Prefabrication of modular units in construction projects refers to off site manufacturing of building modules (e.g. bedroom units, bathroom units) which are then assembled and installed on site. This method is casually described as “LEGO” method of construction where various building parts are installed on site as opposed to the traditional in situ construction where works are predominantly carried out on site from scratch. In Singapore, this off site manufacturing and on site assembly method is widely known as ‘prefabricated prefinished volumetric construction’ or PPVC. Whilst the benefits of PPVC are widely written in various literature of construction such as higher productivity and consistency in quality, this article examines PPVC from contractual and commercial perspectives of a contractor. Given the breadth of issues that this subject entails, this article is part 1 of a two-part series. In essence, these articles provide insights into how should a contractor evaluate the risk profile of a PPVC project if it decides to participate as a tenderer. What are the tender clarifications or qualifications that should be included or negotiated in order to protect its financial interest? 

One of the greatest distinction between PPVC project and other conventional project pertains to method of construction. By contrast the completed buildings under a PPVC methodology do not exhibit differentiating visual characteristics revealing its method of construction apart from minor detailing in construction joints. Notwithstanding that, the design development process of PPVC project undertaken by architect and engineering consultants has to accommodate and consider the practical aspects of the fabrication process. Much of the modular units are likely to be identical in design and be standardised in order to achieve the desired productivity level through repetition in fabrication. In this regard, part 3.1.2 of the Design for Manufacturing and Assembly (DfMA) which is a PPVC industry guide led by the Building And Construction Authority (BCA) of Singapore highlighted the need for early design coordination involving fabricators, builders and contractors. Where contractors are required to provide its construction and fabrication input during tender to facilitate design development, to what extent is the contractor deemed to have assumed design responsibility? To the extent that the main contractor and PPVC fabricator are separate and distinct entities, how should the design responsibilities, if any be structured and distributed in the contracting process? Additionally, if much of the fabrication and manufacturing works are performed off site, how do this arrangement affect progress payments and contractor’s cashflow? As significant amount of fabrication details have to be ironed out at the inception of the project, this may require a fast track subcontracting procurement process to ensure a holistic and inter-disciplinary coordination in both design and manufacturing. Traditionally, various nominated and domestic subcontractors are only engaged sometime after the award of main contract works. This may not be feasible if subcontractors’ input are required in advance in respect of fabrication and connections details. 

All the above issues are practical considerations that should be at the forefront of the mind of any commercial director driving the procurement strategy of a contracting firm. Ultimately, the decision on whether to adopt the PPVC method is made by the Employer or property developer which in part is also influenced by regulatory requirements. Whilst the contractor has a limited say on whether to adopt a PPVC approach for any given project, it is incumbent upon the contractor to address any contractual ramifications of any consequential PPVC approach. In doing so the contractor has to consider issues from the view point of a manufacturer or fabricator.

Design And Build / Design Development And Build

As mentioned earlier, the Design for Manufacturing and Assembly (DfMA) is a PPVC industry guide that contractors can refer to for all relevant subjects including procurement models. Under part 2.1 of this guide, it is proposed both Design and Build (D&B) or Design Development and Build (DDB) can be adopted for PPVC projects given the need to incorporate construction and fabrication details in the design development process. Early involvement of contractors and fabricators is almost inevitable to ensure that the design intent does not only include aesthetic consideration but also incorporate practical fabrication and on site installation details. So what are the specific design details that are required from fabricators and contractors for PPVC projects? A general understanding of these design and fabrication input may shed light on the extent to which design responsibility may be delegated from the design and engineering consultants to the contractor and fabricators. 

Whilst PPVC modular units are never intended to replace the functions of load bearing structural elements of a building e.g. beams, columns, slabs etc, these modular units have direct impact on structural integrity of the building as a whole. If any PPVC module experience an isolated or localised load stress, it has to be able to effectively transmit such load evenly and uniformly to the structural system to maintain its integrity and robustness. This in turn is dependent on the way in which the inter-module connections are designed including interfacing details. The overall idea is to avoid the collapse of one module to cause a domino effect on the adjacent modules resulting in complete structural failure. In other words, the design inputs from the contractors and fabricators are not merely pertaining to how the works are to be constructed but also maintaining the structural performance of the building. If the structural performance of the building is compromised, the fabrication and design details of the PPVC modules could be one of the points of causation. Apart from structural concerns, there are also other architectural design performance implications in respect of PPVC fabrication. For any given architectural floor layout, the extent of modularisation of PPVC will need to be undertaken to determine the types of modules, the number of modules and the percentage of total super-structural floor area for compliance with regulatory requirements. These efforts in turn will affect the economics of the development cost since the dimensions of modular units will establish the weight of the PPVC modules and its ability to be transported with certain freight trucks over a projected number of trips. Thereafter, the moulds required to be fabricated to facilitate the production of defined modular units will be determined as well. Within the modular units, other architectural details will be ironed such as water tightness between modules and positioning of shaft or openings where services are required to traverse through multiple modular units. Any architectural design that does not adequately consider the practical details in modularisation can have potential ripple effect on project including alignment of openings for services that runs through multiple modular units, inter-modular unit connections that in turn affects water tightness, sound insulations and fire compartmentalisation etc. Likewise the choice of architectural materials and finishes affects the weight of modular units which consequently implicates the transportation cost and construction timeline. Therefore the traditional delineation of design responsibility and workmanship responsibility is blurred because the feasibility of fabrication could end up driving the design development decision making process.

The common procurement route for PPVC project is therefore either D&B or DDB where the contractor holds design responsibilities in addition to its  usual workmanship responsibilities. Under D&B, the contractor provides a full design proposal based on a design brief that encapsulates the Employer’s requirements. In this regard, the entire spectrum of design process i.e. from initial concept design to detail design are produced by the contractor and submitted to the Employer for its evaluation and subsequent acceptance. On the other hand, DDB option involves a procurement route where the contractor develops detail design based on an initial concept design produced by the Employer through its architectural consultant. In this DDB approach, the contractor is usually required to also provide its full structural engineering as well as mechanical, electrical and plumbing (MEP) engineering design to support the requirements included in the initial concept design. 

Given the distinction between D&B and DDB, when participating in any tender for PPVC project, one ought to be satisfied that the choice of contract form matches the corresponding design responsibilities. Taking public sector procurement as an example, the PSSCOC for Construction Works and PSSCOC for Design & Build are typically used as the contract forms of choice. The former is meant for traditional design-bid-build whereas the latter is drafted for D&B. Although both contract forms have provisions dealing with design from the contractor under their respective Clause 6, the PSSCOC D&B evidently sets out a more extensive and onerous design responsibility. Under PSSCOC D&B, the contractor not merely has to be responsible for its design but also has to satisfy itself that any inadequacy, impracticability, insufficiency or unsuitability of the Employer’s requirements (and arguably its own concept design) has been addressed by the contractor’s design proposal. Therefore it is of paramount importance for the contractor to understand whether there is any residual design responsibility on the part of the Employer’s architectural consultant in the production of the initial concept design. If yes, how can particular conditions be introduced to make certain that such delineation is described appropriately. If the contractor is required to address and rectify any design deficiency included in the Employer’s requirement, it may result in fabrication details superseding concept design where necessary.

Payment For Material Off Site And Associated Risks

Under most conventional construction projects, there is a general reluctance on the part of the Employer to make payments for construction materials or goods that are off site for various reasons that will be elaborated later in this article. Therefore traditionally, payments are only made to the contractor either for materials that are already delivered to site or those that has been incorporated into the permanent construction works. Where payments are made for materials off site by exception, there are contractual safeguards in place to protect the Employer’s interest. As bulk of PPVC projects are fabricated, manufactured and assembled off site, payments for these modular units are almost inevitable for project cashflow purposes. However when the characteristics of PPVC projects are examined closer, some of these conventional concerns for off site payments are not quite applicable given the unique features of PPVC modular units.

So what are the reasons for generally not paying for construction materials off site? Firstly it is challenging to ensure that the ownership for off site materials that are paid by the Employer is transferred from the contractor to the Employer. By contrast, materials that are delivered to site or already incorporated into the permanent works do not have the same ownership concerns since these are by definition within the physical possession of the Employer. If the contractor goes into liquidation, there is a real concern that the paid off site materials may not be properly accounted and could end up being sold as part of the liquidation process. Alternatively, if the contractor had not made payment to its downstream supplier for the off site material concerned, there may be retention of title provisions in the supply contract where the ownership of the said material is not passed to the contractor until payment is made. Therefore the title of ownership to these materials could not be passed to the Employer by the contractor if the contractor do not have the relevant titles in the first place. It should also be noted that off site materials which are generic by nature e.g. cement, reinforcement bars, floor and wall finishes, are relatively liquid assets with considerable secondary market value that can be sold to other interested buyers. 

Secondly, it is challenging to distinguish a bag of cement assigned to Project A from another identical bag of cement assigned to Project B. Therefore, even if the ownership is passed to the Employer, it is physically challenging to identify materials that are paid and meant for the Employer as compared to other identical goods within the same storage area. Although some may proposed the use of vesting certificate to indicate the ownership for goods concerned, such measure may not be adequate if the storage of such materials are not secured. Given the collective reasons above, payment for materials off site is inherently risky and the enforcement mechanism is not entirely reliable. Notwithstanding that under the PSSCOC, Option Module B is available in case parties are inclined to have payments made for materials not delivered to site. However, it should be noted that even if such option is adopted, the amount certified for payment is subject to the discretion of the Superintending Officer. 

As mentioned earlier, the hesitations for off site materials payment may not be applicable for PPVC modular units because unlike general construction materials, PPVC modular units are highly bespoke for its intended project. It is almost impossible for a bespoke modular unit to be mistaken for other projects given the specific dimensions, choice of architectural finishes and the overall structural fit to its intended building system. Therefore, there is very limited secondary market value for such specific and bespoke modular units making it significantly less vulnerable to be subject to liquidation proceedings without the Employer’s knowledge. It should also be noted that most PPVC modules are heavy with weight of ranging from 25 to 40 ton and can only be handled with high capacity cranes that are limited in the market. The risk of it being misplaced from fabrication site is therefore reduced significantly. Given the observations above, it is incumbent upon the contractor to draw the distinctions of material off site payment risks during tender negotiation in order to secure the most favourable payment terms. Very often the presence of certain Option Modules or template agreements may shape the general understanding of certain concepts. These general templates are after all ‘general’ and may not be applicable under all circumstances.

Although the risks of ownership transfer and disposal of materials due to liquidation proceedings are considerably lower for PPVC units as compared to generic construction materials, there are still issues to be considered when negotiating payment terms. There ought to be a reasonable mechanism to ensure that payments commensurate with progress of work done. Based on a PPVC Information Kit (Revision 1.0 dated November 2019) published by the Building And Construction Authority, there are recommended payment arrangements that can be found in its part 4.2. Traditionally, quantum of payments are dependent on actual work done on site. However, when works are done off site which are executed under a fabrication and manufacturing model, the contractor may be in a better position to manage the speed of production. This is because the works are not affected by elements outside the contractor’s control such as inclement weather. Further, since the detail design are in the contractor’s realm of control due to either the D&B or DDB procurement pathway, contractor could expedite the progress of works considerably without waiting for issuance of construction drawings, consultants’ response to request for information etc. However, it may be vague to define what constitute percentage completion, say 50% of work done. In view of the above, the PPVC Information Kit proposes a milestone payment arrangement. Under this payment method, 30% shall be paid for completion of PPVC shell offsite, further 30% for completion of PPVC finishes offsite and final 40% payment upon on site installation of PPVC units. These percentages are with reference to quantum of PPVC cost included in the contract sum. 

Advance Payment Bond

Apart from ensuring a fair payment term for work done off site to facilitate project cashflow, it is equally important to secure an initial downpayment or advance payment where necessary. It is not uncommon for the Employer to accede to request for advance payment if it is credibly established that the contractor is expected to expend a significant capital outlay which is common for PPVC projects. The Employer would usually require an advance payment bond as a form of financial guarantee in return for such advance payment. Under the contract form of PSSCOC for construction works, the Option Module D is available for parties undertaking PPVC project with agreement for an advance payment. In short it provides a contractual mechanism governing the Employer’s right to call on the advance payment bond, the progressive clawing back of advance payment and also setting out the requirements to be fulfilled by the contractor prior to receiving its advance payment. 

How should a contractor assess the commercial viability of the proposed Option Module D? In essence, the benefit of such arrangement should outweigh the risks and costs associated with the provision of the stipulated bond. Based on part 4.2 of the PPVC Information Kit mentioned earlier, the common practice under public sector project is for advance payment amounting to 20% of the total PPVC cost subject to a maximum of 10% of the entire contract sum. The contractor ought to compare the interest cost of such amount based on say an overdraft facility or credit line with a bank relative to the cost of provision of an unconditional demand bond. As the banking relationship and financial credibility of every contractor with its bank differs, such comparison is fairly specific to the firm’s unique credit circumstances. Occasionally, banks may require its clients to place a fixed deposit for the sum stipulated in the unconditional bond as a form of collateral. In such a case, the risk and cost associated with securing an advance payment may outweigh its benefit. This is because the advance amount will be progressively clawed back based on an agreed series of tranches within a defined duration. In other words, the advance amount diminishes over such defined duration but the contractor’s cash collateral equivalent to the advance amount remain ‘frozen’ with its bank throughout the validity period of the bond. Under Option Module D, the bond shall remain valid for three months after the full recovery of advance payment amount. If the contractor has the relevant funds to fully cushion such arrangement, it may be better of utilising such funds for its working capital rather than requesting for an advance payment. Alternatively the contractor could negotiate for a more favourable claw back arrangement where it is done over an extended period of time which result in a smaller monthly recovery sum. If such arrangement could not be agreed, the contractor may also consider procuring an insurance bond in lieu of banker’s guarantee for the same financial guarantee. This is an acceptable alternative under Option Module D. Under the insurance bond, the contractor is required to pay an insurance premium that corresponds with its risk of default rather than having to put up a significant cash collateral with a bank.

Conclusion

In part 2 of this PPVC related article series, we will be examining other contractual issues from the contractor’s perspective such as subcontract procurement risk allocation, components of contract documents and construction programme. It is quite evident that PPVC projects require contractor to assess conventional contractual issues from a different lense. Traditionally, one formulates its position on various contractual issues based on case precedents and relevant commentary and legal literature. However there is still a limited number of PPVC related disputes at least available in the public domain. Until PPVC methodology progressively becomes main stream construction method, contractors should exercise vigilance and judgment from first principle i.e. back to basics. It also helps to have a healthy dose of skepticism on the use standard agreement templates. Most of these conventional templates are legacy of traditional construction method that may be commercially incongruent with the nuances of PPVC construction approach.




Koon Tak Hong Consulting Private Limited

Building Information Modelling or ‘BIM’ is a technology platform that is capable of generating 3D model of building or infrastructure for the purposes of construction project. Such digital model is intelligent and data rich where parties involved in the lifecycle of such project e.g. architect, engineers, contractors, surveyors, facility managers, regulatory authorities etc could access project related information, modify or update such information to enable collaboration. Apart from an enhanced visualisation of the building prior to getting constructed, such technology platform provides granular insights into the spatial dimensions, inter disciplinary coordination, schedule and sequence of construction methodology, progress of works, cost and cashflow etc. Given that the possibilities are rather limitless, it is currently supported by various softwares available in the market including Autodesk Revit, Navisworks, AutoCAD etc.

This article examines BIM from the perspective of main contractors and subcontractors under traditional design-bid-build procurement pathway as it relates to disputes and claims. Under such traditional procurement arrangement, contractors do not have any design responsibility and are generally required to build in accordance with the drawings produced by the project consultants. Since contract sums are derived based on drawings and specifications issued during tender, any deviations from original design that entitles additional payment and/or extension of time are rather self evident by means of visual comparison with construction drawings produced by the consultants. With the increase in adoption of BIM in various construction projects, contractors are expected to ‘work collaboratively’ with other parties in the project such as consultants, Employer’s representatives and its stakeholders using the prescribed software or under an open BIM platform. Very often working collaboratively involve providing input to BIM models which may then be relied upon by other parties. What are the digital safeguards available for avoidance of implicitly undertaking design responsibilities? Since all stakeholders are working based on an agreed digital model as opposed to each party producing their respective 2D drawings, will this inadvertently compromise a clear delineation of responsibilities? 

It is not uncommon to see contractors hiring BIM managers, BIM coordinators etc to support their projects. However are these contractor appointed BIM representatives in the best position to safeguard the contractor’s contractual interest? What should contractors be mindful of in its participation of BIM projects such that they can harness the productivity benefits whilst being alert of any unintended consequences relating to claims and disputes? By way of example, contractors are often required to produce combined services drawings and shop drawings in the course of construction so as to ensure that the routing of services do not physically clash on site and that the actual site dimensions are identified prior to manufacturing of certain building components for site installation. To this end, BIM can be of great help in that clash detection and spatial coordinations can be done digitally through the relevant 3D models and software functions. However, the resolution of clashes in layout of services often involve design development decision making that may require compromises to be made to the original design. These compromises include change in size or location of building structural elements (e.g. beams, slabs, columns), increase in false ceiling space which result in reduction in floor to ceiling height, checks against design codes clearances to ensure continuing compliance etc. BIM softwares could be efficient in that a modification in one aspect of the design automatically updates all other elements of the building design that are affected. To what extent is the contractor authorised to make those design developments decisions under traditional arrangement? Are these changes considered alternative proposals from the contractor? What are existing provisions under standard conditions that deal with such scenario? Can the ‘no objection’ from the relevant consultants be deemed as a tacit entitlement to additional payment or time? Should the contractor be actively seeking an ‘instruction’ from the contract administrator to regularise such automated digital design change? 

In essence the queries above are clarifications on how to avoid blurring the distinction between design responsibility and construction responsibility with the increase in digital collaboration under BIM. It is interesting to note that despite the increase in use of BIM in construction projects, there is yet any BIM specific provisions under standard conditions of contract to provide clarity on some of these difficult issues. Notwithstanding that, there is a recommended set of BIM Particular Conditions (2nd version published in August 2015) led by Building And Construction Authority (BCA) and its appointed BIM Steering Committee that can be incorporated in contracts for BIM projects. As these recommended particular conditions do not cover all issues related to BIM, users are still required to review and adapt these recommended provisions for their specific needs. In the next few sections of this article, some of the subtle and complex considerations arising from the use of BIM will be explored further from the contractor’s perspective. These include how BIM could be used to facilitate claims management and also best practices to avoid unintended claims and disputes consequences. These discussions can help to better inform contractors in case BIM related particular conditions are to be negotiated and adopted for its needs.

Who Should Hire BIM Manager?

As alluded to earlier, increase in collaboration should not cause reduction in clarity of roles and responsibilities. There should be a system or execution plan in place to maintain a credible historical record of all versions of BIM models including chronological list of inputs contributed by different parties. In case of conflicts or discrepancies on the choice of BIM models that shall take precedence, there must be an agreed method of reconciling such differences where all parties agree to be bound and comply with any outcome of a common method of resolution. As mentioned earlier, the BIM Particular Conditions (version 2) include clauses that provide governance structure to some of these critical BIM management issues. In essence the effectiveness of such governance structure not just depend on the clarity of rules but it is equally important to have such rules administered and enforced by an appropriately authorised individual with the relevant gravitas and hierarchical stature. To this end, Clause 1.5 of the BIM Particular Conditions specified that a BIM Manager shall have such responsibilities and will be appointed by the Employer. According to Clause 2.6.3 of the BIM Particular Conditions, any discrepancies between conflicting models shall be reported to the BIM Manager who shall facilitate resolution of the discrepancy. Further, Clause 3.1 states that the Employer shall appoint one or more such BIM Manager of which all compensation and related cost shall be paid by the Employer. In order to ensure that the BIM Manager is empowered, Clause 4.4 states that in the event of any disagreements on the terms of the BIM Execution Plan, the BIM Manager’s decision shall be final and conclusive. The BIM Manager shall report to and keep the Employer informed on all matters relating to the BIM Execution Plan which shall be updated from time to time. 

The benefits of BIM can only be harnessed based on the extent to which its governance structure can be enforced. To this end, having an appropriately qualified and duly authorised BIM Manager are of paramount importance. It is important to note that therefore the question of who should hire BIM Manager is not merely an human resource and payroll related decision but rather a strategic contractual decision. By way of illustration, if a BIM Manager is reduced to a mere clerical or administrative position, the governance structure could not be enforced effectively potentially nullifying the purported benefits of implementing BIM system. This is why the BIM Particular Conditions had rightly dedicated a significant part of its provisions to ensuring that the Employer, arguably the party with the most bargaining power and commercial leverage to be involved in the appointment of a BIM Manager. This in turn should ensure that its consultants and designers are not relieved from their design responsibilities and do not in any way obfuscate their design obligations from the contractors’ construction obligations. To this end, Clauses 2.4.1 and 2.4.2 underscore such existing contractual arrangements. 

Therefore when main contractors or subcontractors engage or hire BIM related positions for their respective firms e.g. BIM Managers, BIM Coordinator, BIM Modeller, they should ensure that any such personnels do not conflict or contradict with the said BIM Particular Conditions. It is not uncommon to see contractors seeking to hire BIM Managers with responsibilities that are described as follows (1) develop and lead BIM strategy for project in hand, (2) facilitate collaboration between project team members including consultants and stakeholders, (3) conduct regular quality control checks to ensure BIM models meet project requirements and industry standards etc. Assuming these descriptions are intentional, it may potentially conflict with the said governance structure that has been put in place by the BCA and its BIM Steering Committee. It should be noted that much of the BIM related modelling works and its governance set up are already in place prior to the appointment of main contractor and subcontractors. As an example, based on Circular issued jointly by BCA and Urban Redevelopment Authority (URA) dated 1 February 2023 (circular no: URA/PB/2023/01-DCG) all regulatory submissions made from June 2023 onwards shall progressively be required to be done through BIM format. In particular, new projects with Gross Floor Area exceeding 5000 m2 will need to use the openBIM standard. Therefore, the BIM is adopted for project in hand much earlier than any BIM Manager that may be hired by the main contractor. It is highly unlikely that such BIM Manager can belatedly put in a place a BIM execution plan and agree on BIM project standards retrospectively after its adoption months or even year earlier. It is never a wise strategy to put the cart before the horse. If the contractors are required to hire BIM personnels as part of their tender requirements, there should be clarity in scope of services such that the contractors are not expected to bite off more than what they can chew.

Detailed Design That Are Free Of Clashes/ Conflict In Layout of Services With Accurate Site Dimensions

BIM offers a potential breakthrough of a perennial problem that relates to contractors’ entitlement to accurate detailed design particularly with site dimensions and well coordinated layout of services. By way of background under traditional design-bid-build contract, the architect and engineer are required to provide the contractor with detailed design complete with dimensions and scale necessary for the contractors to proceed with its construction works. As an example, the SIA Building Contract 2016 specified under its Clause 3(2)(a) that the Architect shall further supply working drawings, specifications, details, levels or other information from time to time during construction period as may be necessary to amplify and explain in detail the works to be carried out by the contractor. Further, under Clause 19.1(d) of the PSSCOC (Eighth Edition July 2020), any change in the levels, lines, positions and dimensions of any part of the works shall deemed a variation. Therefore contract drawings from consultants should be provided with details and dimensions such that any difference from actual site condition is considered a variation. Notwithstanding that, it is also fairly common that contractors are often required to provide shop drawings prior to manufacturing of certain parts of the works where they are to verify actual dimensions and conditions on site prior to commencement of the works. It is also customary for the contractors to be required to include in its contract sum the cost of ‘wastages’ as a result of cutting of building supplies or finishes to accommodate the site conditions. Consequently, it is not uncommon for parties to dispute over which party should be responsible for the cost associated with ensuring that the actual works carried out on site conform with the site conditions. This situation is inherently vague because there are contract provisions that ‘by implication’ leaves any question of design, choice of material or workmanship to the contractors e.g. Clause 3(1)(a) of the said SIA Building Contract. 

Given the above, the risk allocation in respect of completeness of design details can be contentious and debatable. The ambiguity is exacerbated when contractors particularly those carrying out mechanical, electrical and plumbing works are often required to produce combined services drawings that coordinate the layout of services to ensure that these are free of conflicts or clashes in routing on site. Therefore, consultants regularly qualify that their design drawings merely communicate a set of performance based design intents that leaves the contractor with the latitude to comply these in any way it deems fit. However with the advent of BIM, 3D modelling appear to provide a digital solution to such perennial 2D problem. The Singapore BIM Guide (Version 2 dated August 2013) is drafted with joint collaboration of public sector and private enterprise partnership aims to provide clarity on the requirements of BIM usage at different stages of construction project. Whilst this document remains a ‘guide’, it is a useful document that sets out the standard practice and industry norm as it relates to roles and responsibilities for various project members when using BIM in a construction project. Contractors should therefore benchmark any tender conditions with the guidelines included in this document as a basis of negotiation. This guide apparently provide some instructive principles on the subject of site dimensions and coordination of layout of services. 

According to Architectural BIM Modelling Guideline included in Appendix C of the Singapore BIM Guide (Version 2), the modelling is structured in five distinct stages namely (a) Conceptual (b) Preliminary Design (c) Detailed Design (d) Construction (e) As Built. Under traditional design-bid-build pathway, contractors are generally responsible for stages after detailed design i.e. construction and as built. Under ‘Detailed Design’ where the output is for the production of tender documents, the general requirement is that all the architectural elements in the model uses actual or accurate dimensions and correct materials. Therefore, the tender documents issued to contractor should include architectural tender drawings that are complete with actual and accurate dimensions. In fairness, Clause 2.6.2 of the BIM Particular Conditions (2nd version) specifies that all dimensions in a model shall be verified on site where possible and applicable before commencing works on site. However, this can be construed as a task to be done on a case by case basis as required and may entitle contractors to additional compensation in case the dimensions provided by the consultants deviated from the site conditions. 

Section 4.7 of the BIM Modelling Guideline is also relevant in this regard. This section essentially provide a workflow of traditional design-bid-build model. Prior to engagement of contractors under pre-tender stage, design and tender documents are only prepared after all conflicts are resolved. Therefore, it raises the question of whether under BIM project, contractors should continue to produce 2D combined services drawings or should such conflict free layout of services be expected in tender drawings issued to contractors. Assuming project engineers and architectural consultants are reluctant to be responsible for the accuracy of the BIM software as it relates to its ability to provide accurate site dimensions and clash free drawings, it begs the question of why should the contractor be expected to rely on the very same BIM software? It should also be noted that under Section 3.4 of Singapore BIM Guide (Version 2), there is an express recognition that with the BIM adoption, design efforts will increase in the upfront phase of the project. Therefore BIM Steering Committee recommends a 5% increase in consultancy fee payment for design development at pre-tender stage that will be cushioned by a corresponding 5% reduction in fee previously allocated for construction administration stage. Therefore, it is reasonable to expect that the level of detail that are typically made available during construction phase can now be included in tender drawings that will be issued to tenderers.

BIM, Security of Payment Act and Claims Management

In Singapore, contractors’ entitlement to progress payments for construction work done is given a statutory force by the Security of Payment (SOP) Act. Any contractor that is financially aggrieved by not receiving progress payment within the prescribed time frame may apply for statutory adjudication under the SOP Act for a speedy and binding resolution of payment dispute. As the adjudication process follows a strict timeline, it is in the contractor’s interest as the claimant to support its adjudication application with incontrovertible evidence demonstrating work done that entitles progress payment. To this end, BIM may provide supplementary digital evidence in support of its payment claim. 

Under a project BIM Execution Plan that is jointly agreed by the Employer and all parties to the project, a digital 3D BIM model provides a baseline plan to measure progress of works throughout the construction period. Various building elements can have its details increased progressively in tandem with the progress of the construction works. There are certain BIM softwares that enable stakeholders across trades to update a central model as work progresses. Some of these progress tracking can be done in real time by having on site camera to support its monitoring function. These digital evidence can be helpful in statutory adjudication since it is in essence evidence from a technology platform that has been jointly agreed by the parties in its adoption and associated factual veracity. Under traditional non BIM payment adjudication application, claimant’s application are usually supported by progress reports, photographic evidence and site diaries. Very often these may be criticised as being self serving paper trails in that these are produced by the very same claimant. Having supplementary BIM digital evidence should address some of these criticism. Apart from having real time tracking of progress of works, it may also facilitate cross comparison against baseline programme to similarly provide an objective measurement of whether works carried out are in tandem with the agreed schedule. In case there are claims for extension of time due to certain events, the details of time impact of such event may also retrieved for further analysis. This in some ways may provide insights on whether any prolongation claims are factually justified.

Conclusion

There are various productivity related benefits associated with the adoption of BIM in construction projects. Contractors that are able to adapt and evolve stand to gain in various aspects of its claims administration and application as well. In the process of embracing BIM, contractors will be well served to be opportunistic on how it could ride the wave of digital disruptions.




Koon Tak Hong Consulting Private Limited

This is part 2 of a series of articles examining Singapore Infrastructure Dispute-Management Protocol (SIDP) from the contractor’s perspective. By way of context, SIDP is a set of procedures that govern the functions and authorities of Dispute Board (DB) in its disputes resolution role as regards construction projects above $500million in contract sum. The issues raised in this article are unique from the contractors’ perspective which may be helpful as regards any participation in tender or construction of SIDP projects.

To recap, part 1 of this series dealt with the importance of having a back to back arrangement with subcontractors as it relates to DB and how the Security of Payment (SOP) Act could be used within the dispute resolution functions of DB. In this regard, DB is a panel consist of one, two or three members whose role is to resolve and avoid construction disputes by way of either mediation, rendering of opinion or issuance of determination. Whilst the choice of mode of dispute resolution is decided by the parties, it is fair to say that parties in dispute are unlikely to agree on much including the mode of dispute resolution. In the absence of parties’ agreement, the DB will be authorised under SIDP to issue direction on the mode of dispute resolution. The choice of dispute resolution can be consequential because the DB’s opinion may be binding on an interim basis on the parties and the DB’s determination may be both binding and final which may not be subject to any review under future arbitration or litigation. As DB wears different hats under different circumstances, how the DB conducts itself and how should the parties interact with the DB will vary depending on the role that the DB plays. There is a fundamental distinction between the role of a mediator as compared to an adjudicator issuing determination. If such distinction is blurred during the parties’ interaction with the DB, the impartiality in the dispute resolution process may be compromised resulting in the determination outcome liable to being set aside. This will be examined further in this article. 

One of the unique features of construction contracts is the appointment of an independent certifier. This may be an Architect, Superintending Officer (SO), Engineer etc depending on the contract form used. An independent certifier issues certificate under the contract that in principle resolves dispute until such time parties choose to commence arbitration or litigation to finally determine those very disputes. In this regard, it appears that the certifier’s role may overlap significantly with that of DB. How should a contractor navigate the contractual terrain under SIDP project in view of the coexistence between certification regime and the DB’s dispute resolution function? These issues may have a direct implication on the way in which the contractor deals with its claims management procedures. Due to the multitude dispute resolution avenues provided for under the contract, it is quite common for standard forms of contract to include multi tier dispute resolution clauses that dictates both the sequence and choice of dispute resolution modes. It is of paramount importance to ensure the the functions of DB is not at odds with such multi tier dispute resolution clauses as it may directly affect the jurisdiction and authority of any state court, arbitrator or adjudicator. The issues raised above will be reviewed in further detail in the subsequent sections of this article.

Mediation vs Determination – Managing Conflict of Interest of Dispute Board

The case of Glencot Development and Design Ltd v Ben Barrett and Sons (Contractors) Ltd highlighted the inherent conflict or tension between the role of mediator and adjudicator. In this instance, the adjudicator who previously played the role of a mediator was found at least on prima facie basis to have failed the test of impartiality. This case is relevant to SIDP because the DB could potentially play the role of mediator and subsequently as adjudicator as regards any disputes between the parties. Not all attempt to mediate will result in a settlement. If the DB mediates a set of disputes between the parties that fail to result in a settlement agreement, there is no express rule under SIDP that prohibits the DB from acting as an adjudicator in future. In fact, one may argue that the provision under Article 7.3 of SIDP, is aimed at preserving as far as possible the impartiality and independence of DB to act as adjudicator in case mediation fails. Under this provision, the DB is required to conduct mediations only in joint sessions without private caucuses. All parties shall be present at all times to avoid the actual lack of impartiality or the perception of lack of impartiality on the part of the DB. 

So what exactly happens in mediation sessions that may affect the impartiality of the mediator? For mediation to be successful, the mediator may explore what are the areas of concessions as well as mandatory demands out of each party’s positions or demands. This is a necessary step for mediator to discover what may be the common grounds between the parties and what each party are willing to forgo in the spirit of conciliation and settlement. When a party discloses its areas of concessions, it may give rise to a few reactions. Whilst it may be a strategic decision rooted in pragmatic consideration, it may also be viewed as a sign that such demand was not true and authentic. It may implicitly indicate that the party was not entirely persuaded in the merit of its own claim. On the other hand, a party that is assertive with its demand may be viewed as being difficult, inflexible and lacks self reflection. Whilst making concessions are necessary ingredients to a successful mediation outcome, it may taint the perception of the strength of one’s case. On the other hand, any rigidity in position whilst preserves ones case may very well diminish the prospect of mediation settlement. 

Therefore some have quite validly argued that an adjudicator with insights into the case with its previous role as mediator may have its independence compromised. It will be challenging for an adjudicator to psychologically detached himself from the knowledge acquired previously as mediator and still be able to make a neutral determination purely based on the merit of each party’s claims. In fact under Article 6.4 of SIDP, the DB makes its opinion or determination not exclusively based on merit, but taking into consideration what may be appropriate based on the nature of the dispute so as to facilitate the performance of the contract or reduce the risk of disruption. In other words, project continuity is one of the key points of considerations. Given the circumstances, it is not entirely inconceivable for a DB to render an opinion or determination having considered the Employer’s points of concession (which was disclosed during mediation) in order for the contractor to be in a position to continue with the progress of works.

On the other hand, if one party has received majority of opinions or determinations not in its favour (perhaps rightly so) may understandably be reluctant to participate in mediation administered by the very same DB. Such party may be reluctant to disclose its areas of concessions on various aspects of its claims due to the lack of faith or trust in the process. Therefore, the historical positions of an adjudicator can potentially implicate its future role as mediator. 

Given the observations above, how should a contractor intellectually process its position as regards the DB’s duality in role? Firstly, the contractor has to appreciate that it is possible for issues subject to mediation to be resolved via DB’s determination. Therefore, notwithstanding the spirit of conciliation and settlement, contractor should be strategic in its approach to mediation. Under Article 7.2 of SIDP, each party under mediation shall submit to the DB a mediation summary which shall contain a brief statement of facts and the positions it takes in accordance with any directions issued by the DB. In any such submission of mediation summary, it will be useful to stick to the facts of its case rather than its opinion or subjective evaluation of the claims.  Parties are usually not expected to argue its case or advocate its position under mediation. All correspondence made during mediation should appropriately be labelled as being ‘without prejudice’. Finally, the counter party shall be kept in the loop as regards any correspondence with the mediator so as to avoid any perception of bias. This may affect any of the determination of the DB in case the mediation fails. 

Independent Certification vs Dispute Board

The SO under the PSSCOC is both an agent of the Employer as well as an independent certifier. Under common law, such certifier is required to discharge his certification function in an independent, impartial and neutral manner notwithstanding its simultaneous role as the agent of the Employer. The element of independence is necessary because much of the decisions made by the certifier involve subjects that are either already in dispute or at least has the propensity to turn into dispute. By way of example under Clause 35.1 of the eight edition of PSSCOC published in July 2020, if a dispute arises between the Employer and the contractor in relation to the contract or the execution of the works, it shall in the first place be referred to the SO in writing for his decision. Under Clause 35.1(2) such decision by the SO shall be binding on the parties until and unless either party require that the decision to be referred to arbitration. By way of further example, the independent certifier is expected to assess the contractor’s application for any extension of time where in most cases the project is already in delay and the contractor is likely to simultaneously claim for loss and expense due to events that are considered to have prevented the contractor from completing its works. The certificates issued by the independent certifier are decisions of the certifier based on his assessment of the facts surrounding the issues before him. 

According to the preamble of the SIDP, its procedures can be easily incorporated into any construction or infrastructure contract using the recommended standard clause. Therefore, it is fair to say that no major modification is expected to the existing standards conditions, including the provisions for the independent certification regime. Given the circumstances, how should one navigate the dispute resolution role of DB and the independent certification regime with the potential overlap in responsibilities? Assuming parties refer their disputes to the SO and the SO subsequently makes a decision under Clause 35.1(2) which shall be binding and final subject to any future reference to arbitration, can such decision be referred to the DB prior to arbitration? Does the DB has the power to override the SO’s decision by way of its own determination? 

The SIDP is presently silent on the hierarchy of authority between the SO and the DB. However, there are two opposing perspectives as to whether the DB is empowered to override any decisions made by the SO. One of the perspectives is that the DB’s authority is found under the contract and no further, much like the SO. However,  under Article 6.0 of the SIDP, the DB shall have the power to resolve ‘disputes’ via mediation, opinion or determination as the case may be. It should be noted, such power is not expressly extended to include any review of decisions or determinations already made by the SO. In other words, the DB’s function should not be viewed as one of legal appellate in authority. Since both the SO and DB are both ‘creatures of contract’, there is no reason to believe that a decision already made by the SO is subordinate to the DB. Likewise, any determination made by the DB (apart from opinion since it is non binding if objected in a timely manner by either party), shall not be subject to review by the SO. Whilst it is mandatory for the parties to refer their disputes to the SO pursuant to Clause 35.1 of the PSSOC, there is no such mandatory requirement as regards reference of dispute to the DB. Under Article 6 of the SIDP, difference or dispute ‘may’ be referred by any party by filing a referral of dispute. In other words, the DB’s involvement in dispute resolution is on a non mandatory basis. If indeed the intent was for the DB to review an SO’s decision, the reference of dispute to DB should have been mandatory as well, which is not the present case. By way of illustration, since the SO’s decision can be reviewed by an arbitral tribunal, the parties ‘shall’ refer all their disputes to be finally resolved under arbitration as well. 

An alternative perspective is that the DB is a dispute resolution mechanism that is agreed by the parties above and beyond a conventional construction contract with a pre-existing independent certification regime. In other words, had parties taken the position that an independent certification regime was sufficient for their dispute resolution requirements, there is no reason to further agree on the formation of DB under the SIDP. Under this alternative interpretation, any ‘dispute’ shall include disagreements between parties arising from differences in respect of decisions made by the SO. Further, it should be noted that whilst the determinations of the DB and decisions of the SO can be subject to review under subsequent arbitration, there are no express provisions that the SO’s decision shall exclusively be reviewed by an arbitrator. A decision by the SO shall be rendered within 30 days upon receipt of such reference by the parties. There are no express requirements on the breadth and extent of submissions expected from the parties to facilitate the SO’s decision making process. By contrast, the DB has the authority to issue directions pursuant to any proceedings for resolution via determination. Such direction may include duration that the DB requires to render its determination that could well exceed the 30 days prescribed for the SO. Under Article 13.2 of the SIDP, the DB shall have the power to require parties to among others, produce any documents or materials deemed relevant, convene hearings, decide on all procedural matters for such hearings, appoint experts, examine parties or witnesses called by the parties, issue procedural directions if any party fails to comply with any provisions of the protocol, determine any application for interim or provisional relief etc. It is clear that the procedural powers of the DB is comparable to that of a statutory adjudicator or tribunal under arbitration. It is unlikely that any determination made under such elaborate procedural framework could be viewed as being subordinate to an abbreviated reference of dispute to the SO. Finally it should noted that if either party fail to comply with any of the binding decisions made by the DB, the subsequent courts or arbitral tribunal shall have the power to summarily or by expedited procedure order enforcement of such decision under Article 10.2 of the SIDP. By contrast, such provision is not available for the decisions made by the SO. Therefore under this alternative perspective it appears that the DB’s decision has a higher degree of legal enforceability, suggesting that any differences arising from SO’s decision may be deemed a dispute before the DB. 

Multi-Tiered Dispute Resolution Clauses vs SIDP

Multi-tiered dispute resolution clauses can be commonly found in standard forms of construction contracts where parties are required to subject their disputes to an agreed sequence of steps prior to the final dispute resolution forum. Using the example in the preceding section of this article, parties under the PSSCOC shall firstly refer their disputes to the SO prior to any final reference of dispute to arbitration. Any party that prematurely commences an arbitral proceeding without fulfilling the prior agreed sequences of steps may breach the multi-tiered provision jeopardising the authority of the final arbitral tribunal. Any arbitral award rendered by a tribunal that lacks the necessary authority may have its award liable for being set aside. Therefore it is of paramount importance for parties to be clear whether the multitude dispute resolution avenues available constitute mandatory sequences of steps or purely voluntary options available for consideration. In this regard, if SIDP is adopted in a contract with pre-existing multi-tiered dispute resolution clauses, how can the DB work in tandem with such clause?

As mentioned in the preceding section of this article, Article 6.1 of the SIDP states that any dispute or difference ‘may’ be referred by any party to the DB which suggest that the involvement of DB in dispute resolution is not mandatory unless either party decides to make such reference on a voluntary basis. In other words, if both parties do not refer their dispute to the DB and proceeds with the mechanism under the existing multi-tiered dispute resolution clause, the jurisdiction of the final arbitral tribunal is unlikely to be compromised. Therefore, the DB constituted under SIDP is unlikely to be part of the pre-agreed sequences of steps prescribed under the multi-tiered dispute resolution clauses. However, if the DB is involved in a particular dispute and subsequently renders its determination, such decision shall be binding and final. Even if either party objects to such determination within 28 days upon receipt of such outcome, the determination continues to be binding but interim. It is interim in that such decision can be reviewed under arbitration if such is the final dispute resolution forum. Can such interim but binding outcome still be subject to the pre-existing multi-tiered dispute resolution clause? If yes, what if the SO makes a decision contrary to the DB’s determination? If the SO’s decision happens to be in favour of the Employer, departing from the DB’s determination previously made that was in favour of the contractor, it is entirely possible for the SO to be perceived as being biased. Therefore will the contractor’s refusal to participate in the SO’s decision making process be deemed as a breach of the multi-tiered dispute resolution clause? 

It is clear that under the hypothetical scenario above, the availability of multitude dispute resolution avenues may promote more disputes than it actually resolves any dispute. Parties should therefore be clear in the actual intention of DB’s role vis-a-vis any pre-existing multi-tiered dispute resolution provision.

Conclusion

From the discussions above, it is clear that any contractor that decides to address any of the SIDP negotiations with a ‘light touch’ may do so at its peril. It is both in the contractual and financial interests for the contractor to avoid expending legal fees in the midst of construction projects as that can be extremely draining to its cashflow. One should appreciate that dispute resolution provisions can be the very source of disputes if it lacks clarity that it deserves. It should also be noted that one of the clear and unique benefits of SIDP is that the DB’s overarching mission is avoidance of dispute as opposed to purely resolving disputes that had crystallised. At present, most if not all of the dispute resolution methodology resolves disputes as opposed to avoiding disputes. Therefore the overall effectiveness of SIDP should be viewed from the percentage of disputes that do not require escalation to arbitration (or litigation as the case may be), rather than making a like for like comparison with other conventional dispute resolution mechanism e.g. arbitration, litigation, mediation, adjudication etc.




Koon Tak Hong Consulting Private Limited

SIDP refers to Singapore Infrastructure Dispute-Management Protocol that was launched in 2018. It is a set of procedures that defines the role and authority of Dispute Board (DB) as regards construction projects above $500million in contract sum. This article examines SIDP from the contractor’s perspective and is part one of a two part series. Whilst it is true that contracting parties are free to negotiate terms and conditions, the bargaining power is not exactly equal between the Employer and contractor. Any contractor that rejects SIDP included in tender conditions risks submitting a non compliant tender. Therefore contractor should appreciate the mechanics behind SIDP and try to make it work based on its commercial interest. The principles discussed in this article are applicable to other types of DB under various international standard conditions of contract. The concept of DB was introduced as early as 1999 under FIDIC forms of contract and has since been adopted by other suites of contract form such as JCT, NEC etc. Whilst not all DB are identical, they share some core principles which is the establishment of a board or panel comprising one, two or three members during the inception of the project to assist parties in resolving their disputes as early as possible under various modes namely mediation, adjudication, issuance of opinions etc. 

SIDP is particularly interesting in the context of Singapore, where the local contract forms such as SIA Building Contract, PSSCOC, REDAS Form etc as well as the local legislation of Security of Payment (SOP) Act already offer certain dispute resolution features that can be found in the function of DB under SIDP. However one of the unique features of DB under SIDP is that it is established at the inception of the project usually before any dispute has arisen, with relatively more intimate knowledge of the project as compared to say a third party adjudicator, arbitrator or mediator under alternative dispute resolution. Notwithstanding that, it is incumbent upon the contractor to understand how to navigate the dispute resolution terrain since any adoption of SIDP does not override the existing dispute resolution regimes. Under the preamble of SIDP, it is stated that the SIDP can be easily incorporated into any construction or infrastructure contract using the recommended standard SIDP clause. Therefore, no major or extensive modification is expected to the existing contract forms with any adoption of SIDP. From the contractor’s stand point, it is worth examining how its rights and obligations under existing dispute resolution provisions e.g. arbitration clauses, SOP adjudication regimes, certification by independent certifier etc could exist harmoniously with the roles and functions of an DB under SIDP. By way of example, if a payment dispute is “resolved” by the DB, is the contractor still entitled to refer such payment dispute to an adjudicator under SOP regime if it continues to perceive as being aggrieved? If there is no contracting out of SOP Act due to its mandatory legislative force, what is the purpose of DB? The same question can be asked in respect of other provisions such as arbitration, mediation etc. Finally, if and when a determination is made by the DB under the main contract, does it have the same effect on the corresponding subcontract? By way of example if the DB makes a finding in favour of the Employer’s position that certain curtain wall facade panel was non compliant with the specification, can such finding be similarly imposed on the curtain wall facade nominated subcontractor? Or should the main contractor re-litigate the same issue under its subcontract?

This article attempts to deal with the above mentioned issues from a practical perspective so that contractors can have a better handle of its claims management procedure under SIDP project. Whilst there may be no absolute definitive answers to some of these questions, such discussion can hopefully illuminate the nuances of the pertinent issues.

Back To Back Arrangement With Subcontractors

For large construction or infrastructure projects exceeding $500million in contract sum, it is almost certain that the main contractor will have to outsource part of the works to subcontractors. The choice of subcontractor can be imposed on the main contractor by the Employer in the case of nominated subcontractor or out of the main contractor’s own volition in the case of domestic subcontractor. Therefore if dispute arises in any given trade of works undertaken by certain subcontractor, it materially affects at least three parties namely the Employer, main contractor and the relevant subcontractor. By way of example, if there are issues with certain curtain wall facade panel in a construction project, it directly implicates the main contractor and curtain wall subcontractor. To the extent that such issue is causing delay to the overall main contract completion date, the Employer is implicated as well. Occasionally, the delay in curtain wall facade works may have flow on effect to other subsequent trades of works such as internal wall and floor finishes which are usually carried out after the curtain wall is completely installed to ensure a weatherproof internal building environment. Therefore, those subcontractors carrying out the subsequent trades could be implicated too. In other words, disputes can rarely be ring fenced or compartmentalised in the context of construction projects.

Given the potential ripple effect of any given dispute, how should a main contractor cascade the main contract dispute outcome by the DB to other relevant subcontractor(s)? Framing the same issue differently, how should the main contractor avoid a scenario where it faces different dispute outcomes arising out of the same set of facts? By way of illustration, what if the DB makes a determination in favour of the Employer whereas the arbitrator appointed under the subcontract makes a finding in favour of the subcontractor? To be fair, the issue of ensuring consistency in dispute outcome between main contract and subcontract has been a perennial problem even before the introduction of DB. To this end, subcontract conditions usually include certain clauses whereby the subcontractor shall indemnify the main contractor in so far as the provisions under the main contract relate and apply to the subcontract works. Further, the main contractor and subcontractor ‘shall use their best endeavours’ to secure the appointment of the same arbitrator to decide on dispute under the subcontract if such arbitrator had already been appointed to determine certain disputes under the main contract where some or all of the matters in dispute arise out of the same facts. At present moment, it appears that the jurisdiction of DB under SIDP is confined within main contract. Whilst the usual back to back provisions can be found in the subcontract, those provisions are only applicable if the subcontractor is found to be liable for certain breaches that expose the main contractor to the Employer correspondingly. Those provisions are silent on the extent to which subcontractors are expected to participate in the dispute resolution process of the DB under the main contract. In the absence of reasonable participation and representation by the subcontractor, can the DB’s finding against the main contractor be construed as a corresponding finding against the subcontractor?

Apart from the practical difficulties in enforcing a back to back dispute resolution provision, the DB approach may have an additional challenge in that the mode of dispute resolution are subject to the parties’ agreement. Under Article 6.2 of SIDP there are generally three different modes available namely mediation, determination and opinion. Firstly, the DB can resolve dispute via mediation in which case the parties have to arrive at a unanimous consensus on a mediation settlement agreement which will be facilitated by the DB that acts as mediator. Alternatively, DB can render a determination on disputes much like an adjudicator where parts of such determination that are not challenged by either party is final. The part of determination that is contested may be reviewed under arbitration or litigation as the case may be.  Finally, DB may issue an opinion on the disputes where parts of such opinion that is not objected shall be binding but not final. The parts that are objected are non binding, which means the disputes remain alive. If parties are unable to agree on the mode of dispute resolution, the DB shall proceed to issue direction to the parties as to the mode of resolving the disputes. 

According to Article 6.4, the DB shall decide based on the nature of dispute which would facilitate the performance of the contract or reduce the risk of disruption to the project. Therefore DB is not necessarily deciding exclusively based on substantive merit but rather based on the interest of project continuity. There are a few observations that can be gleaned from the facts set out above. Firstly, it is unclear the extent to which the subcontractor may have a role to play in the decision making process as regards the choice of mode of resolving dispute. If and when dispute arises, it is quite possible that parties are unable to agree on the mode of dispute resolution. This is because, the party which believe that its case is complex and should be dealt with more thoroughly under arbitration or litigation may elect the mode of mediation so as to “buy time”. Therefore one should not be surprise that ultimately the DB may end up making most of the decisions on the mode of dispute resolution. Since DB’s decision making process is based on facilitating performance of the contract and reducing risk of disruption, it will be counter intuitive to impose crushing determination on the main contractor in terms of hefty damages. Since most of the construction works are essentially carried out by the subcontractors, they are one of the key stakeholders in so far as project continuity is concern. It is in the main contractor’s interest to ensure that certain mechanism is included in the subcontract conditions to ensure the subcontractor’s participation in process of DB’s dispute resolution. In the case of nominated subcontract, the Employer similarly has a role to play since the choice of such subcontractor is made exclusively by the Employer. If the DB renders an opinion that is objected by either party under the main contract resulting in such dispute remaining alive, such outcome is of no utility to the subcontractor if its payment continue to be withheld assuming the dispute apply to certain subcontract works. Under such a case, the subcontractor may prefer to rely on its statutory rights for payments under SOP Act. Therefore it is critical to understand how the adjudication regime under SOP Act can function harmoniously with the role of DB under SIDP, which will be examined further in the next section of this article. 

SIDP And Security of Payment Act – Reference of Payment Disputes

As a matter of general comparison, DB’s ‘opinion’ most resemble statutory adjudicator’s ‘determination’. These dispute resolutions are designed as interim outcome that is binding. The associated findings can be reviewed under subsequent arbitration or litigation. Whilst DB also has ‘determination’ as one of the three dispute resolution modes, it is different from the SOP adjudication ‘determination’, in that the former can be final and not be subject to review if such determination is not objected within 28 days of receipt by the parties. Once the parts of determination by DB is final, any future arbitral tribunal or state court shall have the power to enforce such determination summarily or by expedited procedure. 

Pursuant to Article 14 of the SIDP, the parties are not allowed to contract out of SOP Act and that any actions commenced with the DB shall be subject to the provisions of the applicable SOP legislation. However Article 14.1 of SIDP entitles the parties to pursue actions under both SIDP and SOP Act concurrently. If SOP adjudication takes precedence over DB’s dispute outcome, what could be the incentive for referring disputes to the DB? One of the possible incentives could be the fact that SOP’s adjudication is designed to exclusively address disputes over progress payment for work done as opposed to complex claims relating to damages, loss or expense. This is expressly stipulated under Section 17(3) of the SOP Act. In reality disputes over payment for work done is merely a component of the overall scope of dispute that could emanate from the same set of facts. By way of example, if parties dispute over whether curtain wall panels installed on site are compliant with the specifications, such dispute can give rise to claims over multiple fronts. Whilst the contractor may pursue payment for work done which would traditionally fall within the ambit of SOP Act, there may well be other more complex issues such as delay and disruption to the project giving rise to claims for extension of time, liquidated damages, loss and expense etc. Further, expert evidence may be warranted as it relates to the interpretation of the curtain wall specification and any laboratory testing of parts of the facade panels in issue. The quantum of claims of these relatively complex issues could eclipse the quantum of claims for payment for work done. These complex claims are not meant to be adjudicated within the strict timelines of statutory adjudication. As a general rule, statutory adjudicator has 14 days to render a determination from the commencement of the proceedings. Therefore even if the contractor is able to refer its payment claim issue under SOP adjudication, the interim outcome of such determination meant that there could be cross claims in future from the Employer on those very same issues under arbitration or litigation. The contractor may also have related loss and expense and extension of time disputes pending determination. Statutory adjudicator are neutral third party with no prior knowledge of the project and therefore are not expected to delve into the intricacies of complex issues within the procedural time limits. By contrast, the DB is expected to have more intimate knowledge of the project prior to any dispute. This institutional knowledge is built cumulatively through series of DB meetings and site visits scheduled in consultation with the parties at the inception of the project as provided for under Article 4 of the SIDP. Therefore DB should be better equipped to have the issues resolved with the appropriate context and background efficiently. Therefore it is entirely possible for a contractor to refer payment disputes for work done to a statutory adjudicator and to have the remaining complex issues referred to the DB. If the contractor obtains a favourable determination from the DB and faces difficulties in its enforcement, the SOP regime has provisions to assist through its statutory force. This will be further elaborated in the next section of this article. 

SIDP And Security of Payment Act – Complex Damages Related Disputes

As alluded to in the preceding section of this article, under Section 17(3) of the SOP Act the adjudicator must disregard any part of payment claim or payment response that relates to damage, loss or expense. These are the types of complex damages claims that are more appropriately resolved without the constraints of strict timelines under SOP regime. However, there are two exceptions found under the same section of the SOP Act. Adjudicator may consider complex claim if it is supported by (1) any document showing agreement between the parties on the quantum of such claim or (2) any certificate or other document that is required to be issued under the contract. Under the first category of exception, where DB facilitated a mediation settlement agreement and the contractor continue to face issues with respect to payment, the mediation agreement can be included in SOP adjudication for purposes of enforcement. Under the second category of exception, any opinion or determination rendered by the DB which are not objected in a timely manner can also be deemed as ‘document that is required to be issued under the contract’ since the DB is empowered under the contract. Therefore, if a contractor wishes to pursue claims beyond the confines of payment for work done, it can do so through the DB which is arguably more equipped with the background knowledge and efficiency than say a third party adjudicator.  The determination or opinion from the DB can then be channeled through the SOP route for enforcement. 

However some may argue that if the dispute outcome rendered by the DB is not in the Employer’s favour, and the sum implicated under such complex claim is usually large, one should not be surprise if the dispute outcome is objected swiftly by the Employer. Therefore, in practical terms the contractor’s ability to rely on SOP adjudication may be challenging. 

Notwithstanding the limitations arising from practical realities illustrated above, one may appreciate that perhaps the value in having issues and disputes resolved (or at least in attempt) in advance via DB is by inducing parties to dedicate resources to focus on the problematic issues as early as possible. Very often disputes are not appropriately framed or sufficiently crystallised without adequate dedication and attention. SIDP creates a structured environment to enable this to happen. That is perhaps why it is not uncommon to find parties to be in a position to negotiate and settle only after commencement of legal proceedings such as arbitration or litigation. It is through a structured proceedings that are made available under DB that parties are able to refine and distill what would be a discrete list of issues that underpin the scope of dispute. Once the issues are particularised, it allow parties to make reality check on its true position on matters in dispute. Very often rank and file personnel dealing with disputes on a daily basis may lack the executive decision making authority. Having a structured dispute resolution environment enables issues to be crystallised and clarity invariably emerges with the appropriate involvement by senior management. Clarity of thought is often under appreciated in dispute resolution.

Conclusion

This article which is part 1 of reviewing DB of SIDP from the contractor’s perspective raises some interesting observations that could be helpful during tender negotiations. Main contractor ought to be aware that since most of the actual construction works are carried out by its subcontractors, any potential back to back arrangements on SIDP provisions with subcontractors are necessary for project continuity. Therefore it is incumbent upon the main contractor to ensure that its subcontract agreement are drafted accordingly  particularly when it is instructed on nominated subcontract. Secondly the DB’s dispute resolution role could operate in sync with statutory adjudication under the SOP Act with the right level of understanding. In navigating SIDP projects, main contractor should be conscious of the need to administer its contract quite differently from other conventional project. There are further interesting SIDP related issues that will be examined under part 2 of this article series.



Koon Tak Hong Consulting Private Limited

This article examines Security of Payment (SOP) Act from an adjudicator’s perspective. In two preceding articles relating to SOP Act published on this website, the perspectives of both claimant and respondent were similarly examined to highlight issues that are unique from each contesting party’s perspective. By way of context, the SOP Act aims to facilitate cash flow in construction industry by instituting statutory adjudication regime to swiftly determine payment disputes, albeit on an interim basis. Several key characteristics of this legislation such as its time sensitive adjudication procedures and exclusion of complex damages claims can significantly affect the adjudicator’s jurisdiction. Consequently, adjudicators are expected to strike a balance between observing rules of natural justice by affording parties reasonable opportunities to be heard whilst presiding the adjudication proceedings based on strict time frames. This in turn requires the adjudicator to be adept in navigating payment claims and swiftly identifying key issues that require determinations. As this can be challenging particularly for those from non quantity surveying background, the next section of this article will provide some useful pointers and insights. 

Traditionally, dispute resolution proceedings such as arbitration or litigation incorporate fairly elaborate procedural steps designed to assist the arbitrator or judge to identify key issues for determinations and define the scope of disputes. These steps include amongst others, submission of pleading documents, establishment of terms of reference, discovery of documents that may be relevant to parties’ pleaded positions etc. These steps may take months to complete but are necessary to avoid straying beyond the scope of disputes. Notwithstanding these procedural steps, it is fairly common for disputing parties not only to disagree on the merit of substantive issues but also to differ on the list of issues that require determination. Therefore it can be even more challenging for an adjudicator to navigate these very same dispute terrain without the assistance of the above mentioned procedural steps. This article aims to elaborate further on these procedural challenges from an adjudicator’s perspective. Some may argue that these concerns ought to be balanced with the fact that adjudication determinations are of temporary finality. Notwithstanding the interim nature of adjudication determination, it is not uncommon for dissatisfied party to expend precious resources to pursue legal action in an effort to set aside determinations that are perceived to be in issue.

Immediate Priorities When Deciphering Payment Claims Disputes

Under arbitration or litigation, the claimant’s claims are found in pleading documents such as statement of claims and its statement of reply to defence and counter claim, if any. The claims are typically presented in a written narrative format supported by material facts. By contrast, payment claim which set out the claimant’s positions under adjudication are essentially organised as figures populated in a table or schedule with abbreviated annotations or descriptions. Payment claims are not commonly prepared in a manner intended to be placed before a third party adjudicator under a legal proceeding where disputes have crystallised. Therefore as an adjudicator from non quantity surveying background, there are some best practices and useful pointers that may be considered when identifying the “issues” from a payment claim. 

First and foremost, the primary issues can be distilled by identifying the difference between amount claimed and responded amount, focusing on key areas that contributed to such difference, namely the “big ticket items”. As payment claims are almost identical to pricing schedule in contract document, it is essentially a breakdown of the contract sum divided into various sections. The first section is usually reserved for ‘preliminaries and general’ whilst the remaining sections are the direct costs of the construction works which may be organised by different geographical locations or parts of the construction works. The format of payment response mirrors the breakdown of payment claims. Assuming the claimant was in receipt of a payment response and disputes the responded amount, the payment response document alone should provide a cross comparison between claimed amount and responded amount which in turn usually produce an immediate insight into the key payment issues in dispute. Whilst an adjudicator could rely on parties’ submissions to understand the gist of the payment issues in dispute, each contesting party is likely to only highlight areas that advantageous to their case. Therefore, it is entirely possible that parties may not be able to join issues. Therefore an independent assessment on key reasons why payments are withheld is a useful starting point from an adjudicator’s perspective. It is also worth noting that the adjudicator is expected to render its adjudication typically within 14 days from the commencement of the adjudication proceedings. Therefore it may be more efficient for the adjudicator to first appreciate the key issues based on payment claims and payment response and thereafter request parties to provide their comments on those identified issues where necessary. 

Payment issues typically arise where claimed amount exceeds responded amount significantly. Occasionally this could occur only after taking into consideration set off initiated by the respondent. Assuming set off is not part of the payment issue, the adjudicator ought to identify the key difference between amount claimed and responded amount. Such key difference can generally emanate from the following broad categories: (1) direct costs of construction works, (2) variations, (3) indirect or overhead costs of construction i.e. ‘preliminaries and general’. As regards (1) direct costs of construction works, parties are likely to dispute over two main reasons namely the actual quantity of work done on site or differences in respect of whether work done was in compliant with the contractual specifications. As regards (2) variations, parties are likely to dispute over whether certain works qualify as variations based on definition under the contract, valuation methods of variation works or quantity of varied works. As regards (3) indirect construction costs or preliminaries costs, parties are likely to dispute over whether certain documents that entitles payments were properly submitted (e.g. performance bond, construction insurance, programmes) or payments were claimed based on agreed progressive disbursement mechanism, if any. If set off or cross claim are part of the reasons for withholding payment, the conditions under Section 17(3) of SOP Act can be referred to where there is a requirement of agreement of quantum on such cross claim or certification under the contract. 

Whilst the above are not exhaustive of the nature of payment issues that could arise between the parties, it provides a useful mental mind map for an adjudicator to navigate payment claims swiftly and proactively seek clarification from the parties. This is crucial to operating within the tight time frame prescribed within the adjudication regime.

Natural Justice And Conduct Of Proceedings Of Adjudication

Adjudicator is often alive to the fact that it is not expected to provide the level of analysis on questions of fact or law as often expected in a full curial hearing. Adjudication has been described as a ‘rough and ready justice’ since the determination is an interim outcome. The aggrieved party is not prevented from having its case fully and finally reviewed under arbitration or litigation as the case may be. Therefore, there may be certain payment disputes with underlying issues that are less likely to be finally determined within the timeline constraints imposed on the adjudication process. Given these realities, adjudication determination are unlikely to be set aside by the court on the basis of the merit of the findings or the reasoning underlying the adjudicator’s determination. Adjudication determination however is likely to be set aside if the determined issues fall outside the adjudicator’s jurisdiction or the conduct of the proceedings was defective. Under full curial hearing such as arbitration or litigation, there are procedural rules that act as guard rail to minimise the likelihood of these occurrences. These very procedural rules however are not suitable under adjudication given the timeline constraints.

Under most arbitration institution rules, disputing parties are firstly given opportunities to establish their claims, defences and counter claims (if any) through exchange of pleading documents. The main purpose is to define the material facts of issues in dispute, and consequently the scope of the tribunal’s jurisdiction. Out of abundance of caution, the tribunal and the disputing parties would jointly agree on the scope of dispute by the formalisation of terms of reference. The subsequent phase of document discovery is strictly done based on relevance to the issues in dispute which then sets the foundation for subsequent production of witness statements and expert reports (if any). The methodical procedural sequences are necessary to provide clarity to the tribunal’s jurisdiction as well as avoidance of any allegation of proceedings being conducted in a defective manner. By contrast, adjudication proceedings commence with the claimant filing its adjudication application based on a prescribed format. The adjudication application primarily consist of the payment claim in dispute with attachments of relevant supporting document such as extracts of relevant contract terms and conditions, payment response received (if any), expert reports, photographs etc. The adjudication response from the respondent follows a similar format. Therefore, the material facts of issues in dispute, factual evidence, expert evidence and legal submissions (if any) are bundled and submitted in an upfront manner all at once, as opposed to sequentially via multiple procedural steps. It is important to note that under this bundled approach, evidence is adduced prior to parties agreeing what exactly are the issues in dispute, apart from the obvious fact that payment is withheld. The identification of issues are often more complex and nuanced as it reveals the primary reason as to why payment is withheld. Such issues can be question of fact (e.g. whether works were done) or question of law (e.g. how should certain conditions or specification be interpreted) or even a blend of both. This will be further elaborated in the next section of this article.

Despite the temporary finality nature of adjudication determinations, most adjudicators are understandably concern if their determinations are vulnerable to being set aside. Therefore, the need for clarity in scope of jurisdiction and ensuring probity in conduct of proceedings remained matters of paramount concern. By way of example, whilst the payment claim in issue had been issued to the respondent reasonably in advance prior to commencement of adjudication proceedings, the claimant’s reliance on relevant contract terms and conditions including its arguments in support of its claims are only disclosed to the respondent in the adjudication application. As mentioned earlier, payment claims are usually schedules or tables with figures populated therein which may include abbreviated annotations or brief explanatory notes. These are usually not prepared with the intention of being placed before an adjudicator within the context of legal proceedings. The respondent is required to submit its adjudication response within 7 days after being served such adjudication application. If the claimant includes an expert report to its application, the respondent may be motivated to issue its own “counter” expert report as well but within the 7 days time frame. The adjudicator has 14 days to render its adjudication regardless of the sum in dispute or the number of issues that may be involved. Whilst the adjudicator is authorised to extend the adjudication period beyond the said 14 days, this is subject to agreement by both contesting parties. Such unanimous agreement is rare particularly when parties are already in an acrimonious relationship. 

In view of the above, it is likely that the respondent may request for a time extension since Code of Conduct For Adjudicators (Rule 5 of 5th Edition dated 15 December 2019) states that the adjudicator shall ensure that the parties have a reasonable opportunity to address all matters. In all fairness, the respondent under this hypothetical scenario is unlikely to be able to commission an expert and to produce a corresponding report within those time constraints. In other words, whilst the adjudicator’s reasoning in its determination is not likely to be the cause of a setting aside application, how time extension applications are handled is at the root of natural justice and probity of conduct of proceedings. This is because the respondent may be able to argue, quite validly that it did not have reasonable opportunity to address all allegations made. On the other hand, a claimant could have commissioned an expert, much earlier to produce a report on certain matters included in its payment claim that is likely to be contentious. It is not uncommon for standard form of construction contract to have provision that prevents either party from commencing arbitration until the works achieved practical completion. Further under Section 17(7) of SOP Act, any future adjudicator must have regard of the value of disputed works determined in previous determinations. Therefore, the financial effects of an adjudication determination is not insignificant especially under a multi year project. Further, any future arbitration may take more than a year or longer to conclude. Therefore, although an adjudication determination is expected to be ‘rough and ready’, its implications can be enduring.

Although Section 17(3) of SOP Act excludes complex damages related claims from adjudication regime, there are certain claims associated with work done that may be complex as well. This could arise if parties dispute over whether certain works were done in accordance with specifications resulting in payments being withheld. These disputes may involve interpretation of technical specifications that could entail expert evidence such as on the subject of geology, civil foundation works, curtain wall facade works etc. Occasionally these expert reports may involve extraction of sample for laboratory testing. Clearly whilst these issues are claims relating to payment for work done, the relevant arguments from both parties can hardly be ventilated within the 14 days time frame, which is inclusive of the duration for the adjudicator to render its determination. Therefore the adjudicator could metaphorically be walking on thin ice in balancing rules of natural justice and complying with timeline constraints. 

Crystallisation of Issues And Scope of Adjudicator’s Jurisdiction

When respondent disputes amount claimed by the claimant for certain scope of works, the ‘responses’ or reasons behind withholding of payment are usually brief and abbreviated. This is primarily because payment response and payment claim are typically structured in a table or schedule format rather than a written submission meant for legal proceedings. Examples of such abbreviated reasons include ‘work not done’, ‘work rejected’, ‘difference in quantity’, ‘defects’ etc. Therefore it is unclear at least from a legal perspective what specifically is the issue or issues between the parties. When navigating disputes there is a need to distinguish cause and effect. Withholding of payment is usually the consequence or effect of certain causes which formed the underlying issue. By way of illustration, one of the possible issue could be that the parties differ on the quantity of work actually executed on site which relates to a question of fact. Alternatively, the parties may well differ on what constitute ‘work done’ i.e. how should the specification be construed or interpreted, which in turn is a question of law. Either case, the outcome is the same i.e. parties differ whether compliant work is actually performed on site. The crystallisation of issue however is of paramount importance for an adjudicator because under Section 17(2) of SOP Act, an adjudicator must in relation to an adjudication application determine, amongst others reasons in its determination. The adjudicator’s reasoning is primarily influenced by his ability to effectively identify the underlying issues. If the adjudicator fails to appreciate the real issue in contention, its reasons will be particularly revealing. In this regard, the adjudicator may be alleged to be acting outside its jurisdiction by failing to determine actual issues in dispute. This could result in the determination being set aside. 

Unfortunately, even the disputing parties may take some time to crystallise the actual issues in dispute. Through exchange of pleading documents between the disputing parties, they may subsequently be able join issues. With reference to the earlier example of differing reasons for withholding payment, let us assume that payments were withheld for building facade curtain wall works. Abbreviated reasons were included in payment response that understandably lacks the particularity necessary for legal proceedings. Suppose the claimant initiates an adjudication application and include in its submission relevant progress reports as well as photographs of curtain wall completed on site. The adjudication response that ensue included allegation that the curtain wall installed on site were not in compliance with the specifications prescribed. Upon commencement of the 14-day adjudication proceedings, the adjudicator may be confronted with a conundrum. On one hand, the adjudicator could make a determination in favour of the claimant based on finding of fact that the curtain wall panels were indeed installed on site by relying on progress report submitted. On the other hand, the adjudicator may determined that since the claimant did not challenge the respondent’s allegation of works done being non compliant with specification, he may arrive at a finding in favour of the respondent. In either case, whether the adjudicator rules in favour of the claimant or respondent it runs a real risk of not affording the other party reasonable opportunity to be heard. This is because issues may not have been sufficiently crystallised prior to commencement of adjudication but parties are expected to bundle all its issues and evidence at the very beginning of the proceedings.

In reality if not for the time constraints confronting the adjudicator, the adjudicator would ordinarily grant additional time for parties to respond or address allegations made in order to crystallise the issues in dispute. The claimant could be given time to address whether it had duly complied with the specifications in issue and if so what is its interpretation of the specifications concerned. If the parties actually differ on the interpretation of specifications and such differences are technical in nature, parties may be at liberty to adduce expert reports based on a defined set of expert issues. These procedural steps are necessary in ensuring rules of natural justice are observed but may be challenging given the procedural time constraints. In this regard, the procedural time constraints may have a tangible impact on the jurisdiction of the adjudicator. Therefore whether a determination lacks the necessary reasoning and substantive analysis or whether rules of natural justice were observed in the process leading to the rendering of the determination, these different outcomes may have emanated from the very same root cause.

Conclusion

Whilst it is true that a rough and ready justice may not warrant an in depth analysis of issues in dispute, such lack of analysis could be a symptom that issues in dispute have not fully crystallised. If either contesting parties had not have been afforded reasonable opportunities to be heard it may well cause the reasoning included in adjudication determination to be brief and cursory. In other words, whilst there is usually a natural distinction between defects in conduct of proceedings as compared to content of adjudication determination, these different factors could be two opposite sides of the very same coin.




Koon Tak Hong Consulting Private Limited

Security of Payment (SOP) Act which aims at improving cash flow of construction industry provides statutory right to claimants to receive payment and have access to swift resolution of payment disputes via the adjudication regime. Any respondent (or payer) who receives payment claim and decides to withhold payment must provide its reasons for doing so. In this regard, this legislation may be viewed as a statutory tool to mainly assist the claimant rather than the respondent. However, the SOP Act is not designed in a one sided manner because there are also avenues within this legislation that balances the interest of the respondent too. This article examines the SOP Act from the respondent’s perspective particularly how respondents could better appreciate and utilise this legislation in order to avail themselves with any statutory remedies. 

As the SOP regime can be fairly time sensitive, the respondent should ensure that any response it serves is clear and self explanatory. Whilst much have been written about the need for serving a payment response and to do so in a timely manner, there is fairly limited coverage on how to enhance clarity and reduce subjectivity of each payment response particularly when the responded amount is less than amount claimed. To this end, there are certain best practices that can be considered in administration of interim progress payments. Although payment responses are structured in a table or schedule that mirrors payment claims, there are ways to increase its clarity within the format constraints.

Under the SOP regime, there are several opportunities for the respondent to serve a payment response if it had not done so in an earlier time frame or to vary its original payment response if necessary. The respondent ought to be familiar with these frameworks without appearing to flip flop or to inexplicably change its position that could compromise its own credibility. Finally, the SOP Act is intended to deal with straightforward payment related claims that are associated with work done as opposed to complex damages claims that are not suitable to be adjudicated within a short timeframe. In view of this, how should the respondent position itself in case there are genuine cases of cross claims or set off? The above mentioned respondent centric issues will be explored further in the subsequent sections of this article.  

Transition From Accepted Tender Sum To Contract Sum – Clarity of Payment Response

Clarity in payment response can be enhanced when there is an agreement on payment entitlement especially for disbursement of both direct and indirect costs of construction works. Payment entitlements for overhead expenses and preliminaries could be subjective because these represent indirect cost of construction works. During the formation of contract, the selected tenderer’s offer is accepted and the tender sum becomes contract sum. During this transition, both parties should make the effort to agree on how the contract sum ought to be distributed across the pricing schedule which will in turn influence project cashflow. The contract sum breakdown may not necessarily mirror the accepted tender sum breakdown for various reasons. Firstly, the Employer and its consultant may be concerned over the practice of ‘front loading’ where disproportionate amount may be paid in the beginning of the project in respect of preliminaries or general overhead expenses. Likewise the contractor may want to ensure that its main contract cashflow is in tandem with its subcontract cashflow including other domestic commitments. These issues of contract sum distribution are not usually negotiated prior to award of contract. However these becomes relevant post contract formation as it affects the claimant’s payment entitlements over construction period, thus the associated payment response. By way of example, suppose the contractor allocates $100,000 under its preliminaries costs for all tower cranes deployed for the construction period. Under the SOP Act, the principal focus is cash flow. In this regard, the issue is how should such $100,000 be paid progressively over the construction period, i.e. project cash flow. During the negotiation on distribution of contract sum in pricing schedule, both parties should agree on the lump sum that will be paid upon mobilisation of such cranes. Thereafter, a comparable amount shall be set aside for its demobilisation cost. The balance shall be paid progressively and in equal tranches over the construction period. These payment distributions agreements are important for clarity in payment response particularly when response amount is lower than claimed amount. An adjudicator should ideally be able to appreciate the respondent’s position without elaborate written submission. 

The other critical issue that is not often discussed is the administration of discounts offered by the tenderer (or awarded contractor) during procurement period. Discounts are not uncommon as part of negotiation but the nature of such discount are rarely negotiated at length. Discounts can generally be administered as a lump sum discount or percentage discount. As regards lump sum discount, it can be administered either by distributing the lump sum across various sections of the pricing schedule evenly or it could be applied per agreed tranches to various progress payments (e.g. a $10,000 discount can be applied by way of $1,000 across ten progress payments). As regards percentage discounts, it can be applied as a percentage to the amount due and payable every month or be distributed into the unit rates of agreed scope of works. When percentage discount is incorporated into unit rates, its effect continues to be applicable when valuing addition or omission in affected scope of works. Whilst these issues appear administrative, it can significantly reduce dispute over payments withheld due to lack of upfront discussion. 

Payment entitlement for direct construction works is arguably less contentious than indirect construction works. The general principle is that payment is made based on work done and such payment entitlements are fairly self evident. Direct construction works usually include physical evidence by way of progress reports which is supported by photographic records. Any claim for payment beyond actual completion of works on site is usually contradicted by contemporaneous programmes which documents actual progress of works. If progress of direct construction works is behind schedule, it will also be glaring when cross comparison is made against the initial S-curve submitted by the contractor which depicts the projected cash flow. These supporting evidence can be included in payment response if and when there are disputes over payment entitlements for direct construction works. Cost of direct construction works require relatively less upfront agreement between the parties as compared to cost of indirect construction works.

Types of Responses Under SOP Regime

The respondent should be aware that under the SOP regime, it has several opportunities to submit a payment response or to vary its previous payment response. Firstly, the respondent has the opportunity to provide its payment response within a maximum of 21 days (usually expressly specified under standard forms of contract) after a payment claim is served, or within 14 days if the contract is silent on the deadline for such payment response. 

Secondly, under Section 12(5)(b) of the SOP Act, the respondent is entitled to provide a payment response during the dispute settlement period, if it had not done so earlier or to vary its previous payment response. Such dispute settlement period refers to the 7-day duration commencing from the due date of payment response where the claimant fails to receive any payment response or disputes the payment response received.

Thirdly, the respondent may submit adjudication response within seven days after being served a copy of claimant’s adjudication application. Although adjudication response is strictly speaking not a payment response, these responses are fairly similar in substance in that these provide reasons for proposing payment less than amount claimed. However the respondent should note that under adjudication response, it may only include objections to amount claimed of any nature only if these were communicated earlier to the claimant. Therefore, the respondent is not at liberty to advance new response amount than what was previously communicated. These rules ensure that disputes or differences between the parties are well crystallised prior to being placed before an adjudicator. If the reasons or objections to claimed amount had already been communicated to the claimant, the adjudication response may include other supplemental documentations that are relevant such as expert reports, photographs, correspondence and submissions. 

Based on the procedural steps set out above, it is clear that the later the respondent decides to include its reasons for withholding payment (i.e. during the stage of adjudication response), the more restrictions are imposed on the respondent. The only exception is that the respondent is able to demonstrate that the new objections only arose after the submission of its earlier payment response or that the new circumstances could not have been reasonably known any earlier. In reality however, the time frames for various responses and associated adjudication applications are fairly short. Therefore the likelihood of making new discovery within a compressed period is relatively low. Even if the respondent fail to include new objections in a particular payment claim, it is at liberty to including the same in the subsequent payment claim or to have the issues properly and finally resolved under arbitration or litigation. In view of this, there is limited utility in expending precious financial resources to legally resisting any decision to exclude new objections. 

Timing of Payment Response In The Absence Of Payment Claim Service Date

It is common for most construction contracts to state the date on which a payment claim must be served. Thereafter the payment response is due 14 days (or maximum of 21 days if otherwise specified) from such date. The payment response deadline is therefore dependent on the payment claim service date. If the contract is silent on the payment claim service date, how does it affect the payment response deadline? By way of illustration, if a contractor decides to serve its payment claim on 5 July 2023 where the contract is silent on payment claim service deadline, is the respondent required to provide its payment response no later than 19 July 2023 (14 days thereafter)? In the case of Hiap Seng Building Construction Pte Ltd v Hock Heng Seng Contractor Pte Ltd [2024] SGHC 50, the court held that in the absence of date of service of payment claim, then any payment claim will be deemed to have been served on the last day of the calendar month in which it was served, regardless of when it was actually served. The court in its deliberation referred to an earlier case of Asia Grand Pte Ltd v A I Associates Pte Ltd [2023] 175 with similar facts where reference was made to amongst others, Sections 10(2)(a)(ii) and 10(3)(b) of the SOP Act as well as Regulations 5(1) and 5(3) of the SOP Regulations. Therefore, if a payment claim that was served on 5 July 2023 would be deemed to have been served on 31 July 2023. Consequently, the payment response is due 14 August 2023, i.e. 14 days after such deemed date.

While the case precedents mentioned above deal with the validity of payment response issued by virtue of timeframe, there are several tangential observations that could be gleaned from these rulings as well. From the respondent’s perspective, there are practical implications arising from the court’s ruling. Apart from removing ambiguity of payment response deadline, this is a helpful feature in the SOP Act that balances the interest of the respondent. This is because not all payment claims are equal in respect of the effort and intensity required to process all issues contained therein. While certain payment claims are more straightforward particularly those served in the beginning of the project, others can be more complex especially if it includes various contentious variation claims that usually arise towards the end of the project. In a hypothetical scenario where a contractor unintentionally delays its claim for such variation items and to only raise these accumulated variation claims under one payment claim, the respondent may be hard pressed to deal with an overwhelming claim within the default 14 days timeframe. If the contract is silent on payment claim service date and such payment claim is served earlier than usual in a calendar month, the payment claim is deemed to be served on the last day of such month thus giving the respondent more time to process such payment claim. It should be noted that under the SOP regime, there are no restrictions in time frame for the claimant to raise it variation claims. Some may choose to raise such variation claims progressively while others with manpower issues may choose to do so at later stage of the project when there are resources available to deal with those claims. Claiming and assessing variation claims can be time consuming since it could involve laborious measurements, collation of substantiating documentations, selection of appropriate valuation methods etc. Therefore the present feature of the SOP Act protects the interest of the respondent in case it receives one contentious payment claim say on 31 January 2025 and the next equally contentious payment claim on 1 February 2025. This is because the latter payment claim is deemed to be served on 28 February 2025 giving the respondent some breathing space. 

Setting Off Adjudicated Amount?

Respondent usually have access to certain contractual security to ensure the claimant’s performance of its obligations under the contract such as performance bond, retention monies etc. In case of default by the claimant, the respondent may utilise these securities to address the costs of such default. By way of example, the respondent may call on the performance bond if the claimant fails to complete the construction works in accordance with the specified standards by utilising the funds guaranteed therein. 

However the respondent should exercise such rights judiciously in view of the SOP Act especially if there is an adjudicated amount determined in favour of the claimant. This is to ensure that the calling on such bond does not negate or undermine the adjudication determination. This happens when there is an adverse determination rendered by the adjudicator on the very issues that led to the calling of bond. Using the same example, if the adjudicator found that the contractor had carried out the construction works in accordance with the specified standards, the respondent therefore is not justified in withholding the associated payment. In this case, if the respondent calls on performance bond on grounds that the very same works were not done in accordance with the standards in issue, it directly undermines the adjudication determination. The respondent’s conduct is therefore unconscionable and in violation of the SOP Act. To be clear, whilst adjudication determination is binding on the parties, it is an interim outcome where the parties are free to have those adjudicated issues be finally resolved under arbitration or litigation as the case may be. However, parties are not at liberty to negate the effects of the adjudication prior to any final resolution of disputes. Any attempt to do so may amount to contracting out of the SOP Act by setting off the adjudicated amount.

In this regard, there are a few provisions in the SOP Act that are of relevance. Firstly, Section 21(1) states that an adjudication determination is binding on the parties unless and until the dispute is finally resolved under a court or arbitration proceedings, disputes were settled by agreement between the parties or the court refused to enforce the adjudication determination. Further, Section 36(1) states that the SOP Act shall have effect despite any contrary contractual provision. Therefore the parties are not able to contract out from the SOP Act. Consequently the effects of SOP Act may override parties’ agreement on any provision of on-demand bond. 

Whilst the effects of the above mentioned provision is not meant to indiscriminately curtail the respondent’s access to security, the respondent have to exercise caution in the manner it chooses to call on the bond. The respondent may still be able to call on performance bonds where the grounds for such action is clearly distinguished from the issues determined by an adjudicator. Therefore, it is in the respondent’s interest to be clear, narrow and specific in any of its reasons for withholding payment, in case the adjudication determination that ensues is not in its favour. Such determination can then be clearly distinguished from other issues that may have led to the calling of bond.

Set Off And Cross Claims In Payment Response

Apart from withholding payment on the basis that the amount claimed is not supported by actual works done on site, the respondent may have further cross claims against the claimant that could set off any amount that may be due and payable. These cross claims may arise due to liquidated damages, cost of engaging third party contractor to rectify defects and cost of completing remaining works etc. However, Section 17(3) of the SOP Act states that in determining an adjudication determination, the adjudicator must disregard any part of a payment response related to damage, loss or expense that is not supported by (a) any document showing agreement between the parties on the quantum of that part of the payment response or (b) any certificate or other document that is required to be issued under the contract. Therefore, not all types of cross claims may be within the purview of the adjudicator unless it fulfils the qualifications included in the said Section 17(3). The main purpose of this section is to ensure parties exclude complex disputes from SOP adjudication regime in order to facilitate swift resolution of disputes. SOP Act is meant to deal with payment claims for work done rather than damages claim. 

It will not be surprising to see that any respondent that believes it has legitimate cross claim may attempt to fulfil the qualifications set out in Section 17(3) stated above either by identifying any document depicting an agreement on such quantum or any certificate or its equivalent issued under the contract. These attempts no doubt may require certain creativity in relation to the way these cross claims are couched or presented. Some may argue that since liquidated damages indicated as $X/day are expressly stipulated under the contract, it should fulfil the qualifications of an “agreement”. However, quantum of liquidated damages are quite different from the rate of liquidated damages. The complexity usually associated with deriving the quantum of liquidated damages is determining the period or duration in which the contractor (or the claimant) is in culpable delay. This is because it may involve issues such as concurrent delay, compliance with condition precedents, delay analysis etc. Even if such cross claim are legitimate, it may not be suitable to be determined within the time frame set out in the SOP regime. However, if the independent certifier (i.e. an Architect or Superintending Officer as the case may be), have performed its assessment and certified such delay including the corresponding liquidated damages amount, then an adjudicator may be able to deal with such cross claims within the statutory time constraints. Therefore, it appears that the respondent should prioritise any relevant certification over its search for “an agreement” in order to better avail itself to the benefits of exceptions set out in Section 17(3).

Conclusion

While it is important for the respondent to appreciate the mechanism under the SOP Act, it also critical to apply commercial sense in the course of asserting its rights under the statutory regime. It is worth reiterating that any adjudication determination, including the favourable ones are interim by nature. If the disputes are so contentious that claimant had to resort to SOP Act, it is perhaps fair to assume that the very same dispute may be reviewed again for final determination in future litigation or arbitration. Therefore, any resources expended under the SOP adjudication could inadvertently provide the claimant with an opportunity to “preview” the respondent’s case. In other words, the respondent should always balance its short term interest with the longer term objectives.




Koon Tak Hong Consulting Private Limited

The term ‘claimant’ refers to a contracting party carrying out construction works that serves monthly payment claims for works done. Such claimant could either be a main contractor or subcontractor depending on the tier of contract concerned. Under Singapore’s Security of Payment (SOP) Act, such claimant will have statutory right to receive progress payment and the respondent in receipt of such payment claim must respond accordingly. If the claimant is unsatisfied with the response or fail to receive any response, the claimant shall have the right to apply for adjudication to resolve the dispute quickly. The adjudication determination is temporary but binding on the parties. The ultimate goal is to ensure that deserving claimants will be paid promptly or under the worst case scenario have the statutory right to suspend its works to prevent further cash outflow.

Whilst the statutory tools available to the claimants appear to be beneficial in helping to speed up payment and improve cash flow in the construction industry, the devil is in the detail. This article examines some of the practical issues that a claimant should be aware of in order to better avail itself to the rights for payment and financial remedy embedded within the SOP regime. By way of example, the claimant should be aware that one of the key features of SOP Act is the speedy adjudication of disputes which entails a fairly prescriptive statutory processes and strict timelines. Most dispute resolution processes are designed in a way where the claimant has the full opportunity to provide details beyond its initial claim document including rights to reply to any defences mounted by the respondent. The claimant has a somewhat similar right to do so under the SOP Act but in a significantly limited way. After all, an adjudication determination is effectively an interim outcome of the relevant disputes, where the aggrieved party is at liberty to recover the sums paid in a subsequent arbitration or litigation. 

The claimant’s understanding of the SOP regime is crucial since the payment claim is not merely prepared for the Architect, Superintending Officer, Employer or consultant quantity surveyor who collectively should have an intimate understanding of the project details. By contrast, the claimant ought to prepare its payment claim in a comprehensive and self explanatory manner for any third party such as an adjudicator who may be relatively less familiar with the project background and specifics. This ‘just in case’ mindset is crucial because if the situation escalates before an adjudicator, such adjudicator is expected to make a determination within a compressed time frame without the benefit of supplementary explanations and details. This will be further elaborated in the next section of this article. 

The presentation of payment claim may differ depending on the procurement pathways taken for the project in hand i.e. lump sum contract, remeasurement contract with provisional quantities or design and build contract. The different types of procurement pathways may influence how ‘work done’ is presented that may entitle to payment. Finally, there are various project documentations that are produced on a regular basis as part of an effort to monitor progress of works. These documentations can be utilised by the claimant without the need to expend additional efforts in a bid to enhance the payment claim’s clarity. 

Unfortunately, most payment claims are prepared as a ‘regular paperwork’ without sufficient consideration of its implication down the road under the SOP regime. This article hopefully illuminates certain mechanics behind the SOP Act that are relevant from the claimant’s perspective.

Preparing Payment Claim For An Adjudicator

As mentioned earlier, payment claims are ordinarily submitted to the Employer with a copy issued to the Architect or Superintending Officer appointed under the contract, with the understanding that the consultant quantity surveyor is likely to be carrying out the assessment of such claim. Whilst the format of such payment claim is rather standardised with a breakdown of contract sum agreed upon in advance, the level of supporting details justifying the amount claimed for the period concerned can vary depending on how contentious the claimed amount may be. By way of example if the claimant anticipates resistance from the respondent for certain variation works in dispute, the claimant should provide sufficient details organised in a self explanatory manner, quite possibly for the benefit of an adjudicator. How this can be done is influenced by the timelines prescribed for various procedural steps under the SOP Act. This is because if and when the claimant decides to exercise its adjudication rights under SOP regime, a considerable time would have passed since the submission of payment claim concerned. 

Payment claims are usually arithmetically presented on a cumulative basis. If the payment claim is finally placed before an adjudicator, the amount of work done on site should have progressed quite significantly. Therefore the figures reflected in the corresponding payment claim in dispute may bear little or no resemblance with the actual conditions on site. The claimant have to take cognizance of this reality since the credibility of its claim is largely dependent on the strength of its documentation with very limited physical evidence due to the passage of time. Under a typical scenario where the claimant disputes the payment response, a period of 56 days or close to two months would have lapsed between the day payment claim was submitted to the day adjudication determination is rendered. This 56-day period consists of the following: 21 days for payment response to a submitted payment claim, 7 days of dispute settlement period, 7 days for claimant to issue notice of intention to adjudicate dispute and apply for adjudication, 7 days for adjudicator to be appointed, 14 days for adjudication proceedings. 

In view of the time periods illustrated above, it would be extremely helpful to breakdown the payment claim into the following columns: ‘Amount Allocated in Contract Sum’, ‘Amount Paid To Date’ and ‘Amount Claimed’. This is to ensure that for each line item included in a particular payment claim, its incremental amount claimed for a particular period or month is abundantly clear. This can be derived by taking the difference between amount claimed and amount paid to date. Under Section 17(4)(c) of the SOP Act (2020 Revised Edition), in determining an adjudication application, the adjudicator may only have regard to amongst others, the payment claim to which the adjudication application relates, the adjudication application and the accompanying documents thereto. The adjudicator’s jurisdiction and authority are therefore circumscribed accordingly.

To be clear, the adjudication application by the claimant may include other relevant information such as the expert reports, photographs and related correspondence. These supplementary information may both support the payment claim and refute any reasons previously provided by the respondent for withholding payments. However, the are multiple opportunities available to the respondent to submit or vary its payment response including immediately before the appointment of an adjudicator via the adjudication response. This could leave the claimant with limited amount of time to mount a responsive rebuttal especially if the adjudicator subsequently decide to adopt a document-only procedure. Therefore, the claimant will be well served to operate on the basis that it may have limited amount of time to issue any rebuttal and to anticipate the respondent’s defence during its preparation of payment claim. This again underscores the need to be strategic in preparation of payment claim and not reduce it to a mere administrative document submission. 

Payment Claim Under Lump Sum Contract, Remeasurement Contract And Design & Build Contract

There are multiple types of procurement pathways available in the construction industry but the options commonly adopted include lump sum contract, remeasurement contract as well as design and build contract. In general, there are no strict requirements for the presentation of payment claims to differ in accordance with the types of procurement pathway that the project is under. However certain aspects of the presentation of payment claim should actually differ based on the varying commercial nature of different procurement pathways. 

Under lump sum contract, the contractor is paid based on a fixed price derived in accordance with the quantities measured by the contractor during tender process. Any error in measurement of quantities is the contractor’s risk. Let us consider an example of a project where $100,000 is allocated to all concrete works. Let us further assume that the actual quantity of concrete works is 100m3 but the contractor erroneously measured it at 80m3. In any case the contractor shall be paid progressively based on percentage completion of all concrete works rather than actual quantity of concrete works carried out in a particular month. Therefore, if the contractor carried out 40m3 of concrete works in a particular month which represents 40% of total actual concrete works (40m3/100m3), the contractor is entitled to $40,000 (i.e. 40% x $100,000) as opposed to $50,000. This is notwithstanding the fact that the works done is 50% of its erroneously measured quantity. Therefore in the presentation of payment claim, the actual quantity of works is not relevant in so far as payment entitlements are concerned under lump sum contract. 

The above example can be contrasted with payment entitlements assessed under remeasurement contracts where provisional quantities are included in the contract document as the basis of contract sum. These provisional quantities are estimated by the Employer’s consultants rather than measured by the contractor. The contractor will be paid based on actual works done and such actual quantity may well differ from those provisional quantities. In other words, the payment entitlements are based on actual quantities of works rather than percentage of work done in respect of provisional quantities. This is diametrically opposite to the commercial nature under lump sum contract. Using the very same hypothetical example in the previous paragraph, the $100,000 allowed under the contract as well as the 100m3 of concrete are both provisional figures. The contractor ought to include in its payment claim, the actual quantities of concrete work carried out in a particular month and to multiply it with the prevailing unit rate. The notion of percentage completion based on provisional quantity becomes irrelevant. As a matter of supporting documents for payment claims, the contractor should include the daily site records of concrete works which are counter signed and verified by a Resident Technical Officer.

Under the design and build contract, the concept of completion of works can be quite different as it relates to payment claim. This is because under design and build contract, the contractor produces construction drawings in compliance with the Employer’s requirements based on a design brief. Depending on the choice of contract form used, the contractor’s design drawings may not even be fully completed at the point of contract formation. For further background and context, a separate article entitled ‘Part 1 of PSSCOC D&B vs REDAS D&B – Pre-Contract Design Requirement’ is available for reference in this website. In preparation of payment claims evidencing work done that entitles progress payments, the contractor should be aware that it may not be sufficient to merely include a contract sum breakdown (or pricing schedule) with associated quantities and/or percentage work done.  This is because the drawings produced by the contractor may be subject to dispute resulting in withholding of payments. In this regard, the contractor should include the contractor’s design drawings, approvals of such drawings as well as evidence of work done against those approved drawings (e.g. photographs in progress reports). Evidently, the amount of supporting documents may be more elaborate than traditional design-bid-build procurement pathway. This is particularly crucial if such payment claims are prepared in a way that makes it easier for any third party such as an adjudicator to follow and appreciate the claimant’s position. 

Project Documentations Used in Payment Claims

When selecting the types of supporting documents that may be used to substantiate contractor’s payment claims, one should consider documentations that are produced on a recurring basis throughout the construction period rather than one-off reports. This is because recurring reports enable one to identify the incremental amount of work done for a particular month by comparing the latest report with its preceding version. This is consistent with the typical format of a payment claim. 

There are multiple types of recurring reports that are produced either on a weekly basis, bi-weekly basis or even monthly basis. These include monthly progress reports, S-curve cashflow statements, site diaries, contemporaneous programmes, minutes of meetings, correspondence, non compliance reports, requests for informations, list of variations orders etc. Recurring contemporaneous documents are less likely to be skewed in a self serving way particularly those produced prior to any disputes. Most of these reports are typically circulated to various parties either for their action, attention or purely for information. Therefore, if there are inaccurate information included in any of these documentation, it is likely that concerned parties will respond with any alternative perspective or dissent. By way of example, if a main contractor applies for extension of time under the main contract due to certain Employer related event, it is unlikely that the main contractor can credibly allege that the subcontractor is in culpable delay for the same period of time. Purely based on a prima facie threshold, a subcontractor should have a good adjudication ground in case its payments are withheld by the main contractor by way of set off. Therefore the subcontractor as a claimant under the subcontract ought to appreciate credible project documentation.

The element of neutrality and credibility in the supporting documentation is crucial in increasing the likelihood of a favourable adjudication outcome. This is particularly so where there is limited amount of time for the adjudicator to delve into the intricacies and substantive merit of every issue. As an adjudication determination is designed to be a binding but interim outcome, the claimant should be judicious in allocating expenses pursuing payments. The claimant should as far as possible utilise existing project documentation that are credible in support of its claim rather than expending precious financial resources in creating bespoke submissions where possible. After all, a claimant with its payment withheld is already facing challenging cashflow circumstances.


Loss And Expense Claims

Specific amendments to the SOP Act came into effect on 15 December 2019 that were aimed at addressing the issue of lengthening of adjudication process due to submission of complex claims. This is due to a rise in complicated prolongation costs, damages, losses or expenses that were included in adjudication application that goes beyond the original scope of the SOP Act. These complex claims are more suitably determined via other dispute resolution avenues such as arbitration or litigation where the substance and merit of these issues can be assessed more carefully without the restricted timeframes found in SOP regime. In general, Section 17(3)(a) and 17(3)(b) of the post amendment SOP Act state that the adjudicator must disregard items of claim relating to damage, loss or expense such as prolongation claims unless (i) the quantum has been agreed by the parties or (ii) such items have been certified under the contract. These two exceptions appear to limit the scope of adjudication by permitting such claims only to instances where the respondent has reneged on an agreement on the quantum payable by not making timely payment or paying an incorrect amount. The basis of limiting complicated loss and expense claims from being adjudicated under SOP regime is because the original premise of SOP Act is intended to cover claims for work done or goods and services supplied which are supposed to be straightforward claims. 

There are certain differences between Section 17(3)(a) and 17(3)(b). The former appear to relate to an agreement between the claimant and the respondent (or the Employer and the main contractor in case of a main contract). The latter on the other hand relates to a certification issued by an independent certifier appointed under the contract such as the Architect under the SIA Building Contract and the Superintending Officer under the PSSCOC. Strictly speaking, a certifier is independent of the Employer as it relates to certification functions although such certifier also simultaneously assume the role as the Employer’s agent under the contract. Therefore in practical terms, it will be interesting to see how common it is that the agreement (if any) with the Employer is different with the amount certified for loss and expense by the certifier. From the claimant’s perspective, whether these avenues for loss and expense claims are actually available is a matter that remains to be seen. These provisions are more likely to be relevant to a claimant as an issue of set off against payment claims as a result of liquidated damages that are alleged to be due and payable. In such a case, the adjudicator may have jurisdiction to consider such set off as diminution in value in respect of amounts claimed.

Due to the restrictions imposed on loss and expense claims under the SOP regime, the claimant ought to pay closer attention to other avenues of contractual claims such as additional payment for variations where the valuation principle may allow for additional overheads and expenses. Such overheads and expenses can be claimed in the form of additional preliminaries where there are express provisions for the claimant to do so. Substantively, when a contractor claims for certain heads of loss and expense such as prolongation costs, it is effectively claiming for additional preliminaries. To this end, there are other articles available in this website for reference such as ‘Part 2 of SIA vs PSSCOC – Loss And Expense’ and ‘Part 3 of SIA vs PSSCOC – How To Value Variations?’. These articles provide further detail on certain overlapping elements between loss and expense and valuation of variations under the appropriate provisions. 

Conclusion

Purely from a claimant’s perspective, the SOP regime can be best described as a double edged sword. On one hand it allows swift adjudication of payment disputes in a cost effective manner to facilitate cashflow. On the other hand, certain complex claims such as loss and expense may not be within the jurisdiction of an adjudicator due to SOP timeline restrictions. These very timeline restrictions are also the reason why cost effective and swift resolution of payment disputes are statutory remedies available to a deserving claimant. Whilst a claimant may not adjudicate many complex claims under the SOP regime, it is still worthwhile to prepare these claims during the construction period in case such matter had to be resolved under arbitration or litigation. After all, even the most favourable adjudication determinations are merely temporary outcomes.




Koon Tak Hong Consulting Private Limited

Carrying out construction projects can be a risky business. The project could be at risk of not getting completed due to contractor’s default or that the Employer could be confronted with multiple defects in a building that is supposed to be “completed”. In the unfortunate event that these risks materialised, the Employer often find it extremely challenging to recover financial remedy in a timely manner from the contractor in issue. This is because the contractor could have been financially insolvent or that the allegations of contractual breach are disputed by the contractor. It may take many months or even years before the disputes are resolved via any legal proceedings. To this end, bond is a financial instrument commonly used in the construction industry to mitigate these risks. Most construction contracts stipulate that the contractor is required to provide a bond issued by financial institution in favour of the Employer in an amount that is usually expressed as 10% of the contract sum. The bond shall remain valid and in force until the project achieves final completion. The Employer will therefore be able to call on such bond in case the contractor defaults. Depending on the wordings included in the bond, the financial institution responsible for issuing such bond is obliged to make payment. The main contractor usually passes such cashflow risk down the contractual supply chain by demanding a similar bond from its subcontractors based on sums proportional to the value of the respective subcontract works. 

This article examines the different types of bonds commonly used in the industry and the associated principles of risks allocation. Does the Employer have unfettered access to cash by calling on bonds issued in its favour? In more specific terms, does the Employer actually have the right to utilise the bond without proving that the contractor is actually in default? Even if proof is necessary, are the financial institutions issuing bonds in the best position to determine the merit of the disputes before fulfilling its payment obligations? These are all pertinent questions to be raised in order to have a comprehensive understanding of the effects of bond on allocation of risks. The principles of risk allocation can exhibit quite a different commercial characteristics depending on the purposes for which the bond is issued i.e. performance bond, retention bond, advance payment bond etc.

Basic Characteristics of Bonds in Construction Industry

There are usually three parties to a bond. First, the financial institution is the ‘issuer’. Second, the Employer under the main contract is the ‘beneficiary’ and third, the main contractor under the obligation for procuring such bond is the ‘obligor’. As regards bonds issued under subcontract, the beneficiary is the main contractor whilst the obligor is the subcontractor. 

The issuer’s obligation to pay is very much dependent on the legal characteristics of the bond. There are in general two types of bond namely ‘on-demand bond’ and ‘indemnity bond’. On-demand bonds are often described as cash equivalent due to its simplicity to gain access to payment. The issuer is obliged to pay upon a mere demand made by the beneficiary usually by presentation of compliant document of demand. The issuer is not required to consider whether the beneficiary is justified in demanding for payment or whether the beneficiary had suffered any damages as a result of breach by the obligor. Such low threshold of payment would mean that the issuer have access to obligor’s collateral for the purposes of security. On the other hand, indemnity bond has quite the opposite legal characteristics where the issuer only responds to demand for payment conditioned upon certain facts. In order to establish whether threshold of payment is fulfilled, the issuer may be required to get involved in determining the merit of the underlying disputes between the beneficiary and obligor. This naturally diminishes the beneficiary’s ability to gain access to payment but in turn becomes less financially risky and onerous for the issuer and obligor. There is also a question of how should an issuer actually determine the merit of the underlying dispute and what sort of proof is actually required. Is it a binding determination in the form of a state court judgment or an arbitral award or an admission of breach on the part of the obligor? These documentation proof may be overly onerous to be accepted for the purposes of a bond where the primary function is speedy access to financial remedy.

On-demand bond issued by banks that is also known as banker’s guarantee is quite commonly stipulated in standard forms of contract. As pointed out earlier, since the legal characteristics of an on-demand bond or indemnity bond is dependent on the wordings used, there are instances where parties dispute over the choice of words used in the process of negotiating bond submission. Therefore the banker’s guarantee template specimen is usually included in the contract appendix to ensure compliance by the obligor. In order to underscore the Employer’s desire for an unfettered access to security deposit, the relevant clauses in the standard form of contract usually stipulate the Employer’s acceptance of on-demand unconditional bond is an alternative to cash deposit. In other words, the primary intention is always for the contractor to provide cash deposit and the bond may be accepted provided its essence does not derogate significantly from the liquidity of cash. 

In the case of an indemnity bond, this can usually be procured from an insurance company instead of bank where it may cost the obligor anything between 1% to 5% of the underlying bond amount. This appears to be a more cost effective option than banker’s guarantee where the obligor is usually required to place in fixed deposit a sum equivalent to the bond amount.  This is in addition to the processing fee that the bank may charge. For a project with contract sum of $50million, the main contractor may have its cash amounting to $5million inaccessible for several years with the bank to serve as collateral until project achieves final completion. This can have a compromising cash flow effect even to established contractors. Therefore, indemnity bond issued by insurance companies appear to be a fairly cost effective alternative where the contractor may only be required to pay a fraction of the sum underlying the bond value. However, whether the insurance company may be comfortable issuing an on-demand bond without the extent of collateral typically required by bank may be a subject of negotiation and bargaining power. 

Performance Bond

Prior to commencement of any construction works, the contractor awarded with the project is usually required to provide a performance bond for a sum amounting to 10% of the initial contract value. This performance bond is required for the ‘due performance and observance by the contractor of all its obligations, responsibilities, and conditions stipulated under the contract’. Such requirement is intentionally worded in a very broad manner so that there are no restrictions imposed on the Employer on the permissible basis for any future calling of the performance bond. As pointed out in the beginning of this article, some of the common reasons that may initiate the calling of performance bond include contractor abandoning the project by its default, severe delay to project completion resulting in accumulation of excessive liquidated damages, unsatisfactory and defective works remained unresolved resulting in the need to engage third party contractors etc. Therefore such bond is meant to address situations where the contractor has issues with its contractual ‘performance’.

Some have argued whether there is a necessity for such performance bond given that most construction contract would ordinarily have retention sum amounting to 5% of the initial contract value simultaneously imposed on the contractor. It is also often argued that since the Employer only pays the contractor based on actual works done on site and not ahead of progress of works, its financial risk is minimised. Is performance bond a duplicative requirement considering the availability of retention sum? In fairness, there are certain differences in contractual treatment of retention sum as compared to performance bond. Firstly, retention monies are accumulated progressively by the Employer until it reaches 5% of the contract value based on incremental deductions from interim progress payments. In other words, the Employer would only have the full retention sum after multiples months of deductions made from interim progress payments to the contractor. Secondly, the first half of the retention monies are released to the contractor upon achievement of practical completion and the remaining second half is subsequently released upon final completion. By contrast the Employer would have access to the full performance bond prior to commencement of any construction works until the achievement of final completion. Secondly, there are still practical differences between bond and cash deposits. Even on the best case scenario of an on-demand bond, the Employer may be confronted with various legal resistance to payment such as grounds of unconscionability, which will be elaborated later in this article. On the other hand, retention sums are as reliable as cash deposits. Therefore having retention sums and performance bond simultaneously represents a mixed of financial guarantees available to the Employer.

Advance Payment Bond

As contractors retrospectively recovers payments after carrying out works on site, they are often out of pocket financially due its need to finance the project. The duration from the submission of monthly progress payment claim until the actual receipt of payment can take approximately two months or even longer. Therefore where the project involve early placement of order for costly long lead equipment or construction materials, contractors may request for advance payment from the Employer for a sum that depends on the initial capital outlay expected by the contractor. In return, it is common for the Employer to correspondingly require an advance payment bond from the contractor for such amount. 

The legal characteristics of advance payment bond is largely similar to that of performance bond discussed earlier. However the commercial treatments can be very different between these bonds. Firstly, the Employer usually stipulate in the contract for a progressive recovery of the advance amount paid via deductions from monthly progress payments. The mechanics behind such recovery is quite similar to that of retention sums. In essence, the Employer may stipulate that a certain percentage of monthly progress payments made to the contractor is subject to deduction until such time the advance amount is fully recovered. Such monthly deductions could be in addition to the retention sum deductions. The advance payment bond may be cancelled and return to the contractor once the recovery is completed. Such arrangement may not be appealing to certain contractors especially if the advance payment bond is in the form of banker’s guarantee where a fixed deposit collateral is required by the bank where such sum could have been used for the placement of advance orders. Further to that, the contractor is mathematically worse off than before upon the recovery of advance payment since it is confronted with both a reduced progress payment as well as the need to pay cost associated with the provision of a bond. 

From the Employer’s perspective, the practical advantage of an advance payment bond can be fairly limited particularly if there is a mechanism of recovery of advance payment through deduction of progress payments. It may not be worth the legal costs and hassle to call on the advance payment bond when the order is already placed and part of the advance amount has already been recovered. The Employer’s interest may be better served if certain contractual arrangements can be made to ensure that it has access to the title of ownership of such long lead equipment or material that are off site in case of contractor’s default.

Calling of Bond – Tips and Traps

Whilst on-demand bond often provide the veneer as an absolute financial guarantee for the beneficiary with unfettered access to payment, there are legal safeguards in place which may be construed as impediments or obstructions. These safeguards restrict payment where the calling of bond contains elements of fraud or unconscionability. The presence of these legal safeguards appears to be at odds with the wordings used in on-demand bond where the ‘issuer irrevocably and unconditionally undertakes to make payment immediately upon demand by the beneficiary without proof that there are entitlements due under the principle contract or that the obligor is in breach of its obligations’. In reality the legal safeguards are not in contradiction with the wordings of an on-demand bond. Whilst the issuer is typically under an obligation to pay upon demand, the obligor is also at liberty to contest such payment by applying for a court injunction. The wordings in such bonds only go in so far as addressing payment obligation of the issuer but not on the obligor’s rights to injunctive relief. As the courts in Singapore assess the merit of the obligor’s application for injunction based on grounds of fraud as well as unconscionability, the beneficiary ought to have these considerations in mind prior to calling on any bond in anticipation of any legal resistance.

Although the concept of fraud seems self explanatory, the types of conduct that may be deemed unconscionable is less straightforward. Fraud typically refers to conduct that is dishonest, morally reprehensible and lacks good faith but unconscionable is often associated with ‘unfairness’. The latter can be subjective and fact sensitive, making it difficult to breakdown its definition into discrete and definitive elements. There are however multiple case precedents on the matter of unconscionability as it relates to calling on bonds that may be instructive. In the case of Gammon Pte Limited v JBE Properties Pte Ltd [2010] SGHC 130, the main contractor applied for an injunction to restrain the Employer from receiving payment from the latter’s calling on a performance bond. The performance bond included a term which states amongst others that the issuer shall be obliged to effect payment within 30 business days of a claim and shall be under no duty to inquire into the reasons, circumstances or authenticity of the grounds for such claim or direction. The performance bond is therefore deemed an on-demand bond. The main contractor argued that it would be unconscionable for the Employer to call on the bond although it did not dispute the presence of outstanding defects in the concerned building. The bond amount is $1,151,500.00 and the Employer claimed that $1,820,198.59 is due and payable by the main contractor. The key issue relates to a figure of $2,200,800.00 included in the said $1,820,198.59 pertaining to an alleged rectification cost of aluminium cladding defects. What was before the judge in this instance was purely on the issue of unconscionability on the calling of bond. Therefore the only relevant question was whether there was a prima facie case of unfairness rather than the actual merit of the underlying substantive claims. The main contractor’s case was that original cost of the supply and installation of the entire curtain wall was only $1,690,000.00 of which the cost of the aluminium claddings that were in issue was only $371,664.00. Therefore the alleged rectification cost was six times the original cost of the said aluminium cladding. The Employer apparently awarded the rectification works to an entity which did not appear to have any expertise in design, fabrication and installation of cladding via a one page document with no scope of work detailed at all. Further, the total defects rectification cost amounted to more than 25% of the original contract sum to construct the entire building which curiously the architect had issued completion certificate for. The judge ordered the parties to provide quotations for cost comparison with the sum of $2,200,800.00 and were ultimately found to be significantly lower. The call on the bond was therefore ordered to be deferred by the judge, pending final resolution of all the issues between the parties.  

Given the above it appears that when determining whether it was unconscionable to call on a bond, the principle of unfairness is assessed based on proportionality of sum claimed relative to bond amount. Payment can be restrained if the figures reflected in the relevant paper work, even on a prima facie basis give rise to disproportionality. Therefore, some have argued that an on-demand bond is in reality comparable to an indemnity bond, except that the burden of assessment is shifted from the issuer to a court. The beneficiary therefore ought to satisfy itself prior to calling on any bond that it has a proper basis and documentation to support its claim, regardless of whether the issuer undertakes to pay upon demand without any requirement of delving into the merits of the underlying disputes.

If justification and proper basis are essential ingredients for any successful calling on bond, the primary function and purpose of bond as a risk allocation device ought to be reviewed and understood in perspective. Are bonds meant to prevent the beneficiary from being out of pocket financially whilst the disputes are pending determination? Or are bonds meant to be a security to an amount claimed such that it becomes available when the disputes are finally favourably determined? If it is meant to avoid an out of pocket situation, then beneficiary can technically demand for payment even with mere existence of disputes, regardless of the merits to the claim even on prima facie basis. Given these considerations, it would appear that having cash deposits is a lot more certain and straightforward than an on-demand bond at least from the beneficiary’s perspective. The differences between cash deposit and on-demand bond are not insignificant, both from the legal and commercial perspectives. 

Conclusion

There is no right or wrong on the question of whether a bond is payable on demand or payable on default. This issue is strictly speaking a matter of commercial bargain between business entities as part of its risk allocation assessment. Even when a bond’s security guarantee is ‘elevated’ from an indemnity bond to an on-demand bond, the practical difference may be limited. Therefore when making risk assessment, it may be advisable to pay attention to the details beyond just the label.




Koon Tak Hong Consulting Private Limited

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

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

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

Design Responsibility And Performance Based Specification

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

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

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

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

Programme, Definition of Completion, Testing And Commissioning

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

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

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

Liquidated Damages For MEP Subcontract

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

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

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

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


Price Fluctuations, Off Site Works And Cashflow

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

Building surveyors are often engaged by building owners or council of management corporation when they are confronted with defects particularly those developments that are newly completed. The surveyors will be required to produce a building defects survey report which can be used in multiple ways including identifying the root causes of those defects, proposed rectification measures, as well as an estimation of associated remedial costs. These building defects related information are helpful for the purposes of negotiation with contractors, building developers, suppliers and even to serve as evidence in case legal actions are warranted. 

This article is part four of a series of articles examining reports produced by experts for the purposes of resolution of construction disputes. The focus of this article relates to general building defects for residential apartments, condominiums or strata titled mixed development. Whilst the objective of such report may appear straightforward, there are several tricky elements that had to be considered during the production of such report including legal implications that may not be obvious in the first instance. This article includes some of the tips and traps associated with efforts leading to the issuance of such report.

One of the more obvious questions that ought to be raised prior to engagement of any building surveyor is whether the newly completed development is still under maintenance period or defects liability period. This is the period within which the main contractor responsible for constructing the development undertakes to rectify any reasonable defects within its scope of responsibility. This period is usually 12 to 18 months after the achievement of practical completion and should be expressly stated in the sales and purchase agreement. Unless the defects in question are believed to be caused by design negligence which a main contractor typically is not responsible for, most defects will be attended to within this period. It is also customary for certain scope of works to be covered with an extended warranty lasting beyond the said defects liability period, such as 5 or even 10 years after practical completion. Examples of such scope of works include anti termite treatment to basement or foundation works, waterproofing works to wet areas, prevention of spalling of concrete etc. Where defects coverage is available, it is unlikely that building surveyor is needed in this regard. 

One of the tricky aspects in dealing with building defects particularly deciding if the service of a building surveyor is warranted is when the defects are latent in nature that usually becomes apparent after a considerable period of time beyond defects liability period. To this end, these defects manifest themselves in the form of physical damage to the building much later or often described using legal parlance as “not discoverable until sometime after it accrues”. Most jurisdictions under English common law system including Singapore adopts Limitation Act which prescribes a basic limitation period of six years from the date on which the ‘cause of action’ accrued. This effectively imposes a six years time frame within which any legal action shall commence. This time bar mechanism will be elaborated further in the later part of this article. 

In view of the above, prior to engagement of the services of any building surveyor, the claimant ought to perform some basic research such as availability of extended warranty, whether any defects liability period is in place and an estimation if any potential legal action may be time barred. One of the main values in commissioning a survey report is in the identification of the root cause of any given defects so that the claimant can be effective and accurate in identifying party or parties that it wishes to seek remedy from. After all the claimant who avers liability bears the burden of proof. If it is established that there is no appetite to commence any legal action due to financial constraints or lack of desire to pursue accountability, the building owner or council of management corporation could have proceeded to directly hire contractors to fix the defects without the need for any reports. Therefore the commissioning of survey report may be deemed as a pre-legal action posture.

Contract Documentation From Consultants, Main Contractors, Subcontractors And Suppliers

The presence of defective parts in a building does not necessarily suggests that the contractor is legally liable. It may well be that the specifications included in the construction contracts had been moderated or scale down in order to keep the selling price of the property affordable. It could also be the case where the contractors had been compliant with the specifications stipulated but the specification that was provided by the designer was inappropriate. These background information and context are essential for the purposes of the building survey report since it facilitates the identification of the right party or parties to negotiate with prior to any decision to commence legal action. The types of remedial measures recommended in the report may also be influenced by the nature of the specifications prescribed. The mere reliance on visual inspection may not be sufficiently insightful. It should be noted that if the claimant is not judicious in naming various defendants or respondents to its legal action, the legal costs may escalate disproportionately. 

In view of the above, it is important to identify the architects, engineers, interior designers, main contractors, subcontractors etc that were involved in the construction of the development concerned. The first hand purchasers of the property would naturally rely on their contract with the property developer if necessary. However since various parties listed above do not have contractual relationship with the claimant, the premise of any legal action shall be establishment of liability under tort of negligence. Having identified the parties to the construction project, the next step is to gain access to the relevant contract documents in respect of these parties. These contract documents are important for a few key reasons. Firstly the specifications included therein provide insight into the levels of design and workmanship stipulated relevant for their respective scope of works. Secondly, if there are certain limitation of liability clauses under those construction contracts, it may arguably in some way affect the scope of tortious liability. Thirdly, where possible the schedule of defects included in the survey report should be organised and exhibited according to scope of contractual responsibility of various parties identified. This is to ensure clarity in attribution of responsibilities as part of discharging burden of proof.

It cannot be overemphasised that since these construction contracts are not publicly available documents, gaining access to these information are not as straightforward as it should be. It often requires commencement of legal proceedings first to provide the legal “nudge” for the relevant parties to disclose the necessary document in the spirit of negotiation in good faith. In this regard, the commissioning of survey report may need to proceed first notwithstanding the absence of the necessary documents. 

Scope of Survey Report

The nature and severity of defects may vary significantly depending on circumstances. Certain defects are superficially obvious where visual inspections are sufficient to identify its root cause and remedial follow up measures. Other defects however may require more invasive inspection measure such as the use of borescope which is an optical tool to inspect areas that are impossible to look at by direct line of sight. Where necessary certain isolated parts of the building installations that are defective may need to be dismantled to facilitate a thorough inspection. There could also be certain defects that may require a step further by extraction of sample to be sent for laboratory analysis to identify the chemical composition of the defects concerned. On the extreme end, there may be certain structural defects that could pose health and safety risk which require a separate specialist to carry out an in-depth technical examination that goes beyond the regular scope of services of a building surveyor. Such specialist examinations are usually for systemic defects or structural integrity issue that may implicate the development in its entirety e.g. building facade system. 

The problem however is precisely setting out the scope of services of the building surveyor when the very nature and severity of defects manifested are not entirely known from the outset. Certain defects that may appear aesthetic in nature may well be a symptom of a much deeper systemic problem. However the root cause of the problem may not be readily discoverable until such time when the initial aesthetic focused remedial measures are found not effective, prompting the need to examine the defects even deeper. Therefore, building owners or council of management corporations could enter into services agreement with building surveyor based on multiple iterations of reports, with options for additional laboratory tests or expertise to be enlisted where required. Without such options, the survey report may conclude by merely recommending further investigations on certain defects, which in and of itself does not provide any closure.

As alluded to earlier, survey reports are deemed pre-legal action posture. It would therefore be reasonable to include in the survey report a cost estimation for any follow up rectification works. This will provide an assessment of the overall damages that are likely to be incurred as a result of such defects. Such financial damages could be broken down and split in accordance with the varying scope of contractual responsibilities of different parties involved in the construction works. The accuracy of these financial assessments will be largely dependent on whether the strategy is to first incur the remedial cost to actually fix the defects or to recover compensations first (either through negotiations or outcome of legal actions) before commencing on the rectification works based on sums actually recovered. If the strategy is the former, it is likely that the building surveyor may only be advising the costs by referring to quotations issued by certain contractors/ suppliers based on provisional remedial measures. 

It is also not conventional for scope of services of building surveyor to include carrying out actual rectification works. Building owners should be mindful to put in place check and balance where the party identifying the defects is not responsible for rectifying the defects and subsequently certify its completion. After all, building surveying firms do not usually have in-house capability of carrying out rectification works, and are rightly expected to outsource these functions if contracted to do so. Therefore, the scope of services of building surveyor should include a certification responsibility upon completion of the rectification works undertaken by third parties. This also provides an incentive for the building surveyor to put forward a more prescriptive remedial measures to be followed by third party contractors. 

What if the defects rectification measures are carried out prior to the conclusion of any negotiations or legal proceedings with parties involved in the construction of the development concerned? Will the rectification works therefore “tamper” with the evidence of the defective works? It is not uncommon for the respondent to the legal proceedings to request for an independent inspection of the alleged defects in order to defend their position. Some may argue that the building defects survey report that usually includes photographic evidence may be deemed as a credible and independent evidence that can be utilised by all parties to the legal action. This however may not be sufficient in view of the potential criticism of whether there is actual independence on the part of the building surveyor if it had been involved in the actual rectification works. Based on this criticism, the building defects survey report may only be deemed at best as factual evidence adduced by the claimant rather than an independent expert evidence. On the other hand, such criticism plainly ignores the fact that the efforts associated with negotiations and subsequent legal action if any, could be time consuming. Building owners should not be expected to put up with disamenities or even health and safety risks for an extended period of time when they are, rightly or wrongly the aggrieved parties. 

Limitation Act

As mentioned earlier, Limitation Act stipulates a maximum period of six years from the date on which the ‘cause of action’ accrued. Any legal action in the tort of negligence brought beyond such stipulated period will be time barred. There are several important nuances in its legislative mechanism. Firstly, this period commences upon damages being suffered by the claimant. In general, this is triggered by the date of issuance of the building defects survey report. It is through this survey report that the claimant would have the necessary knowledge that the defects in hand is due to negligence of certain party or parties as opposed to general wear and tear, thereby allowing cause of action to be accrued. Secondly, there is an alternative period of three years applicable which commences from the date upon which the claimant is deemed to have the necessary knowledge required to bring an action for damages. This is particularly relevant if it is established at a later time that instead of Party A who was originally deemed responsible for such defect, Party B was in fact liable. It may well be the case that when Party B was subsequently identified, the six years limitation had expired. In this case, the claimant could rely on an alternative period of three years, commencing from the date upon which Party B was newly identified. This is relevant for construction related latent defects where the real root cause became evident much later. There is however a catch here as regards the alternative three years period. There is a question of whether there were circumstances that would have reasonably prompted the claimant to investigate the real root cause earlier. In other words, could the claimant have identified Party B earlier based on reasonable standard. This is to avoid situation where the claimant could ‘game the legal system’ by being wilful in its inaction in order to extend the limitation period to its advantage. 

It is quite clear that the different legal scenarios above including how various limitation periods are triggered are largely influenced by the manner in which the survey report is worded. This in turn is dependent on the scope of services stipulated during the engagement of the building surveyor. It is essential that the building surveyor is specific in identifying the root cause of the defect so that the building owner could benefit by being able to ascribe such defect to a party or even parties that may be responsible. The root cause should be sufficiently specific in terms of whether it is workmanship related or design related and if so, which construction trades are implicated in this regard. By way of example, if there are complaints of odour emitting from certain wet areas of residential units such as toilets or kitchens, it is critical to identify the source of the odour and whether the sewage pipes (plumbing construction trade) were sealed correctly during installation (workmanship issue). It is also relevant to further investigate whether the pipes had been installed with sufficient gradient as it could indicate whether it is a design or workmanship issue. This in turn may require cross referenced to the as-built drawings to understand whether the gradient stipulated is in compliance with any relevant building code. The building owner will thus be able to conclude whether root cause of the odour was a design engineering issue or poor workmanship. 

It is not uncommon for the initially conceived rectification measure carried out for a given defect is found to be inadequate resulting in the discovery of a subsequent cause of defect that overrides the initial finding. By way of example the panels of external cladding of a building facade may exhibit signs of warping and discolouration. This was initially concluded as workmanship error due to inadequate protective surface treatments to the panels in issue. However the problem persists after the initial round of remedial measures resulting in a detail examination of the facade system as a whole. It was subsequently found that the choice of facade system was not compliant with the relevant building codes and regulations. This then led to the identification of the facade consultant as potentially being liable. In order for the claimant to preserve its right to pursue remedy in view of the limitation period, it is important that the survey report is structured appropriately. This is because, the alternative period of three years from the identification of a new defendant is contingent upon whether the claimant actually had the requisite knowledge or ought to have the requisite knowledge to carry out a detail examination sooner. The primary way that could have prompted the claimant to investigate further is based on the advice given by the building surveyor through his report. Whilst the requirement to carry out a more thorough and potentially invasive examination could be costlier, it may be wise to do so given the negative legal consequences of any inaction. The scope of services of the building surveyor should include the additional option of enlisting the services of an appropriate external specialist where necessary. Any additional fee should be negotiated and agreed in advance. Such additional fee should be inclusive of any follow up inspections after a pre-determined period of time. As some of these expenses may require significant capital outlay and are incurred on a non recurring basis, management corporations may be expected to raise contributions to sinking funds. This increase in contributions from subsidiary proprietors may be subject to approvals via ordinary resolutions during annual general meeting. Therefore, there are significant amount of planning expected in terms of ensuring funding availability prior to the engagement of building surveyor services. The council of management corporations may enjoy less flexibility and liberty as compared to single owner commercial property in this regard. Any failure to plan amounts to planning to fail.

Conclusion

Most prospective property owners do not dedicate much time in anticipating any potential defects in their property at the point of transaction. Most property owners probably spend more time in dealing with other aspects of property ownership such as rental income potential, financing options, location of property etc. Therefore it is quite common for them to expect that  if and when defects arise, the engagement of a building surveyor should be the be-all and end-all to resolving all the woes arising from such event. This could not be any further from the truth.




Koon Tak Hong Consulting Private Limited