To what extent should design be developed immediately prior to signing of a design and build (D&B) contract? This article examines the issue of pre-contract design requirement under the procurement model of D&B. This examination is made in the context of both the Public Sector Standard Conditions of Contract (PSSCOC) and the Real Estate Developers’ Association of Singapore (REDAS) Standard Form of Building Contract. For clarity, the PSSCOC referred to in this article is the seventh edition published in 2020 whereas the REDAS form referred to is the third edition published October 2010. Notwithstanding that the latest edition of REDAS form is the fourth edition published in March 2022, the substance of this article is not meaningfully affected by the changes introduced in this latest edition. For clarity, 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.

Pre-contract design requirement is an interesting subject because it is in essence a balancing act due to two competing interests in D&B contracts. On one hand, there is a desire for clarity and specificity in the scope of works included within the contract sum so as to objectively identify any variations which may give rise to claims for additional payment and/or extensions of time. Clarity in scope of works in turn requires a significant extent of design development. On the other hand, one of the fundamental advantages of D&B is allowing the main contractor to develop its design after award so as to shorten the time taken for the entire design and construct process. Under the latter consideration, the pre-contract design proposal expected from the D&B contractor will not be fully developed at the point of contract. Therefore identifying the pre-contract design requirement becomes a useful point of reference to appreciate how these competing interests are balanced. To this end, it will be helpful to understand how the standard forms of contract widely used for D&B in Singapore balance these competing interests. For further context and background, there is a related article published in this website entitled ‘How To Administer The Procurement of A Design & Build Project?” available for reference. 

Unfortunately, the degree to which pre-contract design should be developed prior to contract formation is not an issue that can be objectively defined. By way of illustration, if tenderers are instructed to provide its 50% developed design during procurement for tender evaluation, this instruction can be ambiguous and subjective. Should the tenderers only provide a concept design with artist’s impression? Or should the design be developed with schematic details beyond just the initial concept design? Therefore how the procurement process is structured should be in sync with the provisions of the standard form of contract. Any gaps or conflicts in this regard would inevitably give rise to disputes between parties.

So what are the provisions in both the PSSCOC and REDAS that determine its specific pre-contract design requirement? The subsequent sections of this article focus on certain provisions in the respective contract forms that may shed light and provide clarity on this matter.

Definition of ‘Contractor’s Proposals’ Under Articles of Agreement

In order for the contractor to qualify for a proper tender evaluation it has to submit its proposal, otherwise known as the ‘Contractor’s Proposals’ in response to the design brief that sets out the Employer’s Requirements. Within such proposal, the contractor is expected to provide, amongst others its design that should demonstrate its competence, understanding of the project’s nuances and to provide a basis of its tender sum offer. These submissions are in effect part and parcel of pre-contract design requirement that is stipulated by the Employer and its consultants. The term ‘Contractor’s Proposals’ is uniformly used by both the PSSCOC and the REDAS. It is useful to understand how the Contractor’s Proposals are defined under both these contract forms so as to appreciate what is expected from the contractor as part of its pre-contract design requirement. A proposal is in effect an offer from the contractor that is submitted to the Employer for its consideration and acceptance. An accepted offer is key to contract formation. 

The PSSCOC includes a template document of the ‘Agreement’ that is usually included in the tender document that will be signed by the parties upon award of contract. Under the second recital of the Agreement, it is stated amongst others that “the Contractor has submitted his developed design documents for carrying out the Works” and such developed design documents is referred to as “the Contractor’s Proposals”. It is worth emphasising that the term “developed design documents” appear in past tense which meant that it is not the parties’ expectation for any significant design development effort to take place after the contract is formed. In fact the degree of development of the design document is so advance that it becomes the basis of the contractor’s lump sum tender price offer. In the third recital of the Agreement, it is also stated that the Employer has relied on the contractor’s development of the Contractor’s Proposals to fully meet the suitability, integrity, durability and practicality of the Employer’s Requirements. When the second recital is read in conjunction with the third recital, it is evident that the design included in the Contractor’s Proposals is developed to such an extent that it is sufficient for the Employer to make an informed opinion that such design satisfies the Employer’s Requirements in the manner described above. Under Clause 4.5 of the PSSCOC which deals with the subject of sufficiency of tender, the contract sum shall be deemed sufficient to bring the project to its full completion. In other words, the contract sum is not merely a provisional figure that is derived based on a partial design. This interpretation is further supported by Clause 6.1(2) where the Contractor’s Proposals is fit for its purpose and takes into account and addresses any insufficiency or impracticality that may exist in the Employer’s Requirements. It follows that under the PSSCOC a mere concept design or an abbreviated partial design submitted by the contractor prior to contract is not sufficient. 

The PSSCOC’s approach is quite contrasting when compared to the REDAS’ approach. The REDAS’ template Articles of Agreement serves a similar function as the Agreement under the PSSCOC. Under Item (B) of the Articles of Agreement, the Contractor’s Proposals include a contract sum which the contractor will require for carrying out such works that includes those necessary for completing the design, construction and maintenance of the said works. In other words when the Articles of Agreement is signed, namely at the point of contract formation, there is still a necessity for the contractor to complete the design. This suggests that the design included in the Contractor’s Proposals is not expected to be fully developed. This interpretation is further supported by Article 2 that appears in Articles of Agreement which set outs the contractor’s obligations. Under the said Article 2, the contractor in consideration of the contract sum paid by the Employer shall, amongst others carry out and complete the design of the works. Under the Articles of Agreement of the REDAS, unlike the PSSCOC’s Agreement, there is no express provision to attest that the Employer had examined the Contractors’ Proposals at the point of contract to satisfy himself that such proposal meets the Employer’s Requirements. It follows that the design available at the point of award remains at an early stage such that it is not sufficient for the Employer to examine its adequacy. Therefore as part of the contract obligations, the contractor undertakes to further develop and complete design after the award. 

Design Fees Included In  Progress Payment Claim

As pointed out in the preceding section of this article, it appears that the pre-contract design requirement differs between the PSSCOC and the REDAS based on the descriptions of Contractor’s Proposals. In general, the PSSCOC anticipates an advance detail design available immediately prior to the point of contract formation whereas the REDAS takes the opposite approach where the design available could be brief and abbreviated. This interpretation is also supported by the format of progress payment claim submitted by the Contractor on a monthly basis. The scope of activities that entitles the contractor to interim progress payment provides an insight on the nature of works undertaken by the contractor during its time for completion.

Under Clause 22.1.1.1 of the REDAS form, the payment claim from the contractor shall include, amongst others, the value of the design payable in accordance with the Schedule of Fees included in the contract document. Therefore, there are significant design developments works expected from the contractor. This is why the contractor had to be paid according to the extent of design activities performed each month. However, there is no equivalent design fee payment under interim progress payment of the PSSCOC that is found under its Clause 32.1. This is not surprising since the design would have been significantly developed at the point of contract formation, such that there is no major design activities expected post contract. 

Drawings and Design Requirements Prior To Commencement of Works

Another contract provision that is worth examining in this regard is the definition of ‘drawings’ and its associated approvals prior to commencement of works. Given that drawings are important part of the contract documents, it provides a perspective on the extent and availability of design during tender that ultimately formed the basis of the parties’ agreement. 

Under the PSSCOC, ‘Drawings’ mean drawings referred to in the contract document including such drawings which have been prepared by the contractor and accepted by the Superintending Officer (SO) pursuant to Clause 6.2 therein. Definition of Drawings also include such other drawings, as may be prepared and submitted by the contractor in his tender or at any time before the contract. First and foremost, Drawings shall primarily refer to those listed comprehensively in the contract document for avoidance of any doubt. Therefore, these drawings would have exhibited a significant degree of design that had been developed during the tender process and are also accepted by the Employer as being compliant with its requirements. There may also be cases where certain part prints, hand sketches or drawings produced that are not to scale but are helpful in providing important context to the Contractor’s Proposals. These documents may also be defined as Drawings where the context permits. Given the significant design development that would have already taken place immediately prior to contract, it is within expectation for the PSSCOC to be all encompassing in its definition of ‘Drawings’. Under Clause 6.2 of the PSSCOC, the contractor shall not proceed with the execution of any part of the permanent works until he has submitted to the SO such Drawings, Specifications, manuals, calculations and other information as shall be necessary to demonstrate the suitability, adequacy, integrity, durability and practicality of such design. It appears that Clause 6.2 restricts overlapping design activities and construction activities. In the absence of such Clause 6.2, the D&B contractor would ordinarily plan its work such that its design activities occur concurrently with the construction activities. In this regard, priority is given to design of works that are scheduled to take place immediately thereafter. However, Clause 6.2 in this case makes sense where considerable design would have already been developed at the point of contract, with perhaps residual detail design taking place after the project is awarded. Therefore, having all design submitted and approved by the SO prior to commencement of works allow an overview of the design in its entirety before such design are executed on site. 

The REDAS form takes a fairly different approach as compared to PSSCOC primarily because contractor’s design is likely to be at its early stage when the parties enter into an agreement. Therefore, it will be difficult to conclusively identify the drawings included as part of the contract document when much of the design and the associated drawings will only be developed much later. In this regard, the REDAS defines the word “Contract” to mean the Articles of Agreement, the conditions and its appendices, the Employer’s Requirements, the tender documents, the letter of acceptance, the Contractor’s Proposals, the Contract Sum Analysis and other documents which the parties may specifically identify. It should be noted that there is no reference to the word ‘drawings’ in the Contract. Parties are then required to provide a list of documents that they consider to be part of the Employer’s Requirements and Contractor’s Proposals. It is likely that there will be some concept design drawings, artist impressions, sketches, preliminary design documentation identified by the parties to represent the design that is available at the time of agreement that is subject to further development. In other words, the concept of “contract drawings” as understood under traditional procurement route is not in place under REDAS form. However, Clause 4.4 of the REDAS form which deals with design review by the Employer’s representative is similar with Clause 6.2 of the PSSCOC as mentioned above. In essence, Clause 4.4 states that the contractor shall submit its full design drawings, plans, specifications for review and acceptance by the Employer’s representative. This shall be fulfilled prior to submission of the same to the relevant authorities for approval and before the commencement of construction. It should be pointed out that not all aspects of design require approval by the relevant authorities.  Only certain aspects of design do require authorities’ approval such as works concerning health and safety matters. By way of illustration, whilst the Employer may be concern about the choice of colour of the carpet used at its main lobby, the statutory authorities do not equally share the same concern. Therefore, it appears that the design had to be accepted by the Employer on a case by case basis as with the approvals required by the relevant authorities. Consequently, the requirement for approval prior to commencement of construction could mean only the part of the works that is under design review as oppose to the construction of the project as a whole. 

Implications of Different Approaches In Pre-Contract Design Requirement 

With the distinction between PSSCOC and REDAS in respect of pre-contract design requirement established, what are the implications? In short, it affects some of the very reasons for choosing D&B over the traditional design-bid-build route. In the preface of the very first edition of REDAS form dated August 2001, it was accurately pointed out that the strengths of design and build contracts can be summarised in three main points. Firstly, it offers single point of responsibility where the designer-builder assumes full responsibility for the outcome of the project for most matters. Secondly, it could possibly shorten the time taken in designing and constructing processes in having these tasks undertaken by a single entity. Thirdly, it could reduce claims arising from errors, omissions or ambiguities in the drawings and specifications since these tasks are also undertaken by a single entity. These three strengths will be further examined in the subsequent paragraphs in light of the pre-contract design requirements.

As regards the first strength of having single point responsibility concentrated on the D&B contractor, this appears to be one of the merits that addresses the Employer’s dilemma when its project gone awry. When problem arises under traditional procurement route, it is likely that the architect or engineer blames the contractor for workmanship issue for being the root cause of the problem, whilst the contractor blames the architect or engineer for bad design as being the root cause. Whilst having single point responsibility concentrated under a D&B contractor solves this finger pointing problem, it inadvertently creates another problem. Where the design available for review and acceptance prior to contract is not fully developed, the Employer faces a hard time identifying in detail what exactly is he paying for in exchange for the contract sum. This is particularly so where the pre-contract design requirement merely expects a concept design that appear to satisfy the Employer’s design brief. Certain property developers may have a very ‘hands on’ approach to their projects by wanting to know exactly the types of marble cladding used in its grand lobby, including the extent of veining and colour tonality. An artist impression submitted by the D&B contractor may not be sufficient in quenching the Employer’s thirst for detail and specificity. Under most D&B route, it is quite impossible for the Employer to be making granular design decisions when it merely provides its Employer’s Requirement which usually consists of a design brief. Even if the Employer decides to adopt a more extensive pre-contract design requirement such as the PSSCOC’s approach, it may give rise to a very lengthy procurement process which defeats the very purpose of D&B.  

As regards the second strength of shortening the overall project duration by overlapping design and construction activities, this may not be possible if much of the design are already developed prior to contract, such as the PSSCOC approach. If the design is already developed extensively, there is very limited room for any overlapping with construction activities. Therefore, where there is an overwhelming desire for fast tracking project, one should consider the REDAS approach with significant flexibility for the D&B contractor to design and construct concurrently.

As regards the third and final strength which relates to conflicts and inconsistencies between specification, drawings and other design documentations, this very much depends on the degree of pre-contract design requirement. Very often, whether or not conflicts and inconsistencies exist depend on the availability of developed design to be read in conjunction with specifications. Concept designs are merely tool to express and communicate a broad architectural aesthetic intent that are not usually meant to be read with detail specification. Much of the inconsistencies surface when detail design unfold and can be cross checked against specifications. Apart from this reason, one should also be aware that D&B contractor typically outsourced the design functions to a separate architecture and engineering firm. General contractors do not typically have extensive in-house design capabilities since this will be a burden from a financial overhead perspective. Therefore, even if the Employer is “insulated” from the problems arising from conflicting drawings and specifications, the problems still exist except that it now resides on the lower end of the supply chain, i.e. between the contractor and its designers. Shifting the problem down the supply chain can hardly be considered as solving the problem. In fact most property developers are alive to the distinction between “solving the problem” and “shifting the problem” that they occasionally have conditions of contract that allow them to make direct payment to subcontractors at the risk of violating contract privity. These are the commercial realities when it comes to risk management.

Conclusion

It is quite clear from the above that whilst D&B contracts resolve certain types of problems, it may inadvertently give rise to other issues. Therefore, the methods of procurement and types of contract used should be approached as an issue of trade off. In considering the merits of each option, one has to balance it with the inadvertent costs. D&B remains an attractive proposition where the project has a standard corporate design and there is an emphasis of design consistency across the developer’s portfolio of real estate spaces or buildings. Therefore, the Employer’s Requirement can be interpreted in the context of established precedents with design tweaking reserved on limited occasions based on specific site conditions.




Koon Tak Hong Consulting Private Limited

The use of structural steel frame for buildings offers various engineering benefits relative to the option of reinforced concrete frame. Whilst the engineering decision is primarily made by the Employer and its consultants, the commercial risks are disproportionately observed down the supply chain, particularly between the main contractor and its subcontractor. The Employer may favour the use of structural steelworks for amongst others, the speed of construction, cost effectiveness and long span beams with column free internal spaces. On the other hand the main contractor may view structural steel works as an avenue of financial gains if adopted with alternative design. The pursuit of financial gains by developing alternative designs after award of tender can be risky given the need to design and construct simultaneously.

Commercial opportunities can be found in certain construction trades where the contractor is able to offer alternative designs or solutions whilst fulfilling the specifications and regulatory requirements. Structural steelworks are generally viewed as one of those construction trades with significant profit opportunities. The Employer is usually indifferent about the granular details  of the structural steel components such as the types of weld, choice of nuts and bolts, thickness of flanges etc as long as the design is overall safe, supports the design intent and fulfils statutory requirements. From the regulatory front, the statutory authorities generally understand that creativity and innovative solutions are available in a free market where industry players are able to utilise their technical knowledge to offer novel solutions where there are financial incentives to do so. Therefore there are usually certain design latitude afforded including choice of steel material if it can be objectively demonstrated that such alternatives are compliant with existing codes without compromise to safety. By way of example, in Singapore the BC1:2023 provides use of alternative structural steel material.

Given the commercial opportunities, it is common for the main contractor to provide its pricing based on the consultant’s design and to offer an alternative steel solution either fully or partially after contract is awarded. Under most standard forms of construction contracts, there are provisions for contractor to offer alternative solutions even under traditional procurement route of design-bid-build. With the adoption of alternative design, the main contractor effectively takes on design responsibilities to the extent such alternative departs from the original design. 

In the next few sections of this article, the commercial risks of structural steelworks that could culminate in disputes will be dissected from various angles. These include the dichotomy of lump sum main contract with remeasurement subcontract, the nature of alternative design for structural steelworks, the criticality of structural steelworks as it relates to construction programmes etc.

Lump Sum Main Contract With Remeasurement Subcontract

Structural steelworks are usually used in certain building and infrastructure projects where the project requirements are clear, design is substantially developed and therefore the contract is procured on a lump sum basis. This can be contrasted with remeasurement contracts where the actual scope of works is uncertain, the design is provisional and actual quantity of works that had to be executed is derived based on an estimation. In construction of a building using structural steel frames, it is highly likely that the project will be procured under a lump sum arrangement since the design of such building, the constructible floor area allowed and its financial viability are almost fixed, defined and certain. Most real estate developers would only commence construction works for such projects when every important detail is ironed out with certainty. Where main contractor is engaged under lump sum contract, it will be paid based on a fixed contract sum unless there are certain design variations occurring during construction period that could give rise to additional payments. From the Employer’s perspective, lump sum contract offers certainty in construction costs by allocating most of the implementation and execution risks to the main contractor. The main contractor that usually has greater knowledge and competence in managing execution risks can often identify whether or not the design provided as well as the schedule stipulated are overly conservative. These gaps may indicate additional profit making opportunities. Where such opportunities exist, the main contractor may be of the view that the project could be completed even earlier under original schedule and the design has too much “safety factor” or “buffer”. Therefore the main contractor may be comfortable with having a remeasurement subcontract where it only pays the subcontractor for the actual work done based on pre-agreed unit rates and actual quantities. It should be noted that most structural steelworks are outsourced by the main contractor under a subcontract arrangement as the fabrication and manufacturing overheads are significant. 

Generally most lump sum main contracts will have its subcontract procured on a lump sum basis as well. This is due to the natural desire to have a back to back coverage between main contract and subcontract subject to the relative value of subcontract works. However the structural steelworks subcontract are usually procured on a remeasurement basis, being an exception to this general rule. This is because during construction, detail design may be subject to change in order to accommodate evolving site conditions. These include change in the type of welding used, change in choice of bolt for steel connections to improve tensile strength, or even the change in size of structural steel members fabricated off site prior to installation. These changes affects the fabrication process, ease of handling and transportation, the number of workers required on site for final installation etc, all of which directly affects actual costs and pricing. Therefore, structural steelworks are often procured on a remeasurement basis as the final cost could vary significantly as compared to the original subcontract sum. Where the main contractor is to offer alternative design to the Employer and its engineer, remeasurement contract is the favoured option since any reduction in structural steel weight and its associated cost savings could only be accrued as additional profit if payment is made to the subcontractor based on actual works done. 

The risks allocation principle is significantly different between a lump sum contract and a remeasurement contract. Under lump sum contract, it is usually stated under the general conditions, preambles to pricing schedule, technical specifications etc that main contractor’s price shall be inclusive of all implementation and execution risks. In specific terms, it is stated that ‘the prices shall be inclusive of all ancillary, other works and expenditures whether or not specifically mentioned in the contract documents which shall indispensably necessary to bring the construction works to completion or which may contingently become necessary to overcome difficulties before completion’. Occasionally, it may also include phrases such as ‘all welding shall conform to the prevailing code of practice and standards, in addition to other special requirements noted in the drawings and/or specifications’. It is therefore highly likely that a good amount of works that do not entitle to additional payment under lump sum contract would otherwise be payable under remeasurement contract. Given the commercial gaps between the main contract and the corresponding structural steelworks subcontract, it is fair to say that such procurement arrangement could be a fertile ground for potential disputes.

Alternative Steel Design With Commercial Opportunities

Funds for research and development are often channeled to areas with considerable room for improvement that comes with clear opportunities for economic gains. Structural steelworks represent such an area in the construction industry where the is a compelling case for constant improvement and innovation. The following is a mathematical illustration of this point. Assume a hypothetical project to construct a commercial building with a contract sum of $200million and the main contractor may have an estimated net profit of 2% which amounts to $4million. Typically, the civil and structural costs for such project could constitute 30% of the contract sum, which amounts to $60million. If the main contractor takes the position that structural design is not “efficient” and could trim the weight of the steelworks by merely 5%, this could lead to potential gain of $3million. Such gain alone could almost double the projected net profit. It should be noted that most structural steelworks are paid generally based on its weight under industry adopted standard methods of measurement. The opportunities of alternative solution for structural steelworks goes beyond merely offering peripheral design tweaks such as different nuts and bolts or types of welding. Very often, a new steel material could give rise to weight savings that in turn translate to multiple fronts of savings such as reduction in material cost, shorter time expended on welding, lower foundation costs due to smaller loading imposed, savings in transportation costs etc.  

There is a constant competition amongst structural steel manufacturers to vie for market share as they are alive to the economic opportunities illustrated above. As a rule of thumb, when new structural steel members are developed and introduced to the market, these could potentially be lighter than the conventional steel members by some 30% to 40% to justify the research and development cost as well as the subsequent marketing cost. The steel manufacturers could charge a higher unit rate for its new steel product but any cost increase may be cushioned by the overall reduction in steel weight.

One may query why the consultant structural engineer appointed by the Employer to design its project not adopt the newer and more efficient structural steelworks solution to begin with? It is entirely possible that those latest design or solutions may have been proposed and adopted by the consultant engineer. In such a case, the main contractor may not see much incentive to offer alternative design. However, there are various scenarios where the consultant engineer’s design development time frame is compressed, denying them much opportunities to explore new solutions. This is because under design development process, the Employer typically spends an inordinate amount of time first and foremost with its architect to explore various design and space layout options that maximises financial returns. Once a decision is made to adopt certain architectural design option, there is almost a “rush” to proceed to tender. It should be noted that structural design can only be meaningfully developed once the architectural design is finalised, since the structural frames are designed to be supportive of the architectural layout and space allocations. Therefore under time pressure, consultant engineer would naturally adopt “tried and tested” design solution that complies with existing design codes and performance standards. Further, the commercial arrangement of professional fee for a structural consultant engineer is usually based on the percentage of the estimated construction cost, rarely with any financial incentive for new design solution. This gap is therefore “capitalised” by the main contractor during construction period, but not without considerable risks. This will be further elaborated in the next section of this article. 

Design Development During Compressed Construction Period

Any alternative proposals by the main contractor are usually governed by certain standard provisions included in the contract form. These provisions include adoption of either full or part of the proposal, sharing of actual cost savings between the Employer and the main contractor, the assumption of design responsibilities by the main contractor in respect of the adopted design alternative etc. It should be noted that an approved alternative structural steelworks remained an integral part of the building as a whole. Therefore any modification to structural works can affect other trades such as mechanical and electrical system and vice versa. If and when an alternative proposal is approved, the main contractor is still expected to submit various detail parts of its design for further approval during the construction period. This is to ensure that the different systems within the building remain in sync with one another. 

To this end, there are several issues that the main contractor had to juggle simultaneous. Firstly, the actual design development for the approved alternative design will be developed further only after the letter of acceptance is signed by the parties, formalising the main contractor’s engagement. At the point of approval of the alternative solution, the level of detail is sufficient for pricing but insufficient for actual construction. Therefore, further construction drawings would be produced for this alternative design during construction period. This meant that the detail design development will be undertaken by the main contractor in conjunction with its structural steelworks subcontractor in parallel with the construction works. It is worth noting that this is a fairly challenging endeavour that is usually undertaken exclusively by established main contractor. In essence, the detail design is being developed with the clock ticking. By way of example, as the site construction work progresses, such as the completion of foundation works, the connections to those foundation interface becomes time critical. Therefore the detail design of the interfacing structural members had to be approved in time in order to ensure that the works continue without any stoppage or disruption. Likewise as the procurement of nominated subcontract works for building facade is completed and ready for award, the interfacing details between structural members with the facade panels had to be approved in time. It is akin to a constant relay race occurring on site in real time with immense time pressure and the coordination between trades had to be near perfect. Any slippage could potentially delay the construction works including ripple effects to adjacent construction trades. 

Secondly, as with any construction projects, variations to design are expected to occur from time to time for reasons unrelated to the adoption of alternative structural steelworks. From the main contractor’s perspective, to the extent that any of these variations affect the structural steel works, any prior approvals to those affected parts had to be reviewed and updated for further approval. By way of example, if the ceiling height for certain rooms is increased, the mechanical and electrical services hidden above the false ceiling may need to be re-oriented and such change could affect the need for penetration of services through certain structural members or the location of joints between steel members. This could further increase the time pressure and complexity of works. It will also give rise to the circular argument of whether those variations are necessitated by the adoption of alternative steel works or are these initiated by the Employer or its consultants by their own volition. This distinction matters when it comes to entitlement to extensions of time and additional payments. 

Thirdly, by the time the final alternative design is approved by the Employer for the structural steelworks, it might have already gone through several iterations of design options that could take weeks or months. Whilst these design reviews by the Employer are on-going, the structural steelworks subcontractor may not have entered into a binding agreement with the main contractor. This is because the need for the concerned steel manufacturer as a subcontractor is not guaranteed until the alternative design obtains full and final approval. Nevertheless the said subcontractor is likely to assists the main contractor with the production of proposed alternative design drawings, including the required details to facilitate such design reviews. From the subcontractor’s perspective, there is every commercial incentive to assists with such design reviews despite the lack of a formal letter of award issued by the main contractor. As the proposed design evolves through each iteration, the subcontractor’s basis of pricing ought to “catch up” with the prevailing design, superseding any earlier quotations of unit rates and prices. As pointed out in the earlier section of this article, the structural steelworks subcontract is usually procured on a remeasurement basis whilst the main contract is usually under a fixed price lump sum model. The subcontractor may take the position that even if its quotations are not quite up to date with the latest design option, it is immaterial since payment will be made on a remeasurement basis according to actual work done. However, the main contractor may have a different risk appetite since it is under a lump sum contract. Due to the conflict of interest between both parties, there could be situations where both the main contractor and subcontractor would dispute over what should or should not have been included under the submitted unit rates of structural steelworks. It should be noted that the scope of works included in each unit rate under remeasurement contracts are fixed based on the description of the preambles. This is despite the fact that the quantity of works may be subject to change. In this regard, the unit rates are often seen as “mini lump sums”. This is often a commercial detail that could easily be overlooked by the parties during negotiation which can be a source of potential dispute. 

Upstream Construction Trade With Multiple Downstream Dependent Subcontractors

As a matter of sequence and logic of construction works, the structural steelworks are carried out at the earliest stage of the construction project after foundations are completed. The structural steel framework becomes the support structure for the subsequent architectural, mechanical and electrical works to be carried out. Therefore when the main contractor is developing the detail of its alternative design in parallel with its other construction activities, it is often alive to the fact that any delay at this stage can have magnified and disproportional consequences. Its delay is capable of causing a ripple effect down the construction supply chain including builders works, facade works, mechanical and electrical works etc. Every mistake becomes more costly than usual.

Whilst the main contractor may endeavour to accelerate and catch up with any delay by deploying additional resources, it may come at a cost. Such cost had to be balanced against the potential gains of proposing alternative structural design. Further, if and when multiple subcontractors carrying out downstream activities are affected, there could be a case against the main contractor in respect of loss and expense claims and/ or damages. The main contractor also had to grapple with the potential overall delay to the original practical completion date, that may result in liquidated damages being imposed by the Employer. The main contractor therefore is often walking on thin ice metaphorically. It is contractually stuck between the rock and a hard place. This is another reason why proposing alternative design, whether structural steelworks or otherwise comes with a very real risk and should only be undertaken with absolute confidence. However, it should also be balanced with the fact that general contracting in and of itself is not a business activity without risk. The only relevant question is whether the risk is worth the reward.

Conclusion

Whilst the main contractor and its subcontractor may be motivated by financial gains in proposing alternative solution, in reality the industry as a whole benefits as well from innovative and improved systems. It cannot be over emphasised that the Employer enjoys the cost savings as well and the society as a whole gains from a more sustainable construction method. Unfortunately, at this juncture the “burden” of such innovation is disproportionately concentrated at the lower end of the supply chain. There appears to be opportunities for a more fair and equitable contractual arrangement in respect of alternative design solutions so that every party “pays its fair share” of the price of innovation. When creativity is met with punishing costs, the spark of motivation gets dampened.




Koon Tak Hong Consulting Private Limited

Imagine you are the contracts manager for a main contractor engaged to  build a 10-storey office building under a single practical completion date. Whilst the construction works are in progress, to your surprise the architect issues an instruction so that the first two floors of the building are completed and be handed over ahead of schedule. You were told that that a large tenant had just signed a multi year lease and will need its space earlier for some major internal fit out works. This is one of the possible scenarios of an early partial occupation. What should be your thought process in dealing with this scenario? Are there any existing standard conditions that cater to such arrangement and if yes, will it provide a fair and equitable compensation for any disruptive related expenditures? 

This article is part 6 of a series of articles comparing the main contract standard conditions of the SIA form published in 2016 and the PSSCOC published in 2020. This article specifically deals with the scenario of early partial occupation. Early partial occupation is an event where part of the construction works are instructed to be completed earlier so that such part can be handed back to the Employer for its occupation or use. It is an impromptu arrangement that was not planned at the inception of the contract but rather introduced during the construction period. Usually phase completion would have been structured and included in the contract had such arrangement been anticipated and planned in advance. 

Early partial occupation should be avoided if possible due to the myriad of risks that parties had to negotiate within a compressed time frame that could have been avoided with advance planning. As the saying goes, if you fail to plan, you plan to fail. Most standard conditions of contract could only offer a framework of procedural steps to be taken if and when it arises. These procedural steps are by no means guaranteeing a mutually satisfactory resolution of early partial occupation. The nature and breadth of risks are influenced by the specific set of circumstances giving rise to early partial occupation. To this end, the SIA form and PSSCOC offer a very different approach, particularly in its presentation amongst others. The SIA form sets out a centralised provision to deal with the subject of early partial occupation which can be found in its Clause 26. The PSSCOC does not have an equivalent centralised provision to deal with early partial occupation. By contrast the PSSCOC decentralised its early partial occupation mechanism to various provisions based on the subject in hand. By way of example there are various provisions that deal with “phase of Works” such as the subject of liquidated damages, extensions of time etc. Early partial occupation is inserted in these provisions but described separately as “part of the Works”. It should be noted that under Clause 17.3(1)(c) of the PSSCOC, the concept of early partial occupation is introduced and defined as “part of the Works”. The approach of either centralised or decentralised also affects the clarity in interpretation apart from manner of presentation. In general, the centralised approach adopted by the SIA form provides ease of reference and interpretation since the objective meaning of the mechanism is described within the appropriate context. 

To understand why early partial occupation could be ‘contractually messy’, the next section of this article illustrates the difference between phase completion and early partial occupation.

Phase Completion vs Early Partial Occupation

It appears that early partial occupation is the antithesis of phase completion where the latter is planned in advance and the former is usually introduced on an impromptu basis after contract is formed. When and how the construction works should be executed affects both the Employer and the main contractor in a variety of ways including logistics, structure of insurance coverage, application of liquidated damages and extensions of time, project cashflow, commencement of defects liability period, methods of valuation of variations, transition of site responsibility as it relates to occupier status etc. If there are requirements for any project to be completed in different geographical segments with varying commencement and/or completion dates, these are very often planned in advance and communicated to the contractor for inclusion in the contract conditions. Each geographical segment is described as ‘phase of works’ and administered with a standard approach. That is why both the SIA form and PSSCOC have a common approach where each phase of works is treated like a separate and distinct contract of its own. By way of example, Clause 25(2) of the SIA form states there is an element of severability for each and every phase where these had to be regarded as separate and distinct contract. As each phase of works has its own time for completion, extensions of time are administered on a phase by phase basis. Likewise each phase has its own liquidated damages stipulated in case of delay. From the contractor’s perspective, the risks and commercial imperatives arising from such arrangement are considered and included in the tender pricing. As an example, the contractor would have to arrange for water and power supply for each phase as well as planning of site access route based on these phasing requirements so that the completion of one phase of works does not disrupt the continuation of other remaining phases of works. 

In the case of early partial occupation where such advance planning is not available, the administration of contract, amongst others becomes an issue. By way of example in the absence of an agreed liquidated damages for parts of the works that is subject to early occupation, how should damages be calculated in case of delay? The same problem also applies to the remaining parts of the works that are not subject to early occupation. It is challenging for parties to agree on a new liquidated damages arrangement as there is very limited commercial motivation for the main contractor to negotiate in good faith and agree. This could easily result in a stalemate.

The existing provisions of contract can be helpful in prevention of stalemate. As mentioned earlier, the SIA form’s Clause 26 which deals with the event of early partial occupation/ re-entry sets out a mechanism in respect of liquidated damages arrangement. Under Clause 26(4)(d)(iv), the main contractor’s liability for liquidated damages shall be reduced proportionally based on the certified value of the occupied parts relative to the certified forecast value of the whole of the works. It should be noted that this clause does not give rise to a fresh liquidated damages applicable to the parts of the works which is subject to early occupation. It is only applicable to the remaining part of the works under construction after the said early occupation had taken place. In other words, if the early occupation parts constitute 30% of the value of the entire works and the original liquidated damages was $10,000/day, the remaining parts of the works shall now be under a fresh liquidated damages of $7,000/day. If the parts meant to be occupied earlier are in delay, there is a question of what should be the liquidated damages applicable? Clearly, this clause does not adequately address all issues which explains why such early partial occupation strategy should be avoided if possible. This once again provides a clear contrast with phase completion which was planned in advance where the contractual mechanism is both clear and unambiguous. Under under Clause 16.2 of the PSSCOC, a similar approach applies where the liquidated damages applicable to the remainder part of the works (exclusive of any early occupation part) shall be derived on the basis of relative proportion.

Early Partial Occupation – Contractor’s Consent And Associated Certification

It should be noted that the land or premises upon which the construction works are intended to take place effectively belongs to the Employer. The main contractor is merely engaged to carry out such works within a limited duration for the benefit of the Employer. Therefore, the main contractor’s consent is not required for the purposes of early partial occupation. However in exercising its prerogative, the Employer should also be mindful that the main contractor is entitled to recover any compensation, damages or additional payments as a result of such early occupation. Therefore the Employer has the ultimate authority but at a cost if exercised in a belligerent manner. The PSSCOC and SIA form duly recognise the Employer’s right in this regard. Under the SIA form, the provision that deals with occupation with consent is dealt with separately from the occupation without consent. This is to provide clarity of differences in treatment and the consequential effects. There are no such separation of provision under the PSSCOC.

The occupation of part with consent is provided for under SIA form’s Clause 26(2) whereas the occupation of part without consent is found under Clause 26(3). Apart from having separate provisions, the terminology used are different as well. The Architect issues ‘Certificate of Partial Occupation’ when the occupation is done with the contractor’s agreement whereas such certificate is named ‘Certificate of Partial Re-Entry’ when the same is done without contractor’s agreement. In reality the main contractor is unlikely to contest the very act of partial occupation by the Employer per se but rather the lack of agreement on either the associated compensation or the contractual effect of such occupation. By way of example under Clause 26(1)(c)(ii), it is stated that in case of occupation without agreement, the Employer may proceed with re-entry and commence occupation only if, amongst others a Delay Certificate shall have been issued and remain operative. This suggests a scenario where the main contractor is deemed to be in culpable delay for the whole of the works and the Employer may decide to proceed with early occupation of part of the works instead of waiting for the entire works to achieve practical completion. Under such scenario, it is likely that the main contractor would contest that it is in culpable delay and by contrast takes the position that it is entitled to extensions of time. Therefore in order to reserve its legal position, it had to in principle not agree to the operations and effects of the Delay Certificate issued which by extension mean the rationale behind the need for early occupation of parts. 

When comparing the SIA form’s Clause 26(2)(b) and Clause 26(3)(b) as regards the Certificate of Partial Occupation and Certificate of Partial Re-Entry, the former include an approximate value of the occupied part as well as a forecast value of the whole of the works upon practical completion whilst such valuation is noticeably absent under the latter certificate. This suggest that in the case of non consent, there is likely a lack of agreement on the valuation of cost to complete the occupied parts including any associated disruptive expenditure arising from the instruction of early occupation. It should be noted that these certificates shall be issued when the Employer proceed to enter and reoccupy the parts in question. These certificates are not supposed to be issued much later on a retrospective basis. Under occupation without consent where quantum of compensation is not agreed, the Certificate of Partial Re-entry is therefore not expected to include any information on valuation since it is expected not to be mutually agreed at the point of issuance. 

Under the PSSCOC, in the absence of a centralised provision for early partial occupation, there are no unique certificates to distinguish occupation with agreement or occupation without agreement. Certificate issued under such early occupation is in the form of a regular substantial completion certificate identifying the parts concerned. Under its Clause 17.3(1)(c), occupation of part of the Works is inclusive of the scenario where such arrangement had not been agreed by the contractor. Instead of putting the responsibility on the certifier like the case of SIA form, the PSSCOC puts the discretionary option of applying for such certificate on the contractor. The descriptions used is such that the contractor ‘may request for such certificate’ as opposed to ‘the Superintending Office shall issue such certificate’. Without a distinct terminology used to describe the certificates issued under early partial occupation, it perhaps could help to provide some room for parties to negotiate after occupation. Some may prefer such approach but others believe that this is effectively kicking the can down the road.

Timing of Issuance of Instruction For Early Occupation of Part of the Works

One of the key issues to be considered for the Employer and its consultant is the timing of issuance of instruction to the contractor for the purposes of early occupation. Whilst it is generally true that it should be issued ‘as soon as possible’, it is also useful to understand some of the financial and contractual consequences if the main contractor is informed belatedly. After all, decisions are often subject to trade off. To understand the issue of timing of instruction, one should firstly consider the consequences of compliance with an instruction issued by the certifier appointed under the contract.

Under Clause 17.3(1)(c) of the PSSCOC, early occupation is effected by way of an ‘instruction’ issued by the Superintending Officer (SO) and Clause 2.5 governs the meaning and effects of ‘instructions’ by the SO. Whilst there is no express reference to a time frame within which such instruction ought to be issued, it is interesting to note that both Clause 25.1(3)(b) and Clause 25.2(b) entitle the main contractor to loss and expense compensation to the extent that it complies with the SO’s instruction for early occupation of part of the works. Such event under these clauses is deemed ‘excepted risk’. Therefore, in considering timing of issuance of any instruction, one should be aware that the later the instruction is issued, the likelier such delay could exacerbate financial losses sustained by the contractor. As mentioned earlier in this article, logistic arrangements need to be facilitated to enable early occupation, and these often comes with financial consequences. As regards project with shorter construction period, whilst there is less room for late issuance of such instruction, the need for early occupation is also diminished. This is because, early occupation generally applies to large project with long construction period where there is compelling incentive to occupy part of the space earlier than schedule, despite the contractual ramifications. Whilst decision makers tend to favour taking longer time in order to deliberate the issue in hand methodically and thoroughly, the “financial ramification clock” is simultaneously ticking. 

The scenario is slightly different under the SIA form since there is a contractual distinction made between early occupation with consent and without consent. As alluded to earlier in the preceding section of this article, under occupation of part without consent, Clause 26(1)(c)(ii) stipulates that the Delay Certificate shall have been issued and remain operative. This suggest that the project is already in culpable delay, at least from the perspective of the Architect. Therefore, the likely motivation for early partial occupation under such scenario is where the Employer could benefit from early occupation of certain parts that is reasonably completed whilst waiting for the practical completion of the remaining parts. Given that the parts subject to early occupation is already completed, an instruction can be issued to effect such early occupation almost immediately whilst providing a reasonable time for the outstanding works to be cordoned off as well as provision of safe ingress and egress of the occupied parts. Such instruction is also like to be reactionary in nature taking into consideration the state of completion of the works. 

On the other hand, where the early occupation is done with the view of securing an agreement with the contractor, such instruction should be done much earlier. Such effort is proactive rather than reactive. As noted in the beginning of this article in respect of a hypothetical example where certain levels of building are instructed to be completed ahead of schedule, it is prudent to even have a series of discussions with the contractor prior to the issuance of instruction. This is to agree on various important issues such as the logistic arrangement to segregate the early parts from the remaining parts, prevention of disturbance to the on-going works, overall costs payable associated with such instruction, settlement of any outstanding delay and application of extensions of time etc. The breadth of issues to be discussed is naturally wide ranging and there is a need for the Employer to be willing to provide some financial incentive beyond a mere compensation or reimbursement based approach. Some may argue that if such agreement can be achieved in advance, parties may be better served to enter into a supplemental agreement so as to reset the contractual relationship with a clean slate. This supplemental agreement option is indeed a cleaner and clearer way forward than relying on the existing provisions under the contract.

Liquidated Damages Applicable To Parts Subject To Early Partial Occupation

It is noted that under both the SIA form and the PSSCOC, there are no express provisions governing application of liquidated damages for parts of the work that are subject to early occupations. The existing provisions under both these contract forms typically provide for liquidated damages applicable for the remaining of the works (outside the early partial occupation). Under both SIA form and the PSSCOC, the fresh liquidated damages for the remaining works are derived based on proportionate reduction of original liquidated damages based on relative value of the remaining works. As alluded to earlier in this article, if the early partial occupation is a reactionary initiative for project already under culpable delay, the issue of liquidated damages for parts subject to early occupation is no longer relevant. However, if the early partial occupation is a proactive measure, it would appear logical for there to be a liquidated damages applicable in case the early partial occupation do not materialise as a result of delay. One of the possible difficulties in setting  liquidated damages for early partial occupation could be the principle of delay to an early endeavour. Suppose the original completion date of a part of the work is 31 December 2024 but brought forward to 30 June 2024 due to a planned early partial occupation. If such part of the works are eventually “delayed” and completed on the original completion date of 31 December 2024, as originally agreed, did the Employer actually suffer any losses or damages under the existing terms of the contract? Such damages could be evident if parties entered into a supplemental agreement varying the original conditions but the reliance of original conditions alone might be challenging.

Conclusion

The issues raised above are by no means exhaustive as it relates to the subject of early partial occupation. There remains a variety of issues worthy of discussion on this topic. However it is hopefully evident that the initiative of early partial occupation is not straightforward even with existing provisions governing the associated mechanism. The intricacies of various commercial issues are unfortunately beyond what could reasonably be regulated by existing contractual mechanism.




Koon Tak Hong Consulting Private Limited

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

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

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

Issues With Natural Stones Specification

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

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

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

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

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

Issues With Subcontracting Arrangement For Stone Works

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

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

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

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

Process vs Product

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

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

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

Off Site Challenges

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

Baseline Programme

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

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

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

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

Contemporaneous Programme

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

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

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

As Built Programme

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

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

Assessment of Extension of Time Using Different Types of Programmes

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

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

Notice of Termination vs Certificate of Termination

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

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

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

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

SIA vs PSSCOC – Immediate Priorities Post Contractor’s Insolvency

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

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

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

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

Liquidated Damages After Termination

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

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

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

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

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

Calculating Costs of Termination

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

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

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

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

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

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

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

Challenges In Accurately Determining Solvency of Contractor Through Its Financial Statements

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

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

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

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

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

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

Element of Profitability 

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

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

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

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

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

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

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

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

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

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

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

Advance Agreement to Cost of Variations

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

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

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

General Rule of Valuation of Variations

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

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

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

How Do SIA and PSSCOC Deal With Valuation of Variations?

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

Tier 1

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

Tier 2

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

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

Tier 3

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

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

Tier 4

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

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

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

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

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


Conclusion

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





Koon Tak Hong Consulting Private Limited

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited