Multi national corporations such as financial institutions, insurance companies, technology firms etc with regional or global presence represent a fairly niche segment of real estate sector. It is often characterised as ‘corporate real estate’ because these entities are multi national corporations that occupy a significant real estate space for its own business and operational needs. Whilst it may have real estate footprints in various cities across a region, these offices have disparate sizes and very distinct needs. By way of example, a financial institution may have a million square feet regional headquarter in Singapore or Hong Kong and multiple smaller offices in various other cities that are no more than 1000 square feet each. Therefore framework agreement represents an opportunistic procurement strategy where the smaller offices are able to enjoy competitive pricing and favourable terms by leveraging on buying power of larger offices. 

Framework agreement is a master agreement with broad geographical coverage with selected vendors that comprises pre-agreed unit rates and general conditions where parties can transact from time to time within its validity period based on execution of ‘statement of work’. These individual transactions or otherwise known as ‘call offs’ are executed when there are actual works to be done whether it is internal fit out works, supply and installation furniture and fittings etc. The general idea is that parties can bargain and negotiate based on a collective volume of regional works in advance thereby accruing economies of scale and avoidance of repetitive contracting paper work.

This article examines the basics of framework agreement for corporate real estate sector including strategic procurement rationale behind such umbrella agreement, the actual contractual mechanics of a framework agreement as well as limitations associated with such arrangement. These issues are relevant for both vendors providing goods and services as well as procurement buyers of corporate real estate.

Why Framework Agreement?

Firstly, framework agreement allows consolidation of regional volume of work to secure a more competitive pricing which would otherwise not be available if procurement is executed on a piecemeal basis. This is because the vendor is able to be more efficient in deploying its production resources based on the anticipated timing of each call off and the associated quantity of work. The vendor under the framework agreement is also able to similarly benefit from the economies of scale from its outsourced third party suppliers and subcontractors. By way of illustration, even if a particular transaction involve a limited number of loose furniture through framework agreement, such transaction will still able to benefit from competitive bulk pricing. Whilst the vendor may have limited financial incentive from discounted pricing for a small volume transaction, this is considered a reasonable trade off in consideration of the future larger volume transactions.

Apart from more competitive pricing, framework agreement affords  more favourable terms and conditions through consolidated bargaining power. Very often decisions of what contractual and legal concessions to be made or even the choice of standard conditions of contract to be adopted can be influenced by financial motivations. Contract terms that are usually considered as mandatory requirements as a matter of ‘legal policy’ becomes flexible with compelling financial motivations. When transaction volume is sufficiently large, senior executives within the organisation will intervene to make business decisions that may override regular legal and compliance impediments. Vendors are understandably concern when they are carrying out works within the office premises of certain financial institutions where any disruption to the operations of such businesses may give rise to millions of dollars of damages and losses. Therefore vendors typically insist on limits or caps to legal liability in case of breaches of contract. These legal liability caps are even more compelling if the contract in hand involve merely a small or limited volume of work whereby there is no real commercial justification to provide any legal waiver. However some may also argue that since framework agreement has a longer validity period and broader geographical coverage than a one off agreement, the implications of any legal waiver is presumably magnified. This has to be balanced with the fact that any increase in volume of work provides the opportunity for the vendor to develop familiarity and experience with its client’s operating environment. This may significantly reduce the prospect of disruptive incidents when carrying out any works.

Consolidation of regional volume of work through framework agreement opens up the interest of top tier vendors that predominantly focus on larger projects. These top tier vendors with higher level of competence would probably not be interested in the absence of the necessary scale and commercial heft. Building and construction industry much like other economic sectors are organised by tiers, formally or otherwise. In general larger firms with deeper talent pool and greater access to resources are likely to focus on larger projects so as to justify its overhead. Framework agreement in this regard provides the commercial justification for larger vendors to participate in corporate real estate works where its projects may be of varying sizes. By way of illustration, certain financial institutions with regional presence over 20 cities may on average set aside approximately $3million annually for each office for capital expenditure. An aggregate of $60million of expected capital expenditure for the entire region may be appealing for top tier regional contractors that would otherwise not tender for any works below $10million. 

How Framework Agreement Works?

As regional framework agreement covers multiple countries with different legal systems and jurisdictions, it is structured differently from typical one off contract that underpins a single transaction. It should also be noted that both the buyer (corporate real estate entities) and vendor (goods and/or services provider) may have different business entities incorporated separately in various countries due to legal, operational, taxation and logistical reasons. Therefore whilst at the basic level a framework agreement is a contract between two parties, in reality it has to accommodate a web of subsidiary or affiliate entities across a region.

Framework agreement should also be sufficiently robust to accommodate details of commercial structure that may vary from jurisdiction to jurisdiction. By way of illustration, given that the parties are multi national corporations, it is likely that the agreed pricing is expressed in US dollars. However transactions may be carried out in various countries based on locally denominated currencies. If the exchange rate of US dollars with these local currencies fluctuate, there has to be an agreement of a foreign exchange hedging mechanism so that the negotiated deal is not diluted by currency fluctuations. Further, the pricing details may also be affected by different taxation regimes such as GST/VAT related indirect tax, tariff, custom levy etc. Whilst the seller do not profit from these tax revenues collected, it is nevertheless part of the pricing burden shouldered by the buyer which has to be considered in the framework agreement. Apart from the commercial and pricing considerations, the legal system varies according to jurisdictions which in turn affects the way in which law may be interpreted in respect of parties’ rights and obligations, dispute resolution avenues available as well as relevant legislations applicable during the execution of the works. Given these multitude of reasons, the framework agreement has to be supplemented with country agreements. Whilst framework agreement represents the overarching regional agreement between the ultimate holding company of each contracting party, the country agreements are executed by selected entities domiciled in every jurisdiction included under the framework. 

As mentioned earlier, parties may transact from time to time via the execution of statement of work or call offs. Each statement of work include project information specific to the transaction and are usually signed by the authorised representative of each party where the works are intended to be carried out. Details such as contract sum derived based on the unit rates included in the framework agreement, project duration, descriptions of the scope of works, specifications as well as other particulars previously not included in the framework agreement are set out in such statement of work. References are made to the framework agreement and applicable country agreement so that there are no ambiguities over the complete set of terms relevant to the transaction. There should be little or no negotiation required for the purposes of execution such statement of work so that it does not defeat the purpose of having a framework agreement agreed in advance. Efficiency and brevity should be the foremost considerations in the drafting of the structure of such statement of work. 

What Types of Goods/ Services Should Framework Agreement Be Used For?

Products or building related commodities are generally one of the more common types of goods that can be appropriately included under framework agreements. In the context of corporate real estate these include ergonomic office chairs, workstations, carpet tiles etc where these products share certain general characteristics. Firstly these products are transacted based on ‘supply and delivery’ or ‘supply and install’ where there is minimal workmanship  expected during the course of installation. The minimum workmanship demand reduces inconsistencies in quality from country to country thereby making it easier to be negotiated in bulk. As the product is likely to be manufactured from a single location by the vendor prior to its distribution to various locations within the specified region, the price of the product concerned should not be different regardless of which city the demand originated from. Therefore the shipping and transportation costs are the only variable which can be itemised separately from the cost of the product. 

Secondly, such products are usually subject to certain design consistency and corporate image where the aesthetic are applied in a recurring manner across the region. Whilst there is an aspect of localisation involved in workplace design, the general overriding element of design consistency across the region is one of the notable characteristics of corporate real estate sector. Most of the corporate real estate strategies involving project managers, project controls, procurement, design managers are driven from a single hub  supporting the entire region in a bid to ensure resource efficiency and also to operate within certain headcount constraints. Therefore the types of workstations or ergonomic chairs used in Singapore are unlikely to be different from those deployed in Tokyo by way of example. This presents the opportunity for bulk negotiation using framework agreements.

Unlike the supply of goods, the provision of services can be tricky under framework agreement. Examples of transactions that may involve extensive provision of services are internal fit out works, retrofitting works as well additions and alteration works. It is extremely challenging to find vendors that can deliver consistent quality of services across a given region. In the provision of services much is dependent on the vendor’s access to the local workforce as it is generally not economically efficient say to deploy craftsman from Japan to work on projects in India. This could be due to a variety of practical issues such as payment of workers’ levy, availability of employment/work permit and other cross border work restrictions. Therefore it is more likely that a local vendor is able to offer a better value proposition as it relates to provision of services than a regional vendor under framework agreement. Any local offices should not be compelled to transact only with a regional vendor purely due to the existence of a framework agreement in the absence of a viable value proposition. In a bid to overcome the issue of inconsistency in quality of services, some have argued that the client should have the option of ‘nominating’ its preferred domestic service providers to the regional vendor under framework agreement. This can be seriously considered if the regional vendor continue to have a meaningful role to play under the nomination arrangement as opposed to being reduced to a mere payment proxy.

Commercial Considerations – Bargaining Power, Guaranteed Volume, Tier Pricing, Number of Framework Vendors

In a commercial nutshell, both buyer and vendor should accrue more benefit under a framework agreement than a one off contract. In other words, the unit rates should be lower to the buyer and the seller should enjoy a greater revenue or profit through aggregated volume of work. The practical challenge is to realise these benefits by finding common grounds. If the commercial outcome is objectively a one sided deal, say only the buyer enjoys majority of the benefit, the framework agreement is likely to be a short term business relationship or tokenistic at best. In reality however an entirely balanced deal is rare because of disparity in bargaining power. In general there are likely to be more vendors than buyers in the corporate real estate market. There is also an element of branding prestige for a workplace system furniture vendor if it could establish a commercial association with a globally recognised investment bank. Notwithstanding these realities, it is incumbent upon the parties negotiating a framework agreement to understand some of the basic commercial considerations and be able to navigate accordingly.

Corporate real estate buyer relies on its list of capital expenditure projects (Capex list) to filter out its anticipated buying power for any given financial year. This list is usually created through annual budgeting process. By way of example, these buying power could refer to total surface area where new carpet tiles are required for Asia Pacific, total workstations and chairs to be replaced for Europe, Middle East and Africas (EMEA) etc. This list of projects could be shared with pre-qualified vendors considered for framework agreement to commence pricing negotiation. However corporate real estate is also a highly volatile industry where its actual demand may fluctuate quite considerably depending on many factors that are outside the control of the contracting parties. Such externalities include hike in global interest rate, equity market and share price performances, adverse news cycle etc. In this regard, the Capex list can be reduced to a mere projection of likely demand rather than a concrete commitment. From the vendor’s perspective there is a material difference between provisional demand and real demand because of the reluctance to deploy resources until there is a binding commitment. Therefore the vendor’s ability to provide its best and final offer in terms of unit rate pricing is curtailed to the extent that the buyer is unable to make a firm commitment. Whilst the parties could still enter into an agreement based on a provisional demand, the buyer may not be able to enjoy a material discounted unit rate as compared to one off contract, which defeats the fundamental purpose of establishing a framework agreement.

One of the ways to get around this challenge is to include a tiered pricing structure where there will be deeper unit rate discounts in accordance with increased in cumulative quantity transacted. Therefore whilst the buyer is not compelled to make any firm commitment in respect of demand, it will be incentivised to transact where possible in view of the progressive discounted unit rates. Likewise the vendor will not be required to offer any deep discount unless it is supported by actual demand. The parties to a framework agreement will have to establish a system of tracking all the orders made throughout the region so as to accurately determine the cumulative demand and its prevailing unit rate discount. Depending on the validity period of the framework agreement, which usually is set at either one or two year period, the cumulative demand gets reset. Every renewal of framework agreement could also take into consideration of the historical transactions to date so as to determine whether any enhancement could be made to the commercial structure. 

Apart from tiered pricing, the buyer can also restrict the number of vendor(s) included in the panel of framework agreement. This may also be an incentive for vendors to offer an enhanced pricing discount notwithstanding the provisional nature in volume of demand. The usual practice is to have two or three vendors for every type of framework agreement e.g. carpet tiles, system furniture, ergonomic chairs etc for purposes of resiliency or redundancy. If the framework agreement is established based on an exclusive sole vendor, it may well provide further commercial incentive. 

Vendors should be alive to the fact that for certain types of system furniture framework agreement such as workstations, the vendor’s revenue streams are likely to flow from two sources. These two streams refer to both the initial purchase revenue as well as future recurring servicing revenue. In case of the latter, it is not uncommon for corporate restack works to be carried out from time to time where the existing system furniture had to be dismantled and re-assembled in new designated locations. The original equipment manufacturer or vendor is usually engaged for such work in order to preserve the product warranty when the furniture had to be dismantled and re-assembled.

Limitations To Framework Agreement – Professional And Consultancy Services

As alluded to earlier in the preceding sections of this article, framework agreement has its limitations particularly as it relates to transactions that involve an extensive scope of services such as those that are professional and consultancy in nature. Service level rendered is largely dependent on the individual consultant engaged, rather than the consultancy firm. The lack of consistency can be an issue. Whilst individuals may be employed, professionally trained and developed by the consultancy firm concerned, much is dependent on individual aptitude, personal interest and professional inclination. As these attributes varies from individual to individual, the service level varies accordingly. Unlike manufactured commodity, no two persons are perfectly identical. Those who are more proficient will naturally be more sought after and are unlikely to be available when there is an actual demand or transaction arising from the framework agreement. In all likelihood, the individuals who happen to be available during framework call offs will be assigned to the project in hand. The corporate real estate client will therefore end up ‘training’ or bringing newly assigned consultants up to speed from time to time where required. Given the consequential abortive effort and associated cost, one may be better off relying on ordinary one off agreement than a framework agreement.

Notwithstanding that, some may still favour having framework agreement for provision of services. The justification is that whilst there may be varying level of quality of services from a consultancy firm, parties could agree to a pricing structure that commensurates with its prevailing service level. In other words, the agreed hourly rates should be higher in cities with higher level of services and vice versa. However this strategy implies that a corporate real estate buyer may be expected to engage such framework vendor even if an alternative vendor that may not be under any framework agreement is available to provide a greater value proposition. Ultimately a satisfactory service level should be the overriding determinant of entering into any agreement rather than pure pricing consideration.

Conclusion

Whilst framework agreement is largely a useful procurement strategy for corporate real estate sector, it should be viewed like any tool with its fair share of benefits as well as limitations. One will be well served by being discerning and critical in exercising judgment on when and how to use such tool. To date there is an absence of standard conditions of framework agreement available for use, unlike traditional construction contract. Therefore most template agreements for such framework arrangements are either drafted from scratch or modified from other general commercial contracts. There may be opportunities to develop such framework standard conditions if and when this commercial practice matures.




Koon Tak Hong Consulting Private Limited

Man-Year Entitlement (MYE) was a Singapore work permit allocation system for construction projects for certain sources of foreign workers which was eventually aborted in January 2024. Dependency Ratio Ceiling (DRC) is instead used as regulatory quotas for main contractors and subcontractors based on its ratio of foreign workers to its total workforce. These are regulatory tools used to manage construction industry’s reliance on foreign workers which in turn affects the industry’s productivity. Construction industry often exhibit an image of low productivity given its over reliance on low cost labour with limited automation or mechanisation in the execution of works. Whilst MYE and DRC are primarily aimed at limiting reliance on manual foreign labour in carrying out construction projects, these regulatory tools are incidentally useful as regards tender evaluation and administration of contracts. This article will explore these incidental functions in further detail. 

During evaluation of tender proposal or issuance of instruction for the contractor to carry out additional works, it is assumed that the contractor will generally have access to the necessary manpower if compensated fairly. In other words, money is usually able to resolve most construction problems. However contractors do not have unbridled access to all types of foreign workers due to limits in issuance of work permits and also monthly levy payable for permits issued. A good understanding of the mechanics of MYE and DRC provides an insight on the contractor’s ability to implement its proposed construction methodology based on its access to manpower. This in turn verifies contractor’s proposed manpower resource chart, estimated duration of certain construction activities and also its propensity to outsource some of its core functions due to limitation in manpower resources. These perspectives are useful in managing procurement, tender negotiations and contract administration matters. 

Whilst MYE and DRC are specific to Singapore, the overarching principles are applicable to most developed countries with similar laws that aim to manage its significant reliance on foreign workers. Where there are changes in legislations or regulations that affect contractors’ ability to carry out its works within the agreed costs and duration, contractor may be aggrieved. Depending on the type of contract form used, certain contractual relief may be available such as extension of time especially where government actions which could not have been reasonably foreseeable resulted in shortage of labour. Contractors are usually required under the contract to comply with all relevant labour legislation, bye-laws and regulations. To better understand how contractors’ compliance with these laws affects their entitlement under the contract, we will first examine the mechanics of MYE and its gradual transition to DRC.

Man Year Entitlement (MYE)

Although MYE framework was dismantled in January 2024 it is still relevant to understand its operating framework to appreciate how employment laws had evolved and its impact on access to foreign workers. Firstly, man-years is a productivity metric used to determine the number of workers (men) required to complete any given project within a specified duration. By way of illustration, 1 man-year is equivalent to 1-year employment of a worker under work permit. Such worker is generally of lower skill from non-traditional source (NTS) countries who is paid no more than $2000 per month. NTS refers to India, Sri Lanka, Bangladesh, Thailand, Myanmar and Philippines. A main contractor is typically allocated with  certain number of MYE quota upon award of a contract based on the value of project in hand. The main contractor then sub-divides its MYE quota to  various subcontractors based on various factors of consideration including subcontract sum. Prior to the dismantlement of MYE framework, contractors were free to engage foreign workers beyond its allocated MYE quota subject to its compliance with its relevant DRC by paying a higher foreign worker levy. In other words when MYE was in force, the DRC was in effect concurrently. Contractors tend to operate within the allocated MYE quota so as to limit its levy payable. The surplus monthly levy payable for engagement beyond the allocated MYE quota varies according to skill level of workers concerned but could be 100% more. 

When MYE and DRC were in operation concurrently, the DRC was not materially limiting contractors’ access to foreign workers as the MYE quota was generally sufficient to cater to the contractors’ manpower needs. Therefore prior to the dismantlement of MYE, there were limited restrictions on contractors’ access to foreign workers apart from cost considerations e.g. monthly levy payable, workers salaries, accommodation cost and other associated administrative fees. There was no real incentive for contractors to reduce its reliance on foreign workers for several reasons. Most contractors that were competing for construction works face similar level of manpower cost, thus it is hardly a differentiating factor in their tender pricing. Additionally, cost of foreign workers was relatively low in comparison to the overall cost of construction works. Foreign workers’ costs were essentially variable overhead where contractors were only required to pay for such cost as and when projects were secured. This flexibility in cost structure is less financially burdensome.

Given the above, there were no compelling reasons for contractor improve its productivity through automation, mechanisation and improvement of workers’ skill levels. This was at odds with the national drive of improving construction industry’s productivity which subsequently contributed to the pivot from MYE (in parallel to DRC) to exclusive adoption of DRC.

Dependency Ratio Ceiling (DRC)

Upon the dismantlement of MYE, the DRC is reduced from 1:7 to 1:5. Consequently, contractors’ access to foreign workers is tighten whereby for every local worker there can be no more than five foreign workers (from the previous seven foreign workers permitted). It should be noted that the five foreign workers refer to both work permit holders and S-Pass holders. The S-Pass holders are mid-skilled workers that are paid a minimum of $3150/month that usually assume site supervisory equivalent roles. Notably, monthly foreign workers levy is increased to $900/month By way of context, monthly levy for NTS foreign workers with basic skills engaged within the MYE quota was previously $700/month whilst those engaged beyond the MYE quota was $950/month. Therefore the monthly levy payable now is comparable to levy payable for those engaged beyond MYE quota. Therefore even for contractors that are willing to pay a higher monthly levy and to pass on such higher manpower cost through higher tender price can no longer do so due to a reduction in work permits and S-Pass available. 

Contractors looking to incur lower monthly workers levy could either increase their workers competence from basic skilled to high skilled through training and skills certification and/or to hire from alternative country sources e.g. Malaysia and North Asian Sources (i.e. Hong Kong, Macau, South Korea, Taiwan) where workers from these regions are generally higher skilled. However these workers who attract a lower monthly levy commencing from $300/month are also likely to command a higher salary to commensurate with their experience and competence level. In other words, the option of hiring lower skilled foreign workers that results in lower productivity is no longer available.   

MYE and DRC Influence On Tender Assessments

When the DRC was reduced from 1:7 to 1:5, the maximum proportion of foreign workers and S-Pass workers relative to the total workforce is reduced from 87.5% to 83.3%. By way of mathematical illustration, a hypothetical mid to small size contractor with 10 local employees that assumed mostly head office positions would have to reduce its foreign workers from 70 men to 50 men. Such contractor could not maintain the same number of workers by keeping the same operating model even if it is willing to incur a higher monthly worker levy. This is the case even if the revenue from projects could financially cushion the increase in monthly levy. Assuming such contractor will need on average 20 basic to mid skilled workers for every construction project, its operating capacity will be reduced from an average of three projects to two projects. 

The above information including the understanding of foreign worker regulatory policies become useful when one assesses tender proposals. It provides insights into contractor’s manpower capacity which correspond to its ability to undertake any new project and validation on its proposed construction method statement. One will also be able to assess the associated productivity and whether the tender price is reasonable given the availability of resources. If the very same small to mid scale contractor participates in a tender, it will be immediately clear whether it will have the relevant capacity to undertake a new project if it has two on-going projects. Assuming these two existing projects require on average 40 foreign workers in total, it is likely that it will only have 10 foreign workers available for the immediate future. In this regard, the tenderer will have to demonstrate how it will realistically manage such manpower constraint. 

There are a few options available to this tenderer and its decision on how to grapple with these realities as well as limitations can be very revealing. Firstly, the tenderer could outsource a portion of its construction works to its subcontractors. Whilst outsourcing to subcontractors is a fairly common practice, the tenderer should demonstrate that its very own manpower is meaningfully and productively deployed to carry out the initial trades of works until such time it is able to enter into subcontract agreements for subsequent trades based on its proposed construction programme. Depending on the prevailing market conditions and the nature of subcontracted works, the tenderer may need to utilise letter of intent to expedite its engagement of subcontractors. Secondly, the tenderer may re-deploy its own manpower from its existing projects to the project in hand if the manpower requirements of those on-going projects are tapering off due to imminent practical completion. Alternatively, the tenderer may adopt a more productive construction methodology that may involve mechanisation or automation that reduces reliance on foreign workers carrying out in-situ works. 

Depending on tenderer’s approach to address its manpower limitations, it may have varying degree of impact on its tender price. Where the tenderer is able to demonstrate that it is able to re-deploy its manpower from its on-going projects, it should have a minimal impact on its tender price. If the tenderer adopts a more productive construction methodology which reduces its reliance on foreign manpower through automation, mechanisation or off site fabrication it should generally result in a more competitive price. However if the contractor does not have sufficient project scale or workload to justify such capital investments, its pricing could be higher particularly if such automation drive is still at its infancy stage. If the tenderer relies on outsourcing as its primary means of overcoming its manpower constraints, its pricing is likely to be higher due to ‘profit and attendance’ imposed on the actual construction cost. This also raises doubt on the degree to which the tenderer is able to effectively control the quality and workmanship of various subcontracted third parties.

Prior to the abolishment of MYE where the DRC was 1:7, whilst the tenderer is unlikely to face similar manpower constraint there is also very limited impetus for it to seriously adopt mechanisation or automation as a long term strategy. This is because the default choice of hiring lower cost basic skilled foreign worker is always an option on the table. Through adoption of automation and mechanisation in the contractor’s day to day construction activities, this hopefully brings about the need for skilled technicians and engineers. This transition may draw interest from local workers as it will create an environment which values craftsmanship, professional growth and career progression. Whether these policies will yield the intended results remains to be seen.

MYE and DRC Influence On Contract Administration

Apart from providing an insight into the viability a tenderer’s proposal, a good grasp of MYE and DRC should also influence the ways in which one administers its construction contract. This is because an understanding of contractor’s access to foreign workers can materially impact on various decisions e.g. whether to issue instruction to carry out additional works, claims for additional payment, application for extensions of time and assessment of proposed construction programmes. 

Very often the decision to issue instructions to contractor to carry out additional works or to change an existing design is primarily driven by the needs for those varied works. The question of whether the contractor has the capacity to actually execute those additional works is often an after thought that will be considered if the contractor’s progress of works is delayed or if the contractor by its own volition raises its manpower concerns. However it is quite unlikely for contractor to expressly raise these manpower concerns as it may have an indirect adverse impact on its other existing claims for extension of time, amongst others. This is because in any of its application for extension of time, it is in the contractor’s interest to demonstrate that any delay in the progress of works is due to excusable and compensable events rather than arising out of its own culpability. Contractor is usually careful in not shooting itself in the foot. Therefore it is incumbent upon the project consultants or contract administrator to have the awareness of balancing the contractor’s manpower for existing scope of works as well as any potential additional works. Whilst the contractor may have the incentive during tender to hire more local worker to avail itself the incremental capacity to engage more foreign workers, such consideration diminishes during the mid stream of the project duration. It is highly likely that the contractor will have to juggle with its manpower resources within the existing constraints. Where the instructions for additional work effectively stretches the contractor’s manpower capacity, its delaying effect may even be longer than usual. Therefore it will be advisable for the contract administrator to request for quotation for any additional works in advance so as to agree on the cost and time impact of any potential instructions. This in turn will provide a benchmark for any future assessment of extension of time, if necessary.

MYE and DRC – Claims Due to Change In Law/ Regulations

As alluded to earlier in the beginning of this article, the abolishment of MYE and the exclusive adoption of DRC represent a change in foreign workers employment law that could affect certain contractors’ access to manpower in the mid stream of their projects. Since this change in law affects the main contractor as well as all its subcontractors, there is a real prospect of delay to project completion. So what are the contractors’ claims entitlement in view of changes in law and regulations?

To be clear the authority typically makes allowances for transitional arrangement to cushion any manpower disruption to on-going projects. By way of example, contractors that have been awarded with projects or committed to certain tenders prior to 18 February 2022 will be allowed to utilise their MYE quota up to 31 December 2024 or project completion whichever is earlier. This potentially provides a one year cushion to the 1 January 2024 MYE abolishment date. However, there may be larger multi-year projects that may still be adversely implicated where the contractors involved may wish to advance claims for financial compensation. The outcome of such claims will largely depend on the terms of the contract. 

In general, contract sum and duration for the construction works are expressly stipulated under the contract. Whilst the contractor’s ability to fulfil those requirements will in turn depend on its access to foreign manpower, it is uncommon for parties to expressly agree on the number of workers present on site at all material times. Whilst there are objective benchmark and measurements that parties could agree to in order to monitor progress of works such as the use of approved construction programme, there is no equivalent contractual deliverable on manpower resource charts. In other words, the Employer is not able to contractually penalise the contractor if it is of the view that the level of manpower on site is less than what it should be. After all, the contractor is ultimately responsible for its ability to achieve timely project completion and how it intends to do so is largely within its prerogative. Therefore, some may argue that if the contractor finds itself facing difficulties in securing foreign workers, its prospect of making a successful claim for additional payment or time extension is diminished. This is because the contractor may still face difficulties in securing foreign manpower even if there was no change in law due to various reasons such as competition for manpower from neighbouring countries, or better job prospects in their home country etc. The contract administrator’s ability to make a fact based and neutral assessment on such claims is quite limited due to a large degree of subjectivity. Notwithstanding that there are certain exceptions to the above such as the entitlement to extension of time under Clause 23(2)(l) of the SIA Building Contract (2016). Under this clause, there is an optional ground for extension of time if there is an unforeseeable shortage of labour resulting from domestic or foreign government actions, or regulations. However it should be noted that there is no express provision for corresponding additional payment even if time for completion is extended.

Conclusion

Foreign worker employment laws and the relevant legislations are not usually matters that are at the Employer or its consultants’ foremost consideration. In fact most contractors’ quantity surveyors, estimators and commercial managers do not spend a significant amount of time on these matters until and unless it becomes an issue or dispute. In reality having good practical working knowledge on such matters can be helpful for all parties including those representing the Employer for reasons articulated above. Very often the large differentiating factors lie in minute details.




Koon Tak Hong Consulting Private Limited

This is part 2 of an article series examining prefabricated prefinished volumetric construction or ‘PPVC’ from a contractor’s perspective. The overarching purpose of these articles is to offer commercial and risks assessment on how should main contractors and subcontractors approach PPVC projects. Based on an earlier article in part 1, it is rather evident that most PPVC projects fundamentally changes the way one should assess contractual risk due to some of its unique characteristics. By way of example, whilst the procurement choice of whether to adopt traditional design-bid-build or design and build are decisions made by the Employer based on its requirements and risk appetite, most PPVC projects would inevitably require contractors to undertake a significant part of the design responsibilities by default. It is almost a given that if the Employer adopts a PPVC approach, much of the design development in particular detail design would have to be undertaken by the contractor. This is largely driven by the nature of fabrication, manufacturing and off site assembly details that are part and parcel of PPVC design development. In this regard, contractors with limited in-house design capability will have to be cognisant of such challenge if it participates in any relevant tender exercise.

In this article, there will be further assessments to understand the extent to which PPVC approach may change or even disrupt the traditional way of contract administration. By way of example under conventional non-PPVC projects, once a baseline construction programme is accepted by the contract administrator, it becomes the basis of supervision and monitoring of progress of works. Whilst the contract administrator may instruct the contractor to revise its programme with remedial measures in the event that the works do not conform with the baseline programme, there is no financial punitive action. The contractor is only liable for liquidated damages in the event that the works remain incomplete upon the expiry of the practical completion date. This does not appear to be the case for PPVC project that adopts the public sector standard conditions of contract (PSSCOC) that incorporates Option Module D. Option Module D authorises the Employer to call on advance payment guarantee if the contractor has failed to execute the works in accordance with the accepted baseline programme, amongst others. As contractors for PPVC projects are expected to request for advance payment due to a significant initial capital outlay, the arrangement for such advance payment guarantee is fairly common. In other words, from a contract administration view point, the accepted baseline programme may carry an additional financial significance. This issue along with other contract administration matters will be further examined in the next few sections of this article.

Construction Programme

As alluded to in the opening of this article, PPVC projects are largely procured under a design and build pathway. Further, for contractors that provide advance payment bond in exchange for advance payment to fund a significant initial capital outlay may be confronted with an additional financial pressure in case it deviates from the accepted baseline programme. According to Clause D2.2(c) of Option Module D of PSSCOC for Construction Works (or its equivalent under Option Module B2.2(c) of PSSCOC for Design & Build) any deviations from such accepted baseline construction programme may be one of the grounds for the Employer to call on the advance payment bond or guarantee. It is noteworthy that under non PPVC project that involve provision of unconditional bond (or also generally known as performance bond), deviation from baseline programme does not usually constitute an express ground for calling of such bond. Whilst deviations from accepted programme may be an early indication of possible completion delay, such delay has not technically materialised and therefore there is no breach of contract. Even if the the works remain incomplete at the practical completion date, there may be ground for completion date to be extended. In other words, deviation from programme during the construction period in and of itself does not signify a forgone conclusion that contract condition is breached. There are legal safeguards in place for the contractor to resist the calling of bond where it is unconscionable or tainted by fraud, signifying that the calling of bond is not a contractual measure that can be taken lightly. Some may argue that the nature of PPVC projects which involve considerable critical works carried out off site may offer justifiable reasons for this new ground enabling calling of bond. The elevated gravity for any deviation from accepted programme may conceivably be a point of negotiation for informed contractors (and rightly so) due to the practical challenges in its enforcement.

To be clear, not all form of deviations from the accepted programme may be reasonable ground to call on the advance payment bond. To be successful in the calling of such bond, the deviations from programme had to be extremely serious that it cast doubts on whether the works will be completed within the time for completion, or that the contractor had failed to proceed with the works in due diligence and expedition. By way of context, an identical ground can be found in Clause 31.1(1)(c) of the PSSCOC justifying a cause to terminate the contractor’s employment for default. This will provide an indication of the severity with which the deviation from programme had to be before it could justify either a case to call on a bond or to terminate the contractor’s employment. What constitute sufficiently severe deviation remains a subjective, debatable and fact sensitive matter.

Proponents for having an express ground to authorise the Employer to call on advance payment bond for deviations from accepted programme are likely to point to the fact that PPVC projects are mostly carried out off site within a controlled manufacturing environment. The level of influence that the Employer and its agent can exert on the contractor’s work progress is therefore limited relative to traditional on site works. Further some of the fabrication details and methodology could be highly proprietary to the contractor and its module units fabricator. If there is tangible deviation of accepted programme, there are considerable difficulties for the Employer to engage any third party contractors to carry out remedial works and to complete the remaining works. In the worst case scenario, the Employer may need to abandon much of the work already done if the replacement contractor could not productively utilise those works due to difference in production and fabrication methods. The design responsibilities of the contractor further compound these problems since there is perhaps an issue of intellectual property right to be considered when engaging third party contractors to take over any remaining works. Therefore some may support the calling of advance payment bond as a strong deterrent against a problem which the Employer is particularly vulnerable to. 

Construction Method Statement As Part Of Contract Document?

Under traditional non PPVC project, whilst contractors are typically required to submit their construction method statement for the Employer’s consideration and assessment, such written proposal is rarely included in the contract document. This is because amongst others, the sufficiency and adequacy of the proposed methodology are risks to be undertaken by the contractor. In the event that the site conditions necessitate a revision to the accepted method statement, it should not be deemed as a variation under the contract that entitles any time extension or additional payment. This practice however may be debatable under a PPVC project for the following reasons. 

As alluded to in the preceding section of this article, off site manufacturing may cause the Employer to have less visibility and therefore control over the progress of works as compared to traditional site based construction works. In a bid to address the associated risks, the Employer has additional contractual tool or lever to enable the calling of advance payment bond in case the works deviates from the accepted programme. As the calling of bond is not a measure to be taken lightly, there ought to be objective standards to be benchmarked against in order to establish legitimate deviation from accepted programme. This is partly to ward off any argument that the call on advance payment bond by the Employer is unconscionable. In order to fortify such objective standards, it may be in the interest of the Employer to incorporate in the contract document a fully developed design which in turn includes its method statement. Such method statement includes all fabrication details, sequence of manufacturing and the expected productivity cycle. This provides certainty in measurement if and when the progress of works falls behind the accepted programme. The traditional concern of additional payment claims or application for extension of time due to unforeseen site is less applicable in a manufacturing and controlled environment.

From the contractor’s perspective, the inclusion of method statement in contract document provides the objectivity in measurement of extension of time, loss in productivity and abortive cost incurred if and when design changes are initiated by the Employer or its consultant in the midst of the production and manufacturing process. However it should also be noted that much of the construction works are outsourced by the main contractor to multiple subcontractors with various trade specialties. It is also likely that the PPVC fabricator may be a separate and distinct entity from the main contractor. At the point when the main contract terms are negotiated, including setting out the agreed construction method statement, much of the subcontractors may not have been identified or engaged. Since the production of PPVC module units involve coordination of various trade contractors, the absence of input from these subcontractors in agreeing a contractual method statement may pose a challenge. In this regard, the main contractor is expected to be strategic in its use of letter of intent vis-a-vis the relevant trade contractors and specialist subcontractors to ensure a holistic method statement is available for evaluation and acceptance. This method statement can in turn be incorporated in both the main contract document and various subcontract documents to ensure a back to back arrangement. It should also be noted that not the entire of a PPVC project is modularised where there could still be residual works that are carried out using the traditional in situ method e.g. foundation works, excavation works, hardscaping and landscaping works etc. Therefore, the method statements to PPVC units that may be included in the contract document would not be inclusive of all these residual in situ scope of works.

PPVC Fabricator vs Main Contractor

In Singapore, the PPVC modular units are manufactured in multi storey manufacturing facility known as Integrated Construction and Prefabrication Hub or ICPH. These ICPH are build on state land on a 30-year lease term and operated by private enterprise procured through public land tender. To date, there are six ICPH operators where these facilities are automated and mechanised to meet the industry’s demand for PPVC modular units, precast building components etc. On the other hand, to date based on publicly available data, there are at least 37 main contractors with PPVC project experience in Singapore. Clearly not all main contractors have the capacity, wherewithal and commercial desire to operate an ICPH. Given these realities, it is highly likely that a main contractor that do not already operate an ICPH would have to outsource the prefabrication works to an ICPH operator. As a matter of due diligence and prudence, such main contractor tendering for PPVC project ought to ensure that the ICPH operator do not have conflict of interest by also participating in the main contract tender. This is because some of the ICPH operators are also main contractor in their core lines of business. 

As there are significantly less ICPH operators than main contractors, it appears that the commercial bargaining power tend to favour the ICPH operators. To date, a significant portion of PPVC approach is driven by government initiative through its land sales conditions for selected government land sale sites. Under Building Control (Buildability And Productivity) Regulations 2011, there is minimum level of use of PPVC at 65% of the total super structural floor area for certain designated sites. Therefore main contractors tendering for such projects are likely to outsource more than half of its contract sum to its selected ICPH operator. In other words, the ICPH operators not just have a larger commercial bargaining power, but also great control and influence over the progress of the works. This challenges the dynamics of relationship between main contractor and subcontractor where the former traditionally enjoys a great commercial bargaining power as well as control over the project. This disruption therefore raises the question of whether the main contractor should continue to shoulder bulk of the project risk if it does not commensurate with the commercial reward? If the main contractor decides to shoulder the same level of risk, is it in the same position to manage those risks as before? 

In reality some of the risks management concerns of the Employer in respect of PPVC project’s main contract is similar to the main contractor’s concerns under its subcontract with ICPH operator. As alluded to in the earlier part of this article, in a bid to mitigate those risks, the Employer incorporated additional contractual tool such as the ability to call on advance payment bond in case the progress of works deviates from the accepted programme. By the very same token, the main contractor when confronted with a diminished bargaining power and control over the progress of works might be incentivised to find ways to pass on those contractual risks. One of the options available for the main contractor’s consideration include the adoption of general damages for ICPH operator’s delay as opposed to liquidated damages. Whilst the main contractor had to prove the quantum of damages sustained prior to recovery, it allows the main contractor to be reimbursed for the actual losses suffered in case of culpable delay that would otherwise be extensive and difficult to pre-estimate. These losses include main contract liquidated damages, loss and expense claims from implicated subcontractors, as well as the main contractor’s very own loss and expense all of which are fact sensitive. If the incumbent ICPH operator’s delay becomes extraordinarily severe, the main contractor may have to switch to an alternative ICPH operator with a different proprietary system and the need to fabricate a new set of moulds. Such delay related damages may become hard to pre-estimate if subcontract liquidated damages were adopted.

Definition of Completion In PPVC Project

Under traditional non PPVC project, the contractor is required to achieve substantial completion or practical completion by the stipulated completion date. The word ‘substantial’ suggests that whilst the building is fit for occupation and ready for handover, it may not be entirely and wholly completed. In fact it is quite common for a list of minor outstanding works to be issued to the contractor together with a substantial completion certificate where such minor works are to be completed after practical completion. The idea is that these minor works do not materially affect the Employer’s beneficial occupancy of the building concerned. Such leeway in definition of completion is somehow absent when it comes to any product or goods that are transacted on a day to day basis. By way of example, when a car is handed over by the manufacturer to its buyer, it has to be entirely completed and ready for use. The manufacturer is not expected to continue to work on a list of minor outstanding works of the car after handover. The distinction in definition of completion between construction works and goods is relevant in the case of PPVC project because of the modular units. By way of context under the America’s legal system, prefabricated building modulars could be treated as general products such as cars or refrigerators where the Uniform Commercial Code or UCC applies. However some have also argued that given the provision of services in the production of highly bespoke prefabricated modular services, the American common law should apply instead. Such distinction in legal treatment affects the definition of completion because the common law allows more flexibility in its substantial completion doctrine. 

Whilst Singapore’s common law is based on a different legal system from the American law, the basic principle as regards concept of completion for PPVC modular units ought to be clarified during tender negotiations for practical reasons. This is because the definition of completion affects the fundamental question of whether a party had performed its obligation under the contract. Performance of contract in turn affects any entitlement to payment and the determination of whether the contract conditions had been breached. As PPVC modular units are fabricated and manufactured in a controlled production facility much like general products such as refrigerators and cars, it is a radical shift from the traditional in situ construction. The idea is that standardisation in production facility improves consistency in quality and productivity. However whilst traditional in situ construction applies the substantial completion doctrine, what constitute completion for PPVC modular units? This question is perhaps more relevant in respect of the subcontract between the main contractor and its ICPH operator/ modular units fabricator than it is to the Employer. With the adoption of Building Information Modelling (BIM), the specification and dimensions of PPVC modular units can be highly prescriptive and accurate given the data rich digital 3D modelling. ICPH operators therefore is required to fabricate based on these prescriptive design. If the PPVC modular units delivered to site could not be appropriately installed in conformance with the site conditions due to irregularity in dimensions, who should be contractually responsible?  The ICPH operator may rightly argue that as it is only expected to manufacture based on design provided, the contract is performed as soon as the goods are transported from its facility much like any general products. Even if the duty of conformance with site dimensions is expressly delegated by the main contractor to the fabricator, is any on site ad hoc modification works to rectify any dimension non conformance issues considered ‘minor outstanding works’ that could be carried out after practical completion? Do these minor outstanding works materially affect the Employer’s beneficial occupancy of the concerned building? These are not merely theoretical issues or academic concepts because it determines the question of delay culpability and liability for damages. With the advent of standardisation in production of PPVC modular unit, any irregularity in dimensions may be replicated to multiple similar units causing a systemic production issue. Ultimately where the main contractor is required to certify completion to its fabricator, there has to be a clear set of requirements to be accomplished before the subcontract works is deemed completed.

Conclusion

Given the peculiarities and unique characteristics of PPVC projects, there may be a case for the creation of a set of particular conditions for its use. Based on the observations made above, such particular conditions may be more pressing and pertinent at the subcontract level than it is for the main contract. These particular conditions could be bolt on to the subcontract standard conditions if and when the project involves PPVC approach. 




Koon Tak Hong Consulting Private Limited

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

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

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

Design And Build / Design Development And Build

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

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

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

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

Payment For Material Off Site And Associated Risks

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

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

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

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

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

Advance Payment Bond

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

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

Who Should Hire BIM Manager?

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

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

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

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

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

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

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

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

BIM, Security of Payment Act and Claims Management

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

Mediation vs Determination – Managing Conflict of Interest of Dispute Board

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

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

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

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

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

Independent Certification vs Dispute Board

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

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

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

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

Multi-Tiered Dispute Resolution Clauses vs SIDP

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

Back To Back Arrangement With Subcontractors

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

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

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

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

SIDP And Security of Payment Act – Reference of Payment Disputes

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

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

SIDP And Security of Payment Act – Complex Damages Related Disputes

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

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

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

Conclusion

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



Koon Tak Hong Consulting Private Limited

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

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

Immediate Priorities When Deciphering Payment Claims Disputes

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

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

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

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

Natural Justice And Conduct Of Proceedings Of Adjudication

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

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

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

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

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

Crystallisation of Issues And Scope of Adjudicator’s Jurisdiction

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

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

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

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

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

Types of Responses Under SOP Regime

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

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

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

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

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

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

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

Setting Off Adjudicated Amount?

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

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

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

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

Set Off And Cross Claims In Payment Response

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

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

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

Preparing Payment Claim For An Adjudicator

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

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

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

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

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

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

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

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

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

Project Documentations Used in Payment Claims

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

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

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


Loss And Expense Claims

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited