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

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

Basic Characteristics of Bonds in Construction Industry

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

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

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

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

Performance Bond

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

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

Advance Payment Bond

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

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

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

Calling of Bond – Tips and Traps

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

Design Responsibility And Performance Based Specification

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

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

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

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

Programme, Definition of Completion, Testing And Commissioning

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

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

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

Liquidated Damages For MEP Subcontract

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

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

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

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


Price Fluctuations, Off Site Works And Cashflow

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

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

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

Contract Documentation From Consultants, Main Contractors, Subcontractors And Suppliers

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

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

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

Scope of Survey Report

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

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

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

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

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

Limitation Act

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

This article is part three of a series of articles that examines the ways in which one can navigate expert reports issued for the purposes of construction arbitration. Piling works or foundation works are one of the common sources of construction disputes that are often subject to dispute resolution through arbitration. The resolution of piling issues can be particularly complex and tricky because the subject in dispute is often inaccessible physically due to being “buried underground” imposing limitations to availability of factual evidence for the arbitral tribunal to make a conclusive and proper determination. Therefore there is usually a heavier reliance on expert evidence to assist the tribunal in identifying the primary technical issues that ought to be distilled from the parties’ scope of disputes. In navigating an expert report, one has to be mindful that ultimately the experts’ role is to provide their evaluative opinions to facilitate the tribunal’s deliberation rather than to usurp the tribunal’s authority. Whilst such distinction is hardly contentious, it is not uncommon to find that expert reports are drafted in a way that stray beyond the expert’s scope of expertise by delving into legal issues on how contract terms ought to be construed as well as making determination on liability of parties. Ultimately whether or not there were procedural irregularities when adducing expert evidence will often turn on whether the technical issues were framed appropriately and if not, had the contesting party raised its objection in a timely manner. Further, it is not inconceivable that the piling expert will be expected to apply its technical knowledge based on his reading and understanding of the relevant specifications. 

The disputing parties as well as the tribunal should not be overly surprise that any determination on the piling issues is likely to be subject to challenge in an effort to set aside the arbitral award. This is due to the domino effect in that any finding of liability in respect of primary piling issue may give rise to adverse consequences on secondary issues such as delay, remedial costs, liquidated damages and/or loss and expense. Typically, if and when parties dispute over piling issues, the remedial efforts and contractual challenges that ensued can be time consuming and costly. Given that piling issues are so closely interwoven with other disputes, parties should rightly dedicate extra caution and procedural care in terms of how expert evidence is adduced on piling issues particularly the way in which the expert report is presented.

This article focuses on arbitration agreement under the main contract ie. between the Employer and the main contractor although it is entirely possible for piling disputes to arise at the subcontract level. Where the piling disputes emanate from the main contract, it is likely that the nature of such dispute involve the question of workmanship rather than design. Most piling construction works are procured under a provisional quantities arrangement where the main contractor is paid based on actual length of piles that had to be driven to achieve certain design capacities. Such capacities are established based on engineering design of the consultant engineer appointed by the Employer. 

In theory, any piling dispute could be caused by either design issue or workmanship issue or a combination of both issues. In practical reality however, if and when piling issues arise, the remedial efforts are usually led by the consultant engineer with disproportionate focus on workmanship issue as opposed to design issue. Some have argued that this is why much of the contemporaneous records surrounding piling disputes are produced with a certain presumption of default in workmanship. The main contractor is bound by the main contract terms to comply with instructions issued by the engineer or contract administrator to carry out certain investigative and remedial efforts even if main contractor disputes the line of enquiry. Where such efforts result in the main contractor incurring loss and expense including schedule delay, the main contractor will inevitably commence arbitral proceedings against the Employer for damages and compensation. The Employer will be expected to defend its position and initiate any counter claims. Even if the Employer is unsure whether any design issues could have contributed to the piling disputes, it is unlikely that it will be able to force its consultant engineer as the third party to the arbitral proceedings. This is could due to the absence of joinder agreement and the lack of authority by the arbitral tribunal to legally force such joinder. Therefore under main contract arbitration, the main contractor is likely to prove that the piling disputes were caused by design issues whilst the Employer will naturally look to establish otherwise. It is quite common that both contesting parties are looking to advance two very contrasting theories as to what was the root cause to the failure in piling works. It is interesting to note that design issues and workmanship issues are closely intertwined particularly as it relates to piling disputes. When one navigates such expert report, it should be noted that these two issues are essentially two opposite sides of the very same coin. In other words, both experts may not actually differ significantly on the material factual premise but have distinctively different theories on the perceived consequences arising from such factual premise. This will be elaborated further in the next section of this article.

Design Responsibility vs Workmanship Responsibility

As mentioned earlier the piles are designed to achieve certain loading capacities generally based on various engineering parameters such as dead load, live load and safety factor in accordance with the respective locations of the piles. These are design responsibilities of the consultant engineer. The main contractor (or its piling subcontractor as the case may be), is responsible for physically driving the piles into the ground and in the process of doing so perform certain specified tests and measurements. These data are tabulated and reported back to the engineer to enable him to decide whether the piles had been driven to sufficient depth that satisfies the design load. When it is subsequently found that certain problematic piles are unable to achieve the required load capacities, the disputing parties do not differ significantly in terms of the general factual premise e.g. location at which the piles were driven, the penetration depth achieved, the type of piles installed etc. The main contractor usually takes the position that it is merely responsible for driving the piles to the required depth as determined by the engineer based on its design parameters. In other words the main contractor assumes no design responsibility. On the other hand, the Employer (effectively representing its engineer’s position) argues that its ability to make the right decision is dependent on the accuracy and veracity of the data provided by the main contractor. Therefore the Employer, namely the engineer’s proxy assumes no workmanship responsibility.

Where it relates to piling disputes, it appears that the distinction between design responsibility and workmanship responsibility is not as clear as it would typically be. Under conventional circumstances, the contractor does not have any input on the design and is contractually bound to merely perform the works as closely as possible based on the given design. Such design are typically defined, developed and certain. Where it is found that the works failed due to construction works not being carried out strictly in accordance with the design, then it is most likely a workmanship issue. However this conceptual distinction appear to be blurred in the case of piling disputes because the contractor arguably has certain input to the engineer’s design decision. This is because whilst the engineer would have stipulated certain loading capacities for the piles, the engineer additionally had to make design decisions on site as to whether the piles had achieved its intended capacities primarily based on the depth of pile penetration, amongst others. The depth of pile penetration in turn affects the skin friction and end bearing resistance. The engineer is often dependent on the data provided by the contractor to make such decision. Additionally there are usually tests to be carried out by the contractor to validate some of these piling datas. Therefore if the engineer makes the wrong design decision on site, was the engineer misrepresented by the data produced by the contractor or was it a case of professional design negligence? This can potentially be a circular argument. After all, soil investigation reports commissioned by the engineer are usually provided to the contractor during tender indicating the likely toe level or hard stratum level located underground which then became the basis of the engineer’s design. It is not entirely clear if contractor can be made exclusively responsible for the underground conditions. 

It is quite clear from the above that the interpretation of the data and specifications are fertile grounds for experts to assist the tribunal based on their technical expertise. It is up to the tribunal to distil the right technical issues out of the factual matrix to make an informed and fair determination. Likewise it is up to the parties’ counsels to frame the technical issues in a manner that is most advantageous to their respective cases so as to put their best foot forward. 

Framing Of Expert Issues

As illustrated in the preceding section of this article, the main contractor is likely to demonstrate that the piles failed due to design issues whilst the Employer aims to prove that the root cause was a matter of workmanship. It is not uncommon for parties to therefore frame their respective technical issue as – “Whether the Claimant/ Respondent is responsible for the failure in the piling works?”. Some have rightly argued that the manner in which this issue is framed is intended to determine the question of liability which is reserved for the tribunal. After all the parties had not consented to appointing the experts to be the arbiter of their disputes. The experts’ role is strictly to assist the tribunal on certain technical issues (as opposed to liability issue) rather than to usurp the authority of the tribunal. Further, the broad manner in which this issue is framed entail examining both factual evidence and expert evidence. When the experts adduce their evaluative opinions, it is often premised on certain factual evidence that are assumed to be accurate and correct. 

The counsel’s ability to finesse the issue and to frame it within the context of a technical subject is therefore important. The very same issue could alternatively be broken down into two relevant sub-issues namely – (1) “Whether the technical requirements stipulated under the contract were appropriate?” (2) “If yes, whether the contractor was in compliance with those technical requirements?”. The former sub-issue is effectively to elicit expert opinion on whether there was any problem in the design whereas the latter deals with the question of workmanship. Such distinction may provide some clarity that could be of assistance to the tribunal in the course of its deliberation. 

Occasionally, one may also find that the expert issue could be framed as “What was the cause for the failure in the piling works?”. The framing of this issue suggests a fact finding query on a technical matter. It should however be cautioned that the experts’ assessments ought to be premised on factual evidence adduced by the parties rather than an alternative theory that is conceived as an afterthought. In this regard, expert may risks straying beyond the parties’ pleaded positions. By way of example, let us assume that the parties are factually in dispute over the interpretation of the piling data and how it may have led to inadequate pile penetration. This is corroborated by contemporaneous records, correspondences as well as pleading documents. If one of the party appointed piling experts opined that the piles’ failure was due to an alternative cause i.e. lack of protective coatings giving rise to corrosion and subsequent structural degradation, this may give rise to procedural irregularity. This is in spite of the fact that the expert through examining tangentially available data genuinely believes that this alternative cause provides a better technical explanation. Whilst such alternative cause amounts to a surprise to the counter party in dispute, it is in any case directly answering the expert issue of “What was the cause for the failure in the piling works?”. Therefore, in order to ensure that the evidence adduced are strictly within the scope of the arbitration, it will be wise for parties to frame the expert issues within the confines of the factual premise. 

Independent Site Inspection And Agreement to Protocol

The accuracy of the piling data and documents provided to the experts by the parties are not infallible. Therefore in order to undertake a comprehensive assessment, the experts may request for access to the site concerned so as to carry out an independent survey including obtaining of samples for further laboratory examination. The obtaining of supplementary factual evidence in all likelihood may provide a further veneer of credibility to the subsequent expert evidence. Provided that the application for site inspection is not done belatedly and relevant to the scope of arbitration, the tribunal is likely to accede to such request given the paramount need to provide parties with reasonable opportunity to present their case. In this regard, it is important to put in place a joint site inspection protocol that is mutually agreed including the choice of any laboratory that will carry out any tests that may be required. This goes beyond a mere administrative matter, because of the importance to having an effective and neutral protocol that ensures a transparent chain of custody of evidence. 

There are certain procedural risk if the purpose of such inspection is not precisely defined. As alluded to earlier, experts have to exercise caution in not straying beyond the parties’ pleaded positions by venturing into alternative theories that are not within the scope of dispute. If an alternative theory is deemed a technical necessity, the party responsible should be ready to amend its statement of claim or defence as the case may be including a reasonable proposal to mitigate any impact on the procedural timetable. The venture into an alternative theory that significantly departs from the scope of arbitration is rare since it is customary for the party applying for such site inspection to be precise with the purpose of such visit. The counter party responding to such application is likely to raise its objection if the purpose of such visit strays beyond the terms of reference of the arbitration. 

A joint inspection by both parties’ experts is usually the preferred option particularly if an experts’ joint statement is expected subsequently. This will help funnel the issues into categories of ‘points of agreement’ and ‘points of disagreement’. Such delineation will help the tribunal to focus only on the necessary points in contentions and make a determination accordingly. This also helps to facilitate a more narrow line of cross examination during the subsequent evidential hearing. 

Another reason why a joint site inspection is necessary and particularly beneficial for the main contractor (likely a Claimant) is that most of the investigate and remedial efforts undertaken prior to commencement of arbitral proceedings are led by the consultant engineer. As alluded to earlier the consultant engineer may be inclined to focus more on workmanship issues. Therefore most of the contemporaneous factual data and documentation are unlikely to be supportive of any finding that may suggest default in design responsibility. An appropriately focused site inspection may level the playing field.

Presentation of Expert Evidence – Witness Conferencing/ Hot Tubbing

Where the technical issues are complex resulting in parties unable to join issue, the tribunal may enlist the assistance of both the party appointed experts by having their evidence presented through witness conferencing. This is also known as ‘hot-tubbing’ of expert witnesses. In essence, this is a format where both experts give their evidence concurrently. The detail protocol can either be mutually agreed by the parties or directed by the tribunal in accordance with its requirements. 

In general the experts will take turns to present an overview of their respective positions following which each expert will be given an opportunity to ask a question directed at the opposing expert. Upon responding to such expert directed question, an opportunity will be given to each expert to comment on those responses. At any point in time during the expert conferencing, questions may be raised by the tribunal on specific matters raised so that the tribunal may narrow the scope in dispute, discover points of agreements and understand the rationale behind the experts’ conclusion or opinion. The parties’ counsel may elect to ask questions during the conferencing or to cross examine the experts after the conclusion of the said conferencing. The tribunal may favour eliciting expert evidence using this format rather than cross examination because it allows a general appreciation of the overall picture of the technical matters in dispute. Cross examination on the other hand typically assumes that the tribunal would have thoroughly digested the issued expert reports in advance and that the only outstanding matter was for the party’s counsel to challenge the opposing expert on certain narrow and specific scope of evidence included in the report. This may not be entirely helpful particularly when the expert reports are meant to address technical issues for the benefit of the tribunal with pure legal background. Whilst the counsel for the purposes of cross examination may put emphasis on least credible parts of the report, the tribunal may only wish to place more focus on actual issues in contention. 

Therefore the way in which expert reports may be drafted could differ depending on whether an expert conferencing is required. Experts who anticipate the need to provide an oral “opening statement” on its expert report may put more emphasis on having an executive summary based on the strength of its analysis. However counsels may be concerned over not having control over the manner in which expert evidence is elicited especially if the expert conferencing is reduced to an “open discussion forum”. There may be risk that the parties in dispute may not be given reasonable opportunity to either present its case or to respond to allegations made against it if the format appears “free for all”. This should also be a concern shared by the tribunal due to law of natural justice.

Conclusion

The technical knowledge of an expert directly affects the strength of logic, weight of evaluative opinion and persuasiveness of such evidence. On the other hand, when one runs afoul of any rules of arbitration and law of evidence it inevitably give rise to procedural irregularity. Whilst technical knowledge is of paramount importance as regards the provision of expert evidence for piling issues, the expert’s appreciation of basic rules of arbitration and law of evidence are crucial as well. It is often the latter that exclusively determines whether any arbitral award is in danger of being set aside.



Koon Tak Hong Consulting Private Limited

This article is part two of a series of articles that examines the ways in which one can navigate expert reports issued for the purposes of construction arbitration. The focus of this article is on quantum issues. Quantum issues deal with assessment or determination of amounts payable for contractual claims. Under construction arbitration, such contractual claims can be broadly divided into three categories namely (1) variation claims, (2) loss and expense claims and (3) remedial works claims. Where the quantum disputes arise out of a main contract, first two categories of claims are likely to be advanced by the contractor whilst the third category is likely to be counter claims advanced by the Employer.

Similar to delay issues, quantum issues are mostly secondary issues that are to be dealt with after the question of liability or entitlement of certain primary issues are first determined. By way of example, if the arbitrator makes a favourable determination for the Employer for certain disputed scope of works, the quantum issue facilitates the assessment of amount which the contractor is liable for. This distinction is important in that experts should be mindful of such delineation and not venture into areas outside their scope of expertise. Quantum experts are usually professionals from quantity surveying background with expertise in valuation of construction costs. Notwithstanding this distinction in different realms of expertise, quantum experts may at times inadvertently stray into matters outside their terms of reference. In this regard, any reliance placed upon such expert evidence may give rise to procedural irregularities which can be problematic for the eventual arbitral award. 

The method of assessment of amounts payable for various types of claims are governed by the contract terms. Under the public sector standard conditions of contract (PSSCOC) used in Singapore, the contractor is required to provide the contract administrator with access to its books and documents that are material and relevant to any of its loss and expense claim. This is to allow the necessary audit, transcription, examination of such documentation to substantiate the loss and expense claim. Such paper trail are in essence factual evidence to demonstrate that the amount claimed is actually incurred, leaving little to no room for subjectivity and inferences. It is important to note that expert evidence are essentially evaluative opinions on technical matters that are meant to assist the tribunal. If the contract conditions prescribe a mandatory requirement for concrete, complete and comprehensive factual evidence for loss and expense claim, is there still a need for expert’s evaluative opinions? Whilst expert’s opinions are expected to be subjective, it is particularly helpful when the factual evidence on a technical issue is not entirely complete leaving room for narrative based on analysis and different interpretations. The rigours and demands of contract terms should compel one to examine under what circumstances should expert’s evidence on quantum issue be required to fulfil a factual evidence gap. Is it the role of a quantum expert to attest the factual credibility of documentation in support of loss and expense claim? 

To understand how quantum experts are best positioned to assist the tribunal, one has to understand the actual methods of assessments for various types of claims including its challenges. This will provide some clarity on where limitations of factual evidence is complemented by expert evidence. These issues will be further expanded in the next few sections of this article.

Challenges In Quantum Assessment of Variations Claims

Typically the time and effort taken to assess a technical issue is proportional with the associated magnitude and complexity of such issue. Interestingly, this may not always be true in the case of quantum assessment of variation claims. The time and intellectual rigour expended to assess a $100,000 variation claim is not necessarily ten times of the same effort for a $1million variation claim. In fact, such time and effort involved may be comparable or approximately similar. This is largely because the steps required for such assessment are similar regardless of the expected amount in dispute. Procedure wise, it is a fact sensitive line of enquiry that involves identification of (1) quantity of work done and (2) unit rates applicable. When parties differ over the amount payable for certain variations claim, it could be due to discrepancies in the associated quantity of work done and/or the unit rates applicable. 

In the identification of quantity of work done, comparisons had to firstly be made between the relevant categories of drawings such as between contract drawings with the corresponding construction drawings or as built drawings. It can be a tedious process because within any given category of drawings, subsequent comparisons had to be made between different types of drawings which relate to the scope of varied works such as layout plans, cross sectional views, detail drawings, elevation views etc. Where the varied works involve more than one construction discipline, further comparisons also had to be made between architectural drawings, structural drawings, mechanical drawings and electrical drawings. The reason why multiple comparisons of drawings are necessary is because the narrative or description of varied works included in the instructions issued to contractor are rarely inclusive of quantities of works affected. Therefore, measurements are taken based on the collective drawings identified above in accordance with rules included in standard methods of measurements, taking into consideration of any exceptions in the associated preambles. Given the large volume of documentation involved in this process, any quantum expert report should appropriately identify the list of drawings referred to including the breakdown of measurements taken from these drawings so as to form the basis of any independently derived quantities of work. This is particularly helpful and relevant where parties’ disputes include measurement of work done. Where neither parties’ expert requested for measurements to be taken via site visit, the accuracy of the relevant drawings are deemed accurate and not in dispute. 

Apart from the time consuming process of identification of quantity of works, the determination of unit rates applicable entails considerable efforts as well. As compared to identification of quantity of work, the assessment of unit rate requires a lot more professional judgment calls. This is because valuation is fundamentally an evaluative process where the outcome is inherently subjective. Opposing experts are expected to differ in matters of valuation. The real test is in their process of arriving at their respective conclusions. Variations are valued based on a tiered approach as prescribed in conditions of contract. There are in general four tiers where the unit rates applicable are strictly confined to those included in the contract if the variations are instructed with little or no disruptions to the contractor’s  prevailing sequence of works. As the variations instructed becomes more disruptive, additional allowances are included to compensate the contractor accordingly. The determination of whether or not varied works instructed are disruptive is both an art and science. Whilst an objective reference can be made to the prevailing construction programme to determine the extent of disruption if any, such programme may not be available since most contract conditions do not stipulate how frequently should a contemporaneous programme be updated. Apart from timing of the instructed works, the mathematical derivation of an adjusted rate is also a qualitative assessment with multiple layers of implicit assumptions. The unit rates are essentially composite rates that consist of labour costs, material costs and plant/ equipment costs. The percentage allowed for each cost component represents an average derived after the total cost was originally calculated based on first principle during the time of tender. There are other relevant considerations in adjustments of unit rates such as the element of profitability, the market price fluctuations, economies of scale etc are included in the mathematical extrapolations.

It is not uncommon for quantum experts to delegate the quantum assessment works to multiple assistants, all of whom are usually identified in the expert report for transparency. Since the party appointed expert usually maintains an overall supervision role, the detail measurement breakdown and arithmetical adjustments of relevant unit rates are not commonly disclosed unless such disclosure is specifically agreed upon by the parties or directed by the tribunal. Depending on the nature of the dispute, such disclosure might be helpful in providing clarity to the mechanics behind quantum assessments of variation claims. 

Different standard conditions of construction contracts are likely to describe its valuation of variation mechanism differently despite an overarching common valuation principles. Quantum experts may dedicate a significant portion of the expert report to provide their interpretations of such conditions as the basis of the quantum assessment works. If part of the legal issues between parties involve the interpretation of the relevant valuation clauses, strictly speaking it is up to the respective counsels to make their legal submissions on such matter. How a contract conditions ought to be construed is typically not within the quantum experts’ scope of expertise. In this regard, it would be advisable for the quantum expert to work in tandem with the party’s legal counsel on the issue of interpretation whilst maintaining an appropriate level of independence. 

Challenges In Quantum Assessment of Loss And Expense Claims

Loss and expense are usually presented in various heads of claims which include prolongation costs, disruption costs, loss of profit etc. As alluded to in the beginning of this article, the contractor is usually required to provide the contract administrator with unfettered access to its books and documents in support of its loss and expense claim. Such requirement is contractually provided for under Clause 23.4 of the ninth edition of the PSSCOC published in 2020. According to Clause 23.6, if the contractor fails to comply with such disclosure requirement, the contract administrator shall make an assessment as shall be reasonable on the basis of information made available by the contractor, if any. If the contractor disputes such assessment and subsequently refers the matter to arbitration, no account shall be taken of any information which was not previously supplied to the contract administrator, regardless of whether or not he could have possibly done so. Therefore, the scope of dispute before the arbitrator is restricted which in turn affects the tribunal’s jurisdiction. This invariably affects the extent to which the quantum expert can meaningfully provide his expert opinions on such loss and expense issues. 

The challenges in this regard are two fold. One, where the burden of information, records and books disclosure is so comprehensive and concrete, it raises the question of the extent to which an evaluative expert opinion is required to supplement the factual evidence. Expert opinions are meant to assist the tribunal on technical issues that are not traditionally within the arbitrator’s scope of expertise particularly those from pure legal background such as lawyers or state court judges. The level of document disclosure found in such clause is apparently meant to establish incontrovertible factual evidence, making little to no room for speculative narrative. Second, it limits the arbitrator’s ability to take into consideration any supplementary evidence that are presented “belatedly” even if such evidence could not logically be produced any earlier. Therefore any reliance on these supplementary evidence may give rise to procedural irregularities that may adversely affect the eventual arbitral award. In navigating quantum expert report, it is imperative that parties are well acquainted with such restrictions or time bar provisions found in the conditions of contract. 

Challenges In Quantum Assessment of Remedial Works Claims

Costs of remedial works are usually expenses incurred by the Employer for engaging third party contractor to rectify what is perceived to be unsatisfactory work carried out by the contractor in issue. Similar to claims by the contractor for variation works and loss and expense, the quantum assessment method is subject to the relevant terms under the contract. The contract conditions typically do not impose the same level of restrictions on the Employer as compared to the contractor’s claims. Therefore, the Employer is usually not subject to the typical condition precedents, early notifications, documentation disclosure, methods of valuation etc. The Employer is generally entitled to reimbursement based on damages and expenses incurred if and when liability is established in its favour. What are the expenses incurred is a question of fact that can be proven by way of receipts, invoices, quotations of such third party contractor. Again, this raises the question of whether the tribunal is genuinely in need of technical assistance by way of evaluative opinion from an expert when there is a complete paper trail in respect of expenses incurred. 

If parties are in contention over what are ‘reasonably’ incurred by the Employer for engaging third party contractors, there are a few factors of consideration that may involve a quantum expert’s input based on his understanding of sequence of construction works, availability of resources, procurement process etc. In this regard the question is whether it is fair for the Employer to be fully compensated financially irrespective of whether the Employer had exercised prudence and reasonableness in the course of remedying the alleged defective works. If the Employer had not carried out competitive tendering for the works in hand, the costs incurred is expected to be higher in the absence of competition. Therefore, the question is whether such works is under genuine time pressure for completion that necessitates the practice of procurement ‘sole sourcing’, if indeed such measure can reasonably save time. It may well be that the Employer is entitled to engage third party contractor to carry out the works in contention that arise during the construction period. This is when there is non compliant by the contractor with the instructions to which it had been issued. It is worth noting that certain contract forms only expressly provide for the engagement of third party contractor after the contractor’s employment is terminated for default. The circumstances under which a third party contractor may be engaged is relevant to quantum assessment as it affects the time pressure for completion, the site congestions and availability of site resources (e.g. scaffolding, equipment, plant) to be used by the third party contractor. These are factors of consideration when assessing what should have been reasonably incurred by the Employer.

Framing Of Expert Issues

Based on the observations made above on variations claims, loss and expense claims and remedial works claims, it is quite evident that quantum expert opinions are not invariably required just because there are quantum issues before the tribunal. Where expert opinions are required, these issues ought to be framed appropriately with two general factors of consideration namely (1) where evaluative opinion is of value to provide analysis to complement factual evidence (2) arbitration costs. Whilst the expert opinions are primarily meant to assist and benefit the tribunal on certain complex technical issues, the ways it is framed is usually decided and driven by the parties’ legal counsels. Due to the adversarial nature of arbitral proceedings premised on common law systems, the tribunal is unlikely to direct the parties to present their expert evidence from a certain angle or perspective that will assist their deliberations. Consequently the parties may frame the expert issues in an overly all encompassing manner, that could inadvertently include both the issue of liability and quantum. Subject to the prevailing arbitration rules, from a procedural timetable perspective parties are usually required to submit their expert issues as well as the identity of their expert witness after the conclusion of terms of reference of the arbitration and document discovery.  It is at this juncture that parties should be able to have a good appreciation of any strength or deficiency in their documentary evidence and the scope of arbitration. Such information can be helpful in finding ways to frame the expert issue in the most advantageous manner.

As mentioned earlier in this article, the effort to parse out quantum issues may involve an overly voluminous amount of documentation where the time and effort expended may not always be proportional to the magnitude of the issue in hand. Where parties are expending a level of time and resources that exceed the amount in dispute, this indicates a lack of sense of proportionality and prudence in managing arbitration costs. This should always a point of concern when considering ways in which expert issues can be framed effectively. To this end, parties may be inclined to instruct its quantum expert to examine the “sufficiency of evidence” in respect of quantum claims in dispute. Under this approach, the quantum expert are not expected to measure the quantities in dispute and derive the applicable unit rates. Instead, the quantum expert may only “review” the documentation submitted in respect of the claims and provide an opinion whether the evidentiary value is adequate on the balance of probability. Such documentations supplied to the expert are usually claims advanced by the contractor as well as responses and evaluations by the project consultants. Where the said consultants are not enlisted as factual witnesses, any unquestioning reliance on such documentations may reveal partisanship. Further, critics have argued that the weighing of evidentiary value is a matter reserved for the tribunal and there is nothing technical in this regard. If the tribunal relies upon such expert opinion, it may be argued that the tribunal had abdicated its responsibilities. After all parties had not consented to referring their disputes to the experts. 

How The Laborious Nature Of Quantum Issues Influences Presentation of Expert Issues?

It is quite common for quantum claims to consist of a long list of discrete and separate issues with varying severity and amounts in dispute. Regardless of the amount claimable, each item of claim may involve a considerable list of documents that parties refer to in support of their positions. Usually the particularised list of claims is only be made available during the issuance and exchange of factual witness statements, way after parties have pleaded their respective positions. In order to ensure that the list of claims are well within the scope of arbitration and that the associated claim and defence are presented both exhaustively and comprehensively, Scott Schedule has been a quite useful format of presentation. This also allow the tribunal to focus on major points of contention and identifying the exact difference in parties’ respective positions, whether it is on the issue of quantity of works or unit rates applicable. Therefore in navigating an expert report on quantum issues, one of the primary focal points will be the Scott Schedule and both experts should provide a joint statement to set out their common grounds and areas of differences vis-a-vis the itemised Scott Schedule.

Conclusion

Very often parties instinctively frame and present their respective expert evidence primarily to magnify the merit of their case. In this regard, parties are driven by their desire to adduce the most persuasive and convincing arguments for its substantive issue. Expert evidence is most certainly a central part of this strategy. However, whether an arbitral award may be set aside do not usually depend on the merit of reasoning but rather the procedural integrity in arriving at such reasoning. Therefore the tribunal’s priority may not be completely aligned with the parties’ focus all the time. As regards quantum issues, due to the fact sensitive and document  driven nature of every item of claim, there should be a healthy balance between both substantive and procedural matter.




Koon Tak Hong Consulting Private Limited

Arbitral tribunals are often presented with a list of issues in dispute for determination. As regards construction arbitration, some of these issues are technical in nature which may not traditionally be within the scope of expertise of arbitrators with pure legal background. To this end, the contesting parties usually engage their respective independent experts to provide technical evidence via an expert report presented in a manner that may be of assistance to their case.

This is the first part of a series of articles which aims at providing guidance on how to navigate such expert report that may be of interest to arbitrators, counsels, experts, disputants etc. As each domain knowledge has unique characteristics of its own, these articles will be organised according to various technical subject matters. These technical matters may involve a variety of domains of knowledge such as delay issues, quantum issues, building defects issues, piling issues etc. This article in particular deals with delay issues which are essentially disputes relating to programmes, schedule overrun and associated entitlement to extension of time.

Different parties may appreciate an expert report from different perspectives. First and foremost expert reports are written to assist the tribunal to understand certain technical matters that may be relevant to issues within the scope of arbitration. Apart from providing clarity to technical issues, the tribunal may examine such report from the angle of credibility and independence so that it can decide the extent to which such expert evidence can be relied upon. Where the expert is party appointed, the counsel representing the opposing party may scrutinise such report with the view of identifying both procedural and substantive vulnerabilities for the purposes of cross examination. The expert engaged by the opposing party may dissect such report with the view of finding areas where the experts may be on common ground or have difference in opinion particularly if a joint expert statement is required subsequently. The disputants or its fact witnesses may review such report to ensure that their witness statements provide the necessary factual basis to support the relevant expert opinions. Occasionally supplemental factual witness statements are issued for such purposes, may in and of itself be procedurally problematic. Therefore, an expert report in reality targets a diverse groups of audience and should be drafted in a way that facilitates navigation. 

It cannot be over emphasised that whilst experts may provide their opinion on matters within his scope of expertise, they do not ultimately make a determination on the issues in dispute. This is because one of the primary characteristics of an arbitration is party autonomy. The parties in this regard had chosen their arbitrator(s) who will make a binding determination on the issues in dispute, or at least agree on the mechanism for the appointment of such arbitrator(s). The expert plays a separate and distinct role from the appointed arbitrator(s). This distinction can sometimes be confused intentionally or otherwise, due to the manner in which the issues are framed. This should be one of the overarching focal points when navigating any expert report. The next few sections of this article will provide some context and background on this matter which is particularly common for delay issues.

Delays Are Usually Consequential Effects of Primary Issues

When parties refer their disputes or differences to arbitration, there are usually multiple issues. Amongst these issues, some are considered root cause of the substantive dispute namely ‘primary issues’. The other remaining issues are deemed ‘secondary issues’ because these arose in consequence of the said primary issues. In this regard, delay issues are usually secondary issues. By way of example, suppose the Employer rejects the works done by the contractor over what is allegedly non compliance with specification. Although the contractor disputes such allegation of non compliance with specification, the contractor complied with instructions/ directions subsequently issued by the contract administrator setting out the follow up corrective measures. These events inevitably resulted in schedule delay due to the time taken to carry out those “corrective measures” although each party may differ on the question of culpability. In this regard, the delay issues would not have arisen but for the primary issue of disputes over acceptability of work done. Even under an alternative scenario where there was no issue over acceptability of work done, disputes over delay are still likely to remain as secondary issues. By way of a further example suppose the contractor encounters underground obstruction over the course of its construction works. Schedule delay ensued due to time taken to carry out works or efforts to overcome such obstruction. If the contractor contest whether it should be culpable over such delay, the primary issue remains whether on proper construction of the contract terms, the risk of underground obstruction lies with the contractor. 

The distinction of primary issues and secondary issues matters significantly in that the outcome of secondary issues is dependent on the tribunal’s finding on the primary issues. If the delay issue (which is usually a secondary issue) in an expert report is approached in a way that  presupposes the finding of its primary issue, the report may risk being rendered redundant. Using an earlier example, if the tribunal finds and holds that works done by the contractor was compliant with the specifications and should not have been rejected, the contractor may not be liable for the delays arising from those wrongful rejections. This is of course subject to the contractor’s usual compliance with the condition precedents in the application of extension of time, including the support of sufficient evidence. The delay expert should be alive to this distinction in drafting its expert report so that it is not of limited assistance to the tribunal. If the expert appointed by the Employer assumes or is instructed to assume that the Employer had rightly rejected the works in issue and had offered delay analysis only based on this presupposition, this can be a problem. The expert report should be sufficiently versatile and relevant regardless of the tribunal’s finding on the primary issues. Even when the tribunal does not make a favourable finding on the primary issues, there are other meaningful areas of expert analysis such as whether there were elements of concurrent delays or whether contemporaneous records support the contractor’s entitlement to extension of time etc. It is not uncommon to find that the expert is constrained way before its appointment. This will be illustrated in the next section of this article.

Instructions, Culpability Assumptions And List of Scenarios

One of the most important and notable sections in a typical expert report is the ‘Instructions’.  This section includes a list of expert issues which require the expert’s opinions. How the expert issues are framed in this section will invariably set the direction of the report. If the issues are poorly framed with implicit assumptions, the versatility of such report may be compromised. 

Going back to the earlier example of rejections of works done by the contract administrator over grounds on alleged non compliance with specification, the primary issues are over works done by the contractor that is in dispute. If the expert issue is “whether the contractor had caused delay to the project completion?”, this may invite the expert appointed by the Employer to provide its opinions on matters outside his scope of expertise or make wrongful assumptions due to how general or broad the issue is framed. The expert may assume that the rejections over the scope of works were valid and consequently the time taken to carry out the corrective measures were the cause of culpable delay. Such assumption may be inconsistent with the tribunal’s finding in which case renders the report to be of limited assistance. Alternatively the expert may opined that the works in dispute were indeed non compliant with the specifications on the basis that the contract administrator had taken such position and the contractor “had not offered a viable rebuttal”. Based on such opinion, the expert then proceed to carry out its delay analysis on the premise of culpable delay. In doing so, the expert may not be aware that it had effectively usurp the power of the tribunal by making its own determination on matters outside its scope of responsibilities. Unbeknownst to the expert, the rejections of the works in dispute may be a legal issue over the interpretation of the wordings of the specification or a factual issue over whether the works indeed fell short of the specified standards. None of these issues are strictly speaking ‘delay issues’. 

One of the ways for expert to avoid the pitfalls described above is by having its report be divided based on different scenarios of culpability. By way of example, the expert issue may be framed as “assuming the rejections were wrongful, whether the contractor was responsible for any concurrent delay?”. As mentioned earlier even if the tribunal does not making a favourable finding over the primary issues, the expert report can still be of assistance by examining other matters such as whether there were issues of concurrent delays and whether the contemporaneous records is supportive of the contractor’s entitlement to extension of time. 

Based on a typical procedural time table for an arbitration, the expert issues are not determined at the time when parties’ experts commence drafting their respective reports. The expert issues are in fact determined and framed much earlier. The framing of such issues are largely influenced by the manner in which parties had pleaded their case which could be months before the experts were even appointed. It should also be noted that how parties choose to plead their case is in turn dependent on availability of documentation and records. Parties’ case is usually advanced from the most advantageous position documentation wise.

Expert Opinion Based on Factual Evidence And Documentation Discovery

Expert evidence is essentially the expert’s opinion on technical issues based on his examination of the relevant facts. Whilst an opinion is expected to be subjective, it has to be premised on objective facts that is available to both parties. According to Article 5(2) of International Bar Association (IBA) Rules on the Taking of Evidence in International Arbitration adopted in 2010, the expert report should contain a statement of the facts which the expert opinions are based on, including a description of evidence and information used in arriving at the conclusions. Therefore, an expert’s opinion is usually problematic not because it is subjective in nature but because the factual premise is in issue. The party appointed expert is not at liberty to rely on certain documents that were not previously disclosed under discovery process or unavailable to the opposing party. There should be no element of surprise in this regard since it effectively deprives the opposing party the opportunity of presenting its case by advancing its response or rebuttal. In this regard, it is considered an affront to due process. Therefore in navigating an expert report, one should pay closer attention to the process of arriving at the conclusion than the conclusion itself. After all, the conclusions in expert reports are unlikely to be critical of the party responsible for its appointment and fee payment despite the perfunctory declaration of independence. 

Expert reports usually include a list of documents provided to such expert to facilitate its technical examination and analysis. If the list of such document is not well particularised but presented in a generic fashion, it may be an indication of problem. The burden is on the opposing party’s counsel or its expert to request for an exhaustive list to ensure that both parties are on equal footing as regards documentation availability. As regards delay issues, the more such issues are framed in a precise and discrete manner, the easier it is for the expert to disclose its corresponding supporting statement of facts and contemporaneous documentation. By contrast, if the delay issues are framed generically and in an open ended fashion, the expert may be required to sieve through voluminous documents in order to search for a needle in a haystack. 

Delay analysis are ultimately an examination of a defined list of events that may be causing schedule overrun with both parties contesting the question of culpability. Some of the examples of such events are – (1) the rejection of certain construction works done at a certain point in time during the construction period, (2) the instruction issued at a certain time to vary the scope of works, (3) the delay in provision of access to the required part of the site due to works carry out by other contractors etc. Events that are well identified facilitates framing of delay issues in a precise and discrete manner. Such clarity in turn enables provision of well particularised documentation. Where the expert is instructed on the basis of a clear list of events with accurately defined set of expert issues, the expert avoids the need to embark on a ‘fishing expedition’ by spending inordinate amount of time going through voluminous documents. This has proven to be an effective strategy in not just prudently managing arbitration costs but also ascertaining upfront the methods of delay analysis available for the purposes of the expert report.

Choice of Method of Delay Analysis

During the course of construction, various documents are produced by the parties in relation to progress of works e.g. baseline programme, contemporaneous programme, interim progress reports, site diaries, instructions from the architects, resource charts, construction method statements, progress payment certificates etc. Each type of documentation offers a unique snapshot of the actual conditions on site at the material time. As a general rule, the more documentations are disclosed and made available to the parties, the more options are available to the experts in selecting the most appropriate method of delay analysis. Whilst there are no specific  restrictions under the law on the type of method that is “legally recognised”, some industry guidelines, norms and common practices may be of assistance. By way of example, the second edition of Society of Construction Law Delay and Disruption Protocol dated 2017 offers at least six credible options in respect of delay analysis. These methods include (1) Impacted As-Planned Analysis, (2) Time Impact Analysis, (3) Time Slice Windows Analysis, (4) As-Planned vs As-Built Windows Analysis, (5) Retrospective Longest Path Analysis and (6) Collapsed As-Built Analysis.

Whilst there is no intention to expand on the merits and characteristics of each and every delay analysis option in this article, it is suffice to say that the richer the documentation details, the more persuasive and credible the analysis can potentially be. A persuasive delay analysis is usually one where the critical path of the project schedule is consistent with the details reflected in various contemporaneous project records. This in turn enables a logical depiction of the delay impact of the events identified. By contrast if the claimant that shoulders the burden of proof is constrained by inadequate documentation, the expert can at best embark on a desktop modelling of a theoretical critical path and thereafter apply such “impact” on the modelled critical path with the events identified. It is likely that such theoretical approach will give rise to various inconsistencies with contemporaneous project records. 

Some critics however may differ with the perspective above and take the position that just because certain analysis method is considered theoretical, it does not necessarily mean it is less credible. As alluded to earlier in this article, the expert evidence is ultimately an evaluative opinion that is inherently subjective. Most standard conditions of construction contract do not include an agreement of the specific method to analyse any given delay. The project records such as site diaries, interim progress reports, correspondence etc are not entirely immune to human errors. Inconsistency in and of itself is not fundamentally fatal to the reliability of an expert report. Taking this argument to its logical conclusion, the expert opinion comes into play when the factual evidence is not entirely complete and the technical assessment connects the factual dots via a complementary analysis. In other words, an expert’s opinion is particularly valuable when there are gaps in the factual matrix. The expert evidence works hand in hand with factual evidence.

Main Contract Delay vs Subcontract Delay

Whether the delay issues arise out of a main contract or subcontract can fundamentally influence the line of enquiry and direction of technical analysis of an expert report. Whilst most typical construction projects are undertaken by a single main contractor, most if not all of the actual works are outsourced to subcontractors. The main contractor’s unique value proposition is in relation to an overarching management, coordination and supervision of multiple subcontractors working concurrently and sequentially on site. In order for a main contractor to be effective, it consistently and regularly produces multiple types of reports, programmes and other similar types of documentation. This is part and parcel of main contractor’s risk management approach which is not necessarily adopted by the subcontractors. 

In this regard the main contractor is typically in possession of wider array of documents that may be relevant to both main contract delay disputes and subcontract delay disputes. This can be illustrated by the following examples. A main contractor may have a delay issue with its brick work  subcontractor over the latter’s inability to complete its brick works according to the subcontract programme. However even if such brick works are purportedly on the main contract’s critical path, the subsequent screeding and painting subcontractor may not be ready to take over the completed brick work as planned over issues unrelated to the brick work subcontractor. In other words, the overall project completion is likely to be delayed even if the brick work subcontractor had no delay issues. The brick work subcontract is arguably inconsequential to the project completion in so far as the subcontract adopts a general damages approach. However as subcontractors do not maintain and control the project’s master programme, these important details could be suppressed. In other words, there could be an asymmetrical information relationship between main contractor and its subcontractor. Likewise, if the Employer is making design changes that have ripple effect over the master programme, the main contractor could be making an application for its extension of time without necessarily updating the subcontractors of these dynamic realities. Once again, the subcontractor may not be in the position produce all relevant documentation if and when the subcontractor refers its dispute to arbitration. Whilst the subcontractor’s counsel may request for the relevant documentation during ‘discovery’ phase of the arbitral proceedings, there is a chance that it may not be successful on the basis that it “lacks relevance” to the subcontract issue in hand. All the above can directly impact the delay expert’s ability to examine and analyse the actual contemporaneous circumstances relating to the delay issues.

The information asymmetry between contesting parties are less obvious in the case of main contract dispute between the Employer and the main contractor. This is because, the project master programme is regularly monitored by the project consultants engaged by the Employer and all subcontract level disputes are not relevant to the Employer on account of contract privity. Therefore, any expert engaged by the Employer for main contract arbitration may face less constraint than those disputes at subcontract level. In summary, when one is navigating expert reports on subcontract delay disputes, it will be advisable to examine the extent to which master programme and project wide reports are included in documentary discovery. There is a distinct difference between known unknowns and unknown unknowns.

Conclusion

Navigating an expert report on delay issues is a classic case where it demands a good understanding of principles of substantive law, procedural law, technical knowledge of construction works and sharp commercial acumen. The more such report is examined from different perspectives, the more insights can be uncovered.




Koon Tak Hong Consulting Private Limited

There are considerable differences between SIA Building Contract and PSSCOC in respect of the ways in which extension of time clauses operate. Under these contract forms, notable differences exist particularly in relation to grounds or events entitling time extensions, notification requirements and the option for prospective delay analysis. This article is part 7 of a series of articles comparing the main contract standard conditions of the SIA form published in 2016 and the PSSCOC published in 2020.

As the PSSCOC is commonly used for public sector projects utilising public funds whilst the SIA form is primarily used for private sector projects, the risks allocation philosophy as regards delay differs accordingly. Although the PSSCOC provides additional ground for entitlement to extension of time, its associated notification requirement also entails considerable details and information pertaining to the delaying event. These features could be due to the additional need for transparency in publicly funded construction projects. 

Extension of time clause in essence allow the original practical completion or phase completion date, as the case may be, to be extended if the project schedule is delayed through no fault of the contractor. This provides contractual relief to the contractor from being liable for liquidated damages. In reality however the extension of time clause primarily benefits the Employer as it preserves its right to impose liquidated damages by establishing an extended completion date. Without the extension of time clause, there will be no extended completion date causing the time to be at large. Despite the differences in the operations of extension of time clauses between the SIA form and PSSCOC, the fundamental purpose for time extension remain unchanged between these contract forms. To this end, some of the common features of SIA and PSSCOC will be explored in the next section of this article so as to establish a basic premise of how the extension of time clause works.  

Common Features of Extension of Time Clauses Between SIA and PSSCOC

A construction contract typically stipulates a time frame within which the contractor shall complete the agreed scope of works failing which the Employer may recover liquidated damages. If the Employer breaches the contract by preventing the contractor from performing its works resulting in delay, the Employer is in principle is not entitled to recover damages from the contractor. The extension of time is effectively a contractual remedy for the Employer’s breach by extending the construction duration, thereby allowing the liquidated damages to continue to be applicable but from a new completion date. There are also situations where the construction duration may be extended if the delaying event is ‘neutral’ where neither parties were at fault e.g. inclement weather, pandemic etc. Therefore one of the common features of extension of time clause is a list of grounds that entitle the contractor to an extended completion date which comprises both neutral events and the Employer related events. In other words, the contractor is not in culpable delay under these circumstances. 

The second common feature of extension of time clause is notification requirement. This is in general a mandatory requirement imposed on the contractor to notify the Employer and its agent within a prescribed duration from the occurrence of the event included in the grounds for extension of time. The contractor’s entitlement to any extension of time is strictly subject to compliance with such requirement, i.e. such notification is a condition precedent. Where the delaying event is caused by the Employer e.g. variation, late site possession by the contractor etc, such condition precedent provides an opportunity to the Employer to take corrective measures in an upfront manner to either avoid the delay entirely or mitigate the delaying effects where possible. The contractor is usually in a better position than the Employer in detecting potential delaying events occurring on site. 

Delay analysis and subsequent identification of any time extension are matters of professional assessments that involve subjective evaluation. The ‘Architect’ in the case of SIA Building Contract or the ‘Superintending Officer’  in the case of the PSSCOC are contract administrators that are empowered to certify any extension of time to the contractor. They are however the Employer’s agent who are paid and engaged directly by the Employer. This gives rise to a conflict of interest. Therefore, under both English common law and express conditions of the contract, these contract administrators are required to discharge their certification functions in an impartial, fair and neutral manner. In other words, they wear two hats under the construction contract – one as an agent, the other as an independent certifier. This is yet another common feature found in both the extension of time provisions of the SIA form as well as the PSSCOC. 

Having established some key common features of extension of time clauses under SIA form and PSSCOC, the next few sections of this article explore the notable differences in the respective operations of these clauses.

Adverse Physical Conditions/ Unforeseen Ground Conditions

Clause 14.2 of the PSSCOC sets out the grounds which may entitle the contractor to extension of time. Clause 14.2(p) is a unique ground that deals with adverse physical conditions as defined within its Clause 5.2. Adverse physical conditions refer to underground obstructions. This is particularly relevant for PSSCOC since public sector projects may well include subterranean infrastructure works such as tunnels or foundation works. There is no equivalent ground for extension of time included under the SIA form. Further, Article 8 under SIA form states amongst others that the contractor’s rates and prices included in its contract sum shall be inclusive of all expenditures even it is not specifically mentioned in the contract document which may contingently become necessary to overcome difficulties in completing the works. Therefore for projects under SIA form, if underground obstructions are subsequently discovered that are neither included in the contract document nor any of its contract drawings, there is a strong argument that such risk is shouldered by the contractor with no entitlement to additional payment or extension of time. 

The risks associated with adverse underground conditions could refer to either obstructions posed by existing cable and pipe services, natural boulders or even difficult soil conditions such as marine clay. These risks if materialise can have significant impact on the project schedule, amongst others. Additional foundational support or the need to re-route the existing works may be necessary in order to overcome such adverse physical conditions so as to achieve project completion. 

Whilst contractor under the PSSCOC may relish at the idea of not being burdened by the risks of adverse physical conditions, it is worth noting that the grounds for extension of time is only applicable where the event was ‘unforeseeable’. Under Clause 5.2, the adverse physical condition could not have been reasonably foreseen by an experienced contractor. Since the contractor is the party making claim for extension of time, it is up to the contractor to demonstrate that the event in question was not foreseeable despite its best effort in carrying out due diligence to the level expected of an experienced contractor. Although the question of foreseeability is undeniably a subjective matter, the contractor will be greatly assisted if it had taken the effort to thoroughly review any existing as built records relevant to the grounds of the project, requesting for additional documentation during tender that may assist with its investigation and to have these requests documented in writing. 

In reality, the delaying effect of underground obstruction can be extremely significant especially if it results in the need to re-design any of the diversion route, to investigate the actual magnitude of obstruction and also the associated construction works to effect the alternative design. Given such protracted duration, it is likely that other delaying events may occur concurrently during this period some of which could be due to the contractor’s own default. Even if those concurrent events are excusable and qualify for extension of time, the burden is on the contractor to ensure compliance with condition precedents to preserve its right to time extension. As a matter of practical concern and prudence, the contractor should produce sufficient amount of evidentiary records and contemporaneous programmes during this period. The entitlement to extension of time does not always result in actual grant of sufficient time extension. All these efforts on the part of the contractor is to avoid the argument that whilst the contractor is in principle entitled to extension of time for unforeseen ground conditions, the contractor was in culpable delay in any case due to concurrent events. 

Notification Requirements/ Condition Precedents

As mentioned earlier, the notification requirement differs quite significantly between the SIA form and the PSSCOC. Pursuant to Clause 23(3)(a) of the SIA form, the contractor shall provide its notification within 28 days of the occurrence of the delaying event which he considers excusable whereas the contractor under Clause 14.3(a) of the PSSCOC shall do so within 60 days. So why is the prescribed duration under PSSCOC almost double that of the same duration under the SIA form? The short answer is that the level of information expected from the contractor is considerably higher under the PSSCOC. 

Under Clause 23(3)(c) of the SIA form, the contractor shall provide a sufficient explanation to the Architect in its notice, the reasons why there shall be delay to completion. As what exactly constitute ‘sufficient’ explanation is not explicitly defined, this quite possibly indicate that the contractor need only to provide a brief narrative of the nature of such delaying event and the fact that such event is on the critical path of the prevailing construction programme. Interestingly, the subsequent Clause 23(4)(a) of the SIA form appear to put the onus on the Architect to request for sufficient explanation, information, particulars or materials so as to enable him to ‘estimate’ the period of time extension. Therefore, the Architect will be hard pressed to accuse the contractor for not complying with Clause 23(3)(c) for reason of insufficient explanation, when there is an explicit alternative avenue for the Architect to request the same from the contractor. Further, the immediate priority for the Architect upon receipt of such notice and the associated explanation is merely to estimate the extension of time rather than the formal time certification. Therefore when the notification requirements under the SIA form is viewed in its entirety, the 28 days duration does not appear unreasonable. 

Whilst Clause 14.3(1) of the PSSCOC appears to provide a more generous 60 days notification duration, the burden of reporting and disclosure on the contractor is noticeably heavier. In this regard, the contractor not only has to provides reasons for the possible delay but also (1) length of delay, (2) duration of extensions of time required, (3) the effect of the event on the programme accepted. It should be noted that according to Clause 14.3(5), the contractor is neither entitled to claim a greater extension of time than that notified under the initial notification in any future arbitration nor advance new/ additional grounds not initially submitted under the same initial notification. Therefore, the contractor is expected to carry out its own due diligence and delay analysis in a full and comprehensive manner, far more seriously than a mere advance warning or early notification to the counter party. In other words, the contractor is not at liberty to include the usual disclaimer that such claim is advanced on a “without prejudice” basis. It is not uncommon that the prevailing programme reflective of the actual progress on site is different from the version that was formally accepted and agreed by the parties under Clause 9. Therefore, the contractor under such circumstance is required to first get a formal approval of its prevailing programme pursuant to Clause 9 so as to demonstrate the disruption or delay to such programme. It is no surprise that where the project is in delay, parties may find it hard to agree on much of the timeline issues which could complicate the approval process for a contemporaneous programme under Clause 9. Where there are concurrent delays occurring on site with one event following very closely with the subsequent event, the cumulative delaying effects complicate matter. The contractor may not be entirely certain if the back log of previous events had been granted with any extension of time and if so how it should reflect the impact of subsequent events. Any prior events that had not been granted with extensions of time materially affect how the prevailing programme should be presented. Again, this will have very real impact on the contractor’s ability to discharge its reporting and disclosure responsibilities under the notification requirements. It should also be noted that since the 60 days notification duration is triggered from the occurrence of the delaying event and that the contractor is required to submit the delaying period and time extension required, this may not be feasible if the event in hand has delaying effect continuously beyond the 60 days. The contractor may not be able to predict with certainty the delaying effect in its entirety if such event continue to be in progress when the notification deadline expires. 

The difficulties with which the contractor is expected to comply with the above mentioned notification requirement underscores the need for an impartial and independent certifier for the contractor to be treated fairly and reasonably. 


Prospective And Retrospective Grant of Extensions of Time

Most extension of time provisions are retrospective in nature in that the notification, information disclosure and subsequent assessment of the delaying event take place after the occurrence and delaying effect of such event had completed. The parties’ focus is on the chronological order of events from a backward perspective. The simple logic to such enduring practice is that one is only able to take a comprehensive view of the delaying matters after its full and complete details had crystallised. 

The extension of time provisions under the SIA form and PSSCOC are primarily retrospective. However, Clause 14.2 of the PSSCOC provides an additional option for the Superintending Officer to extend project’s time for completion prospectively. This prospective option is unique only to PSSCOC. The advantage to a prospective approach is upfront certainty where the parties are aware of the outcome of whether an event is excusable and if so, whether time extension is granted accordingly. This in turn allow a contemporaneous programme to be updated thereby ensuring that parties are “on the same page” in so far as schedule issues are concerned. If and when further delaying events occur, its effect can be benchmarked and measured from an agreed set of programme, thereby mitigating the scope of dispute. This is particularly useful in large and complex construction projects.

For those who do not favour a prospective approach, they typically have issue with the likelihood that any grant of extension of time may not have taken into consideration full and complete material information. This is because the certifier under a prospective approach had not made his determination with the benefit of a complete picture since the delaying event could have just occurred and the associated delaying effect has not taken its full course. To the extent that there are extenuating circumstances that could have afforded the contractor to additional time extension, such risk had to be balanced with the benefit of parties having upfront certainty of schedule issues. 

It is perhaps fair to say that the retrospective approach are typically rooted in the principle of fairness and equity where the claimant is given reasonably opportunity to present the merit of its claim within the framework of rights and obligations under the contract. On the other hand, the prospective approach is influenced by what is the most commercially sensible course of action so as to minimise the time and expense parties may expend for the purposes of dispute resolution. In this regard, the certifier appointed under the contract is also acting as an agent based on the interest of his principal, i.e. the Employer. From time to time, what may be commercially expedient may not always be the fairest approach.  

In Principle Determination Of Any Entitlement to Extension of Time

The formal certification of extension of time is commonly made after the project is completed particularly for large project with a significant number of delaying events. Under Clause 14.2 of the PSSCOC, the Superintending Officer may grant any extension of time after the project’s time for completion whereas Clauses 23(4) and 23(5) of the SIA form provide similar latitude to the certifier. Whilst it is natural for contractor to be eager to receive the outcome of its application for time extension, the certifier on the other hand is likely to err on the side of caution by taking as much time as necessary to make his determination. In order to strike a healthy balance between these competing desires, the SIA form made a unique provision that is not available under the PSSCOC.

Under Clause 23(3)(d) of the SIA form, the Architect shall inform the contractor of whether he considers the contractor is in principle entitled to an extension of time. This in principle intimation allows the contractor the relief that its application is viewed favourably but at the same time does not impose any pressure on the certifier to make a determination until he is ready to do so. The Architect shall provide his in principle determination upon receipt of the initial notice or compliance of the condition precedent and within 28 days of such request from the contractor citing Clause 23(3)(d) specifically. It should be noted that Clause 23(4)(d) subsequently clarifies that the Architect shall not be required under Clause 23(3) amongst others, to decide and estimate the period of time extension to be granted until he receives all necessary particulars and information requested. Therefore it is possible that if the delaying event is one that is complex and more information may be forthcoming, the Architect may refuse to provide any indication of the in principle entitlement. Whilst this may not offer any substantive relief to the contractor, it is useful to the contractor to understand what outstanding information may be relevant to the Architect’s delay analysis and be in the position to assist with the production of such information. In other words, no news is not always bad news. 

The possible reason why such in principle determination is not found under the PSSCOC may be due to the existence of the option of prospective grant of extension of time. Although the prospective approach may mean that the certifier makes his decision without complete set of information since the delaying event continues to operate, it offers upfront certainty to the parties which can be commercially valuable. This certainty is quite similar to the in principle determination found under the SIA form. 

Conclusion

The overall difference between SIA form and the PSSCOC on the subject of extension of time is quite significant. Where the responsibility in respect of notification, reporting and disclosure are rigorous such as in the case of PSSCOC, the contractor should be prepared accordingly. Unfortunately most contractors do not practise a robust claims management that is bespoke to the form of contract being used. It cannot be overemphasised that time extension is rarely a standalone issue because any time is often associated with significant financial ramifications. Apart from being excused from liquidated damages, it could be a precursor to claims for loss and expense.




Koon Tak Hong Consulting Private Limited

Construction contracts typically stipulate the contract sum required to complete a defined scope of works within an agreed duration of time. In Singapore, construction contracts are usually structured based on a fixed lump sum since it is important for both parties to have certainty in the cost that they either had to pay or will be paid for the project. Parties are usually not at liberty to review and amend the contract sum after the agreement is formed since it defeats the purpose of having an agreement to begin with. 

Price fluctuation clauses therefore appear to be at odds with the fabric of this very principle. In essence, price fluctuation clauses allow parties to adjust contract sum if market price of certain specified construction material fluctuates during the construction period. For proponents of this mechanism, it provides an equitable financial relief for events beyond the control of the parties thereby avoiding excessive risk pricing on the part of the contractor which in turn would benefit the Employer as well. For critics of this mechanism, whilst price fluctuation clauses provide a veneer of an equitable risk sharing practice, the implementation details suggest that it falls short of the purported benefits. This article aims to critically examine the perceived shortcomings so that even if one is an ardent proponent of price fluctuation clause, it will help to enhance and improve the agreed mechanism. 

To be clear, it is quite common to require contractors to keep its tender price fixed for a period of time or to have its contract sum fixed for the construction period despite the fact that market prices are expected to vary organically due to natural function of demand and supply. However, price fluctuation clause usually comes into the picture when there is an expected significant swing in certain construction costs due to nation wide event that affects the industry as a whole. Examples of such events include pandemic related construction activities restrictions or export restriction of land sand to Singapore by neighbouring country that significantly affect the price of concrete. Under contract law, the term ‘frustration’ refers to an unforeseen event occurring after agreement is concluded that renders contractual performance by either party fundamentally different from what the parties originally intended. These events occur under exceptional circumstances where parties are released from their future obligations with no entitlement to damages apart from payment for work already done. Therefore, some may argue that if those nation wide events occur, the contract may well have been ‘frustrated’. Admittedly a contract can only be frustrated if those unforeseen event occurs after contract formation. However price fluctuation clauses are put in place in response to certain nation wide events happening prior to contract formation. Therefore construction contracts that are already in force at the commencement of those nation wide events are usually “encouraged” by the authorities to adopt a standardised price fluctuation clause as a means of dealing with what could have been contract frustration.

The Workings Of Price Fluctuation Clause And Limitations To Its Mechanism 

One of the first ingredient to implementing price fluctuation clause is identification of the type of construction costs that will be subject to price adjustments. This typically refers to the price of certain construction material incorporated into the works. The scope of price adjustment could be on a standalone basis or in a blend of several materials. By way of example in Singapore, the price of ready mixed concrete for public sector project is subject to price adjustments whereby it is essentially a combination or blend of cement, sand and aggregate. The choice of subject of price adjustment in this regard is important as it should be widely used in the project and has a significant weightage in respect of the overall construction costs. Structural works constitute roughly 20% -25% of the overall construction costs for most typical building construction projects. This structural costs could be further split somewhat evenly between cost of material (e.g. ready mixed concrete, reinforcement bars), concreting machinery and labourers. Therefore, the likely cost for ready mixed concrete may well be around the ballpark of 7%-8% of overall construction costs. If the price of ready mixed concrete fluctuates by 10%, the range of price adjustment relative to the overall construction costs may well be under 1%. Purely from a mathematical perspective it is understandable why different construction practitioners may differ on the significance of such price adjustments mechanism. It is therefore up to the parties to choose the cost component wisely so that the price adjustment effort commensurates with the benefit. As pointed out earlier in this article, sometimes the impetus behind price fluctuation clause is due to specific nation wide event that could involve a single type of construction material such as the cost of land sand. The practice of parties negotiating the scope of price fluctuation clause out of their own commercial volition is not quite common. Therefore, the choice of which cost component to have its price adjusted is usually not decided by the parties but driven by nation wide events outside their control. 

The second ingredient in the implementation of price fluctuation mechanism is an agreement on what constitute both the ‘base price’ and ‘market price’. The difference between ‘base price’ and ‘market price’ is essentially the range of price adjustment. By way of example, if the contractor submits its tender offer based on $100/m3 of certain grade of ready mixed concrete, this constitute the base price. Since contractors are paid on monthly basis, the market price of such ready mixed concrete for any given month constitute the market price. Assuming the market price for a particular month is $110/m3, the range of price adjustment is $10/m3 for every m3 of ready mixed concrete delivered to site for that month. As with most things in life, the devil is in the detail. Some have argued that the base price should be the price of ready mixed concrete at the commencement of construction period rather than the date of submission of tender offer. This is because tender offers are usually required to be fixed for a period of 90 days or 120 days. Therefore the tenderer undertakes the risk of a fixed price during this period. The next issue is whether the market price should be based on the date on which the specified material is delivered to site. This is because there is a general drive to improve productivity of construction industry by having prefabricated building components manufactured off site and only to have these components delivered to site when these are ready for on site assembly and installation. If the price adjustment only takes place at the point of site delivery, any hope for a timely equitable price relief is diminished significantly. In fact, this could reverse the incentive for contractor to adopt prefabrication of building components, compromising the productivity drive. Finally, there is a more fundamental question of what constitute ‘market price’? If there are ten established suppliers of ready mixed concrete in the market that compete with one another with the best price and have differing market share, how should an industry average price be derived? If the agreement is to refer to a published market price indices, it is likely to be derived based a statistical tool that utilises the element of volume weighted average price that takes into consideration market share and monthly transacted volume in deriving the average price. In reality however, the contractor concerned may have transacted with its supplier based on its very own bargaining power rather than based on a theoretical average price. There will be some statistical arbitrage depending on the actual bargaining power of the contractor. 

Other Provisions That Also Offer Price Adjustments Relief

How common do contractors get financially aggrieved by getting paid based on contract prices when these are lower than prevailing market prices? This is one of the objective measures on the necessity of implementing price fluctuation mechanism. Where there are existing contract provisions that offer similar price adjustment financial relief, are contractors genuinely dependent on price fluctuation mechanism? As variations to the scope of works are often instructed in projects, most construction contracts have fairly detail and established valuation mechanism. Under rules of valuation of variations, there are allowances for contractors to be paid above and beyond its contract rates under specified circumstances. By way of example, where the variation works are not executed under similar conditions as originally contemplated under the contract, the contract rates may be extrapolated to account for fair allowances due to differences in conditions. There are also situations where contractors are paid based on its actual cost incurred for the deployment of plant, materials, labour and other additional equipment necessary for the said variation works. It should be noted that where the contractors are afforded compensation beyond its contract rates, they are permitted to adjust and increase their pricing beyond its original bargain. As most price fluctuation mechanism are specific to construction material such as ready mixed concrete or reinforcement bars, it is arguable that valuation of variations are more generous and all encompassing in that it compensates not only material costs but also inclusive of labour costs and equipment costs. This is because, the contract rates are usually composite rates which consist of a blend of material, labour and equipment costs. 

Since valuation of variations are not confined to one or two specific construction materials identified under price fluctuation clauses but includes all costs necessary for the variation works, can it be considered an equivalent substitute in so far as price compensatory provision? Some may argue that price fluctuation mechanism is neither equivalent nor comparable to valuation of variations. Firstly, price fluctuation mechanism is triggered regardless of whether any instruction for variations had been issued. It is essentially a compensation provision where works are done in accordance with the originally agreed scope. Secondly even if variations are indeed instructed, not all such varied works would qualify for additional compensation beyond the contract rates. Additional compensations are only applicable on a case by case basis. Others however may disagree with the perspectives set out above in that price fluctuation mechanism are usually implemented for projects that are executed over a considerable duration of time, which meant that it involves projects of considerable size and scale. These large projects are usually subject of frequent variations in scope of works because design developments are usually complex and could continue to take place even after project is awarded. These variations are effectively post contract design developments. Whether variations are subject to additional compensation beyond unit rates are primarily benchmarked against the approved baseline programme. This is because any deviation from original schedule is an objective measure of carrying out works under different conditions. Unfortunately large projects are rarely carried out in strict accordance with the approved baseline programme from inception to completion, therefore opening up various opportunities for valuation of variations that could utilise prevailing market prices instead of contract prices. Price fluctuation mechanism on the other hand are usually in operation over a shorter period of time where it only applies to specific types of construction material such as ready mixed concrete. Once the structural works are completed, the mechanism is no longer applicable. 

Since the two competing views above have its own merits, it behooves the contractor to view any price compensatory clauses such as price fluctuation mechanism or valuation of variations based on contract as a whole. Even if the price fluctuation mechanism proposed may not be up to the commercial satisfaction of the contractor, it should balanced its view with alternative provisions that may offer similar pricing relief. Such commercial flexibility is essential in navigating negotiations effectively. 

Do Quantities Of Works Matter Under Lump Sum Contract’s Price Adjustments? 

Under traditional lump sum contract, quantities of works are measured by the tenderers based on tender drawings, specifications and descriptions of scope of works included in the tender documents. The tenderers do so at their own risk because if the quantities that the selected contractor relied on is erroneous due its own measurement mistakes, there is no entitlement for additional payments based on the actual quantities. This is in stark contrast to tenders with bills of quantities where the Employer and its consultant measure the quantities for the tenderers to rely on in their respective pricing exercise. In this case, the quantities formed part of the contract and the contractor is entitled to additional payment in case of under measurement. Such bills of quantities form of procurement is anecdotally less commonly adopted due to the risk it presents to the Employer. 

Given the above and how traditional lump sum contracts are widely used in the construction industry, these beg the question of how does the absence of contractually binding quantities affect the mechanism of price fluctuation clauses? Mathematically, the range of price adjustments are multiplied against the relevant quantities of works carried out over the construction period so as to effect the price fluctuation mechanism. By way of example, if the total quantity of ready mixed concrete for the entire project is 1,000m3 and the average range of price adjustment is $10/m3, the contractor is entitled to additional $10,000 in consequence of the price fluctuation clause. What if the contractor had under measured during tender the quantity of ready mixed concrete at 900m3? Should the contractor be responsible for such under measurement and be entitled to additional payment only at $9,000 based on the average range of price adjustment of $10/m3? Under most traditional lump sum contract, the contractor is not required to disclose its measured quantity that it relies on since such quantity is “non binding” contractually. However, the practical application of price fluctuation clause requires a disclosure of the nett quantity of work for the project in hand that will be subject to price adjustment. This is because the Employer is unlikely to agree to pay additional money via price adjustment relief for quantities above and beyond the project’s scope of works. Price adjustments are usually applied to nett quantity exclusive of any wastages. Therefore quantities included in delivery invoices are usually not relied upon for the purposes of price fluctuation clause. The sensible compromise appears to be an agreement between the consultant quantity surveyor and the contractor on the applicable quantity of works based on their respective measurements. This however meant that there is effectively an avenue for the contractor to amend its quantities of work, reversing its risk of any under measurement of quantities, which should not be the intention of any price fluctuation clause. 

To most construction practitioners from non quantity surveying background, the issue of quantity of works appear unnecessarily complex since measurement based on tender or contract drawings is an objective exercise where different parties should arrive at the same figure. In reality, difference in quantities between parties is quite common particularly for larger project and parties do spend considerable amount of time trying to reconcile their differing figures. This is why under certain circumstances, the Employer is willing to adopt a tender using bills of quantities to eliminate the prospect of different tenderers relying on their own measured quantities that are likely to differ.

Price Fluctuation Adjustment Pending Any Grant of Extensions of Time

Apart from providing relief payments to contractors for fluctuation in market prices, price fluctuation clauses also serve an important function of assisting with the contractors’ cashflow. As regards cashflow, the key is ensuring payments to contractor for price adjustments are made in a timely manner, typically on a month by month basis. To the extent that contractors genuinely rely on these relief payments to support their project cashflow, any delay in access to these payments defeats the very purpose of having these clauses to begin with. The quantum of payment is just as important as the timing of payment. To this end, it is useful to note that most price fluctuation clauses cease to apply after the time for completion or any extension thereof. In other words, to the extent that the project remains incomplete after the original (or extended) practical completion date, the price of the specified material or construction works will no longer be adjusted upwards or downward. In essence, the contractor under such circumstance is deemed to be in culpable delay. Presumably the contractor’s breach of its obligation negates or nullifies its entitlement to assistance of payment. These arrangements raised a few interesting observations.

Firstly whilst the wording of most price fluctuation clauses expressly state that its mechanism cease to apply either upward or downward in price fluctuation, contractor’s only receive relief payments when market price moves upwards. By contrast, the contractor is required to pay credit to the Employer to the extent that the market price moves downwards. Since the mechanism is strictly speaking a double edged sword, why should it cease to apply when the contractor is deemed to be in culpable delay? Why should the Employer not benefit from the price fluctuation clause in this regard? Some may argue, quite validly that in essence price fluctuation clause are primarily aimed at providing payment reliefs to the contractor than it is for the Employer’s cashflow benefit. This is why price fluctuation clause comes into the picture when there are nationwide events that are likely to drive the price of the specified materials or construction works upwards. In other words, the wording of such clauses are not entirely reflective of the actual motivation. 

The second observation is that most extensions of time clauses under standard forms of contract are retrospective in nature. This mean that the certifier appointed under the contract is not under a mandatory requirement of performing its delay analysis prior to project completion. The certifier may well, grant any extension of time if any after the project is completed but prior to closing of the project final accounts. The certifier typically favours such approach in that he can refer to all evidence, site diaries, records, correspondence, programmes etc to make a holistic assessment based on complete set of facts. Therefore, the actual culpability of the contractor in case of schedule overrun is not determined, at least from the perspective of the certifier until the project is in its defects liability period or maintenance period. Consequently, the contractor that may be deserving of extensions of time is not entitled to payment reliefs from price fluctuation clauses until the tail end of the project. This raises doubt on whether price fluctuation clauses could genuinely assist the contractor in so far as project cashflows are concerned if the extension of time clauses are at odds with it.

Conclusion

The financial construct of price fluctuation clauses is usually aimed at providing equitable payment relief but its effectiveness is rarely cut and dry. There are various details that parties ought to be paying attention to so as to ensure that the provisions work in accordance with the altruistic intentions. There is nothing standard about standard clauses.




Koon Tak Hong Consulting Private Limited

Civil engineering and infrastructure projects that are carried out underground such as construction of train tunnel and the associated train stations are extremely complex and challenging for two main reasons. Firstly, the nature and extent of works are largely unknown despite the best endeavours in due diligence and soil investigations prior to commencement. The initial engineering design of a tunnel from point A to point B could be a straight line but may end up in a zig zag pattern due to the requirement of diversion to avoid existing subterranean pipes and services, building foundations or even boulders. The actual works carried out by the contractor could end up being much more than originally contracted for resulting in budget overrun and delays. The second reason for the complexities and challenges of such project is the difficulty in deciding how to fairly allocate commercial risks between the parties. If the underground risks are fully allocated to the contractor, the excessive risks may give rise to unrealistically exorbitant pricing. To the extent that such risks do not materialise in the actual execution, this could be imprudent waste of financial resources. On the other hand if the risks are completely shouldered by the Employer, the contractor may not be incentivised to seek the most cost effective way of overcoming those challenges. Some may question whether the Employer is in the best position of assuming the execution risks when it is not physically carrying out those works. Therefore there is a general recognition that an element of risks sharing is necessary. But the question is how? 

The building construction projects exhibits the opposite profile as compared to underground infrastructure works, although these are usually categorised and conveniently bundled under the same construction industry. As regards building construction, apart from substructure foundation works, most of the superstructure works can be determined more accurately based on its architectural and structural design. As an example, the amount of concrete slab to be constructed will be exactly the same as shown on the structural engineering drawings, unless there is a conscious decision to change the design. Therefore, the level of uncertainty is low and manageable resulting in a less contentious risk allocation between the contractor and the Employer. Contractors are usually not averse to taking on a lump sum contract by getting paid based on a fixed price given a defined scope of works. Even if the Employer is inclined to allocate the entire execution risk to the contractor for a building construction project, the price increase is likely to be manageable. 

It should be noted that most standard forms of contracts used in the industry are largely influenced by the risk profile of building construction projects especially in Singapore. This begs the question of whether the conventional contract form used in Singapore such as PSSCOC, SIA form and REDAS form are suitable for construction of underground train stations and tunnels? The issues raised above will be examined in further detail in this article.

Challenges Of Underground Construction Works

The train tunnel traversing across a densely populated urban landscape can be an engineering feat considering the subterranean depth through which works had to be carried out. By way of example in Singapore, the deepest tunnel is located 43 metres underground or roughly equivalent to the height of a 14 storeys building. It can be tricky when engineering works are carried out under such depth particularly when soil movements could cause uneven settlement if done without adequate protection, ground treatment and stabilisation. It is not difficult to envisage the catastrophe that this may cause to structural integrity of existing surrounding buildings when deep excavations are conducted in densely populated environment. However some of these depths are out of necessity and intentional. The rationale behind such depths are amongst others for avoidance of existing building foundations, services cables in operation, nature reserves and also the fact that train stations had to be sufficiently deep to be effective as a bomb shelter in case of war and emergencies. 

Excavation or tunnelling works become proportionally more challenging  with the increase in depth especially with adverse soil conditions such as marine clay. According to literature, marine clay could cover more than 25% of the area of Singapore and is often associated with poor soil properties that are not suitable for engineering requirements. Marine clay is often characterised as having “toothpaste” like texture and properties. This complicates engineering and design of underground works. The associated challenges include difficulty in identification of depth of diaphragm wall sufficient to reach the main load bearing stratum, additional monitoring instrumentation required to detect soil movement, potential presence of subterranean structures that requires revision in design calculations of loading and structural support. Unlike conventional building construction where execution risks can be reduced considerably with sufficient design, underground engineering works could only be designed based on best information available prior to construction. Therefore, even under traditional design-bid-build procurement route, the engineering consultants are usually expected to improvise its design as construction works unfold. Consequently the contractor is also required to adjust and amend its construction methodology and sequence of works to cater to these underground surprises. 

In order to minimise disturbances and uneven settlements to the ground level surface, tunnels are usually constructed through the underground bedrock which is usually far deeper than conventional basement of buildings. A tunnel boring machine had to be deployed so as to excavate a tunnel through hard rock surfaces using its robust cutter head. Once a certain manageable boring length is achieved, a prefabricated reinforced concrete ring is installed to form a tube encasing to solidify the excavated tunnel. Whilst this method solves one problem, it inadvertently creates another problem. This is because tunnel boring machine launch site had to be identified so as to detect the location of bedrock, excavate shaft to allow the boring machine to be deployed into the intended underground level, remove excavated material from the tunnel and transport the reinforced concrete ring into the designated positions within the tunnel. These launch sites are a necessity in order to support the operations of a tunnel boring machine. Where there is an absolute necessity, certain privately owned lands or properties may be subject to compulsory acquisition in order to facilitate the establishment of such launch sites. This in turn creates legal issues where owners implicated by such acquisitions may resort to legal recourse or involve in an extended commercial settlement negotiations. Whilst these issues are not technically construction risks, it inevitably complicates the timing for commencement of construction works resulting in the entire train network to be constructed in multiple phases. 

Much of the uncertainties and risks associated with underground train stations and tunnel constructions heavily influences the ways in which these engineering construction contracts are procured including the choice of an optimal procurement pathways.  

Procurement Pathways – Lump Sum vs Remeasurement vs Cost Plus

The choice of procurement pathways for construction contracts are primarily focused on the most commercially sensible way of acquiring and paying contractors for its goods and services. It is an art of finding a fair allocation of risks between the parties. Risks are ideally allocated to the party that is in the best position to manage such risks. If certain risks can be best mitigated by proper decision making during design development, the Employer is usually in the best position to assume those risks. On the other hand, if certain risks are best mitigated by way of the most appropriate method of execution of works on site, the contractor is in the best position to assume those risks. When risks are allocated wrongly, the consequences are quite obvious in that the price payable becomes extraordinarily exorbitant in exchange for a suboptimal outcome.  

When the definition of scope of works are certain and the design are fully developed, most Employers favour a lump sum contract, where contractor is paid a fixed price based on a defined duration. Where the scope of works are defined, the tender price differences between contractors are mainly due to unit rates offered rather than quantity of works. The contractor that offers the most competitive unit rates is usually the one with the most efficient plan in deploying its manpower, machineries, equipment and other related resources to manage and execute the project. Therefore, the most efficient and resourceful contractor usually emerges victorious under lump sum competition. Overall resource efficiency and productivity become the few key differentiating factors between contractors in determining their entrepreneurial success. This in turn motivates the contractor to continuously drive efficiency and productivity. This lump sum procurement however does not work very well when the definition of scope of works is uncertain or that the quantity of works is provisional at best. If the contractor is expected to provide lump sum price despite the uncertainty in quantities of works, it will inevitably include a price premium for such risk. A participating contractor has no other choice but to gamble. The contractor that wins the tender may not always be the most productive in this case as it could be the contractor that had underestimated the actual scope of works, thus quoted a cheaper price. The Employer therefore needed another procurement pathway that places less emphasis on the tender price since it is a guess work at best. 

The next best alternative to lump sum contract for underground engineering works appear to be cost-plus contract where the contractor is reimbursed for the actual costs incurred for the resources deployed plus an agreed percentage to account for profit and overhead. The risk in this case is allocated to the Employer in that the contractor is not required to gamble its tender price with premium pricing, and the Employer consequently only had to pay for the actual works done. This however removes the incentive to be efficient, productive and prudent from the contractor’s equation. By contrast the contractor is motivated to carry out more works than necessary since its profit is often expressed as a percentage of its actual cost. The higher the reimbursement for cost, the higher its profit will be. The Employer therefore finds itself in yet another compromised financial position where it had to pay more than necessary whether under a lump sum or a cost-plus contract.

The remeasurement contract appears to be a middle ground in terms of procurement pathway relative to the extremes of lump sum contract and cost-plus contract. This is because a remeasurement contract is effectively a hybrid of both lump sum and cost-plus elements. Under a remeasurement contract, the quantities of works are provisional since it can only be accurately determined upon actual works done. On the other hand, the unit rates submitted by the contractors are “mini lump sums”, where it encompasses a blend of labour, plant and materials as described in the preambles of the schedule of unit rates. By way of example, the unit rates for soil excavations may be described as inclusive of excavators, labourers, planking, strutting and formwork to support excavated site, disposal of excavated materials off site, keeping excavated sites free from water accumulation by installation of pumps etc. Therefore whilst the actual volume of soil to be excavated may vary depending on site conditions, the unit rates are fixed in so far as the cost of various types of resources that are required to directly carry out excavation works. It is quite simply a balance between the interest of the Employer and the contractor. Whilst the Employer continues to pay for actual work done, the contractor is also incentivised to be resource efficient and productive.

Procurement Pathways’ Impact On Standard Conditions of Contracts

The choice of procurement pathways has a significant impact on the standard conditions of contracts. This is because the conditions of contract should give effect to the philosophy of risks allocation embodied in the procurement pathway of choice. By way of example in Singapore, both the design and build option and traditional design-bid-build option being separate and distinct procurement pathways have separate sets of standard conditions of contract. Likewise in the UK, the ICE suite of standard conditions of contract are largely remeasurement contracts to reflect the engineering nature of the projects. On the other hand, the JCT suite of contracts are usually lump sum since it caters to building construction projects in the UK. Unfortunately, there are no notable suite of contract forms in Singapore to specifically cater to underground engineering works despite the scale and magnitude of tunnels and train stations projects in Singapore. Therefore the current practice is either to modify existing contract forms such as the PSSCOC to suit the engineering peculiarities or to adopt and modify ICE contracts to cater to local requirements. To the extent that these modifications are extensive, it may alter the nature of the standard contract forms to being bespoke contracts. One of the primary advantages of standard contract forms over bespoke contracts is the efficiency of having consistent conditions which avoids extended negotiations or uncertainty in the way it may be interpreted. The risks of altering conditions in standard contract forms is that it may have inadvertent ripple effect on the operations of other related provisions.

So what are the specific provisions within standard conditions of contract that are affected by the choice of procurement pathway? If an underground engineering project is contracted on a remeasurement basis, any increase in quantity of works e.g. length of tunnel, volume of excavated earthworks, depth of pile length etc over and above the provisional quantity is not a variation under the contract. This is different from an increase in quantity of works under lump sum contract which would usually qualify as a variation under the contract. A variation is quite simply a change from the agreed scope of works that may entitle the contractor to additional payment and/or extension of time. If there is no agreement on the fixed volume of works due to its provisional nature, then there can be no quantity related variation. In other words, the burden is not on the contractor to request for an ‘instruction’ from the Engineer or Superintending Officer if the works carried out differ from the provisional quantities. The contractor simply gets paid based on actual works done, in accordance with an agreed unit rate. This avoids the administrative burden of  requiring the contractor to issue a notice that may act as a proviso prior to any of its entitlement to payment. 

Under most standard forms of contract, the establishment of variation is important since it is notionally a contractual gateway to other forms of entitlements such as additional payment or extension of time. Therefore variation has often been framed as one of the contractual grounds for these entitlements. However under remeasurement engineering contracts, whilst additional works above provisional quantity is not strictly speaking a variation, it could entitle the contractor to “additional payment” and additional time. It should be clear however, the “additional payment” in this remeasurement context is additional in so far as it exceeds the provisional contract sum that is derived based on an estimation as opposed to a fixed lump sum. 

The situation can be viewed differently in respect of duration for construction works or time for completion. Remeasurement contracts do not have a provisional time for completion. The construction period is fixed and any works completion beyond the stipulated duration could constitute culpable delay which give rise to liquidated damages liability. This dichotomy of provisional quantities of works but fixed time for completion can be viewed as a contractual anomaly. Some have argued, quite validly that time for completion can only be as accurate as the quantities of works. In this case a provisional time for completion should equally apply. Others have disagreed in that even under lump sum contract, the time for completion are generally not derived based on a precise mathematical calculation based on how much time it would reasonably take to execute a defined scope of works. By contrast, the time for completion is usually derived based on other external considerations such as when the project had to be completed to fulfil a handover requirement imposed by third parties. The contractor would therefore need to price the works based on the level of resources required to fulfil those time stipulations. In view of the above time consideration under remeasurement contract, there are two important elements in respect of extension of time. Firstly, whilst actual scope of works exceeding provisional quantity does not constitute variation per se, it should be considered a ground for extension of time. Secondly, if the time for completion is fixed but derived based on an estimated quantity of works, any extension of time should not be deemed as an Employer related event but rather a neutral event such as inclement weather condition which should not attract further entitlement to loss and expense. This is because the actual quantity is after all not initiated by the Employer, unlike the case of a variation due to design change. Therefore the actual payment received by the contractor based on actual quantities of works should be derived based on multiplication against its unit rate which in and of itself is a “mini lump sum” as alluded to earlier. 

What about situations where the additional quantities of works are carried out under circumstances that differ from what was contemplated by the parties? What if the construction of underground train stations require additional excavations, additional underground strutting support and soil treatment due to encounter with marine clay or major underground obstructions. Should there be occasions where there may be justifications for the unit rate be extrapolated in order to cater to these extraordinary circumstances and hardships? Or is this merely the case where the risks associated with lump sum unit rates materialise and there is no reason for the Employer to underwrite the contractor’s lapses in its commercial judgment? At what point should “additional quantities” be considered variations?  Clearly there are no obvious answers to the above rhetorical questions and these are ultimately matters that should be negotiated between parties to understand the limits to which variations provisions should be triggered. There are however certain objective comparison benchmarks that could be of assistance such as the approved construction programme, the associated resource schedule, the approved method statement for execution of construction works and any accepted contractual qualifications. For a remeasurement contract to be effective as a risk sharing mechanism, it has to act as a doubled edged sword that cuts both ways.

Conclusion

The unique risks and challenges to underground engineering works give rise to the need to find a fair and equitable sharing of risks. To this end, the parties choice of any given procurement pathways should be matched by an appropriately worded standard conditions of contract. This is because, various standard provisions such as definition of variations, valuation of variations, additional payment and extension of time may vary considerably depending on the risk sharing profile adopted by the parties.




Koon Tak Hong Consulting Private Limited

Variations under construction contracts are changes or alterations to the original scope of works that may entitle the contractor to additional payment and/or extensions of time. If parties frequently dispute over whether the works had been varied, it is usually caused by the lack of clear definition of what constitute variations. Under traditional procurement route of design-bid-build, variations are self evident by comparing the original scope of works depicted in contract drawings against construction drawings issued by the Employer or its agent. Where there are differences by comparison in these drawings, the scope of variations can therefore be readily identified graphically. Under design and build (D&B) contract, drawings for the original scope of works are produced by the contractor based on its interpretation of the Employer’s requirements. Likewise the Employer and its agent do not generally issue construction drawings. In the absence of traditional means of comparison, are variations still as self evident as before? Do D&B contracts cause clarity or ambiguity in the identification of variations? Do parties dispute more often over whether variations had been instructed under D&B contract? These issues are worth examining in further detail.

This is part 2 of a series of articles comparing PSSCOC D&B (seventh edition published in 2020) with REDAS D&B (third edition published in 2010). The changes made in fourth edition of REDAS in 2022 do not meaningfully affect the scope of this article. The purpose of this article is to examine how are variations defined under both these standard forms of contract and whether such differences material to contract administration?

Availability of Contractor’s Design Drawings At The Point of Contract

As pointed out earlier, one of the more effective ways of identifying variations is by simply comparing contract drawings with construction drawings for identification of differences. This is because, contract drawings represent the original scope of works which give rise to the basis of the initial contract sum. If the D&B contractor had produced extensive design proposals which are in compliance with the Employer’s Requirements prior to entering into an agreement, these drawings are listed as contract drawings which are subsequently included as part of the contract documents. Under such arrangement, there is an extensive pre-contract design requirement. On the other hand, where the D&B contractor’s design proposal are exhibited via an abbreviated initial concept designs with expectation of further design development post contract, the extent of contract drawings available at the point of contract is limited. This on the other hand represents a brief pre-contract design requirement.

In an earlier article entitled ‘Part 1 of PSSCOC D&B vs REDAS D&B’, it was pointed out that these two contract forms adopted very different pre-contract design requirements. To recap, there is an extensive pre-contract design requirement under the PSSCOC form and a more abbreviated pre-contract design requirement under the REDAS form. Consequently, there is a clear list of contract drawings under the PSSCOC approach which in turn facilitates definition and identification of variations. The REDAS form does not have an extensive pre-contract design requirement because the expectation is to have the D&B contractor develop its design after formation of contract. Design drawings developed post contract are subject to approval by the Employer’s Representative. If it can be objectively demonstrated that design developed post contract is in compliance with the Employer’s Requirements, the Employer’s Representative is not at liberty not to approve these drawings. 

Assuming the Employer or its architect decides to inform the D&B contractor of its preference in terms of the layout plan of a particular floor area which departs from the contractor’s proposal, it can be tricky in determining whether this constitute an instruction for variation under the contract. Under the PSSCOC, the D&B contractor could rely on the contract drawings as a means of comparison and may well argue that the “preferred layout” represents a substantive change from the basis of its contract sum. This may be advantageous for the D&B contractor if it decides to advance any claim for additional payment or extensions of time. However, this approach may not be available to the D&B contractor under the REDAS form. The D&B contractor under REDAS form will alternatively rely on the Employer’s Requirements as its basis of identifying any variations. To the extent that the Employer’s Requirements are worded specifically and prescriptively, it will be clear to both parties whether or not the original scope of works had been varied. In the absence of contract drawings, the Employer’s Requirements or its design brief can be instrumental in defining what are variations under D&B contract.

Employer’s Requirements

Under Clause 1.1.17 of the REDAS form, the Employer’s Requirements mean those requirements issued by the Employer to the Contractor, describing the Works that the Contractor has agreed to design and construct and identified in ‘Appendix 2’. Such Appendix 2 is a placeholder for a list of documents agreed by the parties which may include certain drawings. Since this list of documents varies based on project specifics, the REDAS form does not impose any restrictions as to which document should be included. The Contractor’s Proposals are listed separately under Appendix 3 where these are specific documents submitted in response to the Employer’s Requirements. 

The meaning of the Employer’s Requirements under the PSSCOC is relatively more defined as found in its Clause 1.1(p). In essence it shall mean (i) all requirements set out in the tender document setting out the design and/or purpose of the Works, either with or without specification or other details (ii) all requirements not specifically set out in the tender document but a reasonably experienced contractor would consider to be necessary for the satisfactory design and completion of the Works and (iii) all requirements not specifically set out in the tender document but a reasonably experienced contractor would consider to be necessary for the purpose and integrity of the Works. It is clear that the three bullet points included in the definition of Employer’s Requirements are aimed at ensuring the D&B contract is structured as a lump sum contract.

Whilst the definitions under both forms of contract set out above provide an overarching narrative of the purpose of Employer’s Requirements, it may be of limited help to an D&B contractor looking for an objective litmus test on whether the original scope of works had been varied if a preferred layout or design is communicated by the Employer’s Representative. This can be further illustrated by the following example. Let us assume a D&B contractor is engaged to design and construct a proposed workplace for a financial institution which is intended to occupy the entire floor of a commercial building. To this end, the design brief issued and accepted included a list of functional spaces that are required for this workplace which comprises meeting rooms, private offices, workstations in an open layout format, pantry/ pantries, toilets, reception area etc. The design brief stipulated 20m2 of pantry area to which the contractor proposed a single pantry located at the center of the floor in its concept design. This was approved by the Employer but prior to commencement of construction, the Employer informed the D&B contractor to split the pantry space into two separate locations consisting of 10m2 each. The D&B contractor reckoned that this constitute an instruction for variation since it is a departure from an approved design and believed that such alternative layout should give rise to entitlement to additional payment and extension of time. The Employer disagrees in that any approval does not relieve the D&B contractor’s obligation to comply with the design brief and the split into two locations is in adherence to the very same Employer’s Requirements. 

The ultimate question is whether the original scope of works had been varied? Is the definition of Employer’s Requirements under both contract forms sufficiently helpful in clarifying whether there was a departure from the original design brief? Clearly both disputing parties could interpret the existing definitions in a manner that is helpful to their respective case. This explains why the identification of variations under D&B contract can be tricky depending on whether there are sufficient contract drawings and if not, whether the Employer’s Requirements are defined prescriptively. 

Definition of Variations Under D&B For PSSCOC And REDAS

Apart from making reference to Employer’s Requirements and contract drawings, another method of identifying variations under D&B contract is to understand how ‘variations’ are defined contractually. In this regard, the PSSCOC and REDAS form offer two distinctly different approaches.

Under Clause 1.1.33. of REDAS form, variations means any alteration and/or modifications to the Employer’s Requirements, which is instructed by the Employer’s Representative or approved as a variation by the Employer’s Representative in accordance with Clause 26.1. In this regard, Clause 26.1 is a provision which deals with three separate matters namely the Employer’s Representative’s right to vary the the scope of works, the agreement on variation and the valuation methods on variations ordered. Clause 26.1 mainly addresses the manner in which variations are administered rather than how to define or identify variations. Based on the provisions cited above, it is clear that variations under REDAS form are mainly defined as changes to Employer’s Requirements, which in turn requires a prescriptive and clear design brief. The primary reliance on Employer’s Requirements, as alluded to earlier is due to the absence of contract drawings included as part of the contract documents. 

The PSSCOC on the other hand adopts a more precise definition of variations given that the D&B contractor should have its design significantly developed at the point of contract formation or at least no later than commencement of construction works. Therefore whether variations had been instructed should not attract much contentions and disputes between the parties. The availability of contract drawings becomes an objective source of reference in respect of variations. Clause 19.1 of the PSSCOC defines variations in at least six different ways. Under this clause, variations shall mean (1) an increase or decrease in the quantity of any part of the Works, (2) an addition to or omission from the Works, (3) a change in the character, quality or nature of any part of the Works, (4) a change in the levels, lines, positions and dimensions of any part of the Works, (5) the demolition of or removal of any part of the Works no longer desired by the Employer or the Superintending Officer (SO), (6) a requirement to complete the Works earlier than agreed. Further, variations shall include any alteration to the use or purpose of the Works.

Using the earlier example of a potential dispute between the D&B contractor with the Employer over the split of the original provision of single pantry into two separate locations, it appears that Clause 19.1 of the PSSCOC seems more advantageous to the D&B contractor as compared to Clause 1.1.33. of the REDAS form. This is because the PSSCOC offers multiple ways for the D&B contractor to establish that variations had been instructed to the original scope of works. Whilst the total pantry area remain unchanged at 20m2, variation shall include any increase in quantities of any part of the Works such as the length of copper pipes connecting the water supplies to two separate pantries, the additional number of sanitary wares and fittings supplied and installed to serve two pantries etc. All these can objectively be considered as additions made to the original scope of works. In fact, any change in positions and dimensions of any part of the works could also qualify as variation according to Clause 19.1. Given the relative ease with which variations can be established under the PSSCOC, it is also understandable why certain Employer may favour the REDAS approach. Under the REDAS form, since design development occurs progressively and in tandem with the construction process, it offers the Employer more flexibility in shaping its design without getting penalised with additional payment claims. Therefore, it is quite clear using this example that under certain occasions, what may be deemed variation under the PSSCOC may not be the case under the REDAS form. In the next section of this article, the implications of how variations are defined on other contract provisions will be examined in further detail. Does the ease with which variations are defined affect how contracts are administered in general?

Definition of Variations And Its Effects On Contract Administration

Variations is one of the more common grounds for various entitlements under the contract including additional payments, extensions of time, loss and expense etc. Therefore if the very definition of variations is frequently in dispute, it can have a broad ripple effect across the contract administration regime. Does the way variations are defined impact the way in which variations are valued? Yes, but in a limited way which will be elaborated further in later part of this article. Given the above, it is worth reviewing how contract administration under both the PSSCOC and REDAS are affected by the respective ways in which variations are defined.

Clause 22.1(a) of the PSSCOC entitles the D&B contractor to recover loss and expense where it will be reimbursed for loss, expense, costs or damages incurred arising from any material disruption and/or prolongation due to the issue of an instruction for a variation. This is often claimed in the form of prolongation costs, disruption costs, acceleration costs etc which could be derived from additional preliminaries costs amongst others. Whilst there are no equivalent express provision under the REDAS form for loss and expense, the D&B contractor could rely on its common law rights to recover damages which provide entitlement to similar form of financial compensation. So what is the contractual correlation between the issue of ‘definition of variations’ and the claim for loss and expense? In essence, the claimant will need to firstly establish that the scope of works had been varied, namely identifying the variation in issue. Secondly, the claimant need to prove that the variation caused financial damages in the form of loss and expense. This is akin to the primary “issue of liability” and the secondary “issue of quantum”. Therefore, if one is unable to establish the issue of liability, the issue of quantum gets automatically disposed of. Taking this argument to its logical conclusion, the harder it is for one to define or identify variations, the harder is should be for one to be successful in claiming loss and expense. 

Another provision that is interwoven with the definition of variation is the valuation of variation mechanism stipulated under the contract. In this regard, the PSSCOC and the REDAS form are fairly similar in their valuation of variation mechanism. Under Clause 26.3.1. of the REDAS form, variations are valued based on the four-tier rule. Under tier 1, if the variations is of similar character to or is executed under similar conditions or does not involve significant change in the quantity of the works, the prices and unit rates under the contract shall be used for valuation. Under tier 2, if the variation is of a similar character to the original works but not executed under similar conditions to the original scope of works, the prices and unit rates under the contract shall be subject to adjustments with due allowance for the change in conditions and quantity. Tier 3 shall be used if tier 1 and tier 2 are not applicable where variations are valued based on market rates and prices. Tier 4 is where all the above tiers are not applicable and the valuation shall be based on cost of the necessary plant, materials, goods, labour and additional equipment to carry out the varied works. Clause 20.1 of the PSSCOC prescribes a fairly similar mechanism under a four-tier rule as well.

It is worth noting that whilst the PSSCOC and REDAS adopt a significantly different approach to defining variations, these forms share an almost identical valuation mechanism. There could be an explanation as to why the definition of variation does not materially affect the rules of its valuation. As regards the definition of variations, it is both a factual enquiry and legal issue of interpretation on whether there is a change to the original scope of works agreed by the parties based on proper construction of the terms. On the issue of valuation of variation, it is only relevant when the varied works are identified and available for valuation based on the applicable quantities and unit rates. The valuation rules are decided primarily based on the timing in which the varied works are instructed once the issue of variation is established. Using the earlier example of split of original pantry provision to two separate locations, if such decision was made prior to commencement of construction, the valuation method should be tier 1. However if the decision was made after the original pantry had been constructed, it is likely that tier 4 rule will be used for its valuation. This is because the extent of disruption inflicted on the on going construction works are different under both scenarios. This analogy in turn raises an interesting observation on the REDAS form – let us assume that the decision to split the original pantry of 20m2 to two equal pantries of 10m2 was made prior to construction. In this case there is a good argument that there is no variation instructed since it is still in adherence to the Employer’s Requirement. However if the same decision is made after the construction of the original pantry of 20m2, will this decision be construed as a variation simply because of its timing? It is quite fair to say that no Employer in good conscience would deny additional payment to the D&B contractor if the decision was made after construction is completed. However, why should the definition of variation change as soon as the timing of decision is different? Should the definition of variation not be based on an objective comparison between Employer’s Requirements and the actual works done? It appears that there is perhaps an opportunity for variations to be defined more robustly by taking into consideration of the contractor’s approved programme apart from its design proposals that is responsive to the Employer’s Requirements.

Conclusion

The issue of whether variations had been instructed can be contentious even under the traditional procurement route of design-bid-build. However, it appears that the very same issue could be magnified under the D&B contract especially if the design brief is worded broadly. Whilst design brief is not meant to be overly prescriptive in order to provide the D&B contractor with the appropriate design latitude and flexibility, there could be unintended consequences. The consequences in this regard can be felt in many other provisions under the contract.




Koon Tak Hong Consulting Private Limited