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

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

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

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

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

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

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

General Features of PSSCOC Option Module E and NEC4 

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

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

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

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

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

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

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

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

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

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

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

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

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

Partnering Workshops

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

This article examines contract and procurement risks associated with engineered facade in particular curtain wall system and cladding system that are generally used for high rise commercial buildings. Whilst building facade is commonly identified as one of the trades under architectural and builders works, it exhibits certain unique characteristics that elevate its risks profile considerably. Firstly, unlike regular architectural finishes that could be replaced multiple times within the lifecycle of a building, facade system typically last as long as the design lifespan of the building. It is uncommon for the building envelope system to be replaced in its entirety as part of the building maintenance plan. Therefore, most building owners would require the main contractor and its facade nominated subcontractor to jointly provide deed of warranty that could last as along as 12 years. Whilst such duration is much longer than that of conventional architectural products, it is still significantly shorter than the design lifespan of any building. Secondly, in cases where defects are found in the facade system it does not just implicate the owner and the occupants of the building concerned but also third parties such as members of the public in case of falling facade panels. Therefore any design and/or workmanship defect can have a disastrous and enduring effect, beyond pure economic losses. In terms of rectification of fallen facade panels, it goes beyond mere replacement and installation of new panels at affected areas. This is because the failure of selected panels may indicate a systemic problem with the building facade as a whole, therefore could involve a thorough review and inspection to other facade areas leading to rectification and replacement of other parts of the building enclosure. All these rectification works are likely to be carried out under heightened authority and/or media scrutiny, due to the possible public health and safety hazard concerns. This makes any settlement between disputing parties more challenging. Most of these issues are not thoroughly considered at the point when the facade system is first awarded to the contractor concerned. 

Given some of the unique characteristics highlighted above, one would expect that the contract and procurement risks are approached differently both during tender and construction period. However in reality, the subcontract standard conditions for facade system is usually not drafted in a bespoke manner to cater to its unique characteristics. Likewise the tender process leading to the award of facade system is not significantly different from other conventional architectural trades. These anecdotal observations suggest that there could be a dichotomy in risks perception between procurement phase as compared to the maintenance phase. The issues raised in this article hopefully will assist in bridging these risks perception gaps. In the next few sections of this article, several pertinent issues will be examined including the engineering and technical characteristics of facade system that contribute to its risks profile. These in turn raises the question of what would be the appropriate procurement pathway for facade system. The conventional approach of awarding facade system through a nominated subcontract may have inadvertently contributed to the prevailing issues. Ultimately, the Employer’s ability to truly benefit from any warranty beyond the conventional maintenance period is dependent on the contracting arrangement involved. 

Unique Characteristics Of Curtain Wall System And Facade Cladding

A curtain wall system is a form of building enclosure which comprises glass panels and supporting metal frames that is a prominent architectural feature commonly used for skyscraper that has become ubiquitous in city skyline. These glass panels spanning from floor to ceiling level enhances one’s sense of internal volume and space. Engineering wise it is designed to support its own weight as well as to manage any environmental forces that it may be subjected to e.g. wind load, air pressure differential, vibrations from adjacent construction sites, seismic activities etc. Apart from these structural loading considerations, curtain wall system plays a significant role in regulating the overall thermal transfer value which is a measure of a building’s heat gain through its envelope system. Therefore an appropriately designed curtain wall system should ideally allow natural lighting into the building whilst providing heat insulation, so as to reduce the demand for electricity to cool the interior spaces. Interestingly whilst curtain wall system is traditionally an architectural trade, there are various inter disciplinary elements of consideration in its design such as structural engineering as well as mechanical and electrical engineering. Therefore it is not uncommon to find that the Employer may engage a separate facade engineering firm as part of its team of consultants to manage its project. What is worth noting however, is that the facade engineering consultant does not usually provide a prescriptive and all encompassing design drawings to the contractor. The contractor is usually required to demonstrate how it proposes to adhere to certain performance based requirements issued by the facade engineer so as to address various architectural, structural, mechanical and electrical concerns. In this regard, most facade nominated subcontract are procured via design and build or partial design and build. The intricacies and challenges arising from such procurement pathway will be further elaborated in the next section of this article.

As mentioned earlier, there are various competing elements of design and engineering requirements that spans across multiple disciplines in most facade systems. From a structural perspective, the curtain wall system is required to be light weight and yet sturdy so as to reduce the dead load it imposes on the building structural system. Likewise, a thick and bulky glass panel and metal framing curtain wall system is not favoured architecturally due to aesthetic and space utilisation consideration. On the other hand, it is rather challenging to have on one hand a light weight and lean curtain wall system and yet provide a good heat insulation, water tightness and overall thermal properties. Therefore the competitive edge of facade contractors is in their proprietary designs that are capable of addressing some of these competing performance requirements. These proprietary design are usually protected in terms of intellectual property rights. In this regard, the principal role of facade engineers engaged by the Employer is to provide a professional evaluation and validation of engineering proposals offered by these facade contractors. 

Apart from curtain wall system, cladding system that uses metal or natural stone panels as part of the building envelope share some of the issues raised above. As the facade cladding panels used are fairly large in size and its overall dimensions, the weight of each stone panel may easily exceed 100kg per unit. Therefore the proprietary design offered by the facade contractor’s  installation system include fixing mechanism that can securely anchor the panels into the building’s external reinforced concrete wall. Whilst a cladding system is predominantly an aesthetic feature of a facade system, it shares a similar risk profile to that of a curtain wall system. Any defects  in installation that results in falling of heavy panels from high rise building is no less serious in consequences. 

Procurement Pathway – Reasons Behind Design And Build

The detail design of curtain wall system are mostly carried out by the facade contractors due to the increasingly rigorous performance expectations. This explains why the procurement pathway for curtain wall is either design and build or partial design and build, as alluded to earlier. The facade engineering consultants engaged by the Employer is mainly to provide ‘check and balance’ as the facade contractors carries out its detailed design development. The following paragraph provides a brief explanation on how the transition from ‘stick system’ to ‘unitised system’ for curtain wall have resulted in an increasing adoption of design and build procurement pathway for curtain wall system.

The rigorous performance demands on building facade system meant that the modular curtain wall panels had to be manufactured with precision under controlled and automated environment within a factory or plant. These panels are then subject to factory acceptance tests to ensure that it complies with various requirements such as thermal insulation, water tightness, air permeability as well as structural performance. Thereafter these panels are transported to site for assembly and installation. Such off site fabrication method is also known as a ‘unitised system’. Such fabrication method allows better consistency in quality and is superior to the ‘stick system’. 

Stick system is a relatively traditional but cost effective in situ construction method where various individual structural frame members such as transoms and mullions are installed on site and are subject to application of sealants for water tightness upon insertion of glazing panels. Quality consistency can be challenging under this methodology primarily because much of the on site installation are carried out manually by labourers as opposed to off site automated machineries. There are also limits to which tests could be carried out on the curtain wall system manually assembled and installed on site. 

The commercial incentive for facade contractors to transition to unitised system is the competitive edge that it progressively develops over competitors through its proprietary design. By the same token, there is very limited commercial incentive for facade engineering consultants to assume such design responsibility given the risk reward ratio. In general, the consultancy fee payable does not commensurate with the risk that may entail in case of defective facade design. Whilst Employers generally favour design and build approach which offers single point responsibility, facade system are mostly carried out by subcontractors whom they do not directly contract with. This give rise to a unique conundrum as it relates to the main contractor, which will be elaborated further in the next section of this article. 

Design And Build Subcontract Under Design-Bid-Build Main Contract

As facade systems are fairly niche and specialised, these trades are rarely carried out by general contractors or main contractors. With the help from its team of consultants, the Employer typically tender, negotiate and select the facade contractor directly before instructing the main contractor to enter into a nominated subcontract with the selected facade contractor. The gist of this arrangement is to ensure that the main contractor continue to be wholly responsible for all workmanship related issues under the project, but at the same time allow the Employer to negotiate the best possible commercial deal with the facade contractor concerned. However what if the main contractor is engaged under a traditional procurement pathway of design-bid-build? Such main contractor do not have design responsibility since it is only required to construct strictly based on design provided by the Employer’s designers/engineers. Such traditional procurement arrangement is fairly prevalent in construction of commercial buildings that commonly uses curtain wall as its facade system. As regards commercial building, the Employer is more inclined to be in direct control of its aesthetic and design development in an effort to enhance its real estate value. Therefore, whilst the main contractor may not have a design responsibility under the main contract, it is interestingly now required to be jointly responsible with the facade subcontractor for the curtain wall design upon execution of nominated subcontract. The duration of design responsibility may well exceed the period beyond the finalisation of account under the main contract. This is because most nominated subcontractor for facade system and the main contractor are expected to issue a deed of warranty in favour of the Employer for a considerable period e.g. 12 years commencing from practical completion of the project. Such warranty is usually structured under a joint and several liability, where the main contractor remains on the hook even if the facade subcontractor ceases to be in operation within the period of warranty. The intricacies and challenges under such arrangement will be further elaborated in the next section of this article. 

The commercial incentive available to the main contractor in exchange for undertaking a fairly significant facade system design responsibility is rather limited. When the traditionally procured main contract is awarded, the facade system is usually categorised as ‘Prime Cost’ Sum or PC Sum where the main contractor may include its costs for profit and attendance. The profit is usually expressed as a percentage to the nominated subcontract sum, whilst the attendance is a lump sum amount for general supervision and coordination of such trade under the main contract. The total amount for these provisions is generally within the range of 10% of the PC Sum. At the point when the main contractor provides its profit and attendance for the PC Sum concerned, the details of the facade system design are usually not available. Therefore the costing by the main contractor in this regard is done without thorough appreciation of the specific types of risk that such subcontract may entail. In any case, there are provisions available under the main contract where the instruction for nomination may be reasonably objected by the main contractor. Unfortunately as the design for curtain wall system has yet to be completely developed at the point of nomination, there is very limited basis for the main contractor to raise its objection on technical grounds as it relates to the reliability of the design proposed. 

In addition to the above, the scope of design responsibility for the facade system may not be as clear as it should be. If and when defects arise, it is not immediately clear whether such defects emanate from the facade system itself or the building elements that interfaces with the facade system. Such distinction is important because it implicates the extent to which the main contractor may be liable. Whilst the facade system is generally designed by the facade subcontractor, the building structural system is designed by the consultant structural engineer. By way of illustration, curtain wall systems or cladding systems are usually anchored to an underlying structural substrate e.g. external reinforced concrete walls, beams and/or columns. The structural integrity and performance of the facade panels are heavily influenced by the structural elements that it is anchored to. Any lack of clarity in division of responsibility may give rise to finger pointing problem when the facade system fails. 

Defects Rectification Arrangement Under Deed Of Warranty

As alluded to earlier, a deed of warranty is usually executed by the main contractor and the facade subcontractor in favour of the Employer for a considerable period beyond the completion of the project. As such warranty is normally structured under a joint and several liability arrangement, the main contractor may be left solely liable in case the facade subcontractor ceases to be in operation within the warranty period. This should be taken into consideration even if the main contractor may take comfort from the fact that its facade subcontractor shall provide indemnification on a back to back basis.

The rectification effort often involve various contractual matters beyond the physical effort to make good the defective parts of the facade works. There are various intricacies that may not be obvious at the point when the deed of warranty was executed. By way of example, the Employer may require that a complete survey of the facade system as a whole be carried out beyond the mere replacement of the facade panels in issue. This is on the basis that the facade panels that had fallen may be indicative of an underlying systemic issue with the facade system as a whole. This may lead to dispute over the scope of liability and the cost of rectification. The disputing parties may also need to agree on the engagement of a neutral and mutually acceptable expert or consultancy firm that will ‘certify’ that the rectification works are complete. When parties are already embroiled in dispute, it is often very challenging if not impossible to establish agreement on any related matters. If the facade panels involve natural stones e.g. marbles, granite, there is an additional difficulty in finding replacement panels that matches the aesthetic and visual appearances of the existing facade panels. This is because these stones are extracted from natural quarry as opposed to manufactured in a factory. Whether the replacement panels exhibit the same colour tonality and vein like features as the original marble panels can be extremely subjective particularly if the existing facade panels had already been subject to weather elements for a considerable period of time. The time and cost that the main contractor and subcontractor had to expend to make good the defective work can be extremely unpredictable.

Subcontract Practical Completion On Main Contract Critical Path

In Singapore, whilst the certifications of practical completion of buildings are carried out by the certifier appointed under the contract, there are occasions where such certification is predicated on the contractor obtaining the relevant approvals from statutory authority such as Building And Construction Authority (BCA). As regards engineered facade such as cladding and curtain wall system, the BCA requires that the design for framing and fixing of all engineered facades are submitted for its approval. These facade system installation related approvals are necessary for the BCA’s subsequent issuance of Temporary Occupation Permit (TOP) and Certificate of Statutory Completion (CSC) for the building concerned. Any Qualified Person (QP) making application for TOP and CSC on behalf of building owner must list down the relevant structural plan reference numbers of all the engineered facade on an itemised basis. 

In view of the above, complete installation and approval for facade system is a condition precedent prior to any practical completion. It follows that the facade system is highly likely to be on the project schedule’s critical path. Accordingly, any on site testing to installed curtain wall and facade panels had to be completed in advance prior to practical completion. In fact the integrity of the facade system of operational building is so critical that the BCA requires a periodic facade inspection (PFI) to be carried out every seven years for high rise buildings to prevent deterioration and defects. 

The upshot to the above mentioned sequence of procedural approvals and certification for facade system meant that any delay to facade subcontract works may delay the main contract completion as a whole. Whilst the facade subcontract sum may be a fraction of the main contract sum, any liquidated damages under such subcontract may be equal to the main contract liquidated damages. This presents a very tricky risk reward ratio for facade subcontract works. There is very limited incentive for concessions to be made by the main contractor in favour of the facade subcontractor. This is because any concession given may result in its inability to recover a back to back indemnification from its facade subcontractor if the main contractor is found liable for the full main contract liquidated damages to the Employer.

Conclusion

Contrary to popular belief, risks arising under the contract do not commensurate naturally with the expected reward or profit. Facade subcontract works is probably a good testament to this principle. Having the appropriate balance between risks and reward involves deliberate and active intervention during the procurement and negotiation phase of the project. Part of this intervention requires an in-depth understanding of any practical issues that are often contractually elusive.



Koon Tak Hong Consulting Private Limited

A typical construction contract document consists of various components such as specifications, drawings, pricing schedule etc where one may find conflicts, ambiguities and discrepancies amongst these documents. As these inconsistencies and contradicting terms may have cost and schedule implications, standard conditions of contract often include a mechanism on how these issues shall be resolved. This article provides a comparison on how the Public Sector Standard Conditions of Contract (PSSCOC) published in 2020 and Singapore Institute of Architects (SIA) Building Contract published in 2016 deal with such matters. The contractor usually has very limited role in compiling contract document as well as the production of tender document. If there is any discrepancy say between specifications and drawings produced by the project consultants resulting in a claim for additional payment by the contractor, which party should bear the financial or schedule risk? Should the contractor be responsible for its failure to detect the discrepancy in advance and clarify during tender? Or should the Employer be responsible for its consultants’ negligence in the production of their professional deliverables? 

In deciding the contractual philosophy to these questions, it is evident that both these contract forms adopt a very distinct approach. Under the PSSCOC, whilst the contractor may be entitled to compensation, there are certain contractual hurdles that it had to overcome prior to being successful in its claim. The SIA form arguably takes a more subtle approach where it does not have an equivalent claims mechanism as that of PSSCOC but it provides rules on how the contract document shall be construed and interpreted. Whilst some may favour such approach by giving parties more latitude and freedom to manoeuvre, others may frown at its lack of specificity. The details to these contrasting mechanisms will be further elaborated in this article.

It is also important to understand why contradictory terms found in contract document may give rise to claims for additional cost and time. By way of illustration, suppose architectural contract drawings indicate the use of porcelain tiles in respect of bathroom finishes but the interior design schedule of finishes instead reflected certain marble tiles which are more expensive and takes a longer time to source. Apart from the price differences between these different materials, the use of marble tiles potentially give rise to schedule risk. This is because it is more challenging to source for marbles with consistent appearance as regards its colour tonality, veining pattern etc in a natural environment such as a quarry. Assuming the contractor had calculated its contract sum based on porcelain tiles, such discrepancy in basis of pricing is deemed a ‘commercial nature’. This is quite different than discrepancy of a ‘legal nature’ stemming from conflicting choice of words used in drafting of contract conditions resulting in ambiguity in meaning. Whether a discrepancy is of a commercial or legal nature, the effectiveness of contract form in addressing such issue is largely dependent on the resolution mechanism. As a matter of comparison, it appears that the PSSCOC form caters more specifically to discrepancy of a commercial nature recognising the unique procurement process for construction industry.  What are the specific nature of construction procurement process that give rise to conflicting terms and which components within the contract are particularly vulnerable? These will be elaborated in the next section of this article.

Components Of Contract Documents That Are Prone To Conflicts, Ambiguities And Discrepancies

The above mentioned example of conflicting choice of interior finishes is is quite common in reality given the frequent value engineering exercise carried out during design development under a procurement pathway of design-bid-build. In an ideal world all design consultants ought to revise their drawings and specifications in tandem with the latest decision made by the Employer to ensure consistency. However, the frequency with which these design changes occur within a compressed design development timeframe prior to tender is a risky proposition. Consequently, it is a fairly common industry practice for the consultants to issue tender addendum at the late stage of tender or even after tender closing deadline for tenderers to amend their price accordingly. One may find that certain architectural tender drawings that are issued belatedly are not substantively in sync with tender drawings of other disciplines such as structural, mechanical and electrical services. The problem is compounded when specifications included in tender document are not drafted on a bespoke basis for the project in hand but rather ‘standard documents’ that are used repeatedly from project to project. Therefore it is quite common not just for discrepancy to arise amongst different types of tender drawings but also between specifications and drawings. 

As a matter of sequence of work flow, these addendum drawings and specifications will be issued to the consultant quantity surveyor for a corresponding update to its pricing schedule. Depending on the nature of procurement pathway of the project in hand, the quantity and/or descriptions included in the pricing schedule had to be revised accordingly. This information transition from consultant to consultant again becomes a key point of vulnerability. 

Such discrepancies, conflicts and inconsistencies are so prevalent during procurement that the ‘post tender clarifications’ or ‘tender questionnaire’ issued by the consultants to the tenderers are rather revealing. As if in anticipation of the almost inevitable conflicts within the tender document, tenderers are usually asked to confirm that in case of contradictions, the tender price shall be deemed to have included the ‘stricter’ or ‘more costly’ requirement. Such requirement effectively reverses the burden of conflict and inconsistencies on the contractor but often to the financial detriment of the Employer. Therefore as regard discrepancy that are of commercial nature, it is mostly caused by negligence that are avoidable with advance planning. 

Mutually Explanatory Of One Another – PSSCOC Clause 3.1 vs SIA Article 10 

Clause 3.1 of the PSSCOC states that contract document which consists of several sections of documents and drawings are to be taken as mutually explanatory of one another. In case of inconsistencies, the Particular Conditions, if any shall take precedence, followed by Standard Conditions. In the event of any conflict between the drawings, then the order of precedence shall be prescribed in the Appendix. The placeholder for Clause 3.1 in the Appendix relates only to drawings by allowing parties to decide by way of descending order, which drawings shall take precedence. Since architectural drawings typically leads the design development process, it will not be unusual for architectural drawings to take precedence follow either by structural or mechanical and electrical drawings. Notably the specifications, pricing schedules, tender clarifications and contractor’s submissions are not included in this provision. Clause 3.1 recognises that ‘several documents’ and drawings are part of the contract document, of which the former is likely to collectively refer to amongst others specifications, pricing schedules, tender clarifications and contractor’s submissions. However these documents are apparently subordinate to Particular Conditions, Standard Conditions and drawings. The likely rationale for allowing the drawings to take precedence is that the PSSCOC referred to in this article relates to lump sum contract where as a matter of industry practice, the drawings provide the overarching definition of the scope of works. However what is less clear is that the pricing schedules, particularly the section on ‘Preliminaries and General’ typically found under the first section commonly include various particular conditions. These are included in pricing schedule to allow the tenderer to indicate any price implications for compliance with such bespoke requirements. In most cases, these particular requirements may have intended to supersede standard conditions. Therefore parties are advised to be cautious about placement of bespoke requirements or particular conditions within contract document in light of the effects of Clause 3.1 of the PSSCOC. It is also worth noting that documents exchanged during tender such as tender clarifications, pricing breakdowns in schedules, responses to tender questionnaires are produced by the tenderer responsive to its evaluation of tender drawings provided. By way of logic, these documents to the extent that it include details that deviates from the ordinary reading of the said drawing ought to prevail.

Article 10 of the SIA form similarly deals with interpretation and construction of contract document. As with Clause 3.1 of the PSSCOC, Article of the SIA form states that the contract document shall be read and construed as a whole. Unlike the PSSCOC which stipulates the order of precedence of various parts of contract document, Article 10 by contrast states that no special priority other than that accorded by law shall apply to any one document or group of documents. Unlike the PSSCOC, Article 9(1) of the SIA form expressly require that various drawings, specifications, schedule of rates and prices that are included in contract document shall be both identified and signed by the parties. In other words during the compilation of contract document after the issuance of letter of acceptance, parties are expected to sieve through all specifications, drawings and pricing submissions exchanged during tender with the aim of only to include the prevailing versions. Whilst this may be administratively laborious, it is a necessary practice of ensuring that there are no conflicting versions of either drawings or specifications which in turn necessitate stipulation of the order of precedence. Ironically, it is also entirely possible that parties may dispute over which drawings or specifications ought to be included in contract document during its compilation process. Some may argue that such administrative hassle is completely unnecessary as parties had already signed on the letter of acceptance which ordinarily would define the list of contract documents that are binding. In other words, the signed letter of acceptance should take precedence. However it is interesting to note that under Article 9(1)(f) of the SIA form, the letter of acceptance is identified as part of ‘such other letters or documents’ that the parties may agree and attach as contract document. This suggest the letter of acceptance after all may not be accorded any special priority in determining which drawings and/or specification shall be included in the contract document in case of dispute. 

Notwithstanding the contractual mechanism that is in place to stipulate how contract document shall be interpreted and construed, there may be occasions where parties take issues over the application of such mechanism.  Where such discrepancies are of significant commercial nature that underpins the basis of contract sum, the project may grind to a halt if left unresolved. The next section of this article elaborates how PSSCOC allows the contractor to claim for additional payment and/or time, subject to compliance with certain condition precedents.

Claims For Ambiguities And Discrepancies – PSSCOC Clause 4.4

The provision allowing contractor to claim for additional payment and/or extension of time for ambiguities and discrepancies in contract is found  under Clause 4.4 of the PSSCOC. As mentioned earlier, this is unique to PSSCOC as there is no equivalent provision under the SIA form. The advantage of such provision is that it provides the certifier appointed under the contract the authority to grant contractual relief which is interim but binding. In the absence of such provision, parties may only deal with these differences under the dispute resolution clause that may involve legal proceedings. The disadvantage of such claims provision is that it typically include condition precedents that the contractor shall comply, failing which it may lose any entitlement to relief under future legal proceedings. 

Clause 4.4(1) of PSSCOC places the burden of notifying of any ambiguity, discrepancy, conflict, inconsistency or omissions found in the contract document evenly on both parties. If such ambiguity is of commercial nature that underpins the basis of contract sum or time for completion, the Superintending Officer (SO) may issue an instruction to the contractor to provide its explanation to the ambiguity concerned and make the necessary adjustment to the term involved. Referring to the earlier example of discrepancy in specification of marble tiles or porcelain tiles, such instruction shall clarify as to which tiles will be used to the bathrooms in issue. 

Upon receipt of such instruction from the SO, if the contractor is of the view that the instruction will give rise to loss and expense and/or schedule delay, the contractor shall notify the SO in writing pursuant to Clause 4.4(2). The contractor’s entitlement to any additional payment in respect of loss and expense or extension of time, is subject to its compliance with the associated condition precedents found in Clauses 14, 23 and 32. Any compensation for loss and expense will only be allowed if it could not have been reasonably foreseeable by an experienced contractor, assuming a diligent perusal of the documents submitted prior to contract. Whilst loss and expense compensates the contractor for heads of claims that are of overhead cost by nature such as prolongation cost, additional preliminaries and/or disruption cost, what is noticeably absent is the direct cost arising from the SO’s instruction. Assuming the SO’s instruction clarifies that the bathroom finishes shall be marble tiles, the loss and expense merely compensates the contractor for its additional indirect cost for managing the project over an extended period of time. The direct cost is not ordinarily compensated under loss and expense claim. In this regard, the direct cost accounts for increase in contract sum due to extra over cost of marble tiles over porcelain tiles. Interestingly, the subsequent Clause 4.4(3) states that if the SO’s instruction result in reduction in contract sum, such reduction shall be valued in accordance with Clause 20. It appears that the cost claims under PSSCOC caters to two exclusive categories namely (1) additional indirect cost and (2) reduction in direct cost.

In most cases of loss and expense claims, it is quite common for relief to be granted only if the event was unforeseeable even by an experienced contractor, such as adverse ground condition. The presumption is that the contractor is in a better position in terms of execution of construction works and therefore is able to better manage the relevant risks. However in the case of discrepancy and ambiguities in contract document, the Employer and its consultants arguably played a dominant role in preparation of drawings, pricing schedule, choice of standard conditions, specification drafting etc. A strong case could be made that it is the Employer and the Architect who had more responsibility in preparation of the contract term than the contractor. It is therefore unclear whether it made sense to place a unilateral burden on the contractor such that the ambiguities and discrepancies must not have been foreseeable by the contractor before claim is allowed. In the next section of this article, the responsibility of the drafter will be examined as regards rule of interpretation. 

The likely explanation as to why SIA form do not allow for claims in case of contract terms ambiguity can be found in its Article 8. Under this article, prices submitted by the contractor shall be inclusive of all works, including those that either indispensably necessary to carry out and bring to completion the construction works or which may contingently become necessary to overcome difficulties before completion. Such lump sum and all inclusive clause makes it challenging for contractor to successfully raise any claim that its price is not sufficient to bring the works to completion because of difference in interpretation of say specifications and/or drawings.

Contra Proferentem Rule – SIA Article 10(1)(c)

Contra proferentem is a rule of contract interpretation where in case of ambiguity, the term shall be construed against the party who was responsible for the drafting. Although contra proferentem rule works against the party responsible for the draft, it should be noted that the drafting of SIA form is led by the Singapore Institute of Architects (SIA) as opposed to the Employer. Whilst the Architect is not a contracting party, it is engaged by the Employer to act as its agent, amongst others. Therefore where the contra proferentem rule applies, it is reasonable to assume that it shall work against the interest of the Employer. This is because the Employer is usually responsible for the choice of contract form to be used and such SIA form is drafted by its agent’s professional institution.

In Singapore, where there is ambiguity in the contract conditions, the court will look at the surrounding context and the purpose of the agreement i.e. the ‘factual matrix’ to ascertain the true meaning of the term in issue. Therefore if on proper construction of the contract based on the surrounding context the ambiguity can be resolved, the contra proferentem rule need not apply. Article 10(1)(c) of the SIA form states that the contra proferentem rule shall not apply either to the Articles or Conditions of the SIA Building Contract 2016. The aim of this Article 10(1)(c) is to prevent any ambiguity to be construed against the Employer, in case contra proferentem rule is applicable. In this regard, Article 10(1)(c) act as an exclusion clause. However it is curious that such exclusion is only applicable to Articles or Conditions of the SIA form. This presumably excludes all other documents that are commonly included in contract such as specifications, pricing schedule, drawings, letter of acceptance, contractor’s submissions, tender clarifications etc. It is likely that these groups of documents may contain ambiguities that are commercial by nature than the Articles and Conditions of SIA form. Therefore the very documents that are likely to contain commercial ambiguities that underpins the basis of contract sum and time for completion are curiously excluded from the effects of Article 10(1)(c). The likely explanation for this approach is that most of these commercially related documents would contain certain order of precedence based on the dates on which these were issued for negotiation and agreement. In other words any changes or evolution to these documents would exhibit certain paper or digital trail. Therefore it is not difficult for the court to construe the appropriate meaning of the terms in issue by following the chronology of events.

Letter Of Acceptance

Whilst most of the mechanism to resolve inconsistencies and ambiguities in contract document are found in standard forms of contracts, there could be similar provisions included in letter of acceptance. In other words, there may be conflicts within resolution of conflict provisions. As the template letter of acceptance is typically provided by the consultant quantity surveyor appointed by the Employer, these templates could be used from project to project regardless of contract form adopted. These template letter of acceptance may stipulate that the terms included in such letter shall take precedence over any other conditions, articles of agreement, correspondence etc. Depending on positions taken by disputing parties, these competing provisions may give rise to ‘battle of forms’. 

Notably some may take the position that a letter of acceptance represents nothing more than an acceptance of an offer. Such letter should not introduce any new terms, unless it is a counter offer. The terms that is accepted by way of such letter could be found in the offer i.e. the tender submissions made by the contractor. Such submission typically include the standard form of contract including the provisions to resolve ambiguities, conflicts and discrepancies. Therefore, the letter of acceptance should not take precedence over the contract form adopted by the parties. On the other hand, if parties dispute over the conflicting mechanism during the process of compilation of contract document, the only document that was signed by the parties was the letter of acceptance. In this regard pending the formalisation of the complete contract document, the letter of acceptance may carry more weight of evidence from the perspective of a state court or arbitral tribunal. Therefore parties should pay special attention to the letter of acceptance to ensure that it does not create more conflict than it intends to resolve.

Conclusion

Provisions resolving conflicts, ambiguities and discrepancies do not get the necessary attention that it deserves during tender negotiations. For some, these mechanism may be regarded as ‘standard’ provisions. Unfortunately those who do not examined these provisions adequately may find that it could be a costly mistake particularly when it consist of discrepancies with commercial nature. Indeed these provisions should not be contentious during negotiation because both parties have the very same incentive to ensure clarity in contract terms.




Koon Tak Hong Consulting Private Limited

Liquidated damages represent a genuine pre-estimate of delay damages that may be suffered by the aggrieved party in case of project late completion. Such amount is commonly included in construction contracts and expressed as a rate of fixed sum per calendar day that shall be payable if the construction works remained incomplete by the agreed practical completion date. This arrangement offers parties upfront certainty of quantum of delay damages which in turn facilitates risk assessment. Additionally, this also relieves the aggrieved party from the burden of proving delay related losses. Liquidated damages are quite commonly used in construction projects and its application is primarily governed by the parties’ terms of agreement. This article examines and compares the application of liquidated damages under both the Public Sector Standard Conditions of Contract (PSSCOC) published in 2020 and Singapore Institute of Architects (SIA) Building Contract published in 2016. By way of background, this article is Part 9 of an article series that compares various key contract provisions between  SIA and PSSCOC.

As SIA and PSSCOC are commonly used in construction industry of Singapore, this examination and comparison provide readers with a general understanding of how treatment of liquidated damages may differ between public and private sector projects. The key difference in application of liquidated damages between SIA and PSSCOC stemmed from their unique and distinct certification regimes. As regards SIA form, a Delay Certificate needs to be issued by the Architect prior to the Employer’s recovery of liquidated damages from the contractor whereas there is no equivalent certificate under the PSSCOC. It follows that the Employer under PSSCOC is allowed to recover liquidated damages once it is established that the works have not been substantially completed by the original or extended practical completion date. Whilst some may dismiss such difference as merely an administrative formality, this cannot be any further from the truth. In fact there are quite significant reasons and implications behind these different certification approaches all of which will be examined further in the subsequent sections of this article. 

Apart from certification that may precede any recovery of liquidated damages, another interesting issue that is often overlooked during tender and procurement is whether the contractor continues to be liable for liquidated damages if its employment is terminated under the contract. In other words, is the Employer entitled to recover liquidated damages from the terminated contractor until such time the replacement contractor completes the project? Or should the recovery of liquidated damages cease at the point of termination? It appears that both the SIA and PSSCOC takes a similar approach in this regard by having express condition to affirm the Employer’s right to recover liquidated damages from the contractor in issue post termination. The express conditions are necessary because based on case precedents, such recovery would not have been permitted if the relevant conditions had been silent on this matter. So what could be the rationale behind such condition and how should a contractor carry out its risk assessment? These questions will be further elaborated as well in this article as part of the comparison between contract forms. 

Before one delves into the intricacies of application of liquidated damages set out above, it is equally important to appreciate the overarching commercial principles including how to calculate liquidated damages as well as types of liquidated damages. These basic concepts are important before any agreement to liquidated damages as the contractor is usually expected to acknowledge that the liquidated damages are reasonable and not intended to operate as penalty. Any party that does not adequately appreciate the basics of liquidated damages will often find it daunting if not impossible to effectively negotiate the relevant terms.

How To Calculate Liquidated Damages?

There are in general three methods of calculating liquidated damages namely (1) loss of income/ additional rental expenses during schedule overrun (2) extended consultancy and supervision charges and (3) additional financing costs of capital employed. Whilst none of these methods are mutually exclusive, it is customary that only one method is used in calculating liquidated damages to ensure that the ultimate sum derived in commercially acceptable. Standard conditions of contract do not typically dictate how should liquidated damages be calculated nor impose an obligation on the Employer and its consultants to divulge the formula to the contractor. It is also fairly uncommon for disputing parties to unravel the actual calculation of liquidated damages for the Employer to justify that the sum fixed is fair and reasonable to ensure its enforceability. By contrast, one of the principles established under the hallmark case of Dunlop Pneumatic Tyre Co Ltd v New Garage & Co Ltd states that even if the consequences of breach are such as to make precise pre-estimation almost an impossibility, it is no obstacle for the liquidated damages to represent a genuine pre-estimate of damage. In other words parties are free to bargain and agree on the sum of liquidated damages even if it is a mathematical challenge to be precise in pre-estimating the losses. The court is in no position to intervene if parties made a business decision as part of the function of free market. 

Given the above, it is incumbent upon the contractor to not squander perhaps the only opportunity during pre-contract to examine the proposed liquidated damages, ensuring that it is truly satisfied that the sum is fair, reasonable and proportionate. To this end, it is important to understand the basis of calculation of liquidated damages. Liquidated damages that are found to be a penalty may be rendered unenforceable. One of the classic definition of a liquidated damages that is found to be a penalty is when the sum stipulated is so extravagant and unconscionable in amount relative with the greatest loss that could conceivably be proved to have followed from the breach. This is once again one of the principles established under Dunlop Pneumatic Tyre Co Ltd v New Garage & Co Ltd. Therefore in examining the liquidated damages proposed during tender, an understanding of the underlying calculation may be instrumental in determining whether it has elements of being a penalty. Although both the SIA and PSSCOC do not dictate the ways to calculate liquidated damages, the latter form is commonly used for public sector construction works that are not necessarily revenue or income generating. The construction of public infrastructures e.g. flyovers, bridges, pedestrian paths, recreational parks, vehicular tunnels etc are of quite different nature than say private sector projects e.g. commercial buildings, condominiums. Therefore, there is no one size fit all approach when liquidated damages are calculated. 

In essence, the loss of income or additional rental expense approach is more suitable for private sector commercially driven projects. As with most pre-estimation, it is essentially a desktop exercise that includes various arithmetical assumptions. If the project involves construction of a grade A office building in downtown, there is an expected loss of income in the event of delay to project completion. Such income generally refers to rental income that is typically measured in dollar per square foot as it relates to rentable areas as opposed to gross floor areas. It should also be noted, that not all rentable areas are equal, where certain premium ground floor locations with high footfall with retail functions are likely to fetch premium rentals than other less prominent locations within the same building. Therefore if the commercial building is divided into multiple phase completions but ironically with uniform liquidated damages notwithstanding the likely difference in rentability, it is an indication that closer examination of calculations is warranted. On the other hand, if a residential development is completed late, it is not uncommon for liquidated damages to be projected based on damages suffered by prospective occupants or buyers that had to pay rentals for alternative accommodations. At the point when liquidated damages are calculated, one will be hard pressed to accurately estimate how many apartment units may be sold and therefore how many buyers may suffer such damages. Therefore it will be instructive to understand the assumptions used in calculation so as to determine whether the mathematical projection is outrageously extravagant.  

By contrast, the additional consultancy and supervision charges as well as extended financing costs of capital employed are calculations that can be made more accurately because most of these variables could be determined in advance e.g. interest rates, professional fees, extent of borrowings. These are charges already incurred by the Employer at the point when calculations are made. Computation of liquidated damages using these approaches tend to be more accurate but are relatively lower quantum than the other revenue or income driven approaches. 

Types of Liquidated Damages

Clause 25(1) of the SIA form and Clause 16.1(2) of the PSSCOC state that where the works are divided in phases, each phase shall have its own liquidated damages i.e. liquidated damages for phase of works. Where the project is not divided in phases, there shall only be one liquidated damages i.e. liquidated damages for overall works. Each phase of works, if implemented operates like a contract of its own with its own completion date, maintenance period or defects liability period as well as separate administration of extension of time. These separate and distinct mechanism allow the proper function of liquidated damages for phase of works. 

Just as the contract forms do not dictate how should liquidated damages be calculated, there is similarly no requirements imposed on the parties as to how the works should be divided in phases. It is however important to note that since each phase of works has its own liquidated damages, it follows that any delay to a designated phase of works should in principle give rise to delay damages. Where delay to any given phase of works does not in principle cause  damages, the enforcement of liquidated damages may be problematic. That observation should nudge one to reconsider whether it was appropriate to classify certain parts of works as a phase of its own. Whilst liquidated damages relieves the claiming party from the burden of proving its actual losses, it does not excuse that party from recovering losses that could not possibly have existed. Therefore in the conceptualisation of phases of works, these are important contractual considerations. By way of illustration, if a large commercial development is divided into phases, each phase is usually geographically separable and identifiable. It may be problematic if the access roads to such development is categorised a phase of works with its own phase completion date that is much earlier than any other phases of work. The enforceability of such phase liquidated damages could be in issue because even if the access roads are completed late but before the operation of the development, the Employer should not suffer any adverse financial consequences. If it could be objectively established that these roads are not required to be functional prior to the operations of the development, what could possibly justify the need for liquidated damages? Therefore having a proper logistic and operational understanding of the project is extremely crucial in stipulating an enforceable liquidated damages for phase of works.

Certification Process Prior To Recovery of Liquidated Damages

As alluded to earlier at the beginning of this article, one of the key differences between SIA form and PSSCOC relates to the certification process prior to recovery of liquidated damages. Under Clause 24(2)(a) of the SIA form the Employer shall only be entitled to recover liquidated damages from the contractor upon receipt of a Delay Certificate from the Architect. Such certificate shall include the following information: (i) original Completion Date, (ii) any duration of extension of time granted, (iii) any extended Completion Date, (iv) affirmation that the contractor is in culpable delay. As such certificate is not available under the PSSCOC, the Employer may commence recovering liquidated damages as soon as the works are not substantially completed within the stipulated time for completion or any extended thereof in accordance to Clause 16.1(1). Contrary to popular belief, whether or not works are substantially completed can sometimes be grey or subjective. ‘Substantial’ completion suggests that the works had to be ‘mostly’  or ‘significantly’ completed as opposed to ‘absolute and final’ completion. Although what constitute substantial completion is usually defined under the contract, interpreting such contractual definition involves judgment call by the certifier. Therefore in determining whether certain outstanding works are tolerable or acceptable, it is a question of whether such works may be deemed ‘minor’ and could be completed after issuance of practical completion certificate. 

To allow recovery of liquidated damages immediately if the works remain incomplete after practical completion date, could be risky because it may not be clear whether the contractor is entitled to any extension of time. The assessment of such time extensions can be time consuming as there are usually submission details that may influence the outcome of delay analysis. Therefore, if the Employer under PSSCOC commences recovery of liquidated damages unilaterally pursuant to Clause 16.1(1) without any supporting validation or certification from the Superintending Officer, there is clearly an element of risk.

The nature of the initial notification requirement under SIA form in respect of application for extension of time is less onerous than the PSSCOC. This could possibly explain why a Delay Certificate is required before recovery of liquidated damages. Under Clause 23(3) of the SIA form, the contractor is merely required to notify the Architect within 28 days of the occurrence of an event that he considers entitles him to extension of time, including reasons why there shall be delay to completion. The extent of information disclosure expected from the contractor is merely to enable to Architect to decide whether there is an in-principle entitlement to extension of time, rather than to enable to Architect to perform any delay analysis to decide the merit of its application. Therefore it is entirely possible that where the works remain incomplete after the original completion date, both parties are unclear what is the duration of time extension that the contractor is actually entitled to. This will prevent any fair and equitable recovery of liquidated damages. The implementation of Delay Certificate therefore provides a necessary and much needed point of clarity to the administration of extension of time. On the other hand, under Clause 14.3 of the PSSCOC, the notification requirement for extension of time by the contractor is relatively more extensive. The contractor is required to not merely state the delaying event but also why there may be delay, the length of delay, the duration for time extension required as well as the effects on the accepted baseline programme. By implication, when the works remain incomplete after completion date, the Superintending Officer should be in possession of the necessary details to not merely provide an in-principle determination of any entitlement to extension of time but also the actual time extension that could be granted.

Post Termination Liquidated Damages

When project completion is delayed so severely that the Employer terminates the contractor’s employment under the contract so as to engage a replacement contractor to complete the remaining works, can the liquidated damages clause survive such termination? In other words, will the terminated contractor be liable for liquidated damages after the point of termination? Under LW Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd [2011] SGHC 163, the court affirmed the well established principle that no claim to liquidated damages can be brought in respect of the period after termination, unless there is express contractual provision. In this regard, SIA form and PSSCOC provide express conditions to allow the Employer to recover liquidated damages beyond the point of termination.  

Under Clause 32(8)(i)(i) of SIA form, which deals with effects of termination of the contractor’s employment, the Employer shall be entitled to the same liquidated damages for delay as those which shall have applied under the terms of the contract if the contractor shall have completed the works on the actual completion date of the replacement contractor. Similarly under Clause 31.3(a) of the PSSCOC which deals with liquidated damages after termination, the Employer shall be entitled to the same liquidated damages for delay as those which would have been payable if the contractor had completed the works on the actual completion date of the replacement contractor. 

In reality most contractors may find it difficult to accept that they shall continue to remain responsible for the construction duration of a project which had been taken out of their hands. Further, it is likely that the replacement contractor would be required under its separate contract to complete the project within a stipulated time for completion, failing which certain liquidated damages should apply. Therefore it is possible that the Employer may be able to have access to two separate sets of liquidated damages namely from the terminated contractor and the replacement contractor for the project in issue. 

In this regard, both the SIA form and PSSCOC included provisions to allow the terminated contractor to have certain relief from the full brunt of liquidated damages in case of delay caused by the replacement contractor. Under Clauses 32(8)(i)(ii) and 32(8)(i)(iv) of the SIA form as well as Clause 31.3(b) of the PSSCOC, the certifier shall in his assessment of delay take into consideration any failure by the replacement contractor to use due expedition and diligence in completing the remaining works as well as any credit for matters post termination that shall entitle the terminated contractor to any extension of time. Whether these provisions could be administered satisfactorily in reality remains to be seen particularly when the terminated contractor would have very limited access to any information on the progress of remaining works. Therefore, the terminated contractor should endeavour to maintain contact with any subcontractors that may continue to carry out works under the replacement contractor so as to gain access to information relating to any post termination activities. These particulars could be helpful for any future legal actions. 

Any objective determination of whether the replacement contractor had carry out the remaining works with reasonable diligence and expedition is dependent on how the completion date is established under its new agreement. If the replacement contractor successfully negotiated a more relaxed and favourable completion date, the likelihood of its culpable delay is reduced significantly. The Employer may not be averse to agreeing to a more relaxed completion date with the replacement contractor if the terminated contractor continues to be liable for liquidated damages for the period concerned. Even if the project is ultimately completed by the replacement contractor, it is extremely likely that the overall construction duration is significantly longer than what was originally planned. This is considering the fact that there are certain additional procurement and negotiation activities that had to be undertaken in consequence of the termination. Much of these additional activities can only be meaningfully carried out post termination. Therefore, the Employer may argue that there is nothing untoward as regards recovering liquidated damages from the terminated contractor for such additional time taken to complete the project.

Conclusion

Based on the issues discussed above, it appears that there are more similarities than differences as regards the application of liquidated damages under both the SIA form and PSSCOC. It is also evident that for one to have a comprehensive understanding of application of liquidated damages provisions, it may not be sufficient for one to only review the relevant clauses included in the contract forms. A great deal of the logistic, operational and financial considerations of the project ought to be considered in establishing a reasonable and enforceable liquidated damages sum. In this regard, liquidated damages is one of the unique features within a construction agreement where its application involves an equal blend of both commercial and contractual principles.




Koon Tak Hong Consulting Private Limited

Minor building works generally refer to simple, basic and low risk construction project that typically involve additions and alterations of existing building space or infrastructure. Although there is no universally accepted definition of what constitute ‘minor works’ there are a variety of standard conditions of contract that cater to such projects such as PSSCOC Lite, SIA Minor Works Contract, JCT Minor Works Building Contract etc. Therefore the contractual significance of such projects is clearly felt across the construction industry, quite contrary to its label of being ‘minor’. Although minor project on its own may be small in dollar value relative to conventional project, these projects are typically of recurring nature, potentially providing a stable source of construction revenue to those who specialise in this very niche market segment. This article is Part 2 of an article series examining minor construction projects and the associated contract form such as the PSSCOC Lite. These articles are meant to provide commercial insights for those involved in minor projects namely representatives of contractors, building owners or project consultants. An examination of the unique and peculiar characteristics of minor projects suggest that one may need to take a different approach as regards the relevant procurement and contract administration matters.

In general most minor works contract forms are not drafted from scratch but originated from its ‘parent’ form e.g. PSSCOC Lite is drafted based on omissions and simplifications of selected provisions from the PSSCOC. The scope of omissions and simplifications are therefore a reflection of the unique characteristics of minor projects relative to conventional projects. These unique features warrant a different contractual approach. By way of illustration minor works are usually carried out over relatively short construction period with simple scope of works. Therefore the likelihood of occurrence of significant variations with disruptive consequences is low. Consequently under PSSCOC Lite, provisions for valuation of variations that cater to such disruptive events such as the application of daywork rates are omitted. Likewise, the provision for revision of construction programme are omitted as well amongst others.

There may be further opportunities for streamlining of contractual provisions beyond the existing amendments e.g. dispute resolution clauses, administration of delaying events etc. Some of these considerations may stemmed from the typical choice of procurement pathways for minor works project. To this end, having a comprehensive understanding of the characteristics of minor works is of assistance in any efforts to streamline and enhance its contract administration. An understanding of these characteristics may be of help to contracting parties when negotiating contract terms when tendering for minor projects.

Types Of Contracts Used For Minor Works

As alluded to earlier, there are a variety of standard conditions of contract that are dedicated to minor projects. The choice of contract form is primarily dictated by source of funding for these projects, at least in the context of Singapore. Public sector initiated and funded minor projects that are estimated between the cost range of $90,000 to $1million are likely to adopt PSSCOC Lite whereas the SIA Minor Works Contract is meant for private sector minor projects. 

Beyond the above mentioned contract forms, it is quite common for minor projects to be executed under Integrated Facility Management (IFM) service agreement. IFM vendors are typically engaged to carry out a variety of services for real estate occupiers or owners including regular office cleaning, reception services, pest control, repair and maintenance of mechanical and electrical systems as well as occasional churn and restack works. Given IFM service provider’s familiarity with the operating environment as well as the existence of a pre-agreed set of unit rates for labour resources, minor works could be carried out by the incumbent IFM vendor. The ease of contracting under IFM service agreement that avoids the administrative burden of carrying out tender, negotiating and awarding of minor works on a project by project basis is one of the key motivations of utilising IFM service agreement. However, IFM service providers are usually not specialised in construction trades which often meant that the actual works are outsourced to third party contractors. The ‘profit and attendance’ payable to IFM vendors are essentially in exchange for avoidance of administrative hassle of tendering and contracting. The terms and conditions included in IFM service agreement are also not suitable for construction works. If and when construction disputes arise, the adverse consequences of relying on IFM service agreement is often the trade off for administrative ease in contracting.

Another common contracting practice in respect of minor works is the use of Purchase Order (PO). Under this methodology, the selected contractor issues a quotation to the Employer based oral briefing during certain organised site visit(s). This quotation includes the contractor’s understanding of the scope of works as well any of its qualifications and exclusions. The Employer’s issuance of PO typically represents its ‘acceptance’ of the contractor’s ‘offer’ which is in essence the said quotation. Occasionally, the PO may include conflicting or contradictory terms and conditions relative to the quotation. If and when construction disputes arise, one of the common source of problem pertains to ‘battle of forms’ where it is unclear which set of terms should be applicable in construing rights and obligations of the parties.

Although the use of construction contract forms for minor works may not be as administratively expedient as the use of PO or IFM services agreement, it offers a more comprehensive protection and contractual clarity to both the contracting parties. It is important to appreciate that what makes construction contract form appropriate to be used for minor works as opposed to generic contract templates is that construction projects are quite different from regular supply of goods or provision of services. Although parties at the inception may have certain expectations of what the minor works may entail, the actual scope of works may differ. This is because it is quite impossible to predict with absolute certainty of what the works may actually entail regardless of the size or scale of the construction project. By way of examples, there may be obstructions discovered when ceiling panels are removed to facilitate installation of internal partition or existing services that need to be re-routed to accommodate the proposed electrical or piping works. In this regard, what makes construction contract forms unique is that it caters to unforeseeable events through the manner in which risks are allocated between the parties. Construction contracts provides clarity on whether these unforeseeable events entitle contractors to additional payments and whether additional time will be granted to the contractor to deal with these unforeseeable circumstances. Such considerations are typically not relevant under the regular supply of goods or provision of services. Therefore generic contract templates are generally inappropriate for construction works. 

Types Of Procurement Pathways For Minor Works

Choice of procurement pathways are largely a refection of the agreed commercial arrangement based on the nature of the construction works. For projects that are likely to be confronted unforeseen circumstances or with unpredictable quantities of work, the procurement pathway of choice is usually remeasurement contract as opposed to lump sum contract. For projects where the Employer prefers to be in control of the design development with emphasis on check and balance, the procurement pathway of choice is traditional design-bid-build as opposed to design and build. These logic and train of thought that typically hold true for conventional project may not always be the case for minor works. 

Much like the consideration of expedience for minor works as pointed in the preceding section of this article, it is uncommon for the Employer to adopt a procurement pathway that may be commercially sensible, but is perceived as being disproportionately burdensome. By way of illustration although minor works may have certain aspects of work that are unforeseeable, it is unlikely for it to be administered under remeasurement contract. This is because the consultancy fee and effort that may be expended may not commensurate with the likely cost that is at stake. Assuming 10% of a $500,000 minor project is subject to element of uncertainty, this amounts to $50,000. The consultancy fee to administer a remeasurement contract may be close to this very amount.

Further, minor works unfortunately do not always attract attention and scrutiny from senior management than conventional project. It is often viewed as ‘necessary evil’ of occupying real estate premises. Consequently, the element of expedience may be the overriding consideration as regards procurement pathway. By way of illustration, a minor works contractor may be awarded a project under design and build not necessarily because of its extraordinary competence in design development but rather to avoid the hassle of undertaking multiple tender and contracting exercise of engaging consultant and contractor separately. Bundling the entire scope of works becomes an administratively convenient approach. Occasionally, the minor works contractor may be directed by the Employer to engage certain design consultant with knowledge of the premises and favoured by the Employer. The contractual risk and burden therefore reside with the contractor.

Given the practical considerations and realities illustrated above, contractors ought to be aware that low contract sum does not necessarily equate to low financial risks. If the proposed minor works involve interfacing with an existing building system e.g. upgrade of power supply infrastructure to an investment bank, any design or workmanship error in the power supply may disrupt the bank’s business operations. The repercussions may amount to tens of millions of dollars in business losses notwithstanding that the contract sum of minor works may be a mere $500,000. Therefore the concentration on legal and financial responsibilities on a single entity with fairly light and fragile balance sheet purely due to administrative expedience, can be a fatal error. Minor projects can therefore be particularly vulnerable where the procurement and contracting efforts may not be executed with the necessary rigour and scrutiny as compared to conventional projects. 

Variations Under Minor Works

As mentioned earlier, as minor works are likely to be simple construction works carried out over a brief period, the likelihood of having a significant and disruptive variation works instructed is considerably low. The valuation of variation provision under PSSCOC Lite is simplified accordingly. It is however noteworthy that under both PSSCOC Lite and SIA Minor Works Contract, the authority for contract administrator to instruct variations to permanent works is preserved. Therefore, parties ought to be alive to the prospect of works being varied under minor project including the contractual ramifications that may follow such as claims for additional payments, extensions of time etc. As minor works which are largely addition and alteration works by nature tend to be unpredictable, there may be a need to instruct additional works from time to time to cater to unforeseen circumstances. By way of example, when a proposed upgrade works to electrical infrastructure interfaces with existing system, it may come to light that certain ad hoc upgrade works are necessary to accommodate new electrical load. This may necessitate variation orders. 

One of the unique aspects of variations under minor works is the application of contract rates and prices for its valuations. In procurement of minor works, it is fair to say that price competitiveness is not the foremost consideration due to lack of economies of scale. Consequently, the unit rates and prices may not necessarily be scrutinised and negotiated unlike that of a conventional project. Further, the breakdown of contract sum may not be distributed in a manner that correspond with the actual cost of works. It is not uncommon for the minor works contractor to have completed all the works by the time it receives its first progress payment. Therefore pricing schedule are often viewed as part of the perfunctory submissions. Addition and alteration works are often a blend of construction trades, where each trade is considerably low in quantity, scale and value. By way of illustration, if a minor project relates to changing of an office layout, it generally involve moving of existing internal partitions, procuring new partitions, reconfiguration of ceiling panels to accommodate new layout, re-wiring of electrical cables based on new workstation orientation plan etc. If a schedule of rate is created based on these piecemeal and ad hoc construction trades, the unit rates are unlikely to commensurate with market rates given the limited volume of works. Very often, unit rates can only make meaningful commercial sense if it is predicated by a sizeable quantity. As a mathematical illustration, a plumber may charge its client $300 to replace a water tap, and the cost remains $300 even if the plumber were to now replace two water taps. This is because bulk of the charges are fixed cost to mobilise the plumber to the site rather than the actual direct works. Therefore the reliance on contract rates and prices for valuation of variation of minor works can be problematic. Blind reliance on unit rate may cause the Employer to pay unreasonably high cost in case of addition of works and the contractor may suffer unreasonably high omission of cost in case of omission of works. Therefore, parties may consider an alternative method of valuing variations by reimbursement of cost reasonably incurred.

Programme And Delay Under Minor Works

As the contract administrator’s authority to instruct variation to permanent works is preserved under most minor works contract form, the extension of time provision is consequently a contractual necessity. This is because the Employer’s right to liquidated damages is preserved when there are mechanisms to allow time for completion to be extended due to excusable delaying events, such as variation works. In the absence of extension of time clauses, time may be ‘at large’. The tricky aspect of delay under minor works is that the regular time extension mechanism assumes that projects are scheduled to be carried out continuously throughout a stipulated duration expressed in calendar days. It is quite common however for minor works which involve additions and alteration to be carried out in a building that is occupied and in operation. Therefore the contractor’s ability to carry out works are restricted to weekends or public holidays to avoid disturbance and disruption to neighbouring tenants or occupiers. In this regard, regular time extension via additional calendar days may not meaningfully compensate the contractor if the additional calendar days granted falls on regular weekdays where the contractor is prohibited from carrying out works. In this regard, the extension of time clause ought to be amended to replace calendar days with operable days. 

Another unique challenge for minor works as it relates to delay and programme management is that since the construction period is relatively brief, the condition precedents commonly found in extension of time clauses may not operate in congruence with its original purpose. Under most contract forms, the contractor is ordinarily required to notify the contract administrator in advance if it intends to make any application for extension of time. These notification could be as long as 60 days of the occurrence of the delaying event. There may be provisions requiring the contract administrator to seek further details of the delaying event within 14 days of such notification. Whilst these notifications and disclosures aim to facilitate any delay analysis, it may not be suitable for projects that are brief, where the time for completion is say 15 to 30 days. This is because the collective durations for various notification requirements and information disclosure may well exceed the original time for completion. Therefore, under certain foreseeable circumstances it may be more productive for parties to agree in advance of any time impact in case of anticipated occurrence of delaying event such as variation orders. 

Dispute Resolution Under Minor Works

The contract sum is never an accurate indication of the maximum financial exposure that a contractor may be liable for in case of dispute. Therefore a contractor should not be under a misconception that it will not be risking more than $500,000 for a project of $500,000 in contract sum. Even if parties agree to impose a maximum amount of liquidated damages to not exceed 10% of contract sum, it is entirely possible for total damages sought under legal action to far exceed $50,000. This is because delay damages are merely part of the total damages that an aggrieved party may pursue. By way of example a minor works contractor may cause physical damage to an existing electrical system of the entire building whilst carrying out certain refurbishment work to an isolated tenanted space. Such event could result in business disruptions to other adjacent tenants including the collective loss of business revenues etc. These consequential financial losses are beyond the scope of delay damages suffered by the Employer that engaged the minor contractor in issue. Therefore any cap in liquidated damages are inconsequential. Whilst the minor works contractor are typically expected to procure insurance policy for the works, the devil is in the detail. There may be certain deductibles, co-payment or exclusions in insurance coverage that the contractor may need to grapple with using its own balance sheet.

In view of the above, parties ought to be aware that legal disputes and claims arising from minor works may not necessarily be minor. Ironically parties undertaking minor projects might be under a false sense of security and do not usually scrutinise terms and conditions particularly those that are deemed more complex with various confusing legalese such as dispute resolution clauses. Most minor works contract forms ‘inherit’ its multi tier dispute resolution clauses from its parent contract forms that were designed for larger projects. Therefore, there may be certain legal requirements to refer differences or disputes firstly to the contract administrator within a defined duration before parties may commence legal action under arbitration. Failure to comply with such strict procedural requirements may adversely affect the jurisdiction of arbitral tribunal as well as the enforceability of the eventual arbitral award. These procedural oversights can be costly and serious which are beyond the traditional contract administration expertise of parties to minor works. On the other hand, due to the possibility of significant damages sought under these legal actions, the prospect of any successful mediation or negotiation settlement can be extremely challenging. In this regard, parties may consider reverting back to traditional litigation before state court. Party autonomy under arbitration are perhaps more suitable for commercially sophisticated entities that have access to adequate legal resources.

Conclusion

The characteristics of minor works highlighted in the preceding sections of this article are by no means exhaustive but it underscore the fact that there ought to be simpler contract forms to cater to its unique requirements. There is clearly no universal consensus on what should be the scope of simplifications to contract provisions in this regard. Indeed it is not simple to define what constitute simple scope of works. In any case, parties undertaking minor works particularly on a recurring basis should take the necessary effort to get familiar with the contract forms available. Simplifications of contract conditions should not be conflated with relaxation of contractual vigilance.   




Koon Tak Hong Consulting Private Limited

PSSCOC Lite refers to Singapore’s public sector standard conditions of contract for construction works estimated at more than $90,000 but not exceeding $1million. The term ‘lite’ therefore suggests that such contract form caters to relatively low cost or minor construction project which require simpler contract conditions due to its reduced risks profile. Its adoption takes effect from 1 May 2025 onwards. PSSCOC Lite is drafted based on omissions and simplification of certain clauses included in the original PSSCOC (8th Edition July 2020) with the aim of reducing compliance cost, balancing risk of contractors and streamline administrative processes. This article is Part 1 of a two part series that focuses on minor scale projects and the associated forms of contract. In Part 1, the focus will be on relevant clauses that were either simplified or omitted altogether from the original PSSCOC in the course of producing PSSCOC Lite. This review will enable users of PSSCOC Lite particularly contractors carrying out smaller scale construction projects for public sector to be more commercially informed. 

PSSCOC Lite can be viewed as the counter part of SIA Articles and Conditions of Contract for Minor Works 2012 of which the latter is similarly a simplified contract form of the original SIA Building Contract meant for private sector projects. Creating an abbreviated contract form for low value low risk project appears sensible given the difference in risk profile. The tricky part however is deciding the actual scope of simplification or abbreviation in the process of deriving a ‘lite’ form. The scope of amendments of PSSCOC for the purposes of producing a ‘lite’ version involves the following provisions: (1) valuation of variations, (2) finalisation of account, (3) programme revisions, (4) liquidated damages and (5) other administrative clauses e.g. appointment of Assistant of Superintending Officers, security deposit, prefabrication clauses, price fluctuation clauses etc. On the other hand, the scope of amendments for SIA Minor Works are quite different.

In deciding what constitute a ‘lite’ form, it is important to have a clear understanding of the general nature of smaller scale project apart from the obvious parameter of having lower contract sum. Firstly, smaller projects are likely to be of additions and alterations to existing space within a building rather than constructing building or infrastructure from scratch on a vacant plot of land. Such additions and alterations initiative often involve repurposing an existing space with the view of changing or enhancing its function. It follows that there may be considerable interfacing works with existing building systems. Examples include converting certain parts of storage space to office, reinstatement of previous leased space to its original condition, repair and replacement of various building systems such as lifts, water tanks, power system etc. Whilst these examples are not meant to be exhaustive, it is clear that low contract sum may not inevitably lead to lower risk. Unfortunately, there is no universal metric for measurement of risk unlike construction cost which is measured in dollar value. Therefore it is challenging to clearly stipulate with precision on what should be the risk level for projects that adopts PSSCOC Lite. Therefore contracting parties are encouraged to stay intellectually nimble by examining risks and costs in parallel. 

Another notable characteristic of smaller scale projects is the shorter construction period, ranging from several weeks to perhaps months. Risks tend to correlate positively with construction duration, in that there is limited amount of construction activities over such brief duration. Such shorter construction period allows one to re-evaluate the typical types of risk that confronts a conventional construction project such as cashflow, delay, price fluctuation in construction costs etc. By way of example, a contractor undertaking smaller project may have fully completed the works by the time it receives its very first progress payment. Therefore various contractual safeguards that are relevant for larger project such as enforcement of performance bond, revision of programme, varying methods of valuation where variation disrupts progress of works etc may not serve its purpose as originally intended. 

In the next few sections of this article, the scope of simplifications of the original PSSCOC to derive PSSCOC Lite (Construction Works) will be examined in greater detail.

Valuation of Variations

There are a few aspects of variations provisions that were either simplified or omitted entirely from the original PSSCOC. It should be noted that whilst the authority and discretion by the Employer and its agent to instruct variations under contract remained largely intact, it is the valuation of variation components that are affected. Firstly, Clause 19.3 of the original PSSCOC which deals with submissions of quotations of variations is omitted. This clause was in essence an opportunity for parties to have an advance agreement on an all inclusive cost of a proposed variation, so as to have upfront certainty on the cost implication of the said variation.  The omission of this clause under PSSCOC Lite perhaps indicates the lower likelihood of variations instructed under a smaller scale project due to possibly a brief construction period. So why are the other parts of variation provisions such as definition of variation (Clause 19.1) and authority to instruct variation (Clause 19.2) remained intact? Some may argue that the advance agreement  on cost of variation is especially important for smaller size contractors. However given the brief construction duration for smaller scale projects, the likelihood of significantly large variations being instructed is considerably lower, therefore reducing the possibility of dispute over the applicability of contract rates and prices. Where variations instructed are significantly large with disruptive effects on the regular progress of works, the prevailing contract rates may not be sufficient to compensate the contractor for the overall financial impact that ensued. Under such circumstance the ability to agree on the cost of variation in advance is particularly helpful. Therefore if a project has its final contract sum being significantly larger than the original contract sum, the choice of PSSCOC Lite may not be appropriate as it indicates considerable variations taking place during the construction period.

By the very same token, Clause 20.4 of the original PSSCOC which deals with valuation of variations using daywork rate method is omitted from PSSCOC Lite. The use of daywork rate is one of the more ‘generous’ valuation method of variation given that the contractor is compensated based on actual cost incurred in accordance with record of resources expended such as labour, plant, equipment, material etc. This daywork method is a significant departure from the application of contract rate which is typically a lump sum composite rate comprising a blend of labour, plant, equipment and material. Similarly, it is reasonable for one to question whether the omission of daywork rate valuation method under PSSCOC Lite is fair for small size contractor that is more financially vulnerable. Assuming that smaller projects are unlikely to have significantly large variations instructed that may warrant the use of daywork rate valuation methodology, this may explain the rationale behind such omission of provision. 

Clause 20.2 which deals with agreement on valuation is amended or simplified considerably under PSSCOC Lite. This provision deals with the mechanism to value and pay any variation works upon progressive completion. There are a few notable amendments in this regard. Under the original Clause 20.2(2)(b), there were elaborate mechanisms under which the contractor is required to notify the Superintending Officer when it is of the view that the variation works are substantially completed. This notification in turn requires the Superintending Officer to either certify such completion or notify the contractor on what works remained incomplete. These mechanisms were omitted in its entirety under PSSCOC Lite. Again, these omissions suggest that under PSSCOC Lite any variations instructed are likely to be minor or moderate in scale within a brief construction period. Therefore the formalities associated with certification of completion of varied works were dispensed with. Consequently, the contractor under PSSCOC Lite is expected to submit its own valuation of the variation works for payment purposes as soon as it considers that the variation work is completed. This departs from the original practice of doing so within 30 days from the Superintending Officer’s certification of completion of the varied works. Such flexibility accorded to the contractor is significant since the contractor is not constrained by the timely certification of completion by the Superintending Officer. On the other hand, the Superintending Officer’s valuation of the varied works is now streamlined. Instead of the original practice of valuing the varied works within 60 days of its own certification of completion of the varied works, he shall now do so within 30 days of his receipt of the contractor’s valuation of the said works. It follows that the Superintending Officer therefore will now, under PSSCOC Lite, certify the completion of the project as a whole, without a separate certification of completion for the varied works. 

Under Clause 20.2(2)(e) of the original PSSCOC, if the contractor disagrees with the Superintending Officer’s valuation of the varied works, it shall provide its notice of disagreement within 30 days, and simultaneously set out details of its own alternative valuation. Failure to do so within the prescribed 30 days shall prevent the contractor from disputing the same in future. In receipt of the notice of disagreement, the Superintending Officer under Clauses 20.2(2)(f) and 20.2(2)(g) of the original PSSCOC may either amend the valuation in the subsequent payment certificate or to do so during the issuance of Interim Final Accounts, to the extent that the Superintending Officer agrees with the contractor’s position. Under the PSSCOC Lite, these provisions are simplified by the removal of the 30 days time frame restrictions imposed on the contractor. The Superintending Officer may amend his valuation in the subsequent payment certificate. Any outstanding dispute over valuation of variations shall be referred to Clause 35.1 which pertains to references of dispute to Superintending Officer, as part of the multi-tiered dispute resolution clause. The application of Clause 35.1 remains in force under both the original PSSCOC as well as the PSSCOC Lite. 

The scope of simplifications of the above mentioned Clauses 20.2(2)(e), 20.2(2)(f) and 20.2(2)(g) from the original PSSCOC serve as a timely reminder on why variations constitute a fertile ground for disputes. The contractor not only is required to carry out additional works to the required standards and potentially be in dispute over scope of compensation, but also to comply with requirements on manner in which valuations are disputed. In this regard, there appears to be considerable contractual relief provided to the contractor under PSSCOC Lite. 

Revised Programme

Clause 9.2 of the original PSSCOC which deals with revision of programme is deleted from PSSCOC Lite. Under this clause, the Superintending Officer may at any time during the construction period instruct the contractor to supply additional particulars of the accepted baseline programme or to submit a revised programme if he is of the view that the works is not progressing in accordance with the agreed baseline programme. The contractor under this clause shall comply with such instruction within seven days to show how it intends to complete the works within the original Time for Completion. Apart from the value of providing schedule remedial measures, it is also an important part of any eventual delay analysis in case of assessment of extension of time or in deciding on issue of liability for liquidated damages. 

Given that clauses for liquidated damages and application for extension of time continues to be in force under PSSCOC Lite, it would appear that Clause 9.2 that enables the provision of revised programme continue to be relevant and necessary. On the other hand, this is balanced by the likelihood of a shorter construction period for projects using PSSCOC Lite which in turn reduces the risks of delay considerably. As the requirement for baseline programme under Clause 9.1 continues to exist under PSSCOC Lite, including the financial implications of failure to submit an adequate baseline programme provided for under Clause 9.4, it is clear that programme remains important for both small and large projects. Therefore even with the absence of Clause 9.2 under PSSCOC Lite, it should not prevent the contractor from taking the initiative of providing a revised programme in the event of schedule overrun, whether due to excusable delaying event or not. This is because the provision of revised programme should not be viewed as an administrative burden but rather a  helpful tool for any future application of extension of time. In other words, the deletion of Clause 9.2 may not be intended to diminish the value of any revised programme since parties are still free to utilise any revised programme in the absence of mandatory conditions.

Liquidated Damages

Under PSSCOC Lite, liquidated damages payable by the contractor pursuant to Clause 16.1 shall not exceed 10% of the contract sum cumulatively. This amendment is reflected in the Appendix of the Conditions of Contract. The wordings in Clause 16.1 remain unchanged. By way of illustration, a project with contract sum of $500,000 will have its liquidated damages capped at $50,000. Assuming the rate of liquidated damages for project of this scale is $5000/day, the contractor’s exposure to liquidated damages for any delay shall not exceed 10 calendar days. This provides a balance of deterring culpable delay whilst at the same time not financially crushing smaller scale contractor over its schedule default. 

It is noteworthy however that Clause 16.3 which deals with the Employer’s common law rights for damages remain unchanged under PSSCOC Lite as well. Under this clause, it is stated amongst others that the contractor’s liability to pay the Employer such loss, expense, costs or damages shall not be limited in any way whatsoever by the amount of liquidated damages for which he might otherwise have been liable for. Does this clause run counter to the cap of liquidated damages at 10% of contract sum? There are clearly two opposing views in this regard. The first interpretation is that since there is an express agreement for 10% of contract sum cap for liquidated damages, this Clause 16.3 should be read accordingly. Therefore Clause 16.3 is only applicable if the Employer is found not to be entitled in law to recover liquidated damages under Clause 16.1 e.g. default in certification procedures. In other words, Clause 16.3 should not be read as a ‘back door’ to the Appendix to the Standard Conditions which serve as particulars to the contract. The opposing view however is that, Clauses 16.1 and 16.3 could be read harmoniously in that only the former relieves the Employer from burden of proof. Liquidated damages are essentially pre-estimated of losses. Where the Employer elects to rely on Clause 16.3 to pursue additional damages above and beyond any liquidated damages cap, it is subject to the usual burden of proof. Therefore, under this alternative interpretation, it appears that the cap only relates to the scope of damages that had to be proven rather than the overall quantum of damages advanced by the Employer. 

In reality the risk of a full blown arbitration dealing with such intricacies of legal issues is rather low in view of the fact that PSSCOC Lite deals with smaller scale project. Parties however are still encourage to negotiate and document any specific clarification on this issue, if necessary. Standard conditions are after all default clauses for parties’ consideration.

Final Accounts

Final account for construction project is usually concluded over the Defects Liability Period that may ordinarily last 12 months after substantial completion (also known as practical completion). There are fairly significant changes in the process of finalisation of account under PSSCOC Lite. Under the original PSSCOC, there was an intermediary step of Interim Final Account where the Superintending Officer makes an interim assessment of the project financials to enable progress payment made to contractor pending final resolution of the project accounts. This was necessary as it was usually time consuming to sort through much of the complex issues that have financial implications such as valuation of variations, delay analysis or remedial of defective works. An interim assessment in this regard, facilitates cash flow. Under the PSSCOC Lite, the Superintending Officer proceeds directly with the Final Account without the need for an Interim Final Account, as smaller projects are expected to have less complexities and issues in dispute in the course of finalisation of account. The following are some of the specific examples.

Firstly, Clause 32.4(1) of the original PSSCOC provides for submission of Final Payment Claim by the contractor within 90 days of the date of substantial completion. Under PSSCOC Lite, the contractor shall do so within 30 days of the expiry of Defects Liability Period. At the first glance it appears that there is a delay in submission of Final Payment Claim under PSSCOC Lite that may run counter to the aim of balancing risks of smaller scale contractors. However, the contractors are free to submit its regular progress payment claim at the point of substantial completion, where necessary pursuant to Clause 32.1(2) of PSSCOC Lite. The delay in submission of Final Payment Claim can therefore be construed as an extension to the duration for submission of regular monthly progress claim.

Upon dispensing with the need for Interim Final Account found under Clause 32.5(1)(a) of the original PSSCOC, the finalisation of account effectively takes place after Defects Liability Period as opposed to during Defects Liability Period. It is expected that the Final Payment Claim under PSSCOC Lite may therefore be inclusive of any additional claims that may arise during Defects Liability Period. Therefore the Final Payment Claim under PSSCOC Lite is anticipated to be more all encompassing. Upon receipt of Final Payment Claim, the Superintending Officer under Clause 32.5(1)(a) of the PSSCOC Lite shall within 21 days provide its assessment and simultaneously issue the Payment Certificate according to such assessment. It should be noted that under Clause 32.5(3) the original PSSCOC, the Superintending Officer shall do the same within 30 days of the end of Defects Liability Period. In other words, there is no appreciable delay to the finalisation of account under PSSCOC Lite notwithstanding the later due date for submission of Final Payment Claim by the contractor. 

What happens if the contractor disagrees with the Superintending Officer’s assessment of final account? Under the original PSSCOC, Clauses 32.5(4), 32.5(5) and 32.5(6) provide a series of steps that allows the contractor to notify the Superintending Officer within 30 days of receipt of such assessment and thereafter for the Superintending Officer to respond within further 30 days either with an amendment or not. Any outstanding dispute or difference shall be subject to Clause 35 of PSSCOC multi-tier dispute resolution provision. The contractor’s failure to respond with its disagreement within the stipulated time frame is deemed to have agreed with the Superintending Officer’s assessment which then becomes final and binding. However the same is streamlined under PSSCOC Lite. In this regard, any disagreement by the contractor in respect of the final account shall be responded within 30 days and be directly subject to Clause 35.1 which is part of the multi-tier dispute resolution provision. Therefore it appears that the new provisions under PSSCOC Lite is less onerous to the smaller scale contractors.

Conclusion

Apart from the provisions elaborated in the preceding sections of this article, there are other omissions from the original PSSCOC for the purposes of creating PSSCOC Lite which are rather self explanatory and made sense intuitively. These include the waiver of security deposit under Clause 4.5, appointment of Superintending Officer’s assistants under Clause 2.4, price fluctuation under Clause 33 and Option Module D pertaining to advance payment for Prefabricated Prefinished Volumetric Construction (PPVC). Collectively, these are contractual mechanism that are less relevant for smaller scale projects. With the introduction of PSSCOC Lite there is a good chance that this will give rise to appreciable difference in tender prices, risks appetite and scope of dispute. It may be worthwhile for construction practitioners and statutory authority to make an objective and constructive assessment in due course of any notable lessons learnt from the adoption of PSSCOC Lite. 



Koon Tak Hong Consulting Private Limited

Pricing schedules refer to a section of documents typically included in construction contract where costs of the works are found. The contract sum of the construction works is presented with detail breakdown within such schedule. Pricing schedules are described differently depending on the types of procurement pathway as well as the forms of contract used by the parties. By way of examples, under Clause 13(2) of Singapore Institute of Architect (SIA) Building Contract Without Quantities 2016, such pricing schedule is described as ‘Schedule of Works’ whereas the term ‘Contract Sum Analysis’ is used under the REDAS Design And Build Conditions of Contract. Although the pricing schedules are labelled differently, the characteristics of these pricing schedules are largely similar due to the lump sum procurement used by these forms. Under Option Module A of the Public Sector Standard Conditions of Contract (PSSCOC) of Eight Edition dated July 2020, the pricing schedule is called ‘Bills of Quantities’ as the procurement pathway consist of both lump sum and remeasurement contract. 

In general, the characteristics and functions of pricing schedules are predominantly influenced by the procurement pathway adopted by the parties rather than the label used on these schedules. The functions of pricing schedules are fairly wide ranging in that it affects valuation of variations, interim progress payments, settlement of final accounts and how contract terms may be construed. This article examines the different types of pricing schedules commonly used in construction industry and the implications on how contracts may be administered. As a matter of background, there is an earlier article published on this website entitled ‘What Is Tender Document?’ of which Section 5 and 6 therein may provide a general appreciation of this very topic.

Pricing schedules can be a fertile ground for disputes in that parties tend to argue their positions without appreciating that the characteristics of pricing schedule may vary from project to project depending on the relevant contract terms. By way of illustration, suppose a sum of $10,000 is indicated within a pricing schedule for the provision of rectangular concrete planter boxes as part of the landscaping works in the common areas of a condominium development. As part of cost saving measures, the Employer decided to omit these planter boxes through variation order. Upon measuring the quantities of concrete, formwork and reinforcement bars from the contract drawings and applying the prevailing unit rates, the cost for the concerned works is valued at $12,000. Should the amount of $10,000 or $12,000 be omitted from the contract sum? Under this hypothetical scenario, the contractor may be inclined to argue that $10,000 should be the sum omitted since that was the amount that was included in its tender price, having considered the element of competition during tender. The consultant quantity surveyor on the other hand may counter argue that $12,000 should be the sum omitted given that it is premised on actual quantity and prevailing unit rates included in contract document. After all the terms of the contract ought to be binding on the parties. It is interesting to note that the ‘right answer’ may very well depend on the relevant contract terms as well as the procurement pathway chosen by the parties. The underlying principles applicable to this hypothetical scenario will be further elaborated in the next few sections of this article.  

Schedule Of Works/ Contract Sum Analysis – Lump Sum Pricing Schedule

As mentioned earlier, there are a variety of terminologies used for pricing schedules in lump sum contract including Schedule of Works, Contract Sum Analysis, Activity Schedule (or priced schedule of activities), Schedule of Rates And Prices etc. As such terminologies are contractually defined, one should always refer to definitions of such term regardless of the label adopted. The definitions of pricing schedule under lump sum contract typically share certain common characteristics. Firstly, such pricing schedule provides an itemised scope of works for the proposed project where it could be organised either based on geographical parts of the works, sequence of construction activities or based on different construction trades. Secondly, such itemised breakdown of scope of works included in the schedule is used by the contractor as the basis for deriving its tender price, and therefore its eventual contract sum. Thirdly, the lump sum nature of such contract mean that the pricing schedules do not usually contain any quantities of works and unit rates of construction costs. Finally, the descriptions of works included in such schedule are abbreviated and intended to be used for guidance only. In other words, the contractor is expected to satisfy itself on the true nature of the scope of works by examining the drawings and specifications.

Under the above mentioned SIA contract, Clauses 13(2)(a) and 13(2)(b) refer to Schedule of Works and its contractual effect. In general this schedule with breakdown of the construction works shall be used for pricing purposes during tender by the contractor and the descriptions therein may not be accurate. Therefore such document is included for guidance only and shall be of no contractual effect. These clauses also refer to ‘Schedule of Rates And Prices’ pursuant to Article 2(2) of SIA contract that is incorporated in the contract document. Such reference is only relevant in so far as the Schedule of Works include unit rates and prices that are meant for valuation of variations. Notwithstanding that, most Schedule of Works under lump sum contract do not include unit rates. The unit rates that are binding on the parties for purposes of valuation of variation are typically set out separately under a Schedule of Rates, which will be elaborated further in the next section of this article. This is because Schedule of Works do not usually include any quantities and therefore unit rates are not required to derive the contract sum. Therefore, in the remote event where any Schedule of Works include unit rates, only such unit rates shall have contractual effect as these are deemed part of ‘Schedule of Rates And Prices’ for the purposes of SIA contract. It is important to note that under Article 9(1) of SIA contract, only Schedule of Rates And Prices are listed as part of the contract document. Schedule of Works is absent from this list of contract documents. 

The third edition of REDAS contract refers to ‘Contract Sum Analysis’ as its pricing schedule. It should be noted that whilst the latest REDAS form available is the fourth edition, there are no material differences with the third edition as it relates to pricing schedule matters. Due to the design and build procurement used for REDAS, there are two distinct commercial elements under this form. Firstly, the procurement pathway is based on lump sum contract and secondly, the pricing schedules are primarily prepared by the design and build contractor based on its proposed design that is eventually accepted by the Employer. This departs from the usual practice where the pricing schedule is prepared by the consultant quantity surveyor. Appendix 5 of the REDAS form is the placeholder for a list of pricing documents agreed by the parties. As the pricing schedule for lump sum contract do not typically include quantities of works and construction unit rates, it is likely that a separate Schedule of Rates is prepared and agreed by the parties that is included in Appendix 5. This Schedule of Rates exist for the purposes of valuation of variations. Under Clause 1.1.9 of the REDAS form, the Contract Sum Analysis shall mean an analysis or detail breakdown of the Contract Sum set out in the aforementioned Appendix 5, including the Schedule of Rates. 

Reverting to the earlier hypothetical example of variation order involving omission of concrete planter boxes, the valuation of such works shall be based on unit rates agreed by the parties, as opposed to lump sum prices indicated within the pricing schedules. By way of illustration, Clause 26.3 of REDAS form which deals with methods of valuation of variations, expressly stipulates the reliance of prices and unit rates set out in the Schedule of Rates. Likewise, Clause 13(2)(a) of the SIA form states that only the Schedule of Rates And Prices shall be used for valuation of variations. Since valuation of variation involves the use of unit rates, it follows that measurement of quantities will be necessary too for the relevant varied works. In other words, the $12,000 shall be the sum omitted for the purposes of the said hypothetical variation order.

Schedule Of Rates

The principle of relying on measurement and application of prevailing unit rates to value variations rather than to utilise lump prices indicated in the corresponding pricing schedule appears counter intuitive to some. Why not utilise the corresponding lump sum price readily identified in the pricing schedule rather than to derive a separate sum ‘from scratch’? In other words, why should the contractual effect of Schedule of Rates take precedence over Schedule of Works? One of the notable reasons is because prices for construction works are usually expressed in a standardised manner. For most commonwealth countries including Singapore, there is a Standard Method of Measurement or otherwise known as ‘SMM’ that are used to provide a uniform basis of measurement for most construction works, subject to any amendments initiated by the quantity surveyor on a case by case basis. This is to ensure that there is an industry wide agreement on how to express various types of construction works in their respective units of measurement as it relates to pricing purposes. In addition to that, it also provides a uniform industry wide benchmark on what should be the types of cost that are deemed included in any given unit rate. By way of example using SMM, cast in-situ concrete piles in driven casings are measured in meter length where such unit rate shall be inclusive of all cost associated with supplying, transporting, handling, pitching, driving and withdrawing of pile casings. Although certain suppliers of the relevant concreting works may be inclined to express its pricing based on metric ton or kilogram (kg) of concrete used, the SMM provides a standard industry practice. 

By contrast, the Schedule of Works is not usually presented based on the benchmark of SMM but rather based on geographical parts of projects, sequence of construction works etc. By way of illustration, it is not uncommon to find the bin center for a condominium development to be expressed as an ‘item’ in a lump sum pricing schedule although such bin center is likely to consist of a blend of construction trades and materials including brick wall, concrete structural elements, temporary formwork, reinforcement bar, mechanical shutter door systems etc. Such abbreviated approach is perhaps favoured in lump sum pricing for ease of cost comparison and also valuation of interim progress payments. Such abbreviated approach however is not congruent with the SMM, where the relevant units of measurement of say concrete is more suitably standardised since it is relevant and in use in other parts of the project. By contrast, the unit rates included in Schedule of Rates are usually in compliance with the SMM. Any departures from SMM are usually project specific and the extent of such deviations can be found in the preambles of the Schedule of Rates. Therefore the Schedule of Rate’s general adherence with the SMM provides a standard commercial basis not just between the contracting parties but also other relevant third parties e.g. subcontractors, suppliers who may need to provide pricing information or quotation to the contracting parties. 

Bills Of Quantities (Lump Sum With Quantities)

The phrase ‘Bills of Quantities’ is commonly used in the industry albeit in a casual manner, often interchangeably with Schedule of Works. One of the key characteristics of Bills of Quantities as a pricing schedule is that it includes quantities of works as well as unit rates. Such quantities of works are typically expressed in units of measurement that is in compliance with the SMM, apart from other deviations that may be identified in the preambles of the Bills of Quantities. Bills of Quantities can be used in both lump sum contract as well as remeasurement contract. In this section of the article, the lump sum version will be examined first. 

For for avoidance of doubt, works included in Bills of Quantities are mostly measured for quantities. However there are certain types of works within the Bills of Quantities that are not measured, with no quantities and are therefore expressed in a lump sum amount or commonly refer to as ‘Item’. Examples of such ‘Items’ are preliminaries and general typically found in the first section of the Bills of Quantities. 

Unlike Schedule of Works, quantities of construction works are measured by the Employer’s consultant i.e. the quantity surveyor for inclusion in Bills of Quantities. The tenderers then rely on such quantities for their pricing and subsequent basis of tender price. By providing quantities for works in the tender document, the Employer stand to benefit from two perspectives. Firstly, the Employer will be able to have a greater insight on the comparison of tender prices since the cost distinctions are mainly emanating from differences in unit rates. In this regard, it is not uncommon for tenderers to arrive at different quantities when they are expected to measure their respective quantities of works, particularly under compressed tender time frame. Bills of Quantities therefore eliminates this problem. Secondly, when the consultant quantity surveyor measures the quantities from tender drawings issued by architects and engineers, it will be able to make a conscious assessment of whether the drawings are sufficiently developed for the tenderers to price. Whether design is adequately developed and fit for tender are particularly important considerations under a lump sum contract. Tender drawings that are insufficiently developed usually attracts risk pricing, thereby inflating the returning tender prices. 

Under Option Module A of the PSSCOC, the Bills of Quantities can be used for both lump sum and remeasurement. Under lump sum arrangement, the quantities of works are not subject to remeasurement. According to Clause A2.0(1) of Option Module A, if the quantities included in the Bills of Quantities appear to be different than the works actually executed on site in accordance with the contract, such difference shall be treated as a variation. It follows that these variations shall be valued in accordance with the valuation of variation provisions as found in Clauses 20.1(a) or 20.1(b). Under the latter provision, the contract unit rates may be extrapolated where the incremental works are executed not under similar conditions as originally planned. Therefore, the risks of any erroneous quantities included in Bills of Quantities is shouldered by the Employer since it is possible for the Employer to pay the contractor based on a higher unit rate than what was previously agreed. Where Bills of Quantities are adopted, it is not common for parties to agree on a separate Schedule of Rates given that the Bills of Quantities already include unit rates for the construction works. It is also worth noting that unlike Schedule of Works, the Bills of Quantities are expressly included in the Contract Document as provided for under Clause 1.1(d) of the PSSCOC. Therefore, the contractual effect of any descriptions of works included in Bills of Quantities is not subordinate to the contract drawings and specifications. It is incumbent upon the Employer’s consultants to ensure that every part of the tender document are in sync and presented without conflicts or discrepancies. Under Clause 3.1 of the PSSCOC, the drawings, specifications and Bills of Quantities forming part of the contract document are taken as mutually explanatory of one another.

Bills Of Quantities (Provisional Quantities)

Clause A2.0(2) of Option Module A under the PSSCOC provides for Bills of Quantities to be used for remeasurement contract. In this regard, the quantities set out in the Bills of Quantities are indicated as ‘provisional’. Unlike a lump sum Bills of Quantities, those provisional quantities used for remeasurement contract are subject to remeasurement upon completion of works. The Employer adopts a remeasurement commercial arrangement whenever there are uncertainties on the exact scope of works e.g. piling works where the pile lengths are determined based on amongst others the location of load bearing hard stratum underneath the ground. In this regard, the Employer undertakes to pay the contractor based on actual work done in order to avoid excessive risk pricing on the part of the contractor. 

One of the notable distinctions between lump sum and remeasurement Bills of Quantities relates to any difference between quantities of actual work done and quantities indicated in the Bills of Quantities. Under remeasurement arrangement, such difference is not deemed a variation. Therefore, the valuation of variation provisions do not apply. In this regard, the contractor is not likely to be paid beyond the unit rates included in the Bills of Quantities even if difference in quantity is significant or that the incremental quantities are carried out in conditions different from what was originally planned. There is no express provision for any extrapolation of contract unit rates. An astute contractor will therefore need to price any associated risks or contingencies in its unit rates whilst managing the need to remain cost competitive. In an apparent contractual irony, what constitute a remeasurement arrangement is in effect creating a lump sum treatment on the unit rates. This is because the remeasurement element is only applicable to the quantities of work rather than the unit rate. 

It is entirely possible for a single project to consist of both lump sum and remeasurement where Bills of Quantities are adopted. Such hybrid arrangement is commonly used where only part of the works e.g. foundation works exhibit the element of uncertainty in the actual magnitude of works. The other parts of the project namely the superstructure of the building can be fully quantified and determined with a complete set of architectural and structural drawings. 

Another advantage of Bills of Quantities over Schedule of Works is that the distribution of costs within the contract sum is more reflective of the actual works given the presence of quantities. Under Schedule of Works, part of the tender assessment involves ensuring that the cost is distributed equitably and fairly without ‘front loading’. A fair distribution of cost facilitates a proper valuation of interim progress payments.

Conclusion

Pricing schedule is evidently a crucial part of tender document as well as contract document where it is more than a mere placeholder for construction cost. It affects the future valuation of variations and reflects the risk allocation agreed by the parties. Therefore any contracting firm that is organised in a way where the ‘tender team’ is separate and distinct from the ‘post award team’ may experience challenges in fully harnessing the costs distribution knowledge within the pricing schedule.




Koon Tak Hong Consulting Private Limited

Under most standard forms of construction contract, there are prescribed consequences for violation or breach of its conditions. Some of the examples include liquidated damages to be imposed for culpable delay to completion dates, withholding of progress payment if the contractor fails to submit a baseline programme within certain timeframe etc. These ‘deterrent measures’ are important to keep the agreement intact and maintain the contractual relationship notwithstanding that one party had breached its obligations. How serious should the violation be before it amounts to a fundamental breach to the contract where it supersedes the regular application of those deterrent measures? Under what circumstances is the aggrieved party entitled to exercise its right of termination under the contract?

This is part 3 of a series of articles comparing PSSCOC Design & Build  (seventh edition published in 2020) with REDAS Design & Build (third edition published in 2010). The changes made in fourth edition of REDAS in 2022 do not meaningfully affect the scope of this article apart from the role of certifier which will be addressed separately. The general differences between the third and fourth edition of REDAS form pertain to Covid-19 pandemic related prolongation costs and co-sharing mechanism of certain construction expenses, advance payment for material fabricated offsite, the introduction of delay certificate prior to recovery of liquidated damages etc.

The issue of termination for default is particularly interesting under design and build (D&B) contract because the contractor is under a broader scope of responsibility than a traditional contractor with only construction responsibility. There are various serious and complex implications that ensue immediately after termination. These include how to meaningfully utilise partially completed design and what is the premium to engage a replacement contractor that is agreeable to accept and be responsible for the adequacy of  ‘legacy design’. It is fair to say termination is not a decision taken lightly since it hardly offer any immediate relief to the aggrieved party. This is why the above mentioned deterrent measures are perhaps more practical if there is meaningful prospect to rehabilitate a problematic contractual relationship. 

This article examines the basics of termination for default provisions including how such contractual rights exist in parallel with common law termination rights. In order to preserve such rights, the aggrieved party should be mindful of various contractual notices as well as procedural requirements associated with termination for default. There are certain distinctions between PSSCOC and REDAS as regards these termination provisions. Although both contract forms expressly set out grounds for termination which justify the Employer exercising its right under the contract, its application can be fairly complex and nuanced. This is because the threshold for termination is rather high, where the default has to be so serious that it objectively supersedes the regular application of deterrent measures. A reasonable and objective judgment call is required in this regard. An appreciation of the parallel common law termination rights is instructive as a matter of context and comparison. A party’s failure to comply with the necessary notification and procedural requirements under contract for termination may itself constitute a repudiatory breach of contract, which is a classic case of a double edged sword. The next few sections of this article will provide some tips and guidance on how to navigate such treacherous contractual terrain.

Basics of Termination For Default

The termination for default of PSSCOC can be found under Clause 31.1 whereas a similar provision under REDAS can be found under its Clause 30.2. These are the Employer’s contractual rights which operate in parallel with its common law rights. On the other hand, the contractor’s contractual rights for termination can be found in Clause 31.2 of REDAS but there is no equivalent provision under the PSSCOC. Therefore, the contractor under the PSSCOC may need to rely on its common law rights for purposes of termination for default.

Parties usually agree on terms for rights to terminate under contract in addition to their common law rights as some have grappled with difficulties of exercising such right under common law. In general common law right to terminate is deemed to have arisen when there is a repudiatory breach committed by an offending party. Such breach is usually so serious that it conveys the fact that the offending party has no intention of performing the contract and the aggrieved party is deprived of the benefit of the contract. Such breach has to be so egregious that it is said to go to the root of the contract. The common law requires the aggrieved party to ‘accept this breach’. If there is any delay in accepting such breach, this may constitute an election to affirm the contract thereby excluding the right to terminate. Therefore the aggrieved party’s hesitation to exercise its common law right promptly may effectively extinguish such right. Unfortunately what objectively constitute repudiatory breach is fact sensitive and there is an absence of a specific definition on the expected level of seriousness. A party that terminates the contract under common law without the right to do so may itself be held to have wrongfully terminated the contract. In the context of construction contract, if the contractor delays the project completion, does it objectively amount to repudiatory breach? How long should the delay be before the Employer can safely exercise its common law rights? By the same token, how bad must the quality of workmanship be before such breach by the contractor goes to the root of the contract? Evidently there are no clear definitions for situations described above and much depends on circumstances. Therefore it is understandable that the Employer may be reluctant to exercise its common law rights without thorough deliberation. Even such reluctance may be deemed an election to affirm the contract rather than accepting the breach. 

Despite the presence of such termination rights under contract for both PSSCOC and REDAS, these forms affirmed that contractual termination rights do not operate to the exclusion of the Employer’s common law rights. By way of example, Clause 31.1(2) of the PSSCOC states amongst others that the termination is without prejudice to any other rights and remedies available to the Employer. There is a similar provision under Clause 30.2.2 of REDAS where such contractual right is without prejudice to any other rights and remedies available to the Employer including the right to treat the contract as being repudiated under general law. 

In view of the characteristics of such common law rights, contractual rights to terminate may well provide certain procedural clarity. Firstly such provisions typically set out discrete grounds for the Employer to exercise its termination rights. This in some way avoids the ambiguity as to what amounts to repudiatory breach as in the case of common law. Prior to exercising such right, the Employer is usually required under contract to issue certain prescribed format of notification so as to formally put the contractor on notice of the occurrence of certain event that is deemed to qualify as a cause for termination. This notice provides the contractor certain time to cure the breach within an allowed duration. If the issue persists, the Employer may then proceed to exercise its right under the contract. There are also express provisions to regulate post termination follow up measures to ensure an orderly transition leading to the engagement of a replacement contractor. One key feature in this regard is the usage of the phrase ‘termination of the contractor’s employment under the contract’ rather than ‘termination of the contract’. This is to ensure that other critical clauses that are required to continue to be in force survive the termination, such as arbitration clauses, liquidated damages provision post termination, confidentiality agreement etc. These termination related provisions under both PSSCOC and REDAS will be examined further in the next few sections of this article.

Contractual Notice And Procedural Requirements For Termination For Default

Under the REDAS form where the contractor is in default, contractual notice is issued either by the Employer or the Employer’s Representative. The circumstances that require notice from the Employer can be found under Clause 30.2.2 whereas Clause 30.2.1 provides for circumstances where similar notice may be required from the Employer’s Representative. It should be noted that the Employer’s Representative’s notice is optional in that such notice ‘may’ be given to the contractor in case where works are wholly suspended without justification or fail to proceed with due diligence and expedition. The Employer’s Representative’s notice does not itself terminate the contractor’s employment under the contract but merely serve as a ‘warning notice’ which then provides the contractor with an opportunity to cure the default within 28 days of receipt. Although such 28 days grace emanates from non mandatory notice, this procedural allowance may in some ways address any of the Employer’s risk associated with wrongful or premature termination. By contrast, the notice issued by the Employer under Clause 30.2.2 of REDAS amounts to Notice of Termination which terminates the contractor’s employment under the contract. The circumstances which warrant the Employer’s notice in this regard is broader than those under the Employer’s Representative. This include where the contractor fails to comply with the ‘warning notice’ issued under Clause 30.2.1 from the Employer’s Representative within the said 28 days. Although Clause 30.2.2 also uses the word ‘may’ as regards the Employer’s issuance of its notice, this is in the context where termination under contract is without prejudice to its common law right of termination. The termination is effective immediately upon the contractor’s receipt of the Notice of Termination. It is therefore both administratively and legally important for the Employer to be able to know precisely when the contractor is in receipt of its notice and mode of communication that may provide such paper or digital trail. Under Clause 1.5 of REDAS on subject of ‘Communications’, where provision is made under the contract for the giving or issue of any notice, such notice shall be in Writing, and ‘Writing’ under Clause 1.1.35 means any hand written, typewritten or printed communication including telex and facsimile transmission. Further, Clause 2.2.4 states that all notices and other communications given by the Employer and/or the Employer’s Representative under the contract shall be given to the Contractor’s Representative. 

As regards the contractor’s right to terminate for default under contract, these provisions can be found under Clause 31.2 of REDAS. It should be noted that in so far as progress payment related disputes are concerned, these are subject to Security of Payment Act where the remedies are set out separately. Comparatively, the procedural requirements are rather brief as it relates to contractor’s right to terminate under contract. It is applicable in the event of the Employer’s bankruptcy where the contractor may issue its written Notice of Termination of which the termination will take effect immediately. The above mentioned mode of communication applies accordingly. 

As regards PSSCOC, the Employer’s right to terminate under contract is structured differently from REDAS. The contract administrator in this regard is the Superintending Officer where such certifier is required under both contract and common law to discharge its function independently and impartially. Where the grounds of termination for default relates to the contractor’s performance, the Superintending Officer is responsible for making such determination. Under Clause 31.1(1) of the PSSCOC, if the Superintending Officer is of the opinion that the contractor had amongst others abandon the contract, fail to execute the works in accordance with an accepted baseline programme etc, then the Superintending Officer may issue a Termination Certificate, identifying the nature of the default. Such certificate is issued to the Employer to formally communicate the Superintending Officer’s assessment, with a copy provided to the contractor at the same time. The Superintending Officer’s independent assessment (as expected under general law and contract) may in some ways address any of the concerns of whether the termination is done appropriately and fairly which in turn may relate to any risk associated with wrongful termination. Similar to the REDAS, the Superintending Officer’s assessment via Termination Certificate does not itself terminate the contractor’s employment. It is however an essential procedural requirement for the Employer to issue its very own notice of termination to the contractor which shall take effect upon the contractor’s receipt. Under Clause 31.1(2)(e) of the PSSCOC, the Employer’s issuance of its notice of termination is on the premise that the Employer ‘shall’ have been issued with a Termination Certificate from the Superintending Officer. The certificate from the Superintending Officer similarly offers certain grace periods within which the contractor shall cure its default or prevent its recurrence. These grace periods are structured in three scenarios namely (i) the contractor shall cure its default within 7 days of the Termination Certificate, (ii) the default identified in Termination Certificate shall not be repeated within 30 days, (iii) any other defaults that would entitle the Superintending Officer to a Termination Certificate shall not be committed within 30 days of the original Termination Certificate. 

Where the contractor’s default is not associated with its ‘qualitative performance’ thus avoiding the need for independent professional assessment, the Employer may issue its notice of termination without the Superintending Officer’s Termination Certificate. By way of example, Clause 31.1(2) provides for these grounds such as contractor’s insolvency, committing corrupt or bribery practices, failure to provide security deposit/ performance bond or prescribed insurance policies.

Grounds For Termination For Default

The justification for the Employer to exercise its contractual rights for termination for default can be found in the provisions relating to grounds for termination. The grounds provided for under both PSSCOC and REDAS are largely similar except that the former included two additional grounds i.e. contractor’s violation of bribery laws and failure to insure the works. In reality there is very limited practical difference in these grounds, due to the fact that the contractor’s failure to comply with written instruction either from the Employer’s Representative under REDAS or from the Superintending Officer under PSSCOC would qualify as a ground for termination for default. These contract administrators may from time to time issue a written instruction that is specific to the circumstances in hand. The focal points however are whether such instruction relate to a severe issue justifying termination and whether the time period for compliance is reasonable for the contractor to cure its default. 

One of the grounds for termination for default available to the Employer that is unique to REDAS pertains to its Clause 30.2.1.1 in the event where the contractor wholly suspended the carrying out of the design or construction of the works without justification. The express reference to suspension of the design activities by the contractor is not available under the PSSCOC. This is because the design development activities would have been significantly completed when parties enter into the agreement. Further information on this topic is available in a separate article published in this website entitled ‘Part 1 of PSSCOC D&B vs REDAS D&B – Pre-Contract Design Requirement’. Given that the contractor under REDAS is expected to carry out significant design development works after agreement is formed, there is an inevitable overlap between design development and construction works. Instead of commencing construction works after design is fully completed under the traditional approach, time efficiency is achieved by commencing certain parts of the construction works as soon as the corresponding design is completed. This however give rise to a conundrum where such fluidity in programming and sequencing may cause difficulty in objectively determining whether the D&B contractor failed to proceed with due diligence and expedition with its design works. 

Currently, the threshold is extremely high in respect of termination for default as regards design works. Clause 30.2.1.1 refers to a scenario where the contractor ‘wholly suspended’ the carrying out of the design of the works, amongst others.  The ground for termination for default for failure to proceed with due diligence and expedition is reserved for the construction works as found under Clause 30.2.1.2. It is noted that under Clause 30.2.1, the Employer’s Representative may issue its written notice to the contractor requiring that it ‘recommence’ with the design works, underscoring the fact that only when the contractor is found to have wholly suspended its design activities, such default may give rise to contractual termination. As design development activities precedes construction activities, it serves as an important bellwether or early indicator if progress of the works is at risk of being in delay, particularly under D&B arrangement. Therefore, whilst the Employer and its agents may rightly be watchful of any signs of delays based on progress of design activities, they may wish to benchmark any of its ground for default based on actual construction activities. Strict adherence to contractual grounds is a prudent position to take particularly when considering termination of the contractor’s employment under the contract.

Roles of Contract Administrator In Termination For Default

As the contract administrator plays a critical role as regards termination by default, it is important to understand the basic principles of its function under law. It is trite law that a contract administrator such as the Superintending Officer under the PSSCOC is required to discharge its certification function fairly, independently and impartially notwithstanding the fact that it is concurrently an agent of the Employer. Further information on this subject can be found in a separate article published in this website entitled ‘Part 1 of SIA vs PSSCOC – Certifier’. Under REDAS, the Employer’s Representative administers the contract. It is interesting to note that based on a recent case precedent of CEQ v CER [2020] SGHC 70, it was held by the court that unlike other contract forms that typically require an impartial and independent certifier, the Employer’s Representative appointed under REDAS ‘is neither an independent certifier nor a referee between the parties in any meaningful sense’. The court cited an example of certification of progress payment where it is not an objective assessment of works done and monies due but instead a mere signal of the employer’s assent to the payment claim, as submitted by the contractor. The subsequent court’s decision on the role of Employer’s Representative such as Builders Hub Pte Ltd v JP Nelson Equipment Pte Ltd [2023] SGHC 120 affirmed this finding. In an apparent reversal, the REDAS 2022 (fourth edition) expressly stipulates that the Employer’s Representative shall at all times act impartially and independently from the Employer in respect of all or any matter or decision in the Conditions which requires his exercise of discretion or judgment. 

The chronology of events above is important as it relates to termination for default because the assessment as to whether the contractor is in default based on its performance such that it justifies the Employer’s exercise of its termination rights can be subjective. In this regard, it requires judgment call and an exercise of discretion by the contract administrator. As strict adherence to procedural requirements stipulated under the contract is necessary when exercising contractual termination rights, it is prudent that the contract administrator is not only impartial but also seen to be impartial in the course of its assessment of the contractor’s performance, leading to any issuance of notice or certification. Under the third edition of REDAS published in 2010 referred to in this article, as the Employer’s Representative’s independence is not a requirement, any of its notice that may be tainted with bias or prejudice may not meaningfully affect the Employer’s exercise of its contractual termination rights. In any case as pointed out earlier, the Employer’s Representative’s notice is likely to be non mandatory. However under the fourth edition of REDAS, if the Employer’s Representative decides to issue such notice to the contractor, the requirements of independence and impartiality shall apply. If the Employer subsequently decides to rely on the contractor’s failure to cure its default within 28 days of the Employer’s Representative’s notice as the basis of termination and the said the notice is found to be ‘defective’ due to elements of bias or prejudice in the course of assessing the contractor’s performance, there may be adverse consequences. This is because any reliance on defective notice as the basis of termination under contract may jeopardise the exercise of such termination rights. 

The situation is relatively more straightforward under the PSSCOC since the impartiality and independence of the Superintending Officer is an undisputed necessity under law. Likewise the Employer shall rely on the Superintending Officer’s Termination Certificate as it relates to contractor’s performance as the basis of its issuance of notice of termination. Therefore, the Superintending Officer shall in all cases discharge its function in a neutral, fair and unbiased manner.

Effects Of Termination On Any Partially Completed Design

Terminating the defaulting D&B contractor’s employment under the contract can be more complex than traditional contractor because of the outstanding design works that may need to be utilised. It is unlikely that an Employer when confronted with a partially designed and constructed project will choose to abandon works completed so far and to start from scratch entirely. Under Clause 31.2(1) of the PSSCOC, upon termination the Employer shall have the right to employ its own qualified persons and contractors to continue with the design, execution and completion of the construction works. The terminated D&B contractor shall upon request by the Superintending Officer, furnish such letter of release and hand over such information, drawings, specifications, designs and other documents and information as the Superintending Officer shall require to enable the Employer to continue with the design, execution and completion of the works. On the other hand, Clauses 30.3.2 and 30.3.3 of REDAS have similar provisions. Under these clauses, the Employer may employ other contractors to complete the design and construction of the works and the replacement contractors shall have the right to use the design documents and construction documents to complete the outstanding works. The Employer shall be entitled to appoint his own design consultant or qualified person to continue with the design of the works and to act as the qualified person for the works. The terminated contractor shall arrange for the issue of the Letter of Release from his qualified professionals and persons to the Employer. 

The PSSCOC provisions above work in conjunction with its Clause 3.6(1) where the copyright and other intellectual property rights in the contractor’s design shall remain with the contractor but the Employer shall be deemed to have a non-terminable non-exclusive royalty free license to copy, use and communicate the contractor’s design including making and using modifications of them for the purposes of completing, operating, maintaining altering, repairing and demolishing the works. Interestingly there is no equivalent provision for the same under REDAS. Therefore in the case of REDAS, when the Employer attempts to secure a Letter of Release from the terminated D&B contractor, there is an added difficulty of negotiating relevant intellectual property issues including payment for copyright. 

The issue is not just confined to the Employer securing the right to use the terminated D&B contractor’s design, but it also involves engaging a replacement contractor that is willing to shoulder the responsibility of completing the project using a ‘legacy design’. One of the ways to overcoming this problem is to arrange for novation of agreement of the existing design team from the terminated contractor to the replacement contractor. This is on the assumption that the terminated D&B contractor had outsourced the design responsibilities to a third party. Occasionally there are situations where the D&B contractor may self perform significant part of the design works but outsource the construction component of the project.

Conclusion

It is quite clear from the above that terminating a D&B contractor hardly offers any immediate relief to an aggrieved Employer and should be the last resort. Despite the obvious importance of having appropriate termination provisions, these are rarely negotiated in an upfront manner prior to entering into an agreement. Although the idea of utilising termination provision is fairly remote at the inception of any contract, it should not be the reason for having a false sense of security.




Koon Tak Hong Consulting Private Limited

Final account of construction contract is a financial statement that is produced upon project completion that sets out the final contract sum of the project including the amount due and payable between the parties. In an earlier article entitled ‘Final Account of Construction Contract – Commercial Perspective’ published in this website, some of the practical considerations during preparation of final account were highlighted, including reasons why such financial closure can be highly contentious. Therefore most standard forms of contract provide a certification regime associated with finalisation of account so as to provide some orderly structure to this process. This article is part 8 of a series of articles comparing the main contract standard conditions of the SIA form published in 2016 and the PSSCOC published in 2020. The next few sections of this article will compare and contrast the certification process stipulated under these two contract forms to help readers navigate  such process effectively. 

A good grasp of the final account certification process is important for both contracting parties including the consultants administering the contract. This is especially so where the claims that may be included in the final account consist of contentious issues e.g. disputed variations, loss and expense claims, remedial works cost etc. Unlike monthly progress payment certification which are interim by nature, final accounts certification are generally penultimate in that it represents the final opportunity for settlement and payment under the contract. Most contract forms provide opportunities either for corrections or modifications to be made for previous progress payment certificate due to the fact that the calculations therein are done on a cumulative basis. By way of example, if parties disagree over whether the concrete works were indeed carried out to the level that was claimed under certain month’s interim progress payment, there are opportunities available in following month to review the quantity in issue in conjunction with the other newly completed works. This is assuming the contractor is reluctant to pursue its statutory rights under Security of Payment Act given the need to preserve a harmonious working relationship. By contrast, there are no further progress payments opportunities beyond the contractual closure of final account. In many cases parties are expected to confront all issues including disputed claims that may have been deferred for a considerable period of time, within a defined window of opportunity. From the contractor’s perspective, it is of paramount importance to understand the expected level of supporting documentations to be submitted to facilitate the assessments of its claim including any repercussions in case of belated disclosure. On the other hand, the Employer and its consultants have to be mindful of the absence of contractual recovery mechanism of any payment made in case of potential latent defects surfacing after closure of final account. There is always possibility of future dispute arising beyond the closure of final accounts.

As the PSSCOC is meant for public sector projects whereas the SIA form are commonly used for private sector projects, there is a noticeable difference in respect of the manner in which final accounts are handled. The following sections will illuminate some of these differences.

Final Account Claim vs Final Payment Claim

The final account assessment process commences with the submission of final claim by the contractor. The terminologies used under the SIA form and PSSCOC for such final claim differs. Clause 31(9) of the SIA form refers to ‘Final Account Claim’ whilst Clause 32.4 of the PSSCOC refers to ‘Final Payment Claim’. Despite the difference in terminology used, these final claims are substantively similar in that these are penultimate claims from the contractor upon achievement of practical completion. There are also no provisions for further submission of claims by the contractor after its final claim. 

Given the finality of such claim, it is in the contractor’s interest to ensure that its submission is not just swift (for the sake of its cashflow) but also comprehensive.  In this regard the content and timing of issuance of such final claim differ significantly under these two contract forms. Under Clause 31(9) of the SIA form, the burden is on the contractor to derive and consolidate the final account for the project consultants’ assessment. On the other hand, under Clause 32.4(2) of the PSSCOC it is incumbent upon the Superintending Officer to measure and derive the amounts due under the final account. The contractor is given an opportunity to witness and verify such measurements undertaken by the Superintending Officer. The contractor is only required to submit its best estimates of the relevant measurements and amounts due in the event that the Superintending Officer fails to complete such measurement pursuant to Clause 21.1. Under such Clause 21.1 the Superintending Officer shall give adequate notice to the contractor if he decides to measure any parts of the works. As the SIA form and PSSCOC referred to in this article are lump sum contracts, these measurements primarily refer to variation claims where changes were made to the original scope of works, thus the need to determine quantity of varied works. The contractor under the SIA form sends its final claim directly to the Architect with a copy to the Quantity Surveyor whereas the PSSCOC stipulates that such final claim is sent to the Employer with a copy to the Superintending Officer. This difference in formality may be indicative of the fact that the Superintending Officer assumes control and oversight of the project financials throughout the construction period, including cost implications of any of the instructions he issued. 

As mentioned earlier, the contractor under the SIA form is responsible for deriving and consolidating the final accounts which meant that the burden is on the contractor to ensure that its final claim is comprehensive. If it is established subsequently that contractor had missed certain claims after the stipulated deadline say due to emergence of new information e.g. belated claims from subcontractors and suppliers, such omission may amount to the contractor’s breach. Clause 31(9)(b) and 31(9)(c) of the SIA form set out at length the level of granularity of the final claim. These particulars include (a) details of all quantities, rates and prices, (b) adjustments of the contract sum (c) additional payments or compensations under the terms of the contract. The contractor may also include in its claim any explanations and supporting vouchers, documents or calculations, including documentations relating to designated or nominated subcontractors and suppliers that is necessary for the finalisation of account. It is interesting to note that under subsequent Clause 31(9)(d) of the SIA form, it is stipulated that ‘non submission’ of the Final Account Claim by the contractor shall be taken as a waiver of rights by the contractor for the final account. Some may argue that final claim that lacks the required level of particularity may not strictly qualify as Final Account Claim. In other words, a contractor that submits a final claim that is lacking in the necessary detail to support its claim may be construed as ‘non submission’ of Final Account Claim. Such contractor may be hard pressed to argue for a belated inclusion of further details since the contractor is deemed to have waived such right by virtue of Clause 31(9)(d). 

Whilst some may take the position that to bar any advancement of additional details beyond a certain deadline appears onerous, it should be noted that similar restriction also exist under the PSSCOC. Under Clause 32.4(2) of the PSSCOC such waiver of rights is only applicable within the confines of particulars relating to loss and expense claims. The provisions above underscore the importance for contractor to be aware of the significance of relevant final account deadlines. Apart from ensuring timely financial closure for project concerned, such deadlines also play a key role in signifying the transition of the project from construction period to maintenance period. 

In general, the final claim is due for submission upon achievement of project completion but the devil is in the finer details for both the SIA form and PSSCOC. Under Clause 32.4(1) of the PSSCOC, the contractor is to submit its final claim within 90 days of the Date of Substantial Completion (or the latest date of substantial phase completion as the case may be). As such date refers to the one indicated in the substantial completion certificate issued, it can be tricky if such certificate is issued belatedly or that the existence of such certificate is in dispute for a variety of reasons. Occasionally the alleged certificate may be a subject of dispute due to non compliance with the necessary procedures leading to its issuance, unauthorised party issuing such certificate etc. This can have a consequential effect on the said 90 days due date and any associated waiver of contractor’s rights on final account as mentioned earlier. It is also not uncommon for the Employer to request for additional works after certain deemed substantial completion date resulting in difficulty to ascertain the due date of the final claim. This is because the Employer cannot on one hand instruct additional works beyond the stipulated due date but on the other hand takes issue when the final claim which should encapsulate all variations is submitted beyond the deadline. 

Under Clause 31(9)(a) of the SIA form, the timeline for final claim submission appear broader. The contractor is only required to submit its final claim before the expiry of the Maintenance Period but after the achievement of completion or after issuance of the last statutory instrument by the relevant authority whichever is later. As regards the latter, there are instances where parties define practical completion as the date on which the statutory authority issues Temporary Occupation Permit. The absence of reference to practical completion certificate avoids the difficulty associated with dispute over the existence of  completion certificate as properly defined under the contract. However the flexibility with which final claim is interpreted as due for submission may ‘encourage’ more additional works instructed after practical completion and consequently an ‘open ended’ final account duration. 

Interim Final Account

As highlighted in an earlier article entitled ‘Final Account of Construction Contract – Commercial Perspective’, the duration taken to prepare, negotiate and agree on a statement of final account can be considerable given the need to assess various issues e.g. disputed variations, extensions of time, loss and expense etc. In an effort to expedite the settlement of final account, at least for the non contentious issues, the PSSCOC implemented an ‘Interim Final Account Certificate’ which is a form of draft final account that is provisional but binding. This certificate is unique to PSSCOC and not available under the SIA form. In essence under Clause 32.5(1)(a) of the PSSCOC, the Superintending Officer shall issue such Interim Final Account Certificate within 21 days of receiving the Final Payment Claim from the contractor. This Interim Final Account Certificate which is accompanied by a Payment Certificate shall be subject to Security of Payment Act. As the timing for issuance for such Interim Final Account Certificate is triggered by the receipt of Final Payment Claim from the contractor, what happens if the contractor fails to submit its Final Payment Claim? According to Clause 32.5(2)(a), the Superintending Officer is still bound to issue its Interim Final Account Certificate except that it is now within 150 days from the Date of Substantial Completion (or the latest thereof in case of phase completions). Under this scenario, the Superintending Officer is only required to follow up with a Payment Certificate within 30 days of the issuance of Interim Final Account Certificate. This payment certificate shall not be subject to the Security of Payment Act presumably because of the absence of payment claim (or in this case the final claim) from the contractor. The said 30 days intervening period serve as a window of opportunity for the contractor to dispute such Interim Final Account of which the Superintending Officer may amend its assessment if necessary. As the process of preparing and agreeing final account may at times be contentious, it is possible for a complete breakdown in working relationship in an acrimonious manner resulting in an alleged failure of the contractor to submit its final claim. Therefore another reason for implementing the Interim Final Account is provide certain contractual structure that may help to facilitate an orderly closure of project finances even when parties are in dispute. 

One of the reasons why the Interim Final Account is not implemented under the SIA form is because the contractor is only required to submit its final claim no later than the expiry of the Maintenance Period. By contrast the PSSCOC attempts to have the final claim submitted at the inception of its Defects Liability Period (its equivalent of Maintenance Period). The upfront processing of project finances is also enabled by the fact that the Superintending Officer plays the principal or lead role of measuring and deriving the amounts due as opposed to the contractor, as alluded to earlier.  Therefore with the Employer led initiative of closing out project finances, the financial discipline that follows provides clarity to the construction costs, which is perhaps more of a necessity where the utilisation of public funds are concerned. 

It should also be noted that the Architect appears to have additional responsibilities under the SIA form as compared to the Superintending Officer under the PSSCOC. These responsibilities relate to subcontract final account for nominated subcontractor and/or designated subcontractor. Under Clause 31(10)(e), the final assessments of the Architect in respect of final account shall also state separately the final amounts for these subcontractors and suppliers. This could explain why there appears to be more latitude in time frame for the submission of final claim under the SIA form. The final claim is expected to have certain clarity in respect of certain subcontract sums to enable the Architect to discharge its functions pursuant to Clause 31(10)(e).

Final Account vs Final Account Certificate

There are two further documents that are unique to PSSCOC which are not available under the SIA form for the purposes of finalisation of account. These are ‘Final Account’ and ‘Final Account Certificate’ as provided for under Clauses 32.5(3) and 32.5(6) respectively. Firstly, ‘Final Account’ is issued by the Superintending Officer within 30 days after the expiry of Defects Liability Period of a draft statement reflecting closure of project finances and any amount due and payable between the parties. Upon further 30 days of receipt of such Final Account, the contractor may dispute any amounts therein by issuance of its disagreement or dispute in writing, expressly setting out the ground for such dispute. According to Clause 32.5(4), the contractor shall be deemed to have accepted the Final Account in the absence any such ground of dispute. This shall then be final and binding on the contractor. In response and within a further 30 days duration from receipt, the Superintending Officer  who acquiesced may issue a notice of amendment to reflect the revision to the Final Account. Where the Superintending Officer disagrees with the contractor’s ground of dispute and decides not to proceed with any notice of amendment, the contractor shall be informed accordingly as well. 

The Final Account Certificate is a certification by the Superintending Officer that reflects his final position on any disputes or amendments to Final Account. It is therefore a certificate that signifies closure to the process of finalisation of account. This certificate shall be issued within 30 days from the date on which the Superintending Officer either agrees or disagrees with any contention raised by the contractor. Any unresolved dispute that remains after the issuance of Final Account Certificate shall be referred to Clause 35 of the multi-tiered dispute resolution provision. The Final Account Certificate can only be amended under Clause 32.5(8) purely for any error or accidental inclusion or exclusion of any construction costs. It is unlikely that this amendment is allowed for any fundamental or substantive alteration based on any merit of assessment. In other words, the Superintending Officer’s authority is significantly curtailed in respect of assessment of final accounts once Final Account Certificate is issued.

Final Certificate vs Final Completion Certificate

Final Certificate is unique to the SIA form whilst the Final Completion Certificate is provided for only under the PSSCOC. Whilst these two certificates appear fairly similar in its description or label, each of these have different contractual functions. Under Clause 34 of the PSSCOC, Final Completion Certificate signifies the expiry of Defects Liability Period and any defects had been satisfactorily rectified by the contractor. In other words, it is specific to the physical status of the project and is not issued for the purposes of final account. 

On the other hand, Final Certificate provided for under Clause 31(10)(a) of the SIA form is issued for the purposes of final account in that it represents the Architect’s financial assessment or measurement of the final claim. The expiry of maintenance period including satisfactory defects rectification is signified by the issuance of Maintenance Certificate as provided for under Clause 27(4) of the SIA form. In other words, the Final Completion Certificate under the PSSCOC is similar with Maintenance Certificate under SIA form. 

As a matter of prudence, closure of project finances and expiry of maintenance period (or defects liability period) are usually scheduled to occur close to one another. This is to preserve financial leverage so as to incentivise the contractor to rectify any final outstanding defects quickly. In this regard, the Architect under Clause 31(10)(a) of the SIA form shall issue its Final Certificate within 84 days of receipt of final claim or its issue of Maintenance Certificate whichever is later. In other words, if the contractor takes an unusually longer period of time to rectify outstanding defects resulting in delay in issuance of Maintenance Certificate, this will correspondingly delay the timeframe for its settlement of final account. There is also a similar mechanism under the PSSCOC in this regard. Under Clause 32.5(9) of the PSSCOC, the Superintending Officer shall not be obliged to issue its Final Account Certificate before the Final Completion Certificate. In other words, the Superintending Officer is not required to close the project finances and settle the amount due and payable until the defects are fully rectified. Even if the Superintending Officer had issued the Final Completion Certificate, it does not relieve the contractor from its obligations and liabilities arising from Defects Liability Period.

Conclusion

Whilst the process of concluding a project final account appear to be a fairly regimented certification process with strict timeframes, expected format of submission and method of assessment, it should also be noted it is often subject to commercial negotiation and settlement. Final account is one of the rare contractual mechanism that has a balance of both commercial and contractual elements. It is not uncommon for parties to settle on a final figure not necessarily based on merit of their case but rather what is expedient and what may bode well for future business relationships. Having said that, one can only be in a good negotiation position if it had fully complied with the necessary contractual obligations to fully preserve its rights. If you are not ready to walk away, you are not ready to negotiate.




Koon Tak Hong Consulting Private Limited

Final account of a construction contract provides the final contract sum upon project completion. To facilitate this arithmetical process, all relevant and permissible adjustments are applied to the initial contract sum. This exercise is in principle to identify the final amount due and payable to the contractor after deducting sums already paid from the final contract sum. For projects that are in dispute, such final amount could instead be payable to the Employer by the contractor. The submission and review of draft final account can be a delicate and contentious exercise because parties are required to agree on a financial summary that is conclusive of all claims, including those that are disputed. Therefore different standard forms of contract typically set out its respective procedures, timeline and certifications to help facilitate this process.  

This article examines some of the key commercial considerations behind the preparation of final account including both the contentious and non contentious aspects. It firstly provides an overview of the arithmetical adjustments applied to an initial contract sum and how such process may be influenced by different procurement pathways adopted by the parties i.e. lump sum or remeasurement contract. An understanding of this arithmetical exercise can perhaps shed light on why final account may be contentious even though notionally it can be perceived as a mere financial reconciliation process. Positions taken or deemed taken by parties evidenced by the final account may affect parties’ positions under any potential legal proceedings. This is because whilst final account is ideally a statement representing full and final settlement of all claims between the parties, in reality the situation may be different. Certain issues such as latent defects may arise much later after the conclusion of final account. Further any settlement between the parties if not properly worded may have consequential implications on related third parties such as project consultants, subcontractors, suppliers etc. 

Unlike most certification carried under construction contract which is generally an impartial and independent determination made by an authorised contract administrator, final account may be an outcome of a commercial settlement. In other words, the details encapsulated in the final account may not be entirely based on merit of substantive issues but rather a function of concessions, expedience and business decisions. Whilst at the initial process it typically involves the consultant quantity surveyor and the contractor’s quantity surveyor/ commercial manager, it may be concluded with active participation by senior executives from both the contractor and the Employer where the situation warrants their attention. Therefore despite strict timelines and procedural requirements of final account stipulated under the contract, it is not uncommon to find that such formalities are waived by the parties’ conduct. Notwithstanding that, parties should be careful not to stray beyond the mandatory legislation requirements such as those set out under Security of Payment Act, where applicable.

Overview of Arithmetical Adjustments To Initial Contract Sum

Projects awarded with incomplete design development where its scope of works lacked firm definition usually are the ones that require the most arithmetical adjustments during preparation of final account. The construction phase for these projects usually commence prematurely resulting in multiple contingency allowances in its contract sum and also mid stream design changes that resulted variation orders that were avoidable. The original contract sum usually consists of provisional sums, provisional rates, prime cost sums, contingency sums and other similar budgetary or design allowances. Whilst some of these allowances are genuine contract instruments to reflect the agreed risk allocation philosophy between parties, the vast majority of these arrangements are aimed at deferring decision making for design development.

The preparation of final account involves identifying any closure to these allowances, valuation of changes to original scope of works and assess other established compensable events. In theory, these arithmetical adjustments could be carried out progressively throughout the construction period where the contractor’s claims are assessed and paid where justifiable through interim progress payments. Any disputes in assessment can be resolved via statutory adjudication of Security of Payment Act. In reality a significant number of these issues are only assessed and resolved upon preparation of final account due to a variety of reasons including sheer volume of administrative work and the desire to avoid legal action via adjudication to preserve relationship. The subsequent paragraphs consist of some examples of arithmetical adjustments performed to the original contract sum.

Firstly, prime cost sums are allowances included in the contract sum for nominated subcontract works. These are works that are procured and negotiated directly by the Employer, where the main contractor is instructed to enter into a subcontract agreement with the nominated subcontractor of choice. Under phase 1 of arithmetical adjustments, the prime cost sums are replaced with nominated subcontract sum. All nominated subcontract works are subjected to the process of preparation of its respective final accounts much like the main contract. In this regard, the original nominated subcontract sum may also vary throughout the construction period. Under phase 2 of arithmetical adjustments, the initial nominated subcontract sum will be replaced with the final nominated subcontract sum, after considering valuation of variations as well as assessments of compensable events. 

Secondly, provisional sums are allowances included in contract sum where it is used to describe certain scope of works where it is uncertain whether such works will be executed, thus the term ‘provisional’. Further, the party that may be assigned to carrying out such provisional sums may either be the main contractor or other designated subcontractors. In this regard apart from the uncertainty in terms of execution, it also unclear which party will be entrusted with its execution. If such provisional sums are not carried out, these budgetary amounts will be omitted entirely from the contract sum in the final account statement. In the event that the provisional sums are carried out, it will be administered much like an ordinary variation order where the amount payable will be valued based on valuation of variations provisions under the contract. Therefore for the purposes of finalisation of account, the provisional sum will be replaced with the amount valued by the contract administrator or consultant quantity surveyor per schedule of rates or applicable market rates.

Thirdly, there are also rare instances where contingency sums are included in the contract sum. Such practice is rare because the utilisation of prime cost sums and provisional sums would have catered for most if not all situations where budgetary allowances are necessary. In the remote possibility where contingency sums are used, the valuation is treated similar to that of provisional sum except that the contractor would not have reasonably expected to include such works in its construction programme. Therefore it is likely that the valuation of contingency sum may also attract additional preliminaries cost otherwise known as indirect cost apart from the direct cost to carry out the instructed works. For the purposes of finalisation of account, if the contingency sum is used, it will be replaced with the sum of direct and indirect costs of the works instructed. 

Apart from the adjustments to individual budgetary allowances within the contract sum listed above, the majority of the efforts in preparation of final account relate to variations instructed under the main contract. These are typically design changes made to the original scope of works resulting in nett addition of works and/or omission of works. For purposes of clarity, all variations should be consolidated under a standalone section that is separate and distinct from the other sections included within the original contract sum. This separation provides an immediate insight on the overall amount of changes initiated on the original scope of works. Such separation is also necessary because variations are administratively treated differently from the original scope of works. Each variation order should be individually supported by its corresponding instructions chronologically issued under the contract. Whilst in theory the contractor would only carry out variation works upon receipt of the instruction from contract administrator, this may not always be the case for variety of reasons. Therefore it is advisable to only proceed with the assessment of the variations only to the extent that it is supported by an instruction. As the instructions do not wholly describe the varied scope of works, each instruction are typically accompanied by ‘clouded’ construction drawings, specifications, sketches or even narratives as supplementary information. 

Lump Sum vs Remeasurement – Arithmetical Treatment In Final Account

When a contract is procured on a lump sum basis, the contract sum is fixed based on scope of works that is well defined as described in tender document and tender drawings. The risk is on the contractor to ensure the sufficiency of its tender price so as to be inclusive of all works including those that may not be specifically mentioned in the contract document but are indispensably necessary to bring the works to completion. As long as the scope of works remain unchanged, the Employer enjoys price certainty for its project. 

Remeasurement contract on the other hand is used when the magnitude of the underlying scope of works is uncertain and therefore parties agree on a contract sum that is estimated based on provisional quantities. These provisional quantities are subject to remeasurement in accordance with actual quantities of work carried out. Whilst the Employer is unable to benefit from price certainty, it will not be required to pay beyond the actual scope of works. 

One of the more distinct differences between these two types of contract  is the arithmetical treatment during preparation of final account. Upon completion of a lump sum contract, the contractor is paid the full contract sum for its original scope of works, subject to any variation orders. There is no necessity for any measurements to be done to the original scope of works. By way of illustration, if a contractor was awarded $10million to build a school that is based on the contractor’s measurement of 100m3 of concrete, amongst other construction materials, the $10million is payable upon completion even if the actual quantity of concrete under the original scope was 90m3. Any arithmetical adjustments arising from variation orders are subsequently applied to the $10million. This approach can be contrasted with the remeasurement contract where the original contract sum was merely an estimate and the actual amount payable is based on measured final quantity of works carried out. By way of illustration, if a contractor was awarded a concrete piling works contract based on total provisional pile length of 50,000m at a contract sum of $10million, the average unit rate is $200/m. If the actual concrete pile length installed is 25,000m, the final contract sum is $5million. It should be noted that whilst there is a difference between provisional pile length and actual pile length, such difference does not constitute a design change or variation order. In other words, any difference between provisional quantity and actual quantity of works does not require an instruction from the contract administrator for payments to be made. However if the piling contractor is instructed to carry out additional works above and beyond its original scope of works e.g. to supply and install sheet piles which amounts to $1million, this variation order is applied to the $5million. In this case, the final contract sum is $6million ($5million for concrete piles and $1million for sheet piles). 

The original $10million contract sum under the remeasurement contract is not featured in the final account because it was merely an estimation based on provisional quantity that was subsequently superseded. The final contract sum under remeasurement contract is derived based on a ‘bottom up’ approach where it is calculated from scratch based on actual quantities of work. On the other hand, the lump sum contract final account is prepared based on a ‘top down’ approach where arithmetical adjustments are applied to  the fixed lump sum of $10million.

Contentious Issues In Preparation of Final Account

Some of the more contentious issues that parties may need to grapple with during preparation of final accounts relate to recovery of liquidated damages, loss and expense claims, disputed variations and set off or contra charges for any remedial works. As the final account is administered by the contract administrator with assistance from consultant quantity surveyor, the scope of final account is dependent on their authorities provided for under the contract. By way of example, the public sector standard form of contract in Singapore i.e. the PSSCOC include express provisions for contractor to claim loss and expense which is noticeably absent in the private sector standard conditions e.g. SIA Building Contract. Therefore the ambit of the final account is within these certification limits. In order to overcome these limitations, parties that are in agreement may consider entering into a carefully worded supplementary agreement to include other claims settlement that are beyond the scope of the original agreement. In any case, assuming there are no certification restrictions, the following paragraphs deal with some of the more contentious issues in final account.

Where liquidated damages recovery by the Employer is applicable in the preparation of final account, it is not merely an arithmetical exercise. There is a chain of events that precedes the computation of liquidated damages which is listed as follow. Firstly, the contractor is liable for liquidated damages if it is in culpable delay. Such culpability in turn depends on assessment on any extension of time by the certifier. The contractor’s entitlement to extension of time is generally dependent on the merit of its application as well as compliance with any condition precedents and/or notification requirements. The merit of its application requires detail delay analysis of any concurrent delays, existence of supporting contemporaneous programmes, identification of critical paths and understanding the time impact of any delaying event etc. In other words, whilst the use of liquidated damages provides certain extent of relief as it relates to proof of damages sustained, it often involve a web of interwoven issues that can be subjective, complex and time consuming. The contract administrator making these assessments may also be responsible for causing or contributing to these delays in his concurrent role as the Employer’s agent or architect. Therefore it is not uncommon for the contractor to be dissatisfied with such determination regardless of the merit of the assessment. A contract administrator administering a final account often require certain measure of deft and skill when there is an absence of complete neutrality, whether actual or perceived. 

By contrast, if the contractor is found to be entitled to extension of time due to delays caused by Employer related events, there may be a case for recovery of prolongation cost, disruption cost etc which are part and parcel of loss and expense claims. In cases where there are express provisions for claims of loss and expense, there are extensive and fairly onerous reporting, disclosure and notification requirements. Whilst these requirements are aimed at preservation of evidence and contemporaneous records to support such claim, occasionally the contractor may find that the level of access and audit to its books, financial records, internal documents may be intrusive. After all the contractor may take the view that since it was not responsible for the delay, why should it be penalised by having prying eyes over its sensitive records just to recover due compensation. Again, this is another reason why the preparation of final account is much more than just an arithmetical exercise of project financials. 

Finally, there may be occasions where the Employer and its consultants are at odds with the contractor over the interpretation of the specification for the construction works. Works that are duly completed from the perspective of the contractor may be challenged by the Employer’s team as being non compliant with the project requirements. The issue of how should certain contract term or conditions be interpreted and construed can be challenging and it is not uncommon to find such dispute to be subject of a lengthy legal proceedings. However when the Employer rejects certain scope of works and decline to pay, it is fundamentally premised on its interpretation of the relevant specifications which happen to differ with the contractor’s position. Even if the contractor undertakes to comply with the Employer’s demand and carry out alteration to the works that it deemed completed, the contractor would seek additional payment and consider it as a variation order. In other words, the contractor may consider the issue concerned a matter of disputed variation. If and when the Employer decides to engage third party contractor to ‘rectify the defective work’, the finalisation of account is confronted with two opposing issues. Firstly, whether the Employer is entitled to set off the remedial costs from amounts payable to the contractor? Secondly, whether the contractor is entitled to any payment for the works in dispute? Unfortunately as the preparation of final account is by no means an appropriate forum for parties to contest over the construction and interpretation of contract terms, the contract administrator and/or the consultant quantity surveyor is left with the unenviable task of making financial assessment of an underlying problem that is objectively out of their scope of expertise. 

Whether Final Account Represents Full And Final Settlement

In view of the possibility that finalisation of account can be contentious, parties are understandably reluctant to fully commit to a final account statement to the extent that it may restrict their future legal rights. This is why it is not uncommon to find that standard conditions of contract often have provision to deal with the scenario where the contractor refuses to participate in the preparation of final account. This commonly arises when the disputes between the parties had escalated to a level where there is a breakdown of working relationship and the acrimony eventually implicates even claims that are less contentious. In this case, there are common provisions for the certifier to either proceed with its own assessment unilaterally based on information available or to bar the contractor from submitting any additional supporting information in future arbitration that was not previously disclosed. One of the possible explanation for the breakdown in settlement of final account is the fear that any commitments made to the final account may implicate one’s future ability to review or re-litigate disputed claims. The question is whether final account represent a full and final settlement of all issues? 

The more commercially sensible approach to this scenario is the avoidance of ‘throwing baby out with the bathwater’. Parties should attempt to resolve non contentious claims and be able to compartmentalise these from other contentious issues. From the contractor’s perspective it allows facilitation of cashflow at least partially and to include proviso in the final account statement that ‘this settlement does not prejudice either party’s future rights to pursue other claims.’ This statement should be acceptable to the Employer as well since it is also in the Employer’s interest to preserve such right for future issues that are latent in nature e.g. defects rectification, warranties etc. In negotiating and agreeing to such carve out provision, parties should also ensure that the ambit of arbitration clause is preserved accordingly to avoid expending unnecessary legal costs in battling over the future arbitrator’s jurisdictions including the enforceability of the eventual arbitral award.

Conclusion

Settlement of final account is often a blend of commercial acumen and appreciation of strict contractual rights. It is an area of practice that requires certain flair in navigating contractual landscape. It requires one to mentally distinguish the concept of ‘justice’ and ‘concession’ where trade off is necessary even if one believes in the absolute merit of its position. It is clearly a tricky area that goes beyond the mere arithmetical exercise of project financials.




Koon Tak Hong Consulting Private Limited