Marble tiles are often used as cladding to walls or floors of main lobbies in high end commercial and residential buildings because these exude a certain unique aura of grandeur and opulence. One of the reasons for such unique characteristic is because it is extracted from natural quarry rather than manufactured in factories, thus carrying a distinct exclusivity in its aesthetics. However what is less commonly known is that such marbles, granites or natural stone works are extremely prone to contractual disputes, more so than standardised manufactured building products like ceramic tiles, homogeneous tiles, mosaic tiles etc. 

Ironically, the unique feature of natural stones which makes it aesthetically appealing is exactly the reason that renders it vulnerable to disputes. From the buyer’s perspective, it is challenging to precisely define the appearance of marbles that it seeks to purchase since these are sourced from natural quarry rather than designed and fabricated in a controlled environment such as factory. From the seller’s perspective, it is equally challenging to commit with absolute certainty if the desired marbles are indeed available in stone quarries. Whilst it is possible for parties to settle with generic marble specification, this can be a source of dispute if a large quantity of marbles supplied are rejected based on subjective aesthetic criteria. Therefore there is an element of guess work or risk at the inception of the agreement that had to be managed carefully.

The risks of the stone works are exacerbated when the buyer specifying the product and the seller supplying the product are not in direct contract with one another. Very often, such stone works are procured under a subcontract where the Employer nominates its preferred stone contractor to its main contractor, so as to avoid the risks that comes with contract privity. In other words, it is the main contractor that enters into an agreement with the stone contractor under a subcontract arrangement where the former has little or no involvement of the stone procurement process. It should be noted that the main contractor is usually not the party deciding on whether the stones supplied are aesthetically acceptable or in line with the design intent. These critical decisions are usually made by the architect in consultation with the Employer. Therefore, it is not surprising to find that stone works becomes a fertile ground for disputes which are avoidable to begin with. This article examines these problems in further detail. The multi perspective discussion included in this article will hopefully enhance one’s ability to frame the problems with appropriate context and clarity.

Issues With Natural Stones Specification

In an ordinary transaction, the buyer specifies the product based on certain brand or model and the seller supplies accordingly. There is no mystery to the goods being transacted. As alluded to in the preceding part of this article, marbles and natural stones in general are difficult to be specified in absolute certainty and accuracy because it is a naturally occurring stone sourced from quarries located in mountainous region. Mankind does not have control over how geological rocks are formed including its colour, grain variation and veining patterns in general. 

There are various generic trade names used to describe natural stones such as “Arabescato Corchia”, “Statuario Venato”, “Travertine” etc. These names are generic in that it could refer to stones originating from certain region that exhibit certain physical characteristics including colour tonality and vein-like features which contain mica or other trace of minerals. However even geological experts could at times disagree whether a batch of marble in dispute belongs to certain geological group or whether it conforms with its alleged trade name. This can be contrasted with other manufactured commodities such as a smart phone where no reasonable person would dispute over what actually is an iPhone 15, as there is an objective universal definition based on its appearance, model and operating performances. Due to the inherent subjectivity with the exact definition of natural stones, there are difficulties in enforcing such specification. These natural stones particularly marble are costly types of wall and floor finishes usually installed at prominent space within a building. Therefore the architect and interior designer are expected to be very sensitive and strict with the types of marble appearances that is deemed acceptable. 

To fully appreciate the issues pertaining to marbles specifications, one needs to understand what are the common procurement practices. At present, stone contractors tendering for projects are usually required to submit their bid prices based on amongst others, a pricing schedule with generic stone trade names as well as a set of specifications. The specifications may include amongst others, a description of the appearances of required marbles, the country of origin or region from which the marbles are to be sourced, the establishment of an approved control range after the contract is formed based upon a visit or several visits to the contractor’s recommended quarry. The said control range typically refers to several marble slabs selected from the identified quarry that conform with the architect’s design intent based on its physical appearances which include the exhibited vein patterns, colour tonality, knots, swirls, waves and overall aesthetic appeal. Upon establishing a control range of marbles, the specification further stipulates the subsequent cutting, polishing, dry laying and shipping of approved marbles from overseas quarry to the project site for its final installation.

Whilst the above general description of what can commonly be found in marble specification appear reasonable, in reality it could be fraught with risks for various reasons. Firstly, the contractor would be required to submit and be committed to its tender price even before having sight of the marbles that are deemed acceptable. Whilst there may be written descriptions of acceptable marble appearances included in specification, such wordings pale in comparison with actual visual confirmation of marbles that are required. That is why despite what may be written on the marble specifications, there is typically a mandatory requirement of establishing a control range that visually exhibits the acceptance criteria after the contract is formed. In other words, the definition of product to be transacted only crystallise after parties signed on the dotted line, at which point the water is metaphorically under the bridge. 

It should be noted that the unit rate committed by the contractor for any given type of marble is usually inclusive of an estimated percentage of wastages and rejections. If the contractor pays for 100m2 of marbles to the quarry owner for its marbles and expects only 70m2 are accepted or approved, the rejected 30m2 are nevertheless included in its unit rates and prices under the contract. Such projection is purely a commercial risk assessment that varies depending on marble types and its expected rejection rate. If the actual rejection rate exceeds original projection, this invariably result in financial loss. Anecdotally, marbles that are meant to be installed in aesthetic focal points such as grand lobbies, building entrances etc are expected to be more stringent in its selection criteria resulting in higher rate of rejections. Having the control range of marbles established post contract formation presents various commercial risks. Firstly, the control range could be significantly different from the contractor’s expectation resulting in higher rejection rate than initially anticipated. Secondly, the quarry recommended by the contractor may not have adequate supply that aesthetically matches the approved control range resulting in the need to explore new quarries and the consequential schedule delay. 

Issues With Subcontracting Arrangement For Stone Works

Marble and stone works in general are typically procured under a nominated subcontract arrangement where the actual agreement for the works is between the main contractor and a subcontractor with procurement efforts led by the Employer and its consultants. The architect and Employer are focused on the aesthetics of the building design that naturally motivated them to playing a lead role in shortlisting, tendering, interviewing, negotiating and finally selecting the stone contractor. Upon receipt of a nomination instruction from the architect, the main contractor will complete the subcontract execution process pursuant to the standard conditions. The main contractor will apply the agreed profit and attendance costs on the subcontract sum in lieu of the original prime cost sum. 

Whilst the main contractor usually assumes the execution risks associated with the stone works, it unfortunately has a limited role during the procurement of the stone works. Certain aspects of procurement process are understandably sensitive as it involves tender price comparison, commercial negotiations and tender interviews where commercially confidential information are only disseminated on a need to know basis. Therefore the main contractor is only meaningfully involved in the procurement when the stone contractor is selected and ready to be nominated under a subcontract arrangement. Consequently, various critical discussions pertaining to the choice of marbles and its acceptance criteria as well as the expected aesthetic appearances are done in the absence of the main contractor. 

Under the nomination procedures stipulated pursuant to the main contract standard conditions, there are certain protective measures available to the main contractor albeit on a limited basis. By way of example the main contractor may object to any such nomination if the subcontractor’s proposed programme is not consistent with its master programme or there are reasonable doubts on either the solvency or technical competence of the nominated subcontractor, amongst others. In reality however, most of these concerns would have been dealt with during the procurement process since the main contract document and nominated subcontract document are essentially prepared by the same consultant quantity surveyor. Therefore most if not all of the discrepancies or inconsistencies would have been addressed prior to nomination in order to avoid the main contractor’s objection to the very nomination.

The main contractor typically has no design and aesthetic related responsibilities under traditional procurement route but is now placed in a precarious position of being implicated legally and financially if and when aesthetic related issues arise on the marble works it “inherited”. In other words, if there are any disputes or differences on the scope of negotiation between its subcontractor and the architect, the main contractor is inevitably exposed despite its absence during those discussions. By way of illustration, assuming the subcontractor was unable to source for marbles that matches with the approved control range resulting in multiple rejections and schedule delay, the delivery of the project as a whole could be compromised. Other subcontractors that are suppose to commence their subcontract works upon completion of marble cladding installations will be consequently delayed and would rightly be expected to claim for financial compensation and time extensions from the main contractor. Likewise as regards the stone subcontractor in dispute, its only recourse will be legal action against the main contractor due to contract privity. This is despite the fact that any dispute in rejection of stones is essentially an issue between the architect and the stone contractor. The main contractor unfortunately becomes the proxy of disputes. If and when the dispute deteriorates to an advance, acrimonious and irreversible manner, it could result in the termination of the subcontractor’s employment and engagement of a replacement stone subcontractor. This drastic contractual measure however does not quite solve the root of the problem. This is because the replacement subcontractor is unlikely to be able to source for marbles that matches with the approved control range that was first establish under the original subcontract. The original control range could have been extracted from certain quarry many months if not more than a year ago and there is no way to guarantee that a new batch of stone sourced will exhibit the same physical characteristics as desired. That is just part and parcel of working with Mother Nature. Despite the original problem remained unresolved, the main contractor is now required to expend precious resources to deal with the legal ramifications following the contract termination actions. 

Process vs Product

When drafting a specification for any given scope of works, it is important to ascertain whether one is primarily focus on the end product or the process of creating/manufacturing the very product. It is a balance between two considerations namely ‘product’ and ‘process’. In the earlier part of this article, an analogy was made using iPhone to illustrate the importance of having a universal definition of the subject of transaction for avoidance of misunderstanding. Using the very same analogy but applying it on the balance between product and process, one has to ascertain whether it is more important to focus on the appearance, operating performance and function of the iPhone or should one place more emphasis on where the iPhone is assembled, the country of origin of its electronic components and where the rare earth minerals used in the iPhone are sourced. If the end user is indifferent about the manufacturing process but is more concern about how the end product will perform, aesthetically or otherwise, then the specification should be more product focused. Using the construction technical parlance, it is the balance between performance based specification vs prescriptive based specification. 

As and when marble related disputes arise, it is often associated with the end product in particular its appearances or aesthetic performance. Admittedly, there could other non appearance related issues resulting in rejections such as damaged/ broken marble tiles, lack of anti slip surface treatment resulting in safety hazard or even poor workmanship in installation. These issues however can often be resolved relatively easily because the problems can be objectively defined and issues are self evident. 

It is not uncommon to note that most marble or natural stone specification in use are disproportionately focused on the process rather than the product. It is quite common for specification to include various processes such as the region from which the stones should be sourced, the geographical identification of the quarries from the prescribe region of origin, the number of marble blocks that had to be produced from the selected quarry before marble slabs are cut from these blocks, the types of machine used for cutting and polishing of the marble slabs into marble panels/ tiles etc. It is entirely possible that the end product marble may still not be aesthetically acceptable even if all the specified processes are fully complied. In fairness, there are also opposing views on this matter which are quite understandable. Some may take the position that by instituting rigorous processes and approval ‘check points’, it allows early warning if the marble in production are not acceptable rather than to learn about it at the eleventh hour when these are delivered to site.  Also, since there are pricing premiums for marbles from certain regions, it is entirely reasonable to have certain means of verification. In view of the different perspectives on the above mentioned issues, it is advisable for the Employer and its consultant to discuss and debate the above mentioned issues thoroughly in order to decide the best way forward. The specification should be a strategic document that is drafted on a project by project basis rather than a default template document used on a recurring basis.

Off Site Challenges

The architect usually discharges dual function in most construction projects where he firstly designs the building and secondly ensures construction works conforms with his design intent. As regards the marble and natural stone construction works, his latter function with respect to supervision and quality control becomes challenging when the quarries are located in various regions around the world. It is therefore quite common for a project domiciled say in Singapore to have its marbles sourced from several countries simultaneously such as Turkey, Italy or China. Where building materials are sourced in a foreign country, there could be various off site challenges such as workers strike affecting shipping and port clearances, breaches of environmental laws in respect of mining activities in specified quarries resulting in suspension of works, closure of site over winter period etc. The architect’s ability to manage these situations is further compromised if he does not have sufficient local representatives that could deal with those challenges with the relevant on the ground connections and relationships. Whilst these execution risks could be outsourced to the contractor through the terms of the contract, the architect is ultimately responsible to the Employer for the choices of material specified for the purposes of his design. 

As the marble and stone works are usually administered under a nominated subcontract, this usually indicates that the design approval is obtained from the Employer at a fairly advance stage of the construction works. It follows that the marble and natural stone works had to be executed over a compressed period of time. If and when any of the above mentioned off site challenges occurs during the subcontract period, there is very limited margin of error. Therefore as a matter of risk management, the architect usually favours having some form of his own representation being available on the ground where the marbles may be sourced. These architectural representatives had to deal with a whole host of issues including inspecting and approving dry lay of marble tiles, ensuring that the marbles sourced complies with the acceptance criteria set out in the control range, production of photographic reports of approved marbles for proper record and contract administration etc. These local representatives however are not the building designers and therefore the architect will have to provide his own final approval as and when necessary. In doing so the architect has to balance between ensuring only the approved marble tiles are shipped from these overseas locations and the logistical reality of not being on the ground most of the time. Whilst the architect could specify in its requirement that the stone subcontractor to provide certain manpower on the ground, he has to consider the need for check and balance in quality control and supervision. 

One of the possible solutions in overcoming the problems mentioned above is by procuring the marbles from the various regions ahead of schedule, even before the nominated subcontractor is engaged. These marbles could be purchase by estimation of quantity based on the latest design drawings and be shipped to a fabrication site located close to the project. In other words, the marble and natural stones could be procured in a manner similar to a regular long lead item where the ‘supply’ and ‘installation’ functions typically expected from a stone contractor are decoupled. Since bulk quantity of marbles are purchase in advance via a single transaction, the marbles’ veining and colour tonality are likely to be consistent, thereby reducing the risks of incompatibility in appearances. This is because these marbles are sourced within the same vicinity in the selected quarry that are subject to similar geological effects.

Conclusion

Given the risks associated with marbles and natural stones cladding works and the recurring types of disputes, it is in all parties’ interest to adopt a procurement practice that is mutually beneficial. Very often when disputes occur, the parties concerned are likely to believe that the procurement system could have worked better to mitigate or even completely avoid those issues in hand. The key is to act on those beliefs by improving the procurement system and risks allocation in advance.




Koon Tak Hong Consulting Private Limited

Construction programmes or schedules are contractually required to be submitted by the main contractor to a Contract Administrator such as the Architect, Engineer or Superintending Officer (SO) for approval at the beginning of the project for two main reasons. Firstly, it allows progress of works to be monitored and secondly it facilitates assessments of any extensions of time. The programme is such an important document that usually most standard forms of contract provide certain penalties for failure to obtain its approval in a timely manner including withholding parts of progress payments or even restraint from commencing any works.

Despite the criticality of such document, the contract rarely prescribe the types of programme, particularly the specific nature of information that should be included in those programmes. Instead, the definition of what is considered acceptable or will be approved is not clearly defined leaving the Contract Administrator with broad discretionary power, that can be a source of dispute. This article examines the types of construction programmes in general and the respective functions of these documents. Having a fundamental understanding of these concepts is critical to providing clarity to programme related contract provisions.

Baseline Programme

Baseline programme is the first accepted and approved programme produced by the main contractor at the commencement of the project. Such initial programme will almost certainly be revised during the course of construction in response to a dynamic site condition such as encountering underground obstruction, revision in building design or simply a new timeline to catch up after a series of delays. Due to such likely revisions, the presence of a baseline programme that will objectively reflect the scope and extent of changes in timeline is crucial. This is because the records of any revisions or changes in schedule is likely to shed light on what are the underlying causes of delay and the party that is likely to be responsible.

A baseline programme that is complemented with relevant data, records and information inevitably becomes a more effective tool in monitoring progress of works and measuring any extensions of time. A baseline programme should at a minimum be accompanied with resource records, progress records, cashflow statement as well as other certification documentations such as instructions, directions and related correspondence. Firstly, this is to ensure that when one is examining the timeline planned for any given works, it is also able to appreciate how realistic such timelines are given the resources available to support the target dates. Secondly, if and when the plans are not executed as intended, what are the scope and extent of delay and disruptions if any. Very often the programme related provisions under standard forms of contract are not sufficiently prescriptive in describing how comprehensive should a baseline programme be for it to be approved by the Contract Administrator. The reluctance to be prescriptive may be due to the perception that any approvals given may signify that the consultants are committing to providing certain information to the main contractor in accordance with the targets indicated in the baseline programme. Contrary to popular belief, the building design is rarely developed in its entirety when the construction contract is formed. Very often, during the course of construction the contractor may continuously issue Request for Information (or RFI) related document to the consultants to seek further details to facilitate construction. 

The baseline programme, as with any other types of programme is usually presented in a critical path method where the entire timeline is divided into various activities which in turn represent various trades of works. These activities are linked logically based on a certain sequence of construction. There are various softwares available in the market that present the programme based on a critical path method. At the project level, the same software should be prescribed so that all parties can work on the same platform. When examining such programme that is linked activities by activities, the key focus should be the interface logic linking one activity to another where it usually signifies the completion of one activity leading to the commencement of the subsequent activity. This is the area where the impact of delay is demonstrated. By way of example, if the casting of concrete wall is delayed, the subsequent painting to the very same concrete wall would be delayed as well, since no painting work can commence without the wall in place. In other words, there is a logical sequence between one activity leading to another activity. However in reality there could be other reasons causing delaying impact to the painting work even if the concrete wall is in place. For example, there could be multiple concurrent activities occurring around the vicinity of the concrete wall causing site congestion. This is likely to occur when an ambitious contractor plans various activities simultaneously without considering the resource constraint critical path. Therefore in examining a draft baseline programme, a shrewd Contract Administrator will be sensitive to the logical links between activities in order identify spots that are vulnerable to extensions of time. The resource records becomes useful in verifying whether the contractor actually has the resources necessary to support its proposed baseline programme.

The overall critical path of the entire project refers to the longest path from the start of the first activity to the finish of the final activity. It is the schedule route where if any delay occurs along such path, there would be a corresponding delay to the practical completion date. This explains why the phrase of ‘critical path’ where every activity along such path is considered critical activity. Any other alternative paths is considered ‘float’ since a delay along such alternative route may not give rise to delay in practical completion. The presence of alternative paths meant that the definition of critical path gets revised from time to time in order to accommodate or cushion any delay without causing a delay to completion. The exact route of the critical path exhibited in a baseline programme becomes important because any corresponding change that arises often becomes a focal point in forensic delay analysis.

Contemporaneous Programme

Contemporaneous programme is also known as the revised programme or updated programme. In essence this is a revised version of the baseline programme. As programmes could be revised multiple times during the course of construction, each contemporaneous programme could also refer to a corresponding snapshot of the prevailing timeline of the project at a moment in time. Should a contemporaneous programme be produced at an agreed interval? Or should it be produced at the discretion of the Contract Administrator, presumably when the project is in delay and in need of a fresh plan to catch up or even mitigate those delays? It appears that there is no one unified industry practice and different standard conditions of contract takes a different approach. Most contract forms place emphasis on the production of the baseline programme but unfortunately do not place an equal emphasis on contemporaneous programme. This could be due to the lack of appreciation of the importance of contemporaneous programme or the intentional deference to the Contract Administrator. Since extension of time provisions are typically drafted with a fairly elaborate mechanism, one would imagine that there should be an equally elaborate provision governing the production of contemporaneous programme. This is because each snapshot of timeline provides a forensic insight into the state of the project schedule, that is necessary to assess extension of time. 

Substantively, every feature that exists in baseline programme should equally be included in contemporaneous programme. Elements such as critical path methods, resource records, logically linked activities, progress records etc should be updated in every version of contemporaneous programme. This is to ensure a like for like comparison when one examines the evolution of a project schedule within the contract period. In every revision of contemporaneous programme, the actual resources utilised, actual duration taken for specific activities, actual critical path of the schedule, actual progress of works achieved etc are incorporated in the prevailing schedule. Likewise, any change in planned resource to be utilised, planned critical path, planned sequence of works are updated if any. Therefore, a contemporaneous programme provides both the prospective and retrospective views of the project schedule at a moment in time. A factual retrospective record of the timeline is crucial for certain types of delay analysis methodology such as the ‘time slice analysis method’.

Given the undeniable evidentiary value of each contemporaneous programme, it begs the question of what should be the philosophy on the frequency with which such programme should be produced? Some view programme as a ‘reaction’ for delay where it should be available only when the schedule is in issue. Others view programmes as tools of ‘prevention’ by having these in place prior to any dispute. Whether it should be a tool of reaction or prevention, it is ultimately a function of cost benefit analysis. It is undeniable that whilst the presence of contemporaneous programmes is beneficial, it could be costly since professionals with reasonable level of competence had to be dedicated to such intricate assignment. Traditionally, main contractors being the party claiming for extensions of time are more incentivised to ensure the availability of evidence to support its claim. Rightly or wrongly, the Employer may take the position that the burden of proof is on the main contractor as regards extension of time. Therefore, the Employer is less likely to dedicate such resources accordingly. Consequently, such cost is usually incurred by the main contractor on a case by case basis depending on the risk profile of the project in hand. On the other hand, there is also an alternative view that contemporaneous programme should not be produced on a regular interval but rather be created on as-needed basis. The problem with this approach is that when need arises namely when the schedule is already in delay and parties are at odds with the causes of delay. Therefore it is not uncommon to see that parties who are in a difficult relationship could not agree on anything including what should or should not be included in the contemporaneous programme. In such a case, contemporaneous programme does not solve the problem but rather adds to the scope of disagreements. Delay analysis can become contentious in the absence of contemporaneous programme because parties are now required to engage expert witnesses to construct their respective theoretical contemporaneous programme in case of arbitration or litigation. This could add costs to dispute resolution.

As Built Programme

As built programme is a factual record of the timeline of a project that is sometimes known as constructed programme. For projects that produce contemporaneous programme on a regular time interval, as built programme represents the penultimate version of the contemporaneous programme. One of the shortcoming of as built programme is that it is usually a manifestation of different activities and the duration taken but without the inter activities logic linking one another. Further, as built programme only depicts when certain activities in issue commence and finish without shedding light on what could have caused the delay. Therefore as built programme does not usually exhibit the as built critical path. The user of as built programme, such as delay analysts are usually required to develop a critical path based on their professional opinion by way of deduction. Such deduction usually involve a comparison with the baseline programme or the appropriate contemporaneous programme. Such process of deduction involve application of common sense and logic guided by clear definition of what constitute commencement and completion of any given activity. By way of example where two interfacing activities are executed in a certain geographical phase of work with overlapping period, it can be tricky when defining commencement and completion. Further, parties should ideally have agreed in advance on the common method of delay analysis. 

Although most construction contracts stipulate submission of as built drawings upon project completion, it is extremely rare that the contractor is required to produce an as built programme. In Singapore, as built drawings of completed buildings are required in exchange of statutory approvals for occupation. However as built programmes are rarely required except when parties are engaged in legal proceedings which involve forensic delay analysis. Obviously as built programmes are almost exclusively used for delay analysis as there is no need to monitor progress of works anymore upon completion of project. Consequently, the factual veracity of as built programmes are under tremendous scrutiny where disputing parties would cross check the as built programme with other contemporaneous records of the project such as project cashflow, progress payments, progress reports, correspondence, approved method statements etc. To the extent that there are discrepancies or conflicting information, disputing parties will challenge the accuracy of the as built programme in support of their pleaded positions. Therefore, for as built programmes to be useful and reliable it should be as accurate, true and correct as possible.

Assessment of Extension of Time Using Different Types of Programmes

Based on the preceding sections of this article covering different types of programmes, it is clear that every programme offers a unique perspective of the project schedule. These perspectives in turn give rise to different methods and options in assessment of extensions of time. However in reality parties are not at all spoilt for choices but rather constrained by limited options in delay analysis. This is because most construction contracts do not have a robust regime to produce different types of programmes at appropriate time intervals. As alluded to earlier, most contract forms place certain emphasis in the production of the initial baseline programme and leaves the subsequent programmes to the discretion of the parties. There is also very limited specificity on the types of information that should complement these programmes. Any revision to programmes are usually initiated when there are issues with the project timeline as a reactionary measure. If and when parties are engaged in legal proceeding, the water is metaphorically under the bridge. Consequently the delay analysis options available to the parties are dictated by documentation available and the quality of information included therein.

There are a variety of methods in assessing extension of time. There are no laws that seek to recognise or sanction only certain methods of assessment and therefore there is no issue of legitimacy of one method over another method. There are however certain methods that are more widely discussed and adopted, thus considered as being more “popular”. The methods referred to in the subsequent part of this article are therefore by no means exhaustive.

If only a baseline programme is available, one of the delay analysis options is the ‘impacted as-planned’ method. This approach is one of the least complicated methodology thus best known for its simplicity. Such simplicity also make it less costly and less time consuming to be developed, making it the preferred approach when there is a tight budget in financing an arbitration. However its very simplicity is often argued as a double edged sword in that certain aspect of its result could be deemed theoretical and departs from what actually occurs on site. Therefore if this method is applied to a complex multi faceted development, it could be vulnerable under cross examination. In essence, the delay event is ‘impacted’ or ‘introduced’ on to a baseline programme that is logically linked and with its critical path exhibited. Consequently the planned finished date is compared with the impacted finished date to identify the schedule overrun. This method does not cater to concurrent delay and the impacted programme may not represent the reality or factual records available, thus often seen as theoretical. The other difficulty is the argument of what is the actual delaying event or the root cause of the schedule overrun. Parties in dispute rarely agree on what constitute the delay event since the baseline programme would have been revised when the disputed event occurs. 

Where the project consistently produces contemporaneous programmes on a regular interval beyond the initial baseline programme, there are more delay analysis options available to the parties. These additional options arguably increases the credibility and quality of extensions of time assessments. Under such circumstance, the parties could consider adopting the ‘time slice analysis’ amongst other options. As the term suggests, it involves slicing the entire project timeline into smaller windows. Every window is recorded in a contemporaneous programme. What should the duration be for each window? One could define the window based on a fixed duration say one month, or based on the duration where the occurrence of certain delay event and its ramifications are in focus. In case of the latter, assuming a delay event occurs and affects only three consecutively linked activities, there could be three windows in total where each window represents the duration to complete each activity. Each window depicts both the contemporaneous events occurred on site and the planned activities immediately thereafter. Therefore it provides both retrospective and prospective view for any given moment in time. Both the forward and backward view facilitate assessment of extension of time in an upfront manner rather than to procrastinate these contentious issues until project completion. However, for this method to be fair and effective it requires both parties to be proactively and consistently engaged in programme matters rather than to leave these details to either one party. If it is left to only one party, say the main contractor’s programmer, there may be inadvertent adjustments made to the subsequent window to neutralise any delay occurred in the immediate past. Such adjustments could conceal the real delaying impact and affects the assessment outcome. When compared to the impacted as planned method, this delay analysis is premised on more facts and actual site records. This addresses any concern of being overly theoretical and being detached from reality.

If one were to primarily rely on as built programme for the purposes of delay analysis, presumably due to lack of credible contemporaneous programme, one of the assessment options available is the ‘retrospective longest path analysis’. This method uses as built programme that consists of actual start and finish dates, including actual project completion date. The as built critical path (may be different from actual critical path) is thereafter determined by tracing the longest continuous path from the actual completion date to the project commencement date. Once this as built critical path is established, delay events that occur on such path is examined by comparing it with the original planned dates indicated in baseline programme. Admittedly, such approach ignores any change in critical path during the construction duration which commonly occurs that could have been the actual critical path. To the extent that these critical paths differ, it could be vulnerable to attack under cross examination. Also, in the absence of credible contemporaneous programme, it could be time consuming to establish a critical path that is in sync with much of the project records. This could be exacerbated by any modification in construction sequence or methodology that renders the comparisons with baseline programme obsolete. 

Conclusion

Programmes can be critical in affecting the delay analysis options available. Availability of credible programme related information is directly correlated with a robust delay analysis that could withstand scrutiny. Unfortunately to this end, there is still much room for improvement in ensuring standard conditions of contract institute appropriate programme related regime. Just as contract prices and rates are important for valuation of variations, timeline related information are also important for assessing extensions of time. There should be an equal and balanced emphasis in this regard.




Koon Tak Hong Consulting Private Limited

This is part 5 of a series of articles comparing the main contract standard conditions of the SIA form published in 2016 and the PSSCOC published in 2020. In an earlier article entitled ‘Construction Insolvency Examined From Commercial Perspective’ that was published immediately before this article, there were several key observations that are pertinent to the issue of contractor’s insolvency. These observations include amongst others, the difficulties in defining insolvency, the challenges in relying on financial statements to assess solvency of any contracting firm etc. What is also clear from the previous article is that to effectively navigate the subject of construction insolvency, it requires application of a blend of different domains of knowledge such as construction law, insolvency law, accounting principles, asset valuation etc. 

This article examines a related issue but from procedural perspective, namely how both the SIA form and the PSSCOC deal with termination of the contractor’s employment arising from its insolvency. Whilst the earlier article focuses on the difficulty of identifying insolvency in a timely manner, this article deals with the effects of termination. Admittedly, the subject of termination procedures rarely drives the decision on which contract form to be used for any given project. However a cross comparison facilitates a qualitative assessment of various standard conditions. Even if one primarily uses the PSSCOC, an understanding of any provisions unique to SIA form triggers an intellectual enquiry of the best practices of post termination procedural measures. This is especially useful since there are various follow up actions expected on the part of the Employer and its consultant once its contractor is found insolvent. However these provisions are rarely invoked as compared to other more common provisions such as extensions of time, variations etc resulting in the lack of critical skills required to navigate the relevant procedures.

Notice of Termination vs Certificate of Termination

Understanding the difference between notice of termination and certificate of termination (also known as ‘termination certificate’) is important in navigating construction insolvency. In this regard, both the SIA form and the PSSCOC has a fairly similar approach. Certificate of termination is issued as part of the certification regime administered by an independent certifier namely the Architect under the SIA form and the Superintending Officer (SO) under the PSSCOC. On the other hand, notice of termination is issued by the Employer to terminate the contractor’s employment under the contract. Given this distinction, they should not be confused with one another and cannot be used interchangeably. 

It should be noted that where the contractor becomes insolvent in a manner defined under the contract, the Employer is required to issue a notice of termination. This is expressly provided for under Clause 32(7)(a) of the SIA form and Clause 31.1(2)(a) of the PSSCOC. Upon issuance of such notice, the contractor’s employment will be terminated immediately. What is also clear from this procedure is that the Architect or the SO is not expected to issue any certificate, which by implication means they are not expected to make an independent determination as to the solvency of the contractor. In reality, the Architect or the SO wears two hats where on one hand they are expected to be an independent certifier but on the other hand, they act as an agent to the Employer. This dual function appears to give rise to conflict of interest, therefore the Architect and SO ought to be aware of this distinction and should discharge their functions appropriately depending on circumstances. In this regard, the Architect and SO are likely to be involved, as an agent in all efforts leading to the issuance of notice of termination by the Employer.

However, in other grounds for termination by default such as acts of non compliance or breach by the contractor, the independent certifier is typically required to first issue a certificate of termination before the Employer issues its notice of termination. In these non insolvency related grounds for termination, the independent certifier is thus expected to make a fair and impartial determination on whether the contractor is in breach or non compliance that would justify termination by default. The Employer will then rely on such determination by way of certificate of termination to follow up with its own notice of termination. As an example, Clause 31.1(c) of the PSSCOC and Clause 32(3)(d)(i) of the SIA form provide for ground of termination by default if the contractor fails to proceed with the construction works with diligence and due expedition. If the independent certifier is of the opinion that such default occurs, a certificate of termination will be issued and the Employer may duly rely on the judgment of the certifier to issue a notice of termination. Therefore, such termination can be characterised as a two-step process. The insolvency related termination by contrast is a one-step process.

The likely explanation on why insolvency related termination is treated differently from other termination by default is perhaps the nature of insolvency. Insolvency is viewed traditionally as a financing or business accounting matter and is not typically within the scope of expertise of a construction practitioner. Whilst the effects of insolvency such as departure of key personnel, slow in progress of works, non payment to subcontractors etc are self evident, most insolvency termination provision are more pre-emptive. This could possibly explain why insolvency related terminations are carved out from other types of termination by default. 

SIA vs PSSCOC – Immediate Priorities Post Contractor’s Insolvency

Once the contractor’s employment under the contract is terminated upon the issuance of notice of termination, there are several key decisions and priority measures expected from the Employer and its team. Interestingly, the SIA form differs from the PSSCOC as regards some of such follow up courses of actions. Under Clause 32(8)(a) of the SIA form, the Employer shall have the option to either complete the remaining works or abandon the project entirely. There is no equivalent provision under the PSSCOC that expressly provide the Employer with such optionality. By contrast, under Clause 31.2(1) of the PSSCOC, the Employer is allowed to use any equipment, plant, structure, tools, unfixed materials etc left by the insolvent contractor for the completion of the construction works. Further, Clause 31.2(3) of the PSSCOC states that the Employer shall not be liable to pay any sum to the insolvent contractor until the expiry of defects liability period. These provisions collectively suggest that the Employer is expected to complete the project by default. 

Unlike the publicly funded project under the PSSCOC, the SIA form is primarily used by the private sector projects which are more vulnerable to market forces. Where the real estate market is suffering from a downturn coupled with project with very narrow profit margin, it is possible that an increase in cost may exceed its modest profit margin rendering the project commercially infeasible to be completed. It is almost certain that the cost of completing the very same project will be higher with the insolvency of the original contractor due to a few reasons. Firstly, there will inevitably be additional time required to procure a replacement contractor. This additional time frame would translate into higher financing cost due to interest charges accrued over an extended period of time. Secondly, the replacement contractor is likely to “inherit” the partially completed construction works and be responsible for any latent defects. This additional risk will increase the construction cost. This could explain the reason for contractually providing the option for the Employer to abandon the project.

On the other hand, there may be instances where the Employer may seek to continue the project in which case there are several consequential contractual provisions under both the SIA and PSSCOC to facilitate this course of action. Should the Employer decides to proceed with the project, its subsequent priority should be to determine whether it prefers to maintain the original team of subcontractors and suppliers or to leave that decision to the replacement main contractor. There is perhaps a stronger argument to maintain the original crew given their familiarity with the project scope of works including any building materials with long lead time for manufacturing and delivery. Maintaining the same crew could save time thereby mitigating any cost overrun. There are also alternative argument for allowing the replacement main contractor to decide whether to engage its own team of subcontractors. If the replacement main contractor is under pressure to complete the project with a compressed duration and also inheriting partially completed construction works, having its own team of subcontractors may alleviate some of the areas of concerns.

Assuming the decision is to maintain the original crew left behind by the insolvent contractor, there are provisions under both the SIA form and the PSSCOC that allow direct payment by the Employer. Under Clause 32(8)(d) of the SIA form, the Employer may directly pay any nominated subcontractor or suppliers as well as domestic subcontractors namely those privately engaged by the insolvent main contractor. This is provided that such payment does not violate any insolvency laws. The amount of such direct payment will then be used to offset against any amount that may be due and payable to the insolvent contractor. Whilst the PSSCOC include a similar provision for direct payment, there is a slight distinction in its application. Under Option Module C of the PSSCOC which deals with the subject of nominated subcontractor, Clause C5.0 therein allows direct payment by the Employer to the nominated subcontractor and thereafter offset such amount from payment due to the main contractor. It should be noted that this direct payment provision does not specifically refer to the context of termination arising from insolvency. Instead it refers to certification of interim progress payment where there are reasons to believe that the main contractor fail to pay its nominated subcontractor despite payment being certified under the main contract for the scope of subcontract works in issue. Arguably the Employer may still utilise this provision in the case of insolvency because where the main contractor fails to pay its subcontractor in a timely manner, it may be an indication of insolvency. It should also be noted that the PSSCOC in this regard confines any direct payment by the Employer only to the nominated subcontractor, to the exclusion of domestic subcontractor. In reality, if payment is confined to only nominated subcontractor, its effectiveness in mitigating delay and disruption in case of main contractor insolvency is muted significantly. The Employer should also be aware of scope of works that are self performed by the insolvent main contractor, without any element of outsourcing. The absence of any party keeping such works in progress could in effect disrupt the progress of works until such time the replacement main contractor is on board. 

Liquidated Damages After Termination

Does the insolvent contractor continue to be liable for liquidated damages even after its employment is terminated under the contract? The short answer is yes, and the insolvent contractor is deemed to be responsible for general delays that occur even after it is no longer responsible for carrying out the subsequent works post termination. Under Clause 32(8)(i) of the SIA form and Clause 31.3 of the PSSCOC, there are provisions for the Employer to recover liquidated damages after termination. The original rate of liquidated damages agreed by the insolvent contractor continue to apply. This explains why only the employment of the insolvent contractor that is terminated as opposed to the contract being terminated. This ensures that the conditions to be relied upon by the Employer for the purposes of liquidated damages survive the termination of employment. 

Once the contractor is insolvent, it is fair to assume that it is no longer capable of paying any financial compensation to the Employer. So is the exercise to compute the recovery of liquidated damages purely academic? There are actually some practical reasons for such computation despite the limited prospect of actual recovery. Firstly, such amount of liquidated damages can be used to offset against any sum that the Employer may be payable to the insolvent contractor for works done until the point of termination. Secondly, assuming a liquidator is appointed by the court to deal with the winding up process of the contractor in issue, such computation provides documentation clarity of the total scope of liability of either party. If there are any outstanding sum that the Employer is liable for, the liquidator has a duty of pursuing such sum according to its terms of reference. Whilst the rationale behind such computation is rather compelling, in reality the process can be arbitrary and somewhat theoretical. This is because the insolvent contractor is no longer involved in the project and therefore not able to make its case or claim as to why it should not be responsible post termination delaying event. Therefore, the independent certifier to a large extent is making its determination based on a fairly one sided narrative with limited check and balance. 

As alluded to earlier, both the SIA form and PSSCOC have its own provision to deal with liquidated damages post termination. There are certain differences between their procedural approaches although their general framework is largely similar. Under both contract forms, although the insolvent contractor remains liable for post termination delays, the certifier shall reduce the period of culpable delay to the extent that there are any failure by the Employer or its replacement contractor that would have entitled the insolvent contractor to extensions of time.

Under Clause 32(8)(i) of the SIA form, the Architect shall issue a Termination Delay Certificate upon completion of the project. Such certificate shall include the date upon which the contractor should have completed the project, the consequential full period of delay and total damages due to the Employer. This certificate is given on the same principles as a Delay Certificate under Clause 24 which is a unique feature of the SIA form. The Delay Certificate in general signifies that the contractor is in culpable delay which in turn triggers the Employer’s entitlement to liquidated damages upon its receipt of such certificate. Whilst it is stated that both Delay Certificate and Termination Delay Certificate shall be issued on the same principles, there is a fundamental difference between these certificates. The latter is issued only when the works are practically completed whereas the former is issued when the project is in delay, usually prior to the practical completion of the works.

On the other hand, the PSSCOC does not have an equivalent provision for delay certificate. Therefore, it follows that the Employer’s entitlement to liquidated damages under PSSCOC is not contingent upon the receipt of such delay certificate. By contrast, the SO is only required to issue a certificate of practical completion upon completion of the project pursuant to Clause 31.3(b). Such certificate shall state the full period of delay that the insolvent contractor is responsible for, the date of actual completion as well as the total damages due to the Employer. The other significance of the completion certificate in this regard is that the amount of damages certified shall be immediately recoverable by the Employer pursuant to Clause 31.3(c). Therefore by implication it suggest that in the absence of such completion certificate, say in the case where the Employer decide to abandon the project at the point of insolvency of its contractor, the liquidated damages are likely to cease to apply post termination. It follows that for the Employer to recover any liquidated damages from its insolvent contractor, it would be required to complete the project so as to crystallise the actual date of completion.

Calculating Costs of Termination

Calculating costs of termination is one important aspect of navigating the relevant termination procedures. After all one of the important objectives of termination procedures is to determine an amount that represents a fair and equitable financial closure post insolvency. The general principle of calculating the costs of termination is to identify any incremental cost (or even decrease thereof) that arises as a result of the contractor’s insolvency. 

The following is a simple mathematical illustration of such calculation. Let’s assume a project with an original contract sum of $1million to be constructed over a period of 12 months. The contractor becomes insolvent by the end of the 6th month, i.e. mid way of the construction duration. If the same project ultimately took 16 months to be completed at a final cost of $1.5million, the additional $0.5million is the incremental cost that would not have been incurred if not for the insolvency. Therefore the $0.5million is the first part of the termination costs which represents the engagement of replacement contractor. The other part of the termination cost is the liquidated damages due to the additional period of 4 months i.e. the schedule overrun. Assuming the liquidated damages for the period of schedule overrun amounts to $0.1million, the total cost of termination is $0.6million (taking into consideration the earlier $0.5million derived). Whether there is any amount due and payable by the Employer to the insolvent contractor or vice versa is dependent on the value of work done by the insolvent contractor prior to termination and the amount that had already been paid by the Employer against such value. Assuming the contractor had completed $0.5million worth of construction works but had only been paid $0.3million, there is an outstanding sum of $0.2million that the contractor should be entitled to. Therefore the net amount due and payable to the Employer is the difference between $0.2million and $0.6million, i.e. $0.4million. 

Under the SIA form, in particular Clause 32(8)(f), the Architect and Quantity Surveyor shall jointly issue a ‘Cost of Termination Certificate’ which takes into consideration (1) all possible cost components that makes up the $0.5million which represents the incremental cost and (2) any outstanding amount that the contractor is entitled to i.e. the $0.2million based on the example above. It should be noted that this Cost of Termination Certificate excludes the $0.1million of liquidated damages amount derived based on the schedule overrun as this is provided for under a separate clause namely Clause 32(8)(i). Since there is an outstanding sum of $0.4million that the Employer is entitled to based on the example above, there are several options available to the Employer to facilitate its recovery. Under Clause 38(2)(e) of the SIA form, the Employer could sell the equipment, plant and machineries left on site by the insolvent contractor for the balance amount that is due. Further, the Employer could, amongst others utilise the unconditional bond  or security deposit, if any that is usually prescribed at 5% of the original contract sum to make good the outstanding balance. 

The PSSCOC has a relatively simplified cost of termination provision which is set out under Clause 31.2(3). There is no specific certificate prescribed and there is also no requirement for joint certification with the consultant quantity surveyor. The SO is required to ascertain the ‘Employer’s Cost’ upon the expiry of the defects liability period which represents the incremental cost incurred as well as liquidated damages for the period of schedule overrun. In other words, the SO will be calculating such cost based on actual cost incurred which is unlike Clause 32(8)(f)(vii)(a) of the SIA form, where there is option for such cost to be estimated in advance once the insolvent contractor’s employment is terminated. The Employer under the PSSCOC can also utilise the security deposit and sale of insolvent contractor’s plant, equipment and machinery to make good any sum that it is entitled to arising from such termination.

Conclusion

The insolvency related termination procedures described above can be protracted, financially painful and complex despite elaborate mechanism stipulated. One would imagine that due to such unpleasant ramifications, this would encourage any Employer to be vigilant and cautious in scrutinising the financial wherewithal of tenderers during procurement stage. Unfortunately, most contract forms have more elaborate mechanism to deal with insolvency related termination than avoidance of insolvency to begin with.




Koon Tak Hong Consulting Private Limited

When a main contractor for any construction project becomes insolvent, the repercussions can be both financially and legally painful to the owner or the Employer. Whilst there are various literatures and articles covering this subject, a good amount is written from a legal perspective dealing with issues such as the administrative procedures in respect of codified insolvency laws, retention of title provisions etc. This article however deals with the commercial perspectives of insolvency contractual provisions such as termination clauses and its effectiveness. The purpose of this article is to equip construction practitioners such as architects, engineers, commercial managers and projects managers with practical knowledge of insolvency issues. These construction practitioners interact with contractors more often than lawyers as part of regular construction management and therefore are in a unique position to deal with insolvency issues pre-emptively. Insolvency should not be addressed only after the fact but instead can be mitigated proactively. Unfortunately, most construction practitioners rightly or wrongly do not view insolvency as part of their core professional expertise. This is because insolvency appears to be a subject that involves a blend of skills such as reading financial statements as well as appreciation of business valuation and  insolvency laws.

The key to mitigating and managing any risk is by first and foremost clearly understanding the definition of the risk in hand. As it will be evident from the next section of this article, the term ‘insolvency’ is not necessarily as straightforward as it should be. This becomes problematic because typically standard forms of contract include provisions that allow the Employer to terminate the contractor’s employment under the construction contract if such contractor becomes ‘insolvent’. The ability of any Employer to issue such notice of termination is compromised if the definition of insolvency is not as clear as it should be.

Does Being Insolvent Necessarily Mean That The Contractor Is In The State of Bankruptcy?

When a contractor is said to be insolvent, the general impression is that such company is in the state of ‘bankruptcy’ or that it is unable to pay its debts. It may casually be viewed as being in “financial death” that result in the company unable to continue its operations. However if the contractor has various tangible assets such as plant, machineries, equipment and building but faces a hard time selling these assets at a reasonable market price within a reasonable time frame in order to repay its immediate debts, the contractor should not be deemed as being in “financial death”. Such contractor may at most be considered as being in financial distress but with a reasonable prospect of being rehabilitated. 

However from the perspective of an Employer with a fairly conservative risk appetite, even if its contractor is not technically in a state of financial death but merely facing financial distress, such distinction offers very limited comfort. The paramount concern remains whether the project can be completed with the contractor in issue. Even if the contractor is able to complete the project, whether it will continue to be in operation to honour any defects rectification responsibilities as well as warranties that could last years beyond the expiry of defects liability period. If the Employer continues its progress payments to the contractor in issue, will those funds be channeled to the project in hand in order to sustain its cashflow? Given these legitimate concerns, one may notice that the definition of insolvency included in most standard forms of contract that justifies the use of termination clauses is worded in a broad manner. In other words, being insolvent under most standard forms of contract may not necessarily mean that the contractor is in the state of bankruptcy. Insolvency includes various trigger events that may not necessarily lead to the liquidation or winding up of the contracting company. Ironically these preemptive clauses may end up inducing the financial death of the contracting company.

Under Singapore’s commonly used standard forms of contract such as the Singapore Institute of Architects Building Contract (SIA Form) there are provisions allowing the Employer to terminate the contractor’s employment under the contract due to insolvency. Under its November 2016 edition, Clause 32(7)(a) stipulates grounds for termination due to insolvency of contractor. Under this clause, the Employer has the right to terminate if the contractor (i) becomes bankrupt, (ii) becomes insolvent, (iii) makes a composition with creditors (iv) under a winding up order (v) a receiver or manager appointed for the contractor’s assets (vi) possession of the contractor’s assets shall have been taken by the creditors or debenture holders (vii) the contractor’s assets placed under a floating charge (viii) a judicial manager is appointed to manage its financial affairs. The public sector standard form, namely the PSSCOC has a similar provision under its Clause 31.1(2)(a) based on its July 2020 edition. Evidently, these definitions are not only broad but also diverse in that it include a variety of events with different level of financial severity. In fact, from a commercial perspective, some of these events may not strictly speaking provide a conclusive indication on whether or not the contractor is in financial distress. Therefore, if the Employer unfortunately were to terminate the contractor’s employment based on some of the defined events, it could lead to an unsatisfactory commercial outcome. There are certainly rooms for negotiations on these clauses when parties enter into an agreement based on any of these conditions.

By way of example, one of the trigger events is when the contractor’s assets are placed under a floating charge. Floating charge is quite a common way for any company to secure a loan where the lender obtains a security interest over a group of non-constant assets that change in quantity and value. These assets are typically current assets such as inventory or account receivables. Instead of offering collateral for loan based on an identifiable fixed asset such as a building or an equipment, certain loan arrangement allow for non fixed current assets as an alternative form of collateral. If such floating charge pertains to company’s inventory such as building materials, the contractor can continue to buy, sell and restock these materials without the red tape of obtaining permission from the lender for every such transaction. One may argue that where a financial institution is agreeable to offer loan to such contractor based on floating charge arrangement, it indicates that the contractor concerned has considerable financial credibility. Therefore, it may not be appropriate for a contractor to have its employment terminated due to such financing activities. Ironically some contractors may require these very financing activities due financial pressure arising from various securities required by the Employer under the construction contract such as performance bond, retention monies etc. It may not be equitable for the contractor to be terminated if the underlying event is either directly or indirectly contributed by the Employer.

Another noteworthy trigger event that allows the Employer to terminate the contractor’s employment under the contract is when the contractor is found to be ‘insolvent’. In other words, the Employer is justified to invoke the termination clause, if it is of the view that the contractor is insolvent. However, what is the test of insolvency? Is it an event that can easily, readily and objectively be determined in all circumstances? To this end, there was a case law in Singapore where the judge applied the test of insolvency. This case was Founder Group (Hong Kong) Ltd (in liquidation) v Singapore JHC Co Pte Ltd [2023] SGHC 159. In applying the statutory test of inability to pay debts, reference was made to Section 125(2) of the Insolvency, Restructuring and Dissolution Act 2018. This section states amongst others that a company is deemed to be unable to pay its debts if it is proved to the satisfaction of the court that the company is unable to pay its debts and in determining whether a company is unable to pay its debts, the court must take into account the contingent and prospective liabilities of such company. In this case, the court applied the cash flow test, where a company is insolvent if its current liabilities exceed its current assets such that it is or will, in the reasonably near future, be unable to meet all of its debts as and when they fall due. The reasonably near future for the purposes of this test is taken to be twelve months. 

Whilst this article is not meant to delve into the legal details of this case, it is clear that this issue was adjudicated before a judge with two opposing parties arguing the merits of their respective cases. It is therefore reasonable to say that an Employer may not arbitrarily decide that a contractor is insolvent and should exercise its termination rights with caution. Based on the cited case above, there are instances where the question of insolvency can be heavily contested and legal test had to be applied to make an appropriate determination. Not only the term ‘insolvency’ does not necessarily indicate a state of bankruptcy, the legal definition of insolvency can at times be contentious. Again, parties should consider negotiating a termination clause with clearer definition of insolvency that takes into consideration regular financing activities. 

Challenges In Accurately Determining Solvency of Contractor Through Its Financial Statements

As the subject of insolvency can be tricky as illustrated in the preceding section of this article, it appears that one of the more accurate ways to have an informed view is by examining the contractor’s financial statements. Financial statements generally refer to balance sheet, income statement and cashflow statement which companies are required to produce on an annual basis subject to certain exemptions provided under the law. These financial disclosures are aimed at providing the company’s stakeholders such as lenders, clients, investors, business associates etc an insight into the financial status of the company concerned to facilitate decision making.

Whilst these financial statements may offer some helpful insights, these information are usually requested during tender or procurement phase of the project. Any financial information gleaned from the review of these statements are usually used as part of the tender evaluation criteria with a modest or minor weightage assigned to these considerations. Once the procurement phase is over and the contract is awarded to the contractor, there are usually no requirements for the contractor to continuously disclose any of its financial statements. During the tender evaluation process, it is usually unclear how these financial statements are used and what specific information are identified. Balance sheet, income statement and cashflow statement provide different types of financial perspective of the company and are usually used complementary to one another. Traditionally, financial statements related information are rarely the key focus during tender evaluation unlike other more “popular” topics such as tender price, method statement, proposed team structure, exclusions and qualifications. Rightly or wrongly, there is a presumption that if certain contractor had delivered and completed a similar type of project, it is likely to be able to repeat its accomplishment without much thought given to any change in its financial wherewithal.

Even if the necessary focus is given to the financial statements, there is a question of whether the information included remains updated and relevant. It is often said that the value of financial statements expires the moment it is completed. This is because the transaction data, book keeping entries etc are retrospective in nature, i.e. it is backward looking. By way of example, if a company produces its audited financial statement in April 2024 for financial year ending in end December 2023, those statements is good for use until the next financial statement which is due in April 2025. Imagine the company participates in a construction tender in November 2024 and discloses those financial statements dated April 2024 and was awarded the contract in January 2025. The construction period is for three years i.e. from January 2025 to December 2027. If the contractor is in some form of financial distress in the middle of the project i.e. January 2026, the only financial information available to the Employer and its consultant are assembled from transactions and ledger entries that could have occurred as early as January 2023, which is three years ago. Much like most of us would not be relying on bank statements produced three years ago to determine the balance of our savings accounts especially if transactions occur frequently, it is not wise for projects to be administered in this fashion. 

The issues that arise from the analogy above is two fold. Firstly, when a contractor is possibly in some form of financial distress, there is very limited information available to the Employer and its consultant to make its own informed determination apart from financial informations that were outdated by approximately three years. Secondly, when an Employer had to decide whether to terminate its contractor’s employment it essentially is required to make a judgment call based on its future ability to continue its operation. However the data available for such future projection is basically financial statements that are backward looking. Unfortunately, the Employer and its consultants usually will end up using more primitive methods of assessment such as hearsay and market rumours. Some may even rely on casual observations such as withdrawal of equipment from site, increased staff turnover, complaints of non payment by subcontractors etc, all of which are anecdotal at best. Given that the Employer may be required make critical decisions such as to call on the contractor’s performance bond, issue its notice of termination and to make arrangements to secure the site to prevent unauthorised removal of building material and equipment, it would be preferable for these decisions to be made based on concrete, timely and objective evidence. This is to avoid the Employer being in breach of contract by virtue of abandonment due to its own actions. 

Another challenge in relying on financial statement is that its measurement metric may not be entirely relevant to certain contracting companies due to its inherent nature. In the preceding section of this article, reference was made to a case of Founder Group (Hong Kong) Ltd (in liquidation) v Singapore JHC Co Pte Ltd. One of the subject of determinations was the question of whether the company in issue was insolvent. To this end, the court applied the cash flow test, where a company is insolvent if its current liabilities exceed its current assets. The term ‘current’ refers to a period of 12 months. 

As regards current assets that can be identified on balance sheet, it typically refers to liquid assets such as cash, inventory, account receivables etc all of which are either as liquid as cash or should be able to turned into cash relatively quickly and easily. As regards inventory for a contracting firm, it may refer to building materials such as marbles, granites, ceramic tiles or other similar claddings or finishes. If the contracting firm happens to have claddings that are ‘seasonal’ in its design, they may find it difficult to sell it quickly for cash because of rapidly changing design trend. Likewise, contractors may be in possession of marble slabs that are leftover from previous projects or had been rejected by the architect due to its thick and dark marble veins that are not in line with the architectural design intent. Whilst these marbles should technically qualify as current assets in the form of inventory, whether these can be sold quickly and at a reasonable price are remained to be seen. The observations above illustrate a fairly simple point in that the devil is in the detail when it comes to asset value.

The same challenges apply to account receivables as well in terms of its classification as current assets. These form of asset refers to invoice or bills due and payable by the clients or customers. Some invoices may have payment grace of 60 days from the date of its issuance whereas other outstanding payments may be due to customers with temporary cashflow difficulties. Once again, whether these outstanding payments can actually be collected remains in question. However until that happens, it is classified as current assets, not dissimilar from actual cash. One may argue that the firm could use these account receivables to secure trade financing to convert it to cash, with certain discounts applied to the face value or par value. Whilst by doing so allows account receivables to be converted to cash, it usually comes at a cost which in turn reduces the value of current assets. 

Another difficulty in accurately valuing current assets is whether its value shall be based on the cost paid by the contracting firm or should it be based on the price it might be sold in the market? If neither approach is suitable, is there an independent valuer to appraise its value? As the current assets are typically short term in nature, there is limited or no opportunity at all to value such assets accurately.

In view of the challenges illustrated above, it is evident that the cashflow test applied to determine insolvency can have varying results depending on how the current assets or even current liabilities are derived. Consequently, whilst these tests may have the veneer of a credible approach, the outcomes of such tests are debatable at best. The subjectivity of the commercial aspect to construction insolvency is actually similar to the application of insolvency laws, where contesting parties usually would have their respective interpretations.

Conclusion

It is established quite clearly that the determination of the solvency of any contractor can be a tricky proposition for three reasons. Firstly, the process of making an objective determination of the solvency of a contractor can be subjective particularly if it involves relying on retrospective financial statements. Secondly, the definition of what constitute insolvency can also be debatable if it includes not just whether the contractor can continue as a going concern but also whether the company is in financial distress with prospect of rehabilitation. Lastly, the consequences of making the wrong determination by the Employer on the solvency of its contractor can be extremely disastrous. It not only potentially induces the Employer to be in breach of contract, but it could also be the very root cause of a self fulfilling prophecy that resulted in the financial demise of the contracting company. Therefore, it is of paramount importance to appreciate that the subject of construction insolvency is a topic that is neither “purely legal” nor “purely accounting” matter. It is an issue that requires a blend of knowledge for one to make an informed and holistic assessment.




Koon Tak Hong Consulting Private Limited

This is part 4 of a series of articles comparing the main contract standard conditions of SIA form published in 2016 and the PSSCOC published in 2020. In previous article of part 3, a comparison was made between these very forms with respect to the subject of valuation of variations. This article however examines the procedure of claims set out in each contract so that one can be better informed on how to be prepared. Most construction contracts stipulate a set of rules that regulates every aspect of claims administration in order to provide structure to the process. Whilst most view these procedures as hurdles, these can also be treated as roadmaps to improve navigation and enhance claims quantum. Since the SIA form is predominantly used for private sector construction projects whilst the PSSCOC is mainly for public sector construction projects, these forms exhibit quite a different payment claim procedural framework. 

Whether or not certain instructions or directions issued to the contractor give rise to variations can be a subject of debate. If variations are established, whether there are entitlements to the contractor to claim additional payment and/or extensions of time are also issues that attract considerable amount of contentions. In order to delve into a reasonable amount of depth, this article only focuses on established variations that give rise to entitlement to additional payment. Even when a contractor is in principle entitled to additional payment for variation works, it is still required to navigate through a procedural framework stipulated under the contract before it is remunerated. A solid understanding of this framework and the ability to utilise it to one’s advantage will be some of the key issues discussed in this article. By way of example, there is a perennial debate on the degree to which the contractor should disclose its profitability in respect of the project in hand. Whilst it is understandably a commercially sensitive topic, an appropriate amount of disclosure may be advantageous in view of the claims procedure. The next section will deal with this issue in further detail with special focus on the difference in treatment between the SIA and the PSSCOC.

Element of Profitability 

As pointed out earlier, a contractor’s profitability in respect of a particular construction contract can be commercially sensitive. Profit provides an indication of how keen the contractor was to win a particular tender and the type of strategy that was utilised to secure the project. By way of example, a contractor may offer a deep one off discount in order to win a tender, by squeezing its profit margin to a minimal level with the intention of recovering its profit through subsequent variations that are likely to be instructed. The contractor may view that the tender documentation is done poorly which could result in multiple design changes during the construction period, all of which are profit opportunities. It is therefore natural that the contractor may be reticent about disclosing its profit level and also where had those profits been allocated in the pricing schedule. Given such sensitivity, most standard forms of contract do not have mandatory requirement for the contractor to disclose its profit. 

The PSSCOC as an example, has no requirement for profit disclosure and therefore it is not an element of consideration in the subject of claims of payment for variations. The SIA form however has a different approach where the contractor’s profit is an element of consideration in respect of the procedural requirement for additional payments for variations. However, it is not entirely easy to navigate the SIA’s procedural framework in this regard. Firstly, Clause 5(1) of the SIA which is an important part of the procedural framework that facilitates valuation of variations, requires the contractor to disclose each rate and price the percentages attributable to labour, material, plant and overhead expenditure. Whilst the contractor is not required to state the specific amount of its profit for each component, such breakdown of components is deemed to be inclusive of profit. On the other hand, Clause 12(4) of the SIA form which deals with valuation of variations refers to the element of profitability. In these references, it appears that the valuation mechanism shall have regard to the contractor’s profitability. In other words, the valuation should be done with the knowledge or at least some awareness of the element of profit. There are a few examples within Clause 12(4) to support this interpretation. 

Firstly Clause 12(4) states as a general principle that the variations shall be valued as closely as possible to the contractor’s prices without regard to any alleged element of high or low profitability in those prices. However in Clause 12(4)(a)(i) thereafter, the contractor’s rates and prices shall be applicable when variation works shall have been instructed at times and locations which shall have been readily absorbed into the contractor’s programme on the same basis of commercial profitability as the original scope of works. Whether or not certain works could be readily carried out on the same basis of profitability requires certain knowledge of the contractor’s profit margin. If the contractor’s original profit margin is 10% of the contract sum and the variation works instructed could not objectively be carried out at the same 10% profit margin, then such variation works should not be valued based on Clause 12(4)(a)(i). Unfortunately, if Clause 5(1) is taken into consideration, the contractor is not required to divulge its specific profit amount which appears to be at odds with the operations of Clause 12(4)(a)(i). So how should a contractor navigate these procedures? It should be noted that Clause 12(4)(a)(i) requires the contractor to be paid for variations based on its contract rates and prices, which usually is not favoured by the contractor. This is because those rates and prices may have been squeezed commercially due to tender competition. Therefore, in order for variations to be valued based on more advantageous approaches, the contractor must be able to demonstrate that variations could not be carried out on the same basis of commercial profitability. It is in the contractor’s interest procedurally to state a profit level for its rates and prices so that it could be objectively proven that variation works cannot be carried out based on certain commercial profitability. In the absence of the element of profitability, the burden is on the contractor to demonstrate why Clause 12(4)(a)(i) is not applicable. 

Clause 12(4)(c) also appears to support the interpretation that certain awareness of level of profitability is required under the SIA form. This clause in general provides additional compensation to the contractor beyond that of Clause 12(4)(a), which is favoured by the contractor from a commercial perspective. In order to benefit from Clause 12(4)(c), there are certain procedural requirements that had to be complied with including establishing the level of commercial profitability of the contractor’s pricing.  In order for this clause to be utilised, the variations shall not be readily absorbed into the contractor’s programme on the same basis of commercial profitability as the original works. Likewise any items of works with comparable unit rates and prices must differ in its costs or commercial profitability for the purposes of variation works. In terms of valuation methodology, Clause 12(4)(c) provides for adjustments to prices to account for any increase or decrease in commercial profitability. Again, this particular methodology requires one to be aware of the existing commercial profitability of the contractor as it relates to the original works. 

There is also an express provision under Clause 12(6) of the SIA form which deals with loss of profit in valuation. This is perhaps the most explicit provision so far under the SIA form which recognises that valuation should account for loss of profit that may be incurred by the contractor. This clause states that if the contractor is entitled to additional payment for compliance with an instruction issued under Clause 12(4)(c) amongst others, such payment shall be equivalent to decrease in profitability of the contract works resulting from such compliance. Once again, for a determination to be made on payment equivalent to decrease in profitability, there should be an awareness of such profitability.

The clauses in the SIA form cited above are important from a procedural standpoint because these set out a compelling reason as to why the contractor should state a profit level in preparation for claims. Even if there is no active effort on the part of the Employer or its consultant to seek profit related information, it is in the interest of the contractor to volunteer such information. The burden of proof is on the claimant, ie the contractor in so far as payment claims for variations are concerned. If one is able to comply with the procedural requirement, the better it is positioned to utilise the relevant clauses to its advantage.

Variation Not Carried Out In A Similar Condition Relative To Original Scope of Works

There are multiple assessment options stipulated under valuation of variations clauses in standard forms of contract. There are in general four such options with first tier utilising contract rates and prices. The fourth and last tier compensates the contractor based on its actual cost incurred plus a certain percentage of profit and overhead. In determining which tier is to be adopted, one of the key considerations is whether the varied works is executed under similar conditions to the original scope of works described in the contract. By way of example, if changes to concrete works is instructed after all concrete works under the original scope is completed, such additional works could not be readily absorbed into the contractor’s prevailing programme. Therefore additional compensation should be afforded to the contractor for remobilisation of concreting plant and machineries as well as any disruption to the existing flow of work. The contractor’s ability to demonstrate that the variation works is out of sync relative to the prevailing work flow is one of the key procedural requirements for additional payment for variations. To this end, the SIA and PSSCOC approach this issue quite differently. 

Under Clause 20.1(b) of the PSSCOC, if the varied works is not executed under similar conditions of the original scope of works amongst others, then the contractor shall be compensated based on extrapolated contract rates, which is essentially tier 2 of the assessment option. Purely from a financial perspective, a contractor would likely to prefer tier 2 to tier 1 as a means of additional payment. Therefore the contractor would have incentive to demonstrate that the varied works is not carried out in similar condition relative to the original scope of works. However what are the specific procedural requirements to demonstrate that works are not carried out in similar conditions? Clearly the phrase ‘similar condition’ can be subject to different interpretations. If a contractor is originally planning to install floor tiles to a building based on one building level per day, but only to be disrupted by change in types of tiles that reduces its productivity to a quarter of a level per day, does this qualify for extrapolated contract rates? One who is critical of the contractor’s claim may argue that the contractor is not prevented from carrying works under similar condition even though its revised work plan is not entirely identical to its original intention. Apart from the ambiguity in definition of the word ‘similar’, it is also unclear what specific documents should be produced by the contractor to fulfil the claims procedural requirement. 

On the other hand, Clause 12(4)(b)(i) of the SIA form states amongst others that if varied works shall not have been readily absorbed into the contractor’s programme, then Clause 12(4)(c) shall be applied with additional allowances added to the prices and rates. In this case, specific reference is made to the contractor’s programme which is an approved document of which its veracity should not be in dispute. Under Clause 4(2) of the SIA form, the Architect is required to approve programme submitted by the contractor and such approval can be taken into account in any dispute concerning planned sequence of works. Therefore the SIA form is more specific as compared to the PSSCOC approach. In reality however, programme takes a fairly long period of time for approval and when it is finally approved, a revised programme is already created to reflect the dynamic work sequence changes occurring on site. If a contractor under the SIA form does not have an up to date prevailing programme or that its last approved programme is factually superseded by site progress, it could be a procedural nightmare as it relates to additional payment for variation works. 

On the other hand it is understandable that certain practitioners may instead favour the PSSCOC approach because it allows flexibility. Not making specific reference to a programme means the contractor could rely on other documents to demonstrate whether or not varied works are executed under similar conditions. These documents include monthly progress reports, interim payment certificates, minutes of meetings, or even correspondences between relevant parties. Most of these documents are retrospective in nature unlike a programme which is typically prospective in view point. 

Advance Agreement to Cost of Variations

Whilst a contractor could comply with the procedural requirements by submitting the relevant prescribed documents, there is no guarantee that the certifier will value the varied works to the satisfaction of the contractor. Therefore instead of disputing over the payment amount after the varied works are completed, there is an alternative approach of having an advance agreement to the cost of any variation works before execution. This is procedurally provided for under the PSSCOC through its Clause 19.3. However there is no equivalent provision under the SIA form. 

Under Clause 19.3 of the PSSCOC, the Superintending Officer (SO) may before the issuance of his instruction for variations require the contractor to submit a quotation for the proposed works. The SO may before or after the issuance of his instruction accept the contractor’s quotation. Upon the acceptance of such quotation, the contractor shall neither be subject to valuation of variations mechanism under Clause 20 nor any further compensation for loss and expense. In other words, the amount indicated in the quotation shall be deemed full and final compensation for the varied works once it is accepted by the SO.

Based on the wordings of Clause 19.3 it appears that the option of agreeing to quotation ahead of the works can only be initiated by the SO rather than the contractor. The intention behind this arrangement is perhaps to avoid a complete bypass of the existing valuation of variation mechanism under Clause 20.1 of the PSSCOC by the contractor. This is because in submitting quotations, the contractor is not obliged to utilise its rates and prices included in the contract. In the event that there is no agreement to the quotations submitted, the default mechanism under Clause 20.1 should still apply.

Whilst the contractor may frown upon the idea that it does not have the right to initiate Clause 19.3, the quotation approach may not always be procedurally advantageous to its position. Although some may favour having upfront valuation certainty, it can be tricky if the contractor quoted an inadequate sum for the works due to reliance on inaccurate information provided by the SO. Clause 19.3 prohibits any further payment beyond the accepted quotation. By way of example, it is not uncommon for the SO to issue as built drawings to the contractor that purportedly represents the existing space where the additional works are intended to be carried out so as to facilitate submission of quotation. These as built drawings may have errors even if the SO had shared those information in good faith. Therefore from a procedural standpoint, if and when the contractor is required to submit a quotation, it may be worthwhile for the contractor to qualify in detail the basis of its quotation in case of misrepresentation. It could strengthen its case if the contractor believes that it is entitled to claim for additional payment beyond the accepted quotation.

Although there is no equivalent provision under the SIA form, the contractor is nevertheless required to submit its cost breakdown for the proposed variation works within seven days from the receipt of the Architect’s instruction. This is stipulated under Clause 12(5)(b) of the SIA form. In this submission, the contractor is required to demonstrate that the said costs breakdown is built up from the contract rate and prices for the varied works, including a milestone of stages necessary for completion of such works where required. If the contractor fails to provide such cost breakdown, the Quantity Surveyor under Clause 12(5)(c) may proceed with its own valuation for the purposes of interim progress payment. 

There are a few key observations in respect of the SIA approach as regards how it differs from the PSSCOC. Whilst the contractor is required to submit its costs breakdown seven days after receipt of an instruction, it is not for the purposes of advance agreement but rather to facilitate interim progress payments of associated costs for such works. At the point the cost breakdown is submitted, it is likely that the contractor’s calculation is made prospectively, i.e. prior to commencement or completion of the varied works. However, the Quantity Surveyor is likely to make its own assessment retrospectively, i.e after the works are completed. This difference in time frame between each assessment is likely to give rise to discrepancy in amount valued especially if the varied works are complex. It is also curious to note that the contractor is expected to provide its cost breakdown based on built up from its contract rates and prices. It is unclear how the contractor should proceed if it takes the position that a fair assessment should be made beyond the contract rates and prices, such as using actual prime cost incurred by the contractor or even prevailing market rates. Typically if the contractor make its own assessment based on actual prime cost incurred, the final cost breakdown can only be derived after the works are completed based on actual resources deployed working at actual level of productivity. This breakdown therefore could not possibly be submitted within seven days upon receipt of the relevant instruction.

Conclusion

In conclusion, the SIA form appears to demand more from the contractor as regards payment claims for variations from a procedural standpoint, as compared to the PSSCOC. To this end, the contractor is apparently required to disclose more information such as its profitability, its prevailing programme etc in order to fulfil the relevant procedural requirement for variations related payment. The contractor should therefore put in place a comprehensive claims managements process for avoidance of claims deteriorating into disputes. Ultimately it is unwise to have a single claims management process that is agnostic about the form of contract used for the project in hand. The process should be in sync with the contract form being used.




Koon Tak Hong Consulting Private Limited

This article is part 3 of a series of articles comparing the SIA form against the PSSCOC form. As with the preceding parts of this series, the basis of comparison is the main contract standard conditions of SIA form published in 2016 and the PSSCOC published in 2020. In general, the SIA form and PSSCOC takes a fairly different approach in its respective valuation of variations mechanisms where the former is more detail, structured and defined. However, valuation of variations is a unique area of construction law where its day to day application is more of a ‘technical matter’ than a ‘legal matter’. Therefore, the more granular a contract condition is drafted, the more challenging it could be for a non legal construction practitioner to understand and apply such provision as intended. 

Valuation of variation is an important subject because variation is most certainly part and parcel of administration of construction contract. It is famously said that nothing in this world can be certain except death and taxes. Likewise nothing in construction project can be more certain than variations. Without clarity in the way such variations are to be valued and paid, it could easily become a major point of contention and sources of disputes. A comparison of the different approaches in these two forms of contract allow one to have a more comprehensive qualitative understanding on how variations are supposed to be valued. Therefore comparison is a key plank to acquiring an in-depth grasp of a subject.

Variations under construction contract generally refers to changes to the scope of works that likely attracts financial implications which alters the contract sum. Various forms of contract typically provide its own definition of variations and are usually defined broadly including any change in character, quality or nature of any part of the construction works. In other words, the original scope of construction works agreed at the commencement of the project could be significantly different from what is finally built. Whilst the contractor could provide its tender price of the original scope of works based on the drawings and specifications issued, how should its price be amended in tandem with those changes introduced subsequently? The answer is in the mechanism of valuation of variations. Regardless of the types of contract form used for construction project, there are some general rules applicable to valuation of variations which will be elaborated in the next section of this article.

General Rule of Valuation of Variations

Variations are valued typically based on a tiered approach under most standard forms of construction contract. There are in general four tiers to this valuation structure. Under tier 1, the contractor is bound by its existing unit rates and prices included in the contract document. The extreme end of the spectrum is tier 4 where the contractor will be compensated based on its costs plus any agreed percentage that covers the overhead, profit, supervision etc. Purely from the contractor’s perspective, tier 4 is the most favourable method of valuation since it will be reimbursed for its actual costs incurred in addition to an agreed percentage allowance for profit. There is no commercial risk for the contractor in this regard. On the other hand the least preferred approach for the contractor should be tier 1. This is because the contractor is likely to have submitted competitive prices and unit rates during tender to secure the project. If the variation is valued based on contract rates and prices under tier 1, it is not guaranteed that it will even be able to recover its cost for carrying out the variation works. Tier 2 refers to the use of contract rates and prices to value variations with some allowances for these rates to be extrapolated or adjusted. Tier 3 refers to fair market rate. Given the opposing commercial preferences between the contractor and the Employer as regards which tier to be used for valuation, the mechanism that stipulates the choice of tier to be used becomes critical.

The choice of tier to be used for valuation is generally dependent on the timing in which the variations are instructed. The more disruptive the variations works could be to the progress of works on site, the higher the tier will be used to compensate the effects of such variations. Apart from timing, choice of tier is also dependent on whether there are existing unit rates and prices under the contract for the instructed works. By way of example, if the variation works involve replacing existing floor finishes with a different material that is not originally provided for under the contract, there will be no contract rates available to value such new works. Therefore tier 1 and tier 2 will automatically not be applicable, leaving the remaining options of tier 3 and tier 4.

Whilst most standard forms of contract adopts the principles set out above, there could be certain nuances and deviations based on different risk allocation philosophies. The next section of this article examines how the SIA and PSSCOC deal with its own valuation of variations mechanism.

How Do SIA and PSSCOC Deal With Valuation of Variations?

Clause 12(4) of the SIA form sets out its valuation mechanism. On the  other hand, PSSCOC has its main provision stipulated under Clause 20.1. Between these two forms, PSSCOC has valuation mechanism that more resembles the general rule set out above, with some modifications and additions. As pointed out earlier, the SIA form on the other hand has a more detail, structured and defined valuation mechanism that expanded considerably from the general rule.

Tier 1

Clause 20.1(a) of the PSSCOC resembles tier 1 where contract rates shall be used to determine the value of varied works if such works as compared to original scope of works is of a similar character, executed under similar conditions and are of moderate quantity. By contrast Clause 12(4)(a) of the SIA form resembles tier 1 where the unit rates and prices shall be applicable as means of valuation of variation. However in addition to valuing the actual variation works, the preliminaries expenditure may also be adjusted where necessary based on the make up of the contractor’s prices that are disclosed under Clause 5 of the SIA. The additional allowance under the SIA form for preliminaries costs in respect of variation claims is not widely practised as preliminaries are traditionally claimed under the heads of loss and expense. Proponents of the SIA approach will point out that by including preliminaries costs under valuation of variations, it allows the Employer and its consultant to appreciate the holistic cost of any variation works rather than just the direct cost of the actual works. Critics of the SIA approach however will argue that it is not advisable to unnecessarily blend variation cost with preliminaries cost/ loss and expense claim because these should be treated differently. Variation cost can be valued by simply measuring the quantities of the varied works and multiply it against unit rates. Loss and expense or preliminaries cost can be more complex and involves much more details for a proper assessment. This includes documentation proof of whether additional overhead resources are deployed as a direct result of the variation works concerned due to prolongation of operations on site, loss of productivity etc. These are not traditionally issues that will be implicated under simple and straightforward variation claims. If and when the valuation of a simple variation cost is magnified disproportionally, it may expand the time taken to complete the assessment and could affect payment and project cashflow. The complexity is compounded by the fact that there could be multiple variation works occurring on site simultaneously including breaches of contract by the Employer. It is not easy to establish a direct causation between each and every event with the relevant additional preliminaries costs. This is why the PSSCOC has a separate and distinct loss and expense clause from valuation of variation clause as with most other standard forms including the JCT form.

Tier 2

As regards tier 2, this can be found in Clause 20.1(b) of the PSSCOC. The SIA form on the other hand, deals with tier 2 under two separate provisions namely Clause 12(4)(b) and 12(4)(c). As mentioned in the preceding section of this article, tier 2 is in essence valuation using contract rate with some extrapolation or adjustments or fair allowances. This is when the contract rate itself is not entirely suitable due to various reasons. The term ‘adjustments’ or ‘extrapolations’ or ‘fair allowances’ are subjective. How contract rates are adjusted is often subject to debate. The extent to which contract rates could be adjusted is also grey. There is also an absence of adjustment/ extrapolation formula. By way of example, assume that the contract unit rate of 1m3 of ready mix concrete is $120/m3 and the parties are in agreement to use tier 2 mechanism to value a variation involving an additional 1% ready mix concrete from the total contract quantity. The contractor may claim additional cost based on $360/m3 because the quantity is small and requires additional trips of concrete mixer trucks working on overtime basis during peak period. The Employer’s consultant may disagree on the basis that three times the contract rate is no longer a mere fair allowance or extrapolation but a new rate entirely. It is not difficult to envisage how a variation of such nature with subjective valuation mechanism can be a source of dispute. The idea of having an agreed valuation mechanism should be to avoid or minimise dispute over how variations should be assessed. The situation is exacerbated by the fact that the SIA valuation mechanism under both Clauses 12(4)(b) and 12(4)(c) allow for additional claim for adjustments to preliminaries expenditure which in and of itself can be complex as well. This is because, various site plant and machineries for concreting works could be allocated under preliminaries cost allowing for duplicative claims under both preliminaries as well as unit rates. 

Whilst Clauses 12(4)(b) and 12(4)(c) of the SIA form appear to be part of tier 2 valuation mechanism due to certain shared similarities, there are some distinct differences between operations of these two clauses. In terms of similarity, both these clauses allow the use of contract rates and prices as the basis of valuation with allowances or extrapolation to be made to these rates and prices. In terms of differences, Clause 12(4)(c) is to be used only when the varied works shall not be readily absorbed into the contractor’s programme whereas Clause 12(4)(b) is used when there shall be no exact equivalent item described in the contract. One may reasonably struggle with such distinction. This is because where an instructed work is not readily absorbed into the prevailing programme, it also mean that the existing rates and prices is no longer of equivalence valuation wise. Another difference between these two clauses is the extent to which adjustments to existing rates and prices are allowed. As regards, Clause 12(4)(b) it merely refers to allowance for extrapolation whereas Clause 12(4)(c) allows adjustments made to prices due to (1) change in quantity (2) sequence of ordering (3) special physical and technical circumstances etc. However, it is interesting to note that Clause 12(4)(c) forbids rates adjustments due to change in the level of labour or material costs. In reality, to assume that one is able to make those distinctions clearly when making calculation of variation cost might require an exceptional high degree of optimism. By way of further example Clause 12(4)(c) emphasises that any valuation under this mechanism shall not take into account any change in “level of building cost”. However when extrapolation is made to existing unit rates and price, such extrapolation will invariably involve replacing elements of the existing prices with other elements of substitution that is considered more appropriate based on prevailing market condition. When prevailing prices are used in lieu of contract prices, it is challenging for one to ensure no change in level of building cost. Contract prices which are submitted during tender months ago before variations works are instructed are likely to be different from prevailing prices. Taking into considerations the characteristics of Clause 12(4)(b) and 12(4)(c) of the SIA form, it would appear that its counterpart under PSSCOC of Clause 20.1(b) seem a lot more straightforward and easier to apply.

Tier 3

As regards tier 3, this can be found in Clause 20.1(c) of the PSSCOC as well as Clause 12(4)(d) of the SIA form. Tier 3 is used when tier 1 and tier 2 are not applicable, presumably when the varied works involves new materials or finishes that are not provided for under the contract. This therefore requires the named consultant Quantity Surveyor and/or the certifier appointed under the contract to apply ‘fair market valuation’. 

It should be no surprise that the concept of fair market valuation can be both subjective and elusive. The outcome of the application such principle may vary depending on different point of views. From the Employer’s point of view, it is only fair if the valuation takes into consideration the price competitiveness of the contract rate in general when valuing such variation. From the contractor’s perspective, it is only fair if the valuation is based on prevailing market rates regardless of the price commitment made at the point of tender since the contractor could not have contemplated the variation works in advance. Some may also argue that the concept of fairness should duly take into consideration of the general level of profitability of the contractor with respect to its pricing under the contract. After all, the contractor should not be financially worse off for changes to works that are initiated by the Employer. In fact, the reliance on element of profitability is supported by the SIA form’s tier 3 where the valuation shall be based upon the contractor’s overall level of contract prices and profitability. Upon determining the profitability, the Quantity Surveyor shall not make any adjustments to such level of profitability. In other words, if the Quantity Surveyor is of the view that the contractor’s level of profit is allegedly 5%, this should remain fixed in his valuation under tier 3. This approach is however very unique and apparently not adopted under the PSSCOC. The PSSCOC’s tier 3 is rather brief and succinct where it merely states that ‘measurement and valuation at fair market rates and prices’. This brevity can be an advantage because it allows the valuation to be carried out without any unnecessary shackle.

Tier 4

As pointed out in the earlier section of this article, tier 4 is generally an approach where the contractor shall be paid for variation works based on the the cost it had incurred, including a certain percentage, usually 15% to account for profit and overhead. This is considered the most favourable approach for the contractor since it is guaranteed that the contractor will not be carrying out the variation works at a financial loss. 

It should be noted that tier 4 typically consists of two valuation routes namely tier 4.1 which is the day work rates method and tier 4.2 which is the actual cost plus 15% method. Whilst both these routes guarantee that the contractor will not incur any financial loss for the variation works, the documentation requirements are slightly different. Both the SIA form and PSSCOC adopt tier 4.1 and tier 4.2 but they are sequenced differently in the respective forms of contract. 

Under the SIA form, its tier 4.1 can be found in Clauses 12(4)(e)(ii) and 12(4)(e)(iii) whereas its tier 4.2 is in Clause 12(4)(e)(iv). Tier 4.1 requires the use of day work rates found in the pricing section of the construction contract where a list of hourly rates or daily rates for various construction resources such as plant, equipment, machineries, labour etc will be listed. The contractor will be required to document and record the number of hours or days that each resource are in use for the purposes of the variation works. Such records are then verified by the Architect or any of the authorised representatives by the end of the following week after the works are executed. Under tier 4.2, the valuation shall be based upon actual prime cost incurred by the contractor plus 15% allowance for profit and overhead. By default tier 4.1 will first be adopted under the SIA form. Tier 4.2 will only be adopted if tier 4.1 is not available where the day work rates are not found in the contract document. Tier 4.1 is the default option since the contractor is still bound by the day work rates that it had provided at the point of tender. There is no incentive for the contractor to carry out the works in the most productive manner since it will ultimately be paid based on actual duration it had expended provided that these are recorded and verified.

The PSSCOC’s tier 4.1 can be found in Clause 20.4 whereas its tier 4.2 can be found in Clause 20.1(d). The PSSCOC’s approach is completely the opposite to the SIA form as regards the sequence of these two routes. If tier 1, tier 2 and tier 3 are not applicable, then by default tier 4.2 will be adopted. The contractor will therefore be reimbursed based on its actual cost incurred including an additional 15% to account for profit and overheads. Tier 4.1 will only be used if the Superintending Office (SO) elects to do so. Just as the approach under the SIA form, those day work rates shall be applied based on recorded durations which had to be verified after the work is executed. Purely from a commercial point of view, tier 4.2 appear less administratively onerous and favourable to the contractor than tier 4.1. Therefore, it is curious why would an SO decide to adopt tier 4.1 in lieu of the default option of tier 4.2. The PSSCOC states that the SO is only required to opine that the adoption of tier 4.1 is deemed ‘necessary and desirable’. In reality however, it is likely that whether tier 4.1 or tier 4.2 is adopted, the outcome of valuation may be close or very similar. This is because, the day work rates submitted by the contractor are likely to be in line with market rates since these day work rates do not directly affect the competitiveness of the tender price. From the contractor’s perspective, the only element of pricing that are subject to competition are the composite unit rates of the actual scope of works included in the contract sum.

Lastly, there is a unique Clause 20.5 of the PSSCOC that is not found in most standard forms of contract including the SIA form. This clause belongs to neither of the four tiers. According to this Clause 20.5, the SO is authorised to adjust any of the contract rates if it is found to be excessive or inadequate. These rates can be replaced with other rates that are deemed fairer in line with the market rate. Since the power of the SO is only provided for under the contract, this clause is applicable after the construction contract is formed. It is curious as to why these ‘problematic rates’ are not negotiated prior to formation of contract. This clause appears to be a circuit breaker to the application of the four tiers of valuation since the SO is able to dictate an alternative rate that is deemed ‘fairer’. If this clause is invoked, it would appear that all four tiers are mere academic valuation options as one can bypass these options. It would be interesting to find out how often is this clause is actually used and whether it can withstand the scrutiny of a legal proceeding.


Conclusion

It is quite clear from the above that valuation mechanism of any variation works can be complex and differ according to the types of contract form being used. However, most construction practitioners usually adopt the same valuation calculation methodology regardless of the types of contract form being used. It is rare to see projects administer its valuation of variations differently according to the actual rules stipulated under the contract. This conventional practice ought to be reviewed especially if the project is prone to disputes which could culminate into legal proceedings. On the other hand, if one takes the position that valuation of variations rule ought to be clear and straightforward, the relevant clauses should be negotiated.





Koon Tak Hong Consulting Private Limited

Standard forms of contract commonly used in Singapore such as the SIA Building Contract, the public sector form of PSSCOC or the REDAS form for design and build projects are drafted based on risk profile of a typical construction project. The principle objective of a standard form of contract is that the contract should be sufficiently versatile to be used widely in construction industry for a variety of projects with minimal or no modification required. This article examines whether standard forms of contract are suitable to be used for construction of data center given its inherent unique characteristics. Is the contractual risk profile of construction of data center adequately addressed by conventional standard forms?

To facilitate the review of this subject, one needs to appreciate the general characteristics of a data center in particular what makes it unique and different from conventional construction project. For conventional projects involving construction of residential buildings, retail malls, hotels, schools or office buildings etc, the completed building is meant to be used by people or to host occupants. On the other hand, data centers are facilities to host and operate IT infrastructures. Apart from security personnels as well as IT personnels coming to data centers to perform specific technical tasks from time to time, there are very few occupants located at the data center. Given this inherent functional difference between data centers relative to conventional buildings, one can argue that data centers are designed mainly to cater to the needs of IT infrastructure hardware rather than people. Examples of IT hardwares include servers, racks, structured cabling, back up power, management platform, network security systems etc. These infrastructures are meant to perform enterprise applications and demanding computing tasks. With increasing demand for cloud computing by individuals and businesses, the need for data centers is poised to increase. 

When one is designing a facility to cater to the needs for infrastructure as opposed to individuals, the ultimate aim is to ensure that those infrastructure is provided with an environment that allows it to perform to a very prescriptive and objective standards. By way of example, data centers can be designed to achieved certain classified tiered standards namely Tier 1, Tier 2, Tier 3 and Tier 4 which is a measure of resilience, reliability and availability of redundancy. These standards are objective by and large. On the other hand, conventional buildings can sometimes be subjective in its standards as it is meant to cater to needs of its intended occupants with a range of tolerances and preferences. Such subjectivity is evident from the fact that individuals may have different opinions on what is considered luxurious condominium or from the fact that there is an absence of a global standard of how to design a retail mall.

Given some of the notable unique characteristics of data center mentioned above, it challenges the conventional way we appreciate common contract provisions found in standard forms of contract such as practical completion, maintenance period, extensions of time etc. This will be expanded further in the subsequent sections of this article.

Construction of Data Centers vs Construction of Regular Building – What is Practical Completion?

How the construction of data center is regarded as being “completed” can be very specific and objectively defined whereas this may not be the case for conventional buildings. Under standard forms of contract for conventional project, practical completion or substantial completion is the point at which the certifier appointed under the contract issues a completion certificate. This happens when he is of the opinion that the construction works appear to be complete to his satisfaction apart from minor outstanding works. Whilst the contractor is expected to complete the minor outstanding works within an agreed time period post practical completion, such works carried out by the contractor shall not unreasonably cause disturbance to the Employer’s full enjoyment and occupation of the property. There are multiple elements of subjectivity in this regard. Firstly, the degree to which minor outstanding works are considered acceptable and still qualify for completion certificate can be subjective. Secondly, the extent to which on going construction works are permitted without causing disturbance is a matter for assessment and could vary according to circumstances. In fact, the process of certification of completion that involves judgment call by an individual certifier in and of itself is subjective. What is considered completed to one architect may be unacceptable to another architect. 

The above is in stark contrast to the completion of a data center. Data center cannot be said to be completed and able to function until and unless the IT infrastructures installed are performing its computing task as intended. By way of illustration, if a bank’s dedicated data center is unable to power its digital banking applications, it cannot be considered as operational and completed. Even if the data center appears to be physically completed from the view point of an architect or engineer which would traditionally qualify for a completion certificate, the facility is of no use to the Employer if the IT infrastructures is unable to perform its intended computing applications. IT infrastructures demand very specific environment for it to function and its margin of tolerance is relatively narrow. One common example is the amount of cooling required to keep the data center temperatures low due to an enormous amount of heat generated by the IT equipment. The temperature allowance is designed based on amongst others the classes of data center equipment, ranging from A1 to A4, with A1 being the strictest temperature and humidity requirement. A1 refers to enterprise servers and storage hardware. The layout of data center is therefore design and build to achieve this temperature requirement, such as with the adoption of hot aisle and cold aisle layout with clear compartmentalisation of hot air from cold air for high efficiency. Even if the compartmentalisation is 99% effective, to the extent that the remaining 1% ineffective portion affects the IT infrastructures thereby disrupting digital banking applications, this is unacceptable to the bank or the data center operator/ owner. The usual element of subjectivity and tolerance for minor outstanding works including defects appear not applicable to a data center with mission critical enterprise applications. 

In this regard, the question that arises is whether the conventional provisions of practical completion under standard forms of contract are suitable for construction of data center? A data center can be described in the most basic term as being a reinforced concrete shell within which there are operationally sensitive IT infrastructures. Apart from offering protection and security to the IT infrastructure, the concrete shell also maintains a conducive environment for these infrastructure to function. This is analogous to the relationship between cranium and brain. The data center cannot be said to be practically complete if the associated IT infrastructure are not subject to testing and commissioning as well as demonstrably proven to be operationally ready. Rightly or wrongly, the design, procurement, installation of IT infrastructure are so specialised and unique that it cannot be traditionally considered as ‘construction works’. Therefore, it is tricky to determine whether it make sense to subsume IT works as part of the construction works for it to be administered under a standard form of construction contract. However, if the IT works are administered outside the purview of construction contract, it give rise to the above mentioned conundrum associated with practical completion. The delicate balance between IT works and construction works in reality implicates many other provisions of standard forms of contract, which will be illustrated further in the subsequent sections of this article.

Construction of Data Centers vs Construction of Regular Building – What is Maintenance Period/ Defects Liability Period?

Under standard forms of contract, defects liability period or maintenance period refers to a defined duration, usually any period between 12 months to 18 months after practical completion of a construction project. During this period the contractor is mainly responsible for completing any minor outstanding works and also to rectify any defects that the contractor is responsible for. Whilst the Employer had contractually taken over the completed building, the contractor maintains a relatively small crew on site to manage its residual responsibilities. Whilst this provision works reasonably well for conventional construction project, is it relevant for data center?

As alluded to earlier, the standard form of construction contract is drafted pursuant to the nature and characteristics of construction works rather than IT works. After all main contractors do not ordinarily have specialty and in depth technical expertise in the installation and operations of IT infrastructures. Therefore it is safe to assume that practical completion under standard forms of contract only refers to completion of construction works as opposed to IT works. It follows that IT works are managed and implemented by a separate IT team after the construction team achieves practical completion. In other words, the installation, implementation and testing of IT infrastructure occur during the maintenance period for construction works. 

One of the critical activities during the IT works involve testing and commissioning of the IT infrastructures upon installation. These tests are carried out in multiple levels beyond the initial factory acceptance test. The ultimate objective is to ensure that all equipments and individual hardwares are tested and could function as an integrated system based on the design requirements. Given the need for a holistic assessment of an integrated system, the testing invariably include some of the completed works constructed by the data center contractor such as the electrical power supply, including back up power supply as well as ventilation and cooling systems.  It is entirely possible for such test to fail due to reasons attributable to the contractor’s works. Therefore, it raises the question of whether the contractor’s works had reasonably achieved practical completion if it had not been tested in conjunction with the IT infrastructures. Should the contractor’s responsibility be confined to defects rectification and minor outstanding works pursuant to maintenance period. There is a need to clearly distinguish the differences between non completion as compared to minor defects post completion. Also, the traditional certification process carried out by the architect or engineer may not be suitable as a means of defining completion when in fact there is a more objective method involving testing and commissioning. Therefore it appears that the data center activities that occur during maintenance period is not congruent to the spirit and substance of the standard forms of contract. 

Upon achievement of practical completion, the contractor is expected to demobilise much of its workers, plant, machineries and equipment off site. Therefore if the testing and commission reveals that the construction works are not completed per specification, there could be debate on who should shoulder the cost of remobilising those resources. Whilst some may argue that the mere certification of practical completion does not prove that the works are fit and proper, there are practical realities that could have been addressed had the provisions in standard form of contract been synchronised with the realities occurring on site. By way of further example, upon achievement of practical completion, the contractor is entitled to its release of the first half of the retention monies and the liquidated damages is no longer in force. If the constructions works are found to be non compliant and required significant follow up works, the Employer loses its contractual leverage to a large extent. 

Construction of Data Centers vs Construction of Regular Building – What is Liquidated Damages? 

As pointed out in the preceding sections of this article, the concept of practical completion as provided for under standard forms of contract appear incompatible with the requirements of data center. This triggers a ripple effect to other related provisions including the application of liquidated damages. Under construction of a regular building, liquidated damages is a fairly straightforward provision. It is generally a pre-agreed sum of money that the contractor is liable for in case the construction works remain incomplete beyond the stipulated practical completion date. It is the financial consequences for breaching a contractual date. This sum of money is usually expressed as an amount per day which represents a genuine pre-estimate of losses that the Employer will incur as a result of the delay. This estimate is derived based on amongst others, revenue that the Employer is denied as a result of late completion of the building. 

With the advent of software as a service (SaaS) and platform as a service (PaaS), there is a significant financial incentive for data center operators and owners to provide those cloud application services for a fee. In other words, data center owner views their data center as a revenue generating asset much like how a hotel owner would view its property. In this regard, a delay to completion of data center should attract liability to liquidated damages in a manner no different from a regular commercial building. However, the way a standard form of contract defines completion for a typical construction project may not be appropriate to the nature of data center. If the definition of completion of a data center is subject to debate, then it follows that the Employer’s entitlement to liquidated damages is adversely affected. This is because liquidated damages flow from non completion by a contractual date and ceases to be applicable upon actual completion. Therefore the clarity to what constitutes completion is important in the application of liquidated damages. 

Certain high tiered data centers host mission critical computing applications. It is not uncommon to find in service level agreements with their customers some form of financial penalty in case there is any disruption to their provision of services. This is because those customers in turn may face hefty fines from regulators if those mission critical applications are disrupted. Therefore data center owners become particularly reliant on a clear and effective liquidated damages provision as a means of risk hedging. 

Once the contractor achieves practical completion, it is also relieved from any exposure to liquidated damages. Therefore if and when the construction works are found to be non compliant with the contractual specification after testing and commissioning is performed to the data center, the data center owner loses its ability to recover liquidated damages. The situation could be exacerbated if the data center owner is simultaneously exposed to certain financial penalty under its service level agreement with its clients. Therefore there appears to be room for standard form of contract to address this issue to prevent the Employer from being stuck between a rock and a hard place.

Whether to Include IT Works As Part of Construction Works of Data Center?

The issues raised in the earlier sections of this article share a common underlying cause namely the repercussions of excluding IT works from the construction works from a contractual stand point. This in turn causes the certification of completion of construction works to precede the completion of IT works. It appears that therefore the solution is to include the IT works as part of the constructions works and be managed under the same construction contract. If this is adopted, the main contractor may be required to undertake the procurement, installation and overall coordination of IT infrastructure related works. In this regard, the main contractor is likely to subcontract or outsource a significant portion of such IT works to a third party IT firm with the relevant expertise. It is fair to say that most general contractors do not ordinarily possess the relevant in-house IT infrastructure expertise required for the purposes of data center. Whilst some may argue that contractors that carry out fit out works for financial institution or technology company may have been involved in the building of ‘computer room’ or ‘server room’, the level of intricacies are quite different with respect to a full fledged data center capable of hosting enterprise applications. 

The real question is if the IT works and construction works are managed under a single entity administered through a unified construction contract, does it give rise to a satisfactory solution to the above mentioned issues? Purely from a commercial view point, this unified arrangement is unlikely to be resisted by the main contractor since IT infrastructure works will set to increase the overall construction contract sum. After all, IT infrastructure works include many expensive and delicate hardwares. Correspondingly, the main contractor may be motivated by the prospect of a higher profit level. Admittedly, this is to compensate the contractor for a bigger risk it may be shouldering particularly for a specialised scope of work that it does not have a natural expertise in. From the Employer’s standpoint, its cost may be increased due to higher profit, attendance and overhead payable to the main contractor in return for mitigation of contractual risks. Therefore, whether this arrangement works is dependent on cost and benefit analysis of a balance between contractual concerns and commercial interest.

There is a famous saying that there are no solutions, only trade-offs by the famous economist Thomas Sowell. The contractor that has completed its construction works may not be issued with completion certificate until and unless the overall IT infrastructure works are tested and commissioned successfully. It follows that the site continues to be under the contractor’s responsibility for an extended period of time. The contractor may not be allowed to demobilise much of its labourers, plant, machinery and equipment upon completion of its construction works in case these resources may be needed for any rectification works or follow up works in due course. These resources are effectively left idling or be on stand by which may not be the most efficient use of precious resources, not to mention the corresponding cost that will be incurred. The contractor and the Employer should come to an agreement on what are the types of resources that could be reasonably demobilised off site without compromising any follow up works that may be necessary. This can be discussed and agreed on a case by case basis and there should be a corresponding provision under the contract to reflect this arrangement.

Conclusion

From the issues raised above, there is a strong case to be made that the present standard forms of contract for construction works may not adequately addressed the risks associated with construction of data center. This presents an opportunity for the relevant parties in the industry to examine whether a specialised form of contract for data center may be in order.




Koon Tak Hong Consulting Private Limited

Imagine you are the contracts manager for a main contractor. You are expected to engage multiple subcontractors for your project and need to decide the form of contract to be used. Contract form or template agreement sets out the terms and conditions between the contracting parties. How do you decide? Your choice of contract form will be dependent on the type of subcontractor that you are looking to engage. In general there are at least two types of subcontractor namely ‘nominated subcontractor’ and ‘domestic subcontractor’. 

In case of nominated subcontractor, the choice of contract form is made by the Employer and its consultants which you are required to adopt and follow. In this regard you do not have the freedom to choose. In case of domestic subcontractor, whilst you have the freedom to choose the contract form to be used, the options available can be tricky to assess. This article examines this subject in greater detail. It should also be noted that this subject should also be of great interest not just to main contractors but also to subcontractors in the construction industry since this directly affects their contractual rights and obligations. In order to appreciate the context and options available for subcontract form, one needs to first have a general understanding of the differences between domestic subcontract and nominated subcontract.

Nominated Subcontractor and Domestic Subcontractor – General Differences

Both types of subcontractor enters into direct contract with the main contractor and are also paid by the main contractor for subcontract works done. It is an arrangement for the main contractor to outsource part of its construction works. As regards nominated subcontractors these are procured, negotiated and selected directly by the Employer and thereafter the Employer instructs the main contractor, through its agent to enter into a subcontract with its subcontractor of choice. The main contractor usually conforms with such instruction albeit with some limited room for objections. This nomination process can be tricky because the Employer is effectively walking on a tightrope. On one hand, the Employer wishes to get the best commercial deal out of its subcontractor of choice but on the other hand it had to ensure that conditions of this deal contractually syncs with the main contractor’s requirements. It is indeed a delicate balance but commonly practised in the construction industry. 

As regards domestic subcontractor, the choice of subcontractor, nature of the deal, scope of works being outsourced including any associated terms and conditions is primarily up to the main contractor and its ability to negotiate. The term ‘domestic’ provides a connotation that this is an internal matter for the main contractor which is subject to its purview. 

Key Matters in Subcontract Form of Contract – Back to Back Arrangement

When the Employer arrange to instruct its main contractor to enter into a subcontract with certain nominated subcontractor, it can be tricky. This is because one is directing its counter party to enter into a separate contract with an identified third party. The primary concern is whether the commercial deal negotiated with the nominated subcontractor contain any discrepancies or inconsistencies with the main contract. To the extent that the Employer proposes or even endorses a subcontract with conflicting terms to the main contract, does that change the main contract terms or influences the way it is interpreted?  This can be illustrated via two examples. Firstly, imagine the nominated subcontract terms included a more relaxed deadline where its subcontract period would arguably extend the main contract completion date. Could the main contractor upon acceptance of the subcontract terms argue that the nomination is effectively an extension to its main contract completion date or a tacit extension of time? Secondly, assume the main contractor is instructed to enter into a nominated subcontract in respect of subcontract works that involves selection of natural stones such as granite and marbles. Such selection will be carried out by the Architect as opposed to the main contractor given that it is a subject of building aesthetic. In this regard, the main contractor has limited role to play in so far as the choice of natural stones are concerned and would almost defer entirely to the Architect’s design preferences. If dispute arises between the nominated subcontractor and the Architect as regards rejection of works done resulting in delay and disruption to the project, to what extent should the main contractor bear the brunt of these ramifications? Do the subcontract terms offer any protection to the main contractor? After all, the main contractor had limited say in the selection and negotiation of the subcontractor in issue.

Although there could be further examples of issues that may arise in addition to the two hypothetical scenarios cited above, the point is clear – the choice of subcontract form should as far as possible be structured on a ‘back to back’ basis with the main contract form. The tricky aspect of this back to back arrangement is that the permutation of issues that could potentially arise may be so wide ranging and broad that makes it challenging to mitigate. It is almost impossible to mitigate the risks by providing an exhaustive list of issues that incorporates a back to back arrangement. The Employer rightly or wrongly takes the position that the main contractor ought to shoulder these subcontract risks as it had been financially remunerated to do so.

A back to back arrangement means that the subcontractor shall in general assume all obligations and responsibilities of the main contractor under the main contract, in so far as the subcontract works are concerned. In other words, if the subcontractor breaches its obligations under the subcontract terms which implicates the main contractor, then the main contractor can seek reimbursement from the subcontractor for any such corresponding damages. By way of example, if the subcontractor delays its subcontract works resulting in an overall delay to the project, the main contractor is accordingly entitled to recover any compensation from the subcontractor.

Even under the arrangement of domestic subcontract, the issue of back to back continues to be important and relevant. Whether the choice of subcontractor is nominated or otherwise, the main contractor has every reason to ensure that it is not unfairly “punished” under the main contract due to default of its subcontractor. In addition to that, it would be advisable to make certain that the provisions of main contract are administratively in sync with the subcontract on key matters such as interim progress payment, durations of defects liability period etc. 

In any given project undertaken by the main contractor, it is almost certain that it will be engaging nominated subcontractors as well as domestic subcontractors simultaneously. As a matter of industry practice, most main contractors would outsource a significant portion of the project works to subcontractors so as to keep its own fixed overhead expenditures low to ensure it is financially sustainable. Therefore, any discussion of nominated subcontract form would have a better context when contrasted with domestic subcontract form.

Nominated Subcontract Form

As mentioned earlier, if the Employer and its consultants sets aside prime cost sums in the main contract, nominated subcontractors will be engaged to carry out these works. Accordingly nominated subcontract forms will be used for these engagements as instructed by the Employer. Every major standard forms of contract used in the industry would have its corresponding nominated subcontract form. By way of example in Singapore, the major types standard forms used such as the SIA contract, the PSSCOC and the REDAS would prescribe its respective nominated subcontract form to be used in conjunction with the main contract form. These nominated subcontract forms are drafted with the intention of being contractually in sync with the corresponding provisions under the main contract form. By having the nominated subcontract form operating on a back to back basis with its main contract form, it reduces the likelihood of any objections from the main contractor when an instruction for nomination is issued.

Certain standard forms are drafted to be more prescriptive, detail and elaborate in its provisions of contract. These provisions include very structured condition precedents, timelines and requirement of written notices. These are in general requirements imposed by the Employer on the main contractor in case the latter decides to make any claims for additional time or additional monies. Such main contract forms are usually accompanied by nominated subcontract forms that are equally detail, and usually for good reasons. The extensions of time provision under Clause 14 of the PSSCOC main contract (Eight Edition July 2020) is an example that includes a fairly detail and elaborate mechanism that the main contractor had to comply with. Consequently the corresponding extensions of time provision under its nominated subcontract (Fifth Edition December 2008) found in Clause 24 is drafted in sync with the main contract. The following paragraph illustrates how both Clause 14 of the main contract and Clause 24 of the subcontract are administratively in sync with one another.

In general, under Clause 14.3(1) of the PSSCOC Main Contract the main contractor shall within 60 days of the occurrence of an excusable delaying event to notify the Superintending Officer (SO) of its intention to apply for extension of time. Such notice is a mandatory requirement and shall include contract references as well as reasons for such delay. Upon receipt of such notice, the SO may under Clause 14.3(2) require the main contractor to provide further details concerning the alleged delay within 14 days or such other period deemed necessary. Whilst the notification requirements and associated timelines above may appear straightforward in theory, its application in reality can be tricky for several reasons. Firstly, there could be a time lag between the occurrence of the event and the realisation that the event indeed will have a delaying effect. By way of example, the delaying event could be caused by other contractor engaged by the Employer that has no contractual relationship with the main contractor such as bad workmanship that adversely affects the next trade of works. In such a case the main contractor may only learn about this issue after the works are handed over by the other contractor that is in default. Assuming the next trade of work is performed by a subcontractor, it may take further time before the issue is escalated to the main contractor that will enable the latter to fulfil its obligation under Clause 14.3(1). Secondly, it should be noted that there could be hundreds if not thousands of issues, non compliances events, variation instruction occurring simultaneously for a large construction project at any given time. One’s ability to deal with a delaying event as it occurs could be compromised when confronted with these overwhelming issues.

The wordings of Clause 24 of the nominated subcontract form of the PSSCOC addresses the above issues in some ways, if the delaying event occurs within the scope of the nominated subcontract works. Firstly whilst the main contractor is the party that grants any extension of time to the nominated subcontractor, it is done with the consent of the SO.  Therefore, there will be consistency between the treatments at main contract and subcontract especially if it shares the same underlying delaying event. Secondly, Clause 24(3) of subcontract form stipulates that when the nominated subcontractor makes an application of extension of time with the main contractor, a copy of such application shall be issued to the SO. This is to enable the main contractor to comply with the corresponding 60 days requirement stipulated under Clause 14.3(1) of the main contract mentioned above. This effectively streamlines any communications and notifications between main contract and subcontract to avoid unnecessary confusion and miscommunication. It bears repeating that these timelines and notifications are condition precedents which mean that failure of strict adherence can result in denial of having contract period from being extended, causing liability to liquidated damages. Therefore having a back to back provision is not merely to enable ease of contract administration but also can have significant contractual ramifications. Finally under Clause 24(4) of the nominated subcontract, the main contractor could impose the same requirements of requesting for further details on the nominated subcontractor assuming the SO exercises his rights under Clause 14.3(2).

It is important to note that the above illustration merely cited the example of extension of time mechanism. In reality, there are multiple contractual mechanisms that are in need of back to back provision including on issues pertaining to valuation of variations, loss and expense claims, arbitration agreement etc.

Domestic Subcontract Form

Given the illustration above on the necessity of having back to back provisions between main contract and subcontract, what happens if the main contractor uses a bespoke in-house subcontract form to engage its domestic subcontractors? It is not uncommon for main contractor to have its very own bespoke subcontract form used for all its project regardless of the type of standard form being used for its main contract with the Employer. One may notice that it may contain a frequently used phrase of ‘mutatis mutandis’ or its equivalent in such bespoke form. This phrase in general means that when reading the bespoke form, one should interpret it in conjunction with the main contract form on the basis that there should be changes made to areas where change is required. One can argue that such phrase can be vague and grey whilst others who favour the use of such phrase will look at it as a way of enjoying great flexibility in its interpretation. 

Under situation where the main contract form is drafted in a manner that is less detail and less prescriptive, the use of mutatis mutandis may be sufficient. However under Clause 14 of the main contract PSSCOC form, it is highly unlikely that such phrase will give the main contractor sufficient coverage. Using the very same hypothetical example above of a delaying event caused by other contractor hired by the Employer affecting the scope of certain nominated subcontract works, the main contractor may have limited recourse against its subcontractor. In specific terms, if the main contractor is unable to to fulfil its 60 days notice requirement, the mere phrase of mutatis mutandis offers limited recourse to the main contractor as compared to the corresponding Clause 24 of nominated subcontract form.

If the main contractor simultaneously adopts nominated subcontract form for its nominated subcontractor and domestic subcontract form for its domestic subcontractor, this give rise to two different subcontract regimes to be administered in parallel under a single project. Such dichotomy can be an administrative burden to say the least. This conundrum give rise to the question of whether the main contractor should adopt nominated subcontract form for all its subcontract engagement. In other words, can the nominated subcontract form be used for domestic subcontractor? If yes, does the nominated subcontract form require any amendments prior to its use for domestic subcontract engagements? This will be explore further in the next section of this article.

Some may argue that the different contract form used for domestic subcontractor is a risk that can be managed quite effectively by the main contractor because of the business relationship. Unlike nominated subcontractor, the engagement of domestic subcontractor is subject to discretion of the main contractor. In large part, these relationships are developed over time which promotes trust and good will. These elements can arguably be of help in case parties encounter difficult issues on site that involves claim where pure rights and obligations are not the only factors of consideration.


Amendments to Nominated Subcontract Form for Domestic Subcontractor

If the main contractor is in favour of using an amended version of nominated subcontract form for the purposes of its domestic subcontract, the following could be useful points of considerations. In general, the scope of amendment to the nominated subcontract form shall pertain to provisions that are unique to nominate subcontract arrangement. By way of example certain payment concessions could be made by the Employer as part of commercial negotiations with the nominated subcontractor during the stage of procurement. Such payment concession may include direct payment by the Employer to the nominated subcontractor in case it fails to receive any payment from the main contractor. This concern is not uncommon especially if the nominated subcontractor lacks any working experience with the main contractor and the demands of cashflow is significant in the subcontract works concerned. Therefore these provisions should be deleted as it lacks relevance. 

Another point of consideration for the main contractor is whether the domestic subcontractor should take instructions directly from the Employer or its consultants. Certain main contractors prefer a direct control over its domestic subcontractor for fear that the main contractor could lose its leverage, especially if the instruction concerned a contentious works where parties dispute whether there is entitlement to additional payment or additional time. Other main contractors take the opposite position that if the Employer or its agent’s instructions are deemed the main contractor’s instruction, it avoids communication bottle neck and facilitates progress of works. In reality there is no absolute right or wrong and is dependent on the nature of the domestic subcontract works. If the main contractor allows direct instructions from the Employer and its agents, it should simultaneously safeguard its interest to make certain that any compliance with such instruction shall not be deemed as automatic entitlement to additional payment or additional time. This is particularly important if the construction works are under an extremely fast pace and the contractual paper work may lag behind the actual works done.


Conclusion

The choice of contract form for subcontract works is not merely an administrative decision. Proper deliberation and an informed decision making process sets the risk allocation philosophy of the organisation. Whilst the Employer may have less desire to interfere and impose its preferences on domestic subcontract arrangements, it ultimately affects the construction project as a whole particularly as it pertains to rights and obligations of all parties involved.

Koon Tak Hong Consulting Private Limited

When the Employer arrange for issuance of instructions to the main contractor to carry out additional works after its project achieves practical completion, it seems baffling to most people. Why carry out additional construction works when the project is completed? Is this permissible under the construction contract? In reality most construction practitioners would find that this is quite commonly practised particularly if the project involves major additions and alterations to a building that is in operation throughout construction period. This article deals with various aspects of this unique phenomena by first understanding the rationale behind this practice.

Why Instruct Additional Works After Practical Completion?

Commercial buildings such as shopping centres, hotels, airport, office towers are upgraded and rejuvenated regularly through additions and alterations initiatives. This is done as part of active asset management efforts in order to improve its operational efficiency, keep up with evolving needs and to refresh its image. Additions and alterations are usually executed in phases where construction works are carried out in different geographical locations of the building at different point in time. The remaining parts of the building are kept in operation to generate rental revenue. Therefore the construction works are carried out simultaneously whilst the building is in partial operation. 

Buildings are in constant need of maintenance to keep the building in operation. These maintenance activities ranges from the most miscellaneous activity like changing of directional signage to the more significant ones such as replacing electrical power infrastructures. As a matter of organisational structure, the maintenance team is usually separate and distinct from the construction team, of which the latter manages additions and alterations works. As and when maintenance works arise, there is a natural inclination to have the additions and alterations contractor to execute those maintenance works which usually involve certain degree of construction activities. This natural inclination stemmed from the fact that the maintenance team can do away with procurement and tender process of engaging a separate contractor after its maintenance budget is approved. The justification for ‘leveraging’ on the additions and alterations contractor or the main contractor is the avoidance of having too many contractors working simultaneously on site that may result in clashes, conflicts and the need for coordinations. Further, the maintenance team usually takes advantage of the fact that the main contractor had been vetted by the construction team prior to carrying out the works in the building concerned and would now have acquired sufficient experience and knowledge specific to the building’s operations. The avoidance of carrying out tender and orientation of a new contractor should in theory be beneficial in saving time for the maintenance team. 

After the budget for the maintenance works is transferred from maintenance team to construction team, the latter will then arrange for instructions to be issued to the main contractor for additional works. In terms of timing, such instructions are generally issued towards the tail end of the construction works or even after practical completion. The reason for such timing is because this is usually the period when construction team will arrange for handover of completed works to the maintenance team. During these handover inspections, the realisation of the need for maintenance works on interfacing systems arises. Further the main contractor would usually have more bandwidth and resources available to carry out additional maintenance works when significant portion of its additions and alterations are completed. There is also profit incentive for the main contractor to carry out such additional works. In other words, there is a meeting of minds between all parties, at least commercially for such unique practice to prevail.

So why the maintenance works are not planned in advance and bundled under the additions and alteration works construction contract to begin with? It would appear that any advance planning is more sensible. It allows the Employer to take advantage of economies of scale by aggregating works together and also the ability to programme the works holistically.  There are many reasons for the lack of advance planning. Firstly, maintenance works are usually planned in a calendar cycle based on structure of financial year. These maintenance planning cycle may not coincide with the construction schedule. Secondly, certain maintenance works can be reactive rather than proactive where certain building systems malfunction incidentally. This could also explain why the need for an expedited procurement approach by sole sourcing the works to the existing main contractor.

Is This “Allowed” Under Standard Forms of Contract e.g. SIA Contract / PSSCOC?

Whether the practice of instructing additional works after practical completion is provided for under the contract is a debatable matter. Whilst there is no express provision on instructing additional works in this manner, one may interpret the contract based on other  general provisions that may be relevant. These provisions include the certifier’s power to instruct additional works through variation order, the definition of practical completion, the period for the main contractor to vacate the site during certification of completion etc. It should also be pointed out that parties are free to contract. Therefore, if there is meeting of minds between the parties on the need to carry out additional works albeit belatedly, the contract should reflect the intentions of the parties. This section of the article however deals with the question of whether the general conditions in unamended standard forms of contract are capable of accommodating such arrangement or is there a need for parties to enter into a supplemental agreement. In this regard, two commonly used standard forms of contract are referred to namely the Singapore Institute of Architect (SIA) Building Contract 2016 and the Public Sector Standard Conditions of Contract (PSSCOC) Eight Edition July 2020.

It appears that there are two competing arguments on this matter. Firstly the interpretations of certain conditions do supports the argument that instructing additional works after practical completion is contractually provided for under the said standard forms. Clause 19.2 of the PSSCOC which deals with the superintending officer’s power to order variation, states amongst others that he may at any time issue an instruction in writing requiring a variation. The phrase ‘at any time’ does not appear to be circumscribed by the expiry of contract completion date. Similarly Clause 12 (1)(a) of the SIA contract states amongst others that the Architect shall have power ‘at any time’ to give directions or instructions requiring a variation. The definition of variations under both standard forms appear to be wide enough to include works that may be a departure from the nature of the original scope of works. This should include maintenance works beyond the original additions and alterations works. Clause 22 of the SIA contract deals with the certification of completion. Clauses 22(3) and 22(4) in particular expressly state that apart from stipulating the date on which the works appear to be completed, the Architect shall separately specify the date on which the contractor shall vacate the site and the date on which the Employer shall take over the works. It appears that the SIA contract makes express distinction between date of completion, date to vacate the site and date for the Employer to take over the works. This implies that there is potentially a time gap between the contract completion date and the date on which the works are officially taken over and be under the responsibility of the Employer. This time gap when interpreted in conjunction with the Architect’s authority to order variation works ‘at any time’ opens up the possibility of instructing additional works after practical completion. If the date of taking over of works coincides with contract completion date, it would have quashed any possibility of instruction of additional works post completion. Similarly under Clause 17.2 of the PSSCOC, although the contractor’s license to occupy the site is terminated upon date of substantial completion, the contractor is allowed to re-enter the site not just to carry out defects rectification works but also carry out ‘any outstanding works’. 

On the other hand, the wordings in other general provisions appear to limit the power of the certifier to instruct variations after contract completion date. Even if one disagrees that these provisions give rise to such limitation effect, these provisions should caution one from instructing additional works belatedly. These provisions which include insurance clauses, liquidated damages clauses, valuation of variation clauses etc will be expanded further in subsequent sections of this article.  

Insurance Implications

The insurance provision is one of the more critical obligations on the part of the main contractor, where it is required to procure the necessary insurance policy coverage prior to commencement of any works on site. Such obligation is so critical that apart from producing a copy of the policy, the main contractor is also required to produce a copy of the receipts to prove that payment is made in respect of the premiums for such policy. Under Clause 28.1(1) of the PSSCOC, the main contractor shall maintain insurance of the construction works until 14 days after the date of substantial completion. Such insurance coverage shall also be maintained during defects liability period but only limited to losses arising from a cause occurring prior to the commencement of defects liability period. Clearly, the scope of coverage is reduced during defects liability period to insure defects related risk rather than any new works instructed after practical completion. Similarly under Clause 20(1)(c) of the SIA form, the main contractor shall maintain the insurance coverage for the construction works until completion. 

Given that the insurance for the construction works shall only be maintained until completion, one can reasonably take the view that the standard forms of contract do not anticipate instruction of additional works after completion. If such instruction is anticipated, the insurance provisions would have made allowance for the maintenance of such policies either until the expiry of defects liability period or completion of any and all works on site. In fact the requirement to procure insurance is so strict that it had to be done prior to commencement of any works on site. Therefore, the protection from insurance is so critical that it would be illogical to construe that the requirements are somehow scaled down by allowing works on site without the insurance coverage after completion. After practical completion with the completed works in place, the need for such insurance protection would arguably be higher. As mentioned earlier, some of the belatedly instructed works may be significant in scale and risk such as replacement or improvement of electrical infrastructure of the existing building. If such works are instructed on the purported benefit of time savings as a result of a simplified procurement process, this may well be penny wise pound foolish. 

Liquidated Damages Implications

One of the more effective deterrent against the main contractor for delaying completion of works beyond contract completion date is liquidated damages. Most standard forms of contract would have provisions to allow the Employer to recover liquidated damages if the construction works remain incomplete beyond the stipulated completion date. What happens if there is delay to works instructed after practical completion? The Employer is likely to lose its rights to liquidated damages for such delay and also the deterrent effect associated with such provision. Under Clause 16.1(1) of the PSSCOC, the main contractor shall pay liquidated damages only if works are not substantially completed within the time for completion i.e. before the contract completion date. Likewise under Clause 24(2)(a) of the SIA contract, the Employer shall be entitled to recover liquidated damages from the main contractor upon receipt of a delay certificate, which in turn is issued when the works remain incomplete after the date of completion. 

The practice of instructing additional works after practical completion involves a wide variety of works, including certain maintenance works. Whilst admittedly not all works are time sensitive, the deterrent of late completion is still necessary especially if works are carried out in an operational building. This is why under Clause 22(5)(b) of the SIA contract, the Completion Certificate may include a list of outstanding works with corresponding deadlines for such works to be completed. The main contractor shall provide a written undertaking to comply with those deadlines stipulated by the Architect. It is unlikely however for the Employer to be in the position to impose any liquidated damages if any of those deadlines are breached. 

It is also unlikely that the Architect is authorised to stipulate any supplemental liquidated damages for these belatedly instructed works. It is however interesting to note that under Clause 3(6) of the SIA contract, the word ‘completion’ shall include completion of any outstanding works notified by the Architect pursuant to Clause 22(5) as included in the Completion Certificate. It is important to note that the SIA contract is unique in that the issuance of Delay Certificate is a condition precedent to the recovery of liquidated damages. It is debatable whether the Architect is authorised to issue any Delay Certificate after the issuance of Completion Certificate for the very same works. 

Valuation of Additional Works Instructed Post Completion

As the practice of instructing additional works post completion is debatable, valuation of such works can be a subject of considerable complexity as well.  Is the valuation of variation mechanism commonly found in standard forms of contract applicable to such works? To answer this question, one has to have a basic understanding of this valuation mechanism. Whilst different forms of contract prescribes mechanism with slight differences, the basic principles remain unchanged. In general, the mechanism is structured on a tiered basis where the choice of unit rates and prices used to value such works is dependent on amongst others, the timing when the variation works are instructed. If the main contractor is instructed to carry out additional works in a manner where it is out of sync with its construction programme resulting abortive works and the need for additional resources, such additional works can be more costly. The reverse is true, where the unit rates and prices which were previously subject to competition can be used as the basis of valuation if the additional works are instructed to be carried out under similar conditions to the main contractor’s prevailing programme. The logic to this mechanism is quite straightforward. It is always commercially advantageous to utilise unit rates that were agreed upon during tender where the prices are more competitive. 

Whilst valuation of variation works is more of an art than science with considerable scope of debate, there is still merit in having such provisions included in the contract. This is because once the construction agreement is formed, most if not all of the variation works will by default be carried out by the main contractor. The Employer would have very limited latitude to appoint other contractor to carry out any additional works, which means the Employer’s bargaining power on the costs of those variation works will be de minimis. Therefore having an agreed valuation mechanism provides the necessary structure and balance in assessing variation costs.  

Intuitively, if works are instructed post practical completion, the contract unit rates would not be applicable since most if not all of the significant construction works would have been completed. In other words, any additional works should entail remobilisation of plant, equipment and machinery on site to the extent that it is required. These entail additional costs. If post completion additional works are required, the conventional arrangement will be for the main contractor to provide a quotation in advance prior to issuance of the instruction. This quotation will usually be negotiated and agreed if possible. 

So how does the Employer go about negotiating such quotation? For most construction projects, there are usually a long list of variation works instructed during the construction period that are pending valuation as part of the process to finalise the accounts. The Employer could consider using these variation works as the basis of negotiating any aforementioned quotations. Under the valuation of variation mechanism, there is a method of valuation using daywork rates. This method is adopted when the variation works is completely out of sync with the construction programme. Under this method, the main contractor is essentially compensated based on actual resources utilised on site based on recorded daywork sheets. This method of valuation could be used as a starting basis of negotiating the amounts proposed in the main contractor’s quotation. In essence, the amounts included in the quotation should not be much higher than the amount derived through daywork rates. The Employer could also use any records of actual productivity during construction period as an estimate for the level of resources and period of works required for the post completion works to be carried out.


What is the Actual Completion Date?

Instructing additional works post completion involves an additional layer of complexity when the actual completion date is not often immediately clear until weeks later. Under most standard forms of contract there are procedures in place for the main contractor to issue a notice to the certifier for a joint site inspection for the purposes of completion certification and very often the completion date is not certified on the very day of completion. The certification of completion could take even longer if the certifier is required to assess various extensions of time applications made by the main contractor due to the voluminous contemporaneous records that had to be examined. In view of the above, it is not uncommon for the main contractor receiving such instruction for additional works to be unclear whether to make application for extensions of time especially when the certification of completion is pending. If the instruction is received after the certificate of completion is obtained, it will be safe to say that the main contractor is not required to make any extensions of time application. 

Should the main contractor decide to err on the side of caution by making extensions of time application upon receipt of instruction, the quotation for such additional works may also include any loss and expense claims to the extent that such claims is contractually provided for. This would obviously inflate the costs for any additional works. Therefore from the Employer’s perspective, it is advisable to arrange for the issuance of such instruction in a wise and timely manner to avoid these unnecessary complexities.


Conclusion

Assuming one is of the view that the general standard forms do accommodate instructing additional works post completion, it would be wise to still do so in a cautious manner. Having a convenient process to procure contractor for certain ad hoc works should not be on the expense of the smooth and clear administration of a construction contract. In other words, whilst it may be permissible, it is not a wise move.




Koon Tak Hong Consulting Private Limited

This article examines the different types of drawings issued in construction projects. These drawings will be reviewed from a contractual perspective. Construction law is unique in that it is a blend of both legal matters and technical matters. Various documents that are typically considered ‘technical’ such as drawings, specifications, programmes etc are not reviewed by legal professionals with the same rigour as compared to ‘legal’ documents such as particular conditions, bond, guarantee, warranty etc. A legal examination of technical drawings is important because drawings are possibly one of the more common sources of contractual disputes that do not usually attract adequate legal attention. Having certain level of technical proficiency of the types of drawings, its purposes, timing of issuance, common points of contentions etc will greatly facilitate a holistic understanding of the project’s risk profile.

There are various types of drawings produced by various parties throughout a typical construction project, each with its own unique contractual implications. Even under the traditional procurement route of design-bid-build with comprehensive design in place prior to the engagement of main contractor, the main contractor or its subcontractors are still expected to produce certain types of drawings throughout the construction period. In other words, one is expected to produce drawings even when it generally does not shoulder design responsibility. Therefore, issuance of any drawings should be done with great caution for avoidance of ambiguity as regards design responsibilities. The subsequent sections of this article address different types of drawings issued chronologically throughout a typical construction lifecycle under a traditional procurement route.

Tender Drawings

Tender drawings are produced by designers engaged by the Employer to communicate the scope of works to contractors bidding for the project to facilitate pricing. Tender drawings are essential component of the Employer’s invitation to treat in order to shape the scope and nature of offers from the contractors. The tender drawings’ clarity will in turn enable provision of offers which are defined and unambiguous which then facilitates acceptance. A constant change in invitation to treat creates ambiguity in the scope of offer, which can be a recipe for contractual disaster. Indeed, one of the inherent characteristics of a construction tender is the common changes in tender drawings even before the contractors have the chance of submitting its offer, and it continues to change even after the offer is made. 

One of the reasons to the above phenomena is because the tender exercise commences even before the design is fully developed. This consequently  results in changes in scope of works during the tender period causing the issuance of revised tender drawings. Where the tender drawings are revised during the pricing period, these are ‘tender addendum drawings’. On the other hand, ‘post tender drawings’ refers to revised drawings issued after the pricing duration such as during tender interviews. These revisions could be necessitated by feedback from contractors to clarify drawing details or adopt ion of certain suggestions that enhances ‘construct-ability’ or revisions in design as part of commercial negotiations.

Whilst it is not advisable to have multiple revisions to drawings after the commencement of tender, it remains a common practice. It is important to note that there are typically multiple designers producing tender drawings including architects, structural engineers, interior designers, building facade consultants, mechanical and electrical engineers etc. Therefore, the change in one set of architectural tender drawings potentially implicates consequential revisions to tender drawings of other disciplines. Ideally, various consultants are well coordinated and move in complete locked-step in ensuring design consistency. In reality however, every change or revision in drawings increases risks as it relates to design consistency and conflicting interpretations. Occasionally, changes in design are not even appropriately reflected in revision to drawings but rather casually annotated in hand sketches, part prints etc all of which are not accompanied with the relevant details and also not drawn to scale. Ultimately, it makes the process of compilation of contract document that much harder and complex, which will be further elaborated in the next section of this article. 

Contract Drawings

Contract drawings illustrates the final scope of works agreed between the Employer and the selected contractor which are included in the construction contract document. Contract drawings formed the basis of the original contract sum. Substantively, contract drawings represent the penultimate version of tender drawings. The selected contractor’s offer is accepted by the Employer via the execution of Letter of Acceptance or Letter of Award which is known as an ‘LOA’ in short. The actual formal contract document with complete set of contract drawings are usually compiled and formalised several months after the signing of the LOA. It is important to note that the LOA itself is not accompanied by a physical set of contract drawings. The LOA merely provides a list of correspondences between the contractor and project consultants during the tender period which identifies the timing of issuance of tender drawings or any revisions thereof. In other words, this list of correspondences in the LOA sets out the ‘referencing paper trail’ of the design changes from a chronological perspective. As a result of the duration taken for the preparation of contract drawings, the initial phase of construction project may proceed for months without a physical set of contract drawings in place. This could be contractually risky as there is an absence of documentation clarity in the agreed scope of works during this period. It is not uncommon for the contractor with its tender team being separate and distinct from the project execution team. Once the tender phase is completed and the project is secured, its execution is handed over to another team with different skill set and focus. A new team without the legacy knowledge of what was the scope of agreement, coupled with the absence of physical contract drawings for a period of time may be the recipe for contractual disputes.

Although the formal contract document and contract drawings are important to properly administer the project, there are no associated compilation and formalisation deadline stipulated within the standard forms of contract. One of the time consuming aspect to the formalisation of contract drawing, is the effort to create the penultimate version of tender drawings especially if the original tender design was revised multiple times during the course of procurement and commercial negotiations. The superseded versions of tender drawings are excluded for avoidance of confusion and where necessary any hand sketches previously produced are converted into appropriate format such as the ‘computer aided design’ or CAD version. Generally each contract drawing carries a unique drawing reference which would indicate how many previous version(s) had been produced prior to its final form. 

For reasons that will be further elaborated in the next section of this article, the production of further drawings will continue even after the construction contract is concluded. These drawings are known as ‘construction drawings’. In theory these construction drawings should be substantively identical to that of the contract drawings. However it is quite common for these new drawings to include additional details. These additional details are quite common sources of dispute if the contractor believes that these amounts to variations to the agreed scope of works that give rise to entitlement to additional payment or even extensions of time. Therefore, one of the reasons why the formalisation of contract document and contract drawings can be time consuming is because the contractor’s team may review every draft contract drawings issued by the consultants. These review processes can be protracted and detail oriented as the contractor wishes to avoid inadvertent inclusion of construction drawings with supplementary details as contract drawings. Where such mistakes occur, it may well jeopardise the contractor’s entitlement to additional payment or time.

Construction Drawings

Construction drawings refers to drawings issued by the consultants to the contractor to illustrate the actual scope of works that are to be constructed on site. The contents in construction drawings may be different from contract drawings from time to time for a variety of reasons. In manufacturing industry, every item produced is virtually identical due to standardisation in the production process. By way of example, the mobile phone of a specific model from a specific brand should be no different whether you purchase it from shop A or shop B. In the construction industry however, no two buildings are completely identical even if these are designed by the same architect and build by the same contractor. This is because no two plots of land are completely identical in shape or soil condition or geographical orientation or urban zoning regulations or its neighbourhood etc. In a building design process, it is often a balance between end user requirements versus taking advantage of the inherent characteristics of the site condition. Construction of buildings are therefore often described as being “prototypical”. Whilst building designers often adopt standardisation as much as possible to increase efficiency and productivity, these are somewhat constrained by realities. Some of these realities are uncovered when the actual construction process commences where adaptation of design are required. These adaptations are required notwithstanding the best effort exercised during the conceptual design. 

Tender drawings or the subsequent contract drawings are sufficient to communicate the design details for the purposes of pricing the construction project. These drawings are however inadequate in respect of details to actually complete the construction works due its prototypical nature. Therefore after the execution of LOA, it is common for the architect and engineers to issue construction drawings to enable the contractor to carry out its construction works in accordance to the site circumstances. From time to time, these construction drawings include details that depart significantly from the contract drawings such as actual dimensions, specific choice of finishes. Under such condition, the contractor would request for an instruction from the architect, or engineer pursuant to the conditions of contract to acknowledge its entitlement to additional payment or even additional time. Some of these requests may be contentious in that the project consultants consider any differences exhibited in construction drawings are part of the contractual risks allocated to the contractor and that the prices shall be inclusive of expenditures that are indispensably necessary to complete the works. Therefore these requests for instructions are rejected resulting in disputes. Whether one is advancing or defending against such claims, it is crucial to compare the relevant construction drawings with contract drawings to appreciate the scope of works in dispute. Such disputed scope of works should be reviewed in conjunction with the relevant conditions of contract so as to determine the merit of such claims. It should be noted that the extent to which the architect or engineer issue construction drawings is dependent on the type of specifications included in the contract. In the case of performance based specification where the contractor’s obligation is to construct to achieve a stipulated outcome or requirement which is common in the domain of mechanical and electrical works, the issuance of construction drawings is considerably less. In this case, the contractor has more freedom and flexibility to dictate the choice of materials or brands of systems, as long as it fulfils the said performance specification.

Combined Services Drawings

The combined services drawing or ‘CSD’ in short is usually produced by the main contractor or mechanical and electrical (M&E) subcontractor rather than the consultant engineer. These drawings show the locations, layouts and sizes of all M&E services such as electrical cabling, ventilation ducts, fire sprinklers system, CCTV, plumbing works etc. These drawings coordinates the layout of various services from different M&E trades normally carried out by different subcontractors. The main contractor is therefore by default in the best position to execute these coordination efforts due to its supervisory role in respect of all subcontractors. The main goal of CSD is to determine the optimal layout of these services within a confined and congested space such as above false ceilings. Occasionally, certain cables or pipes are required to penetrate through structural elements such as concrete beams or slabs. Therefore the CSD illustrates the interface between architectural, structural and M&E domains. 

From a contractual perspective, it is important to note that the production of the CSD is effectively a detail design development process based on a set of objectives stipulated under the performance based specifications. Notwithstanding under the approach of design-bid-build where the contractor is expected to build based on a given design, it is in actuality a form of partial design and build. This is because the main contractor and M&E subcontractors through production of CSDs develop detail design on the routing of services based on performance based specifications. Therefore there is no pure traditional procurement approach unless the consultant M&E engineer is also responsible for production of CSD, which is rare. By way of example, the consultant engineer prescribes the capacity or performance requirement of a particular M&E trade and it is usually up to the subcontractor and the main contractor to propose systems that meet those requirements. The production of CSD is therefore part of the process to demonstrate that those requirements can be achieved based on certain proposed systems. 

There are critics who would understandably disagree and argue that the design responsibility continue to be shouldered by the consultant engineer because the proposed system is ultimately approved by the consultant engineer notwithstanding proposals made by the contractor. In this regard, it is important to examine the commonly found provisions in the standard forms of contract pertaining to any design proposals raised by the contractor. Even under the standard forms of contract for traditional procurement approach, there are provisions therein that anticipates some level of design responsibility that resides with the contractor where the choice of workmanship or material or performance of the actual works is made by the contractor. In this regard, it is important for any contractor to pay special attention to these provisions and if necessary negotiate particular conditions that is consistent with the acceptable scope of responsibility. Where there is agreement for the contractor not to shoulder any design responsibility, it is important for the corresponding CSD to exhibit the relevant disclaimers for avoidance of doubt.

Shop Drawings

The main contractor or its subcontractors are usually responsible for the  production of shop drawings. The shop drawings is in essence a graphical interpretation by the contractor of the consultant’s design of certain systems that are to be prefabricated off site by including field dimensions, installation details that were previously not available in contract drawings. There are certain building components or systems that are usually fabricated off site such as structural steel members, precast concrete units, air handling units, standby power generators etc. Prior to fabrication, the precise site dimensions are included in shop drawings for the consultant engineer’s approval. Upon approval, these shop drawings are then handed to fabricators for manufacturing based on those precise dimensions so as to avoid abortive modifications on site.

From a contractual perspective, the review and approvals of shop drawings can be a source of contractual dispute particularly if the engineer makes annotation on shop drawings that is perceived as variation from the original design. Where the installation details annotated on the shop drawings warrants additional works that goes beyond what was originally priced by the contractor in the contract sum, it can be tricky to objectively determine if those annotations indeed entitles one to additional payments. This is because the main purpose of producing shop drawings is to incorporate details that were previously not available in contract drawings. Therefore differences in contract drawings from approved shop drawings are to be expected and cannot be the sole evidence that variations were indeed instructed. Parties in such situation are advised to refer to other parts of the contract documents such as pricing schedule, preambles or specifications for further clarity. Where parties believe that certain annotations on shop drawings may give rise to contractual dispute, it would be prudent for the claimant i.e. the main contractor or subcontractor to formally request for an instruction in compliance with any condition precedents. One should not assume that annotations or hand written notes on shop drawings by the approver amounts to an instruction for change in scope of works. 

The very need to develop shop drawings, or even the CSD reinforces once again the fact that contrary to popular belief, contract drawings are sufficient for pricing but inadequate to complete the construction works. Once construction works begin, the level of details that are expected are usually higher than the information available during tender. That is why the types of drawings issued during construction project can often be a fertile ground for contractual disputes.

As Built Drawings

As built drawings are produced by the contractor upon practical completion of the construction works to illustrate the full and final completed works. It includes all variations instructed during the construction period, apart from the abortive works. These drawings can often serve as useful points of reference for parties to settle final accounts because it illustrates any changes to the original scope of works. The provision of a complete set of as built drawings is usually a condition precedent stipulated prior to final tranches of payments to the contractor, in addition to other deliverables such as warranty documents. 

Whilst on one hand it marks the completion of a construction project, as built drawings are also important if and when the next construction project commences. Assuming the completed building is subject to certain future additions and alterations works or maintenance works, the next team of design consultants will use the as built drawings as the basis of their design development. Likewise, during tender for the next project, the as built drawings are usually distributed to the contractors for their pricing reference as it relates to the scope of works required. In view of the above, the accuracy of as built drawings becomes crucial. Errors in as built drawings can cause disputes in subsequent projects. Unfortunately, during the initial production of as built drawings when the project is originally completed, its accuracy is rarely the subject of much scrutiny as it is almost inconsequential to the completed project. Fortunately there are regulations in most jurisdictions that require the full and comprehensive as built drawings to be submitted to the relevant authorities for its record and in exchange for issuance of statutory approvals. Any material inaccuracies included in these as built drawings may result in fines and penalties.

Given that as built drawings are usually due for submission by the contractor after the project is substantially completed, the question that may occasionally be raised is whether the act of requesting for as built drawings by the architect or engineer implies that the contractor’s work is deemed satisfactorily completed. This argument arises because the architect is usually required to submit a full set of as built drawings to the relevant authorities for its issuance of statutory approvals. On the other hand the architect may refuse to issue practical completion certificate to the contractor due to existence of defects or other non conforming works. In reality, it is possible for the project to be both substantially completed and for a list of defects to exist. In fact it is rare for project to be substantially completed and be literally defects free. The question for the certifier to decide impartially is whether those outstanding works are indeed acceptable defects as defined under the contract or was it so significant that there is a delay to completion. This issue in turn raises the question of how practical completion is defined under the construction contract in hand. From the main contractor’s perspective however, the as built drawing should illustrate the state of the works that was built or constructed at the point when the drawings were produced. If the architect accepts the as built drawing submitted by the main contractor and even relies on those drawings for the purposes of submission to statutory authority, there is a strong argument that the construction works would have been completed from the perspective of the architect. In other words, as built drawings can effectively be a form of evidence.

Conclusion

Whilst drawings are usually deemed “technical documents” that are rarely the subject of much legal scrutiny, it is evident that this cannot be any further from the truth. Based on the preceding sections of this article, a holistic examinations of all documents including drawings should be part and parcel of a comprehensive legal review exercise.

Koon Tak Hong Consulting Private Limited