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

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

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

Common Features of Extension of Time Clauses Between SIA and PSSCOC

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

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

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

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

Adverse Physical Conditions/ Unforeseen Ground Conditions

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

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

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

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

Notification Requirements/ Condition Precedents

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

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

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

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


Prospective And Retrospective Grant of Extensions of Time

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

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

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

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

In Principle Determination Of Any Entitlement to Extension of Time

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

The Workings Of Price Fluctuation Clause And Limitations To Its Mechanism 

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

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

Other Provisions That Also Offer Price Adjustments Relief

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

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

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

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

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

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

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

Price Fluctuation Adjustment Pending Any Grant of Extensions of Time

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

Challenges Of Underground Construction Works

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

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

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

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

Procurement Pathways – Lump Sum vs Remeasurement vs Cost Plus

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

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

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

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

Procurement Pathways’ Impact On Standard Conditions of Contracts

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

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

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

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

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

Employer’s Requirements

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

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

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

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

Definition of Variations Under D&B For PSSCOC And REDAS

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

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

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

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

Definition of Variations And Its Effects On Contract Administration

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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