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

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

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

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

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

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

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

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

Schedule Of Rates

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

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

Bills Of Quantities (Lump Sum With Quantities)

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

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

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

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

Bills Of Quantities (Provisional Quantities)

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

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

Basics of Termination For Default

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

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

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

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

Contractual Notice And Procedural Requirements For Termination For Default

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

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

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

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

Grounds For Termination For Default

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

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

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

Roles of Contract Administrator In Termination For Default

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

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

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

Effects Of Termination On Any Partially Completed Design

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

Final Account Claim vs Final Payment Claim

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

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

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

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

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

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

Interim Final Account

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

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

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

Final Account vs Final Account Certificate

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

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

Final Certificate vs Final Completion Certificate

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

Overview of Arithmetical Adjustments To Initial Contract Sum

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

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

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

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

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

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

Lump Sum vs Remeasurement – Arithmetical Treatment In Final Account

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

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

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

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

Contentious Issues In Preparation of Final Account

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

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

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

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

Whether Final Account Represents Full And Final Settlement

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

Why Framework Agreement?

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

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

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

How Framework Agreement Works?

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

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

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

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

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

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

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

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

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

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

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

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

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

Limitations To Framework Agreement – Professional And Consultancy Services

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

Man Year Entitlement (MYE)

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

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

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

Dependency Ratio Ceiling (DRC)

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

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

MYE and DRC Influence On Tender Assessments

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

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

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

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

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

MYE and DRC Influence On Contract Administration

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

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

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

Construction Programme

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

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

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

Construction Method Statement As Part Of Contract Document?

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

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

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

PPVC Fabricator vs Main Contractor

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

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

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

Definition of Completion In PPVC Project

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

Design And Build / Design Development And Build

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

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

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

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

Payment For Material Off Site And Associated Risks

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

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

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

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

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

Advance Payment Bond

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

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

Who Should Hire BIM Manager?

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

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

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

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

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

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

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

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

BIM, Security of Payment Act and Claims Management

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

Mediation vs Determination – Managing Conflict of Interest of Dispute Board

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

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

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

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

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

Independent Certification vs Dispute Board

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

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

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

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

Multi-Tiered Dispute Resolution Clauses vs SIDP

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited