying events etc. Parties should consciously address these key issues during negotiation, as existing conditions of contract do not typically provide the required level of clarity on the consequences arising from acceleration of work. This article will address these consequential issues in further detail under subsequent sections of this article. 

For avoidance of doubt, the acceleration of works discussed in this article series refers to an intentional schedule amendment initiated by the Employer for its own benefit where there is an in-principle agreement that the contractor ought to be compensated for these extra over efforts. This is different from other circumstances such as ‘constructive acceleration’ or ‘delay mitigation’ where the contractor decides to expedite programme by its own volition in response to schedule overrun, rightly or wrongly. In such cases, there is generally a dispute over whether additional payment to the contractor is warranted. This is outside the scope of this article series. 

Acceleration Of Works – Implications On Existing Pricing And Unit Rates

As regards works that are subject to acceleration, should there be any adjustments made to its pricing and unit rates? Similarly, should there be any commercial adjustments for the remaining works that are not part of the accelerative measures? Whilst there is a general agreement that the contractor is entitled to additional payment for its accelerative measures, it is often debatable as regards how such amount should be derived. The first method is that the existing unit rates and prices of the accelerated works should be adjusted in order to calculate any increase in contract sum. An alternative method is that the acceleration cost should be calculated exclusively based on the additional resources to support the acceleration effort without any amendment to existing pricing and unit rate. The difference between these two methods is that the former approach involves a permanent change in pricing and unit rates. On the other hand, the prices and unit rates remain unchanged under the latter approach. To better understand the merits of these contrasting methods, one should examine the commercial basis of tender price which forms the original contract sum.

When a contractor submits its tender offer, the unit rates and prices are usually structured based on a defined scope of works to be completed within a specified time for completion. In other words, the productivity of its resources influences the basis of its pricing. A crew of workers working round the clock incurring overtime charges based on an ambitious timeline will clearly be more costly than the same crew of workers working based on an ordinary time frame. Whenever the existing scope of works are varied, the unit rates used to value such variation works may be adjusted if such works are executed under different conditions. Whilst acceleration of works may not necessarily be considered as ‘variation’ depending on the contract form used, there is a compelling argument that the contractor should be entitled to fair allowances to its existing pricing if acceleration changes the site conditions. This is particularly so if the change in site conditions affects not just the accelerated works but also other remaining works. By way of illustration, where accelerative measures involve additional work shifts resulting in logistical and resource congestion on site, the increase in work productivity changes the basis of the original pricing by the contractor. Certain shared site resources such as scaffolding, site storage, usage of shared plant and equipment etc which are typically provided for under preliminaries cost may be scarce during any surge in construction activities. The increase in demand drives up unit rates and prices to the extent that these uptick in construction activities extends throughout the construction duration. If and when there are any variations works instructed above and beyond the accelerative measures, these variations are carried out under an environment where there is a pre-existing surge in construction activities. It follows that the valuation of such variation works should be on the basis of adjusted unit rates and prices to reflect the stretched resources.

On the other hand, the Employer and its consultants may argue that the contractor’s entitlement to acceleration cost should be calculated on the basis of an exclusive lump sum. In other words, if and when there are any additional works instructed during the accelerative efforts, such variations shall be valued based on unamended existing unit rates and prices. The acceleration of works should not be an excuse for the contractor to unravel an existing commercial agreement, particularly in the absence of competitive bid. Any  remuneration arising from acceleration of works should included in the lump sum acceleration cost without any commercial spillover to other part of the works. 

   Whilst there are merits to the two competing reasonings given above, it should be noted the Employer has limited room to manoeuvre particularly if the requirement to accelerate is non negotiable. As mentioned in Part 1 of this article series, any incremental in contract sum should be balanced with omission in preliminaries cost by virtue of reduction in construction period due to acceleration. Further, any increase in unit rates could serve as a double-edged sword in that such enhanced rate shall also be used in case of variation to omit certain works. In this regard, the scope of acceleration should be as narrowly defined as possible in order to ensure that only unit rates and prices that are relevant are affected. Where the works subject to acceleration are loosely defined, it may give rise to unintended commercial implications. In view of these considerations, it is also in the interest of the Employer to consider simplification of design as means of acceleration instead of deployment of additional resources. Under such approach, the commercial effects of accelerative measures can be ring-fenced. 

Acceleration Of Works – Resolving Existing Delaying Events

As acceleration is essentially an initiative to bring forward practical completion date(s), parties should in theory be in complete agreement on the exact revised/ accelerated practical completion date. By way of illustration if the original practical completion date was 1 July 2025 and parties agree to bring forward the completion date by six months through accelerative measures, the revised/ accelerated practical completion date is 1 January 2025. As acceleration of works is invariably initiated after project commencement, the original practical completion date could have possibly been affected by various delaying events – excusable or otherwise, prior to the agreement for acceleration. Contrary to popular belief, during the construction period the Employer and contractor are not always in concurrence on the prevailing completion date for a variety of reasons. The practical completion date is only extended if the certifier determines that there is indeed delay to the construction programme and such delaying event(s) is either an Employer related delaying event or neutral delaying event. Prior to any such determination, the contractor had to notify the certifier in accordance with the requirements set out under condition precedents, including continuous disclosure of the relevant facts, information, records etc. As most extension of time are granted retrospectively, there is invariably a time lag between the emergence of the delaying event to any grant of extension of time. Given that it is fairly common for projects to have multiple delaying events with some overlapping with one another, the determination of whether there should be any revision to the original practical completion date can be complex and time consuming. Therefore, as a matter of expedience most assessment of extension of time are carried out towards the end of the project or even after the original practical completion date. The certifier typically justifies such belated assessment with the need to allow the facts to unfold and be in the position to parse out the material information in order to enable a comprehensive analysis. It is therefore possible that when parties negotiate acceleration of works, there may not be any agreement on the prevailing practical completion date. Using the earlier example, if parties are not in agreement that the prevailing completion date is 1 July 2025, it is challenging to determine the revised/ accelerated completion date even if there is an agreement to accelerate the works by six months. Occasionally, the accelerated period could be influenced by the desired completion date.

In view of the above, it is advisable for parties to utilise the need for acceleration as a reason to ‘resolve’ all existing delaying events. The term ‘resolve’ could either refer to a proper and formal assessment of extension of time as provided for under the contract, or for a commercial settlement of all delaying events. In case of the latter, the merit of the contractor’s case may not exclusively determine any grant of extension of time. The Employer would have to make concessions based on its need for acceleration and to balance any concessions made with the ultimate acceleration cost imposed by the contractor. In doing so, the certifier simultaneously acting as the Employer’s agent had to navigate carefully for the following reasons. Firstly, certain delaying events may have been notified by the contractor but had not been assessed due to the continuing delaying effects. In other words, the schedule impact of such delaying event continue to be felt such that the actual magnitude of delay could not be meaningfully assessed. Secondly, there may be certain delaying event where there is clear merit to the contractor’s entitlement to extension of time but the contractor failed to comply with the condition precedents stipulated. Thirdly, there may be concurrent delaying events with varying level of culpability on the part of the contractor. It may be challenging to objectively determine the dominant cause of delay. Finally, there may be voluminous delaying events where its sheer magnitude is causing delay to full and proper analysis and assessment. 

Based on the scenarios above, the certifier could either (I) perform a proper delay analysis ‘by the books’ and arrive at a global determination purely based on merit of the contractor’s case, or alternatively (II) make a business decision notwithstanding the lack of adequate information or even merit to the contractor’s case. Intuitively, Option II may be the faster method of resolving all existing delaying events which is time sensitive in attempting to accelerate any works. However, the certifier who is simultaneously the Employer’s agent may be playing two distinct roles depending on whether to adopt Option I or Option II. If the Architect/ Superintending Officer/ Employer’s Representative adopts Option I, it is discharging the function of an impartial and neutral certifier. In such a case, the reasoning behind any assessment and the impartiality displayed during its certification function are essential legal requirements. However under Option II, the role played is that of an agent to the Employer. Under this scenario, business consideration may be the overriding determinant. 

So how is the distinction in role between certifier and the Employer’s agent relevant in negotiating supplemental agreement for acceleration of works? Assuming parties are able to agree on the terms to acceleration of works, why does it matter which hat the Architect/ Superintending Officer wore in facilitating such agreement? Such issue matters and relevant to the extent that extension of time certification is intrinsic in deriving the accelerated/ revised practical completion date.  Using the previous example, if parties agree to accelerate the time for completion by six months, the practical completion date is revised from 1 July 2025 to 1 January 2025. However if the original practical completion date of 1 July 2025 should have been extended to 1 August 2025 due to extension of time (prior to agreement to accelerate works), then the six months schedule acceleration should result in revised completion date of 1 February 2025. In other words, any challenge on the extension of time (or the lack thereof) could alter the commencing date from which the six months acceleration period is calculated. Such challenge in extension of time could involve the manner in which the extension of time was administered, which in turn implicates whether the certifier discharged his function appropriately as required under the law. On the other hand, if the parties arrive at an agreement purely based on business decision (i.e. Option II), then the supplemental agreement for acceleration of works should refrain from framing the acceleration period by way of duration. Instead, parties could agree to a new completion date of 1 January 2025 and in doing so irrevocably and unconditionally undertake not to pursue any claim for extension of time or liquidated damages arising from delaying events occurring prior to the date of conclusion of such supplemental agreement.  Under this approach, the stipulation of 1 January 2025 is irrelevant to any grant of extension of time which then relieves the parties from any risk of having the determination of extension of time being challenged. 

Accelerated Scope Of Works To Be Self Sufficient Operationally

Acceleration can refer to either bringing forward an existing overall practical completion date or phase completion date. If the project was under a single overall practical completion date, occasionally there may be a need to ‘carve out’ a geographical portion of the works for purposes of acceleration, whilst leaving the remaining works unchanged in terms of existing practical completion date. In such a case, the carved out part of the works may be a newly created ‘phase of works’ with an advance completion date. It is also possible for a project which is divided into multiple phases of works to have one or few of its phases of works to be subject to acceleration. The common theme in the different scenarios mentioned above is that the practical completion date or phase completion date are subject to acceleration. In other words, the works that are accelerated will have an advance handover to the Employer for its beneficial occupation. Such handover will bring about other consequential contractual effects such as earlier commencement of defects liability period (or maintenance period), associated release of retention sums, cessation of insurance coverage in respective of contractor’s all risk policies as well as liability for liquidated damages, issuance of statutory temporary occupation permit by the authorities for the concerned works etc. What should also be clear is that if a certain programme milestone dates are ‘expedited’ without the usual contractual significance associated with practical completion, such initiatives are not acceleration of works per se.

The different types of permutations for acceleration of works are typically more relevant to large projects with considerably long construction period. Given the contractual significance associated with the accelerated works, any supplemental agreements will need to include details involving inter phasing logistics that will enable the early handover. In essence, the works that are handed over in advance shall be self sufficient operationally. Therefore when parties negotiate the extent of works that shall be accelerated, the actual magnitude of such works could be higher than what was originally anticipated. This happens when parties include other ancillary and supporting services that enable the end user to enjoy beneficial occupation of the space concerned. This can be illustrated using a large mixed development project consisting of hotel, retail and office components. Assuming the retail portion of such development had to be accelerated for advance occupation, the actual magnitude of works that may be implicated is usually beyond the total floor areas of the retail component. These additional parts of works may include certain floors of car parking space, additional mechanical and electrical infrastructure works that supports the retail space, ingress and egress roads for traffic access to the retail areas etc. As much of these inter phasing logistics are unplanned, it is not uncommon to delegate the detail design responsibilities to the contractor for greater efficiency in carrying out the works. Parties ought to make certain that any shift in design liabilities (or amendments to insurance coverage) is included as part of the supplemental agreement for acceleration of works.

Contract Administration Of Accelerated Works

Whilst much of this article series focuses on negotiation leading to parties’ agreement to accelerate works, the post supplemental agreement contract administration is another subject that deserves attention. In theory, the administration of revised/ accelerated practical completion date is no different from the original practical completion date. Any culpable delay beyond such revised contractual date may attract liability for liquidated damages and likewise extension of time may be granted under grounds of excusable delays. 

The devil is in the detail in ensuring that the there is no delay to the accelerated works. Beyond the deal between main contractor and the Employer, any success in accelerating works is dependent on multiple parties such as subcontractors, consultants, statutory authorities etc. By way of illustration, the main contractor should ensure that relevant subcontractors involved in accelerative measures shall enter into a back to back subcontract supplemental agreements in a timely manner. These may involve both domestic subcontractors and nominated subcontractors. As much of the documentation of nominated subcontract are driven by the project consultants representing the Employer, the expectation is for the nominated subcontract negotiation to be coordinated in lock step with the main contract. On the other hand, the main contractor should play the same role as it relates to domestic subcontract. Therefore from a broader perspective, negotiation of supplemental agreements at both main and subcontract level is often a well coordinated multi-party effort. If the accelerated works involve multiple trades of works, the contract administration effort will be intensified given the need to coordinate with various subcontractors within a short span of time. One of the contract administration risks is that main contract supplemental agreement is not accompanied by corresponding subcontract supplemental agreements, under the assumption that the ‘administrative paper work will naturally follow’. This cannot be any further from the truth. The main contractor’s ability to execute against the concluded deal is primarily dependent on the support and commitment from parties actually carrying out the physical works. Any gaps between main contract and subcontract may potentially scupper the accelerative measures. The actual accelerative effort is only as good as the agreement to accelerate.  

Conclusion

Based on Part 1 and Part 2 of this article series, it is quite evident that establishing an agreement to accelerate can be fairly complex and require a thoughtful and meticulous process. Very often these matters are deemed administrative issues that can be sorted out as an after thought, since the main contractor is already on board. The issue of setting out a comprehensive agreement to accelerate can often be more time consuming than establishing the original construction contract that typically adopts a standard form of contract. The pain emanating from the lack of proper agreement will invariably be felt if and when the accelerated completion date is not fulfilled which follow by finger pointing game.



Koon Tak Hong Consulting Private Limited

Acceleration of construction works is an initiative to bring a project to completion ahead of schedule. Project with additional scope of works could also be accelerated to complete on its original schedule so as to avoid time extension. There are various ways to accelerate works including deployment of additional resources, adopting more productive construction sequencing  methodology, implementation of alternative design that reduces construction duration etc. Acceleration could be targeted to either part or whole of the works. Although standard forms of construction contracts in Singapore typically allow changes or variations to be instructed on existing works, there are usually no suitable provisions for acceleration with the exception of the Public Sector Standard Conditions of Contract (also known as ‘PSSCOC’). If and when the Employer requires acceleration, it should be done via supplemental agreement with the contractor. Supplemental agreement essentially varies the existing contract terms. So what is so unique about acceleration such that it could not be accommodated under typical ‘instruction for variations’? What are some of the key terms to be included in this supplemental agreement? An understanding of these key terms explains why acceleration of works may be more complex than typical variation of works under contract. 

This is Part 1 of a two part article series examining accelerating construction works using supplemental agreement. In essence such supplemental agreement attempts to overcome constraints found in certain provisions of construction contracts which could not reasonably accommodate acceleration of works. Contrary to popular belief, commonly found construction provisions such as variation of works, early partial occupation etc are not suitable to effect acceleration of works for reasons that will be examined in this article series. This contract provision examination will be done in the context of contract forms commonly used in Singapore. For avoidance of doubt, apart from PSSCOC there are other international contract forms e.g. JCT 2016, NEC4 and FIDIC Red Book where express provisions are included for accelerating works. Even where contract forms have provisions to instruct acceleration of works, there are other commercial issues e.g. calculating cost of acceleration which may not be adequately addressed as a conventional legal matter. In order to facilitate a comprehensive review of accelerating construction works, some of these commercial issues will also be examined in this article series. By way of example whilst the contractor may be contractually required to submit a quotation for its effort to accelerate its works, what ought to be included in such quotation can be highly specific to the nature of project in hand. Further it is not uncommon for acceleration to involve certain amendments to existing design of works by the contractor in order to expedite schedule. There are residual issues that may not be adequately addressed by conventional contract provisions. 

The need for supplemental agreement arises when both parties agree that the proposed acceleration of works is beyond the contemplation of existing contract. In other words, the Employer in principle agrees to make additional payment to the contractor in exchange for schedule benefit. However there are other situations where there is a primary question over whether acceleration of works entitles additional payment. By way of example, a contractor that is in culpable delay may decide to accelerate its works in order to avoid liquidated damages. There could also be an alternative scenario where a contractor that was wrongfully denied extension of time may decide to carry out ‘constructive acceleration’ in order to meet the original completion date. There may be a case for such contractor to claim for costs incurred due to ‘constructive acceleration’ upon project completion. Under these circumstances, parties are unlikely to negotiate any supplemental agreement since there is dispute over whether such ‘acceleration’ were above and beyond the original agreement. For avoidance of doubt, these circumstances are outside the scope of this article.

Key Terms To Be Included In Supplemental Agreement For Acceleration Of Works

Since supplemental agreement varies the existing contract terms, care should be taken to clearly delineate proposed changes to existing contract terms from other terms that should remain unchanged. It should be noted that ‘variation to contract terms’ is different from ‘variation under the contract’. The former permanently alters the contract terms whilst the latter exercises a right found under an existing contract term. So what are the key terms that should be included in supplemental agreement?

Firstly, the practical completion date for either whole of the works or phase of works (or even stage of works) shall be varied. After all, this is the essential deliverable and the very reason for accelerating works. As the need for acceleration invariably arises after commencement of works, it is imperative to carry out contract administration due diligence on whether the original practical completion date had effectively been extended notwithstanding that any formal extension of time had yet been granted. This very issue will be elaborated further in Part 2 of this article series, but for now suffice to say that it is critical to establish ‘paper trail’ that both parties are in agreement of what should be the existing practical completion date immediately prior to entering into a supplemental agreement. Any potential disagreement over the very contractual date that ought to be accelerated will completely nullify the purpose of such supplemental agreement. This also explains why entering into a supplemental agreement is likely a superior option over exercising any right to acceleration that may be found under the contract. The negotiation between parties allow the establishment of a ‘clean slate’ of completion date. Out of abundance of caution, an expression of specific practical completion date is preferable over stipulation based on ‘time for completion’ duration. This is to avoid dispute over the date from which such duration should be calculated from. It may also be tricky to negotiate the completion dates for purposes of supplemental agreement in parallel with a dynamic site condition of a large and complex project. It is not uncommon for the occurrence of any major contentious delaying event in the midst of negotiation that could disrupt the purported agreement on any completion date. Therefore parties are advised to remain sensitive and vigilant of any material intervening events during the course of negotiation. It should also be noted that acceleration should be referenced to practical completion date given its definitive contractual nature e.g. trigger of maintenance period, objective definition of completion, contractor’s relinquish of control over site etc. Therefore acceleration that are reference to non practical completion date that lacks contract definition such as milestone date of certain construction activities can cause difficulties in contract administration. 

Secondly, there should be a clear agreement to the amount of additional payment (including a reasonable breakdown) that the contractor is entitled to in consideration of the acceleration effort and resources. This is also known as the ‘acceleration cost’. The ways to calculate acceleration costs will be further elaborated in the last section of this article. It should be noted that the derivation of an acceleration cost is in principle quite distinct from an ordinary contract sum for construction works. As regards the latter it represents the amount payable for physical works constructed on site. If the contractor decides to alter the construction methodology by its own volition in the midst of the project, the contract sum is not subject to any adjustment. This is because the original scope of works remain unchanged and the construction methodology is usually not included as part of the contract document. However when it comes to acceleration cost, it is generally to compensate the contractor not for any variation in physical scope of works but rather a change in construction methodology which results in increase in rate of construction (hence acceleration to the works). By way of illustration, although having additional labourers working over extended hours do not necessarily vary the final construction works, it objectively increases the contractor’s cost. These distinctions are important because the parties had to agree on the basis of the acceleration cost so that there is a mutual consent on progress payment arrangement for the purposes of compliance with Security of Payment Act. In this regard, a decision also has to be made on whether the acceleration methodology statement should be included in the supplemental agreement evidencing the underlying basis of acceleration. By way of example, the Employer may take the position that its focus is on the accomplishment of an earlier completion date without wishing to be drawn into exactly how many additional workers or additional work hours will be expended by the contractor. Others may take the opposite position by wanting a clear resource chart and acceleration methodology statement as means of supervising whether the contractor had delivered its end of the bargain. These contrasting school of thoughts are fundamentally a function of commercial judgment call.  

If the Employer is willing to pay acceleration cost, such additional payment is likely to be justified by the avoidance of a potential loss, damages or opportunity cost that may be incurred under the existing practical completion date. By way of illustration, the Employer may be required to provide an earlier handover of several floors of its development to a potential anchor tenant as part of a major lease negotiation. Failure to do so by the Employer may result in damages stipulated in the lease agreement or even potential loss of lucrative rental income. In other words, the existing liquidated damages may not necessarily be sufficient to compensate the Employer for losses arising from a newly emerging event that necessitated acceleration of works. Therefore, it is entirely possible that the liquidated damages may need to be revised as part of the key terms of the supplemental agreement.

It should also be noted that during tender evaluation and assessment, the contractor’s original construction methodology would typically be assessed rigorously. Therefore the actual margin available for acceleration through construction re-sequencing and adoption of a more efficient methodology may be limited. In order to fulfil a more aggressive schedule demand, it often involve revision to the Employer’s design as well as the use of alternative construction material or building system that has a shorter lead time. This often require simplification of design by utilising ‘off the shelf’ product rather than bespoke or proprietary systems. Therefore the supplemental agreement should include any amendments to original design and specifications as well as any implications on interfacing works. Where the contractor is required to provide supplementary interfacing design to accommodate these changes, it should also be made clear on the implications on overall design responsibility. 

Should Acceleration Of Works Be ‘Instructed As Variations’?

It is interesting to note that whilst part of existing scope of works could be omitted by way of ‘instruction for variations’ with an associated valuation method for such omission, there is no corresponding ‘omission’ or reduction to time for completion. This is in stark contrast to extension of time that are usually granted in case of instruction for additional works. Setting aside the issue of acceleration, it appears that the typical construction contract forms do not have a robust provision for time savings in case of omission of works. As evident from the preceding section of this article, whenever works are accelerated there are potential ripple effects caused to other non schedule related matters e.g. additional payment, change in progress payments, possible alteration to design responsibility, revision in liquidated damages etc. Admittedly there is no universal approach by standard forms of contract as regards acceleration works including those commonly used in Singapore’s construction projects. As alluded to earlier, the PSSCOC allows for acceleration of works to be instructed as variations, which can be found under Clause 19.1(f) of the eighth edition dated July 2020. Under this clause, the term ‘variation’ shall include a requirement to complete the works or any phase or part thereof earlier than the relevant stipulated ‘time for completion’. This is applicable for both its ‘design and build’ and ‘traditional construction works’ version of procurement pathways. On the other hand, the two other contract forms commonly used in Singapore namely SIA Building Contract and REDAS Design And Build Conditions of Contract do not have identical express acceleration provision under its respective variation clauses. Under the SIA form, whilst there are provisions for postponement of works under its variation clause, there is no allowance to require for an earlier completion. In general, its variation clause caters to physical change in the construction works rather than schedule of the construction works. Similarly under the REDAS form, the definition of variation as found under its Clause 1.1.33 refers to any alteration and/or modifications to the Employer’s Requirements of which the ‘Employer’s Requirements’ under Clause 1.1.17 refers to description of the ‘Works’ which was intended to be designed and constructed by the contractor. By all accounts, there is a strong suggestion that both the SIA form and REDAS form do not cater to acceleration of works by way of instruction of variations, unlike the PSSCOC. 

It appears that issuance of instruction for variation in order to accelerate the works might be the most administratively expedient method, at least compared to the negotiation of a supplemental agreement. Therefore for those who takes the position that its contract form provides for acceleration by instruction of variation, should this option be exercised in lieu of supplemental agreement? As pointed out in the preceding section of this article there are various critical issues that ought to be included in the supplemental agreement. These issues may not be adequately addressed if acceleration is instructed as a variation. By way of example, there are no provision to vary the liquidated damages if necessary. Parties may also be at odds with the accelerated completion date if there are various outstanding delaying events that are pending assessment of extension of time. There is also very limited guidance on the extent to which the accepted accelerated construction method, should be binding between the parties. Further, the valuation of variation provision in standard conditions of contract are primarily aimed at physical alteration and modification of scope of works. Therefore there are various elements of uncertainty that may complicate the administration of contract if parties are not required to deal with these issues prospectively. The negotiation of supplemental agreement on the other hand requires both parties to address these issues in an upfront manner. In this regard it offers contractual certainty and avoidance of downstream disputes.   

Can Acceleration Of Works Be Administered As Early Partial Occupation?

Early partial occupation is a commonly found provision in contract forms for construction works where there is a requirement for part of the works to be handed back to the Employer earlier than the stipulated practical completion date. This is generally an impromptu arrangement that arises after contract commencement. By way of context, there is a related article published on this website entitled ‘Part 6 of SIA vs PSSCOC – Early Partial Occupation Of The Works’ that is available for reference. Can acceleration of works be administered as early partial occupation? Proponents of this approach may favour the ease with which acceleration could be effected by way of issuance of instruction, thereby avoiding a possible long drawn negotiations that supplemental agreement may entail. Unfortunately, there are certain compromises that parties may need to accept under the administration of early partial occupation. 

Firstly whilst there are provisions to revise liquidated damages for the remaining scope of works by way of proportionate reduction based on contract value, there are no liquidated damages for the accelerated works. In other words, if the contractor fail to achieve the earlier practical completion date, no liquidated damages shall be applicable. Secondly, there are also no express provision to determine how the acceleration costs shall be determined. If the contractor anticipates additional costs to be incurred as a result of the acceleration of works, it is unclear whether such cost could be agreed in advance and if so, how such incremental sum shall be paid progressively throughout the course of acceleration. The lack of commercial and payment agreement as regards early partial occupation could also be attributed by the fact that there is an absence of mutual consent on the means and methods by which the works concerned shall be accelerated. In summary, the expedience afforded to the parties at the initial stage may come at a disproportionally significant costs.

Calculating Incremental Costs For Acceleration Of Works

Although it is generally true that the contractor should be entitled to additional payment for the additional resources and cost incurred in accelerating the works, it should be balanced with the fact that a reduction in construction duration would likely to reduce contractor’s time related preliminaries costs. Therefore the arithmetical exercise involved in calculating acceleration cost is usually a blend of additions and omissions with a likely overall net incremental cost.

Acceleration cost can be calculated in multiple ways, with different level of accuracies and perspectives. The first method is the direct cost method where each additional resource deployed for purposes of acceleration are itemised with the corresponding duration identified. By way of example, if additional 10 workers are deployed with 10 work hours per worker at the rate of $10/hour, the additional labour cost is 100 man-hours x $10/hour = $1,000. The same arithmetical approach can be used for other resources such as plant, machineries, equipment. An overall 15% surcharge could be added to cater to head office overheads and profit where it is not possible to identify resources exclusively dedicated to the accelerative measures. This direct cost method appear to be the most intuitively fair and transparent calculation given that it resembles ‘daywork’ method commonly utilised under valuation of variation. However parties should agree whether or not the contractor will be compensated for acceleration cost based on actual cost incurred subject to site records, or will it be a ‘lump sum’ arrangement where payments will be made strictly based on agreed amount regardless of actual resources deployed.

The second method to calculate acceleration cost is premised on productivity cost. This method is suitable where the works are fairly repetitive and there are good records of works completed so far with corresponding payments incurred. By way of illustration of pipe laying infrastructure works, if the record shows that the contractor expended $300,000 to lay 1,000 metres of pipe over one month duration at Part A of the site and $100,000 to lay 1,000 metres of pipe over two months at Part B of the site, a productivity comparison could be made. If it could be established that Part A was able to achieve higher productivity due to additional resources deployed, it is indicative that the accelerative measure to expedite the same amount of works by one month would cost around the ball park figure of $200,000 (i.e. the difference between $300,000 and $100,000). This productivity cost method requires existence of reliable record for comparable scope of works. It also assumes that a linear comparison is possible in the absence of any delaying events occurring on any selected parts of the project. This calculation avoids the need to identify each and every additional resource that is required to execute the accelerative measures by blending the entire cost into productivity rate. It should be a faster way to derive the acceleration cost but requires parties’ agreement on various variables incorporated into the productivity rate.  

The third method is an incentive method where the Employer offers a lump sum to the contractor based on a percentage of the commercial benefit that the Employer may stand to gain if acceleration is achieved. This departs from the conventional way where the quotation is submitted by the contractor to the Employer and its consultant for assessment and negotiation. The contractor would decide whether it could achieve the advance completion date by utilising the lump sum offered. The drawback to this approach could be that the acceleration cost may not bear any correlation to the actual resources required to effect the accelerative measures. If the accelerated part of the works are subject to any excusable delays after entering into supplemental agreement, the Employer will continue to be liable for the agreed amount without actually accruing its corresponding benefit. The benefit to this approach is that it provides an immediate litmus test on whether the accelerative measures make commercial sense. If the acceleration cost way exceeds that financial benefit that the Employer stand to gain by advance completion, the entire negotiation could be aborted immediately as it will no longer make any sense. 

In reality, the three methods identified above are by no means exhaustive nor mutually exclusive. Parties are free to mix and match any of these methods for purposes of deriving the overall acceleration cost, depending on availability of documentation and basis of calculation. It should also be noted that the calculation of acceleration cost for purposes of supplemental agreement is quite different from advancing acceleration claims in case of dispute. In case of the latter, the claimant has the benefit of hindsight by providing the court/tribunal with the relevant cost of additional resources deployed by comparing the as built programme and as-planned programme. Such benefit of hindsight is not available when parties are looking to negotiate a prospective deal.

Conclusion

It should be clear at least in Part 1 of this article series that the supplemental agreement method should be strongly considered by the parties even if there are existing contract provisions that could accommodate instruction for acceleration. In Part 2 of this article series, there will be further examination on the subject of acceleration including commercial and logistical issues. In summary whilst certain existing contract provisions may be readily available for parties’ use with the advantage of expedience, the short term gain should always be balanced with potential long term costs.




Koon Tak Hong Consulting Private Limited