Imagine you are the contracts manager for a main contractor. You are expected to engage multiple subcontractors for your project and need to decide the form of contract to be used. Contract form or template agreement sets out the terms and conditions between the contracting parties. How do you decide? Your choice of contract form will be dependent on the type of subcontractor that you are looking to engage. In general there are at least two types of subcontractor namely ‘nominated subcontractor’ and ‘domestic subcontractor’. 

In case of nominated subcontractor, the choice of contract form is made by the Employer and its consultants which you are required to adopt and follow. In this regard you do not have the freedom to choose. In case of domestic subcontractor, whilst you have the freedom to choose the contract form to be used, the options available can be tricky to assess. This article examines this subject in greater detail. It should also be noted that this subject should also be of great interest not just to main contractors but also to subcontractors in the construction industry since this directly affects their contractual rights and obligations. In order to appreciate the context and options available for subcontract form, one needs to first have a general understanding of the differences between domestic subcontract and nominated subcontract.

Nominated Subcontractor and Domestic Subcontractor – General Differences

Both types of subcontractor enters into direct contract with the main contractor and are also paid by the main contractor for subcontract works done. It is an arrangement for the main contractor to outsource part of its construction works. As regards nominated subcontractors these are procured, negotiated and selected directly by the Employer and thereafter the Employer instructs the main contractor, through its agent to enter into a subcontract with its subcontractor of choice. The main contractor usually conforms with such instruction albeit with some limited room for objections. This nomination process can be tricky because the Employer is effectively walking on a tightrope. On one hand, the Employer wishes to get the best commercial deal out of its subcontractor of choice but on the other hand it had to ensure that conditions of this deal contractually syncs with the main contractor’s requirements. It is indeed a delicate balance but commonly practised in the construction industry. 

As regards domestic subcontractor, the choice of subcontractor, nature of the deal, scope of works being outsourced including any associated terms and conditions is primarily up to the main contractor and its ability to negotiate. The term ‘domestic’ provides a connotation that this is an internal matter for the main contractor which is subject to its purview. 

Key Matters in Subcontract Form of Contract – Back to Back Arrangement

When the Employer arrange to instruct its main contractor to enter into a subcontract with certain nominated subcontractor, it can be tricky. This is because one is directing its counter party to enter into a separate contract with an identified third party. The primary concern is whether the commercial deal negotiated with the nominated subcontractor contain any discrepancies or inconsistencies with the main contract. To the extent that the Employer proposes or even endorses a subcontract with conflicting terms to the main contract, does that change the main contract terms or influences the way it is interpreted?  This can be illustrated via two examples. Firstly, imagine the nominated subcontract terms included a more relaxed deadline where its subcontract period would arguably extend the main contract completion date. Could the main contractor upon acceptance of the subcontract terms argue that the nomination is effectively an extension to its main contract completion date or a tacit extension of time? Secondly, assume the main contractor is instructed to enter into a nominated subcontract in respect of subcontract works that involves selection of natural stones such as granite and marbles. Such selection will be carried out by the Architect as opposed to the main contractor given that it is a subject of building aesthetic. In this regard, the main contractor has limited role to play in so far as the choice of natural stones are concerned and would almost defer entirely to the Architect’s design preferences. If dispute arises between the nominated subcontractor and the Architect as regards rejection of works done resulting in delay and disruption to the project, to what extent should the main contractor bear the brunt of these ramifications? Do the subcontract terms offer any protection to the main contractor? After all, the main contractor had limited say in the selection and negotiation of the subcontractor in issue.

Although there could be further examples of issues that may arise in addition to the two hypothetical scenarios cited above, the point is clear – the choice of subcontract form should as far as possible be structured on a ‘back to back’ basis with the main contract form. The tricky aspect of this back to back arrangement is that the permutation of issues that could potentially arise may be so wide ranging and broad that makes it challenging to mitigate. It is almost impossible to mitigate the risks by providing an exhaustive list of issues that incorporates a back to back arrangement. The Employer rightly or wrongly takes the position that the main contractor ought to shoulder these subcontract risks as it had been financially remunerated to do so.

A back to back arrangement means that the subcontractor shall in general assume all obligations and responsibilities of the main contractor under the main contract, in so far as the subcontract works are concerned. In other words, if the subcontractor breaches its obligations under the subcontract terms which implicates the main contractor, then the main contractor can seek reimbursement from the subcontractor for any such corresponding damages. By way of example, if the subcontractor delays its subcontract works resulting in an overall delay to the project, the main contractor is accordingly entitled to recover any compensation from the subcontractor.

Even under the arrangement of domestic subcontract, the issue of back to back continues to be important and relevant. Whether the choice of subcontractor is nominated or otherwise, the main contractor has every reason to ensure that it is not unfairly “punished” under the main contract due to default of its subcontractor. In addition to that, it would be advisable to make certain that the provisions of main contract are administratively in sync with the subcontract on key matters such as interim progress payment, durations of defects liability period etc. 

In any given project undertaken by the main contractor, it is almost certain that it will be engaging nominated subcontractors as well as domestic subcontractors simultaneously. As a matter of industry practice, most main contractors would outsource a significant portion of the project works to subcontractors so as to keep its own fixed overhead expenditures low to ensure it is financially sustainable. Therefore, any discussion of nominated subcontract form would have a better context when contrasted with domestic subcontract form.

Nominated Subcontract Form

As mentioned earlier, if the Employer and its consultants sets aside prime cost sums in the main contract, nominated subcontractors will be engaged to carry out these works. Accordingly nominated subcontract forms will be used for these engagements as instructed by the Employer. Every major standard forms of contract used in the industry would have its corresponding nominated subcontract form. By way of example in Singapore, the major types standard forms used such as the SIA contract, the PSSCOC and the REDAS would prescribe its respective nominated subcontract form to be used in conjunction with the main contract form. These nominated subcontract forms are drafted with the intention of being contractually in sync with the corresponding provisions under the main contract form. By having the nominated subcontract form operating on a back to back basis with its main contract form, it reduces the likelihood of any objections from the main contractor when an instruction for nomination is issued.

Certain standard forms are drafted to be more prescriptive, detail and elaborate in its provisions of contract. These provisions include very structured condition precedents, timelines and requirement of written notices. These are in general requirements imposed by the Employer on the main contractor in case the latter decides to make any claims for additional time or additional monies. Such main contract forms are usually accompanied by nominated subcontract forms that are equally detail, and usually for good reasons. The extensions of time provision under Clause 14 of the PSSCOC main contract (Eight Edition July 2020) is an example that includes a fairly detail and elaborate mechanism that the main contractor had to comply with. Consequently the corresponding extensions of time provision under its nominated subcontract (Fifth Edition December 2008) found in Clause 24 is drafted in sync with the main contract. The following paragraph illustrates how both Clause 14 of the main contract and Clause 24 of the subcontract are administratively in sync with one another.

In general, under Clause 14.3(1) of the PSSCOC Main Contract the main contractor shall within 60 days of the occurrence of an excusable delaying event to notify the Superintending Officer (SO) of its intention to apply for extension of time. Such notice is a mandatory requirement and shall include contract references as well as reasons for such delay. Upon receipt of such notice, the SO may under Clause 14.3(2) require the main contractor to provide further details concerning the alleged delay within 14 days or such other period deemed necessary. Whilst the notification requirements and associated timelines above may appear straightforward in theory, its application in reality can be tricky for several reasons. Firstly, there could be a time lag between the occurrence of the event and the realisation that the event indeed will have a delaying effect. By way of example, the delaying event could be caused by other contractor engaged by the Employer that has no contractual relationship with the main contractor such as bad workmanship that adversely affects the next trade of works. In such a case the main contractor may only learn about this issue after the works are handed over by the other contractor that is in default. Assuming the next trade of work is performed by a subcontractor, it may take further time before the issue is escalated to the main contractor that will enable the latter to fulfil its obligation under Clause 14.3(1). Secondly, it should be noted that there could be hundreds if not thousands of issues, non compliances events, variation instruction occurring simultaneously for a large construction project at any given time. One’s ability to deal with a delaying event as it occurs could be compromised when confronted with these overwhelming issues.

The wordings of Clause 24 of the nominated subcontract form of the PSSCOC addresses the above issues in some ways, if the delaying event occurs within the scope of the nominated subcontract works. Firstly whilst the main contractor is the party that grants any extension of time to the nominated subcontractor, it is done with the consent of the SO.  Therefore, there will be consistency between the treatments at main contract and subcontract especially if it shares the same underlying delaying event. Secondly, Clause 24(3) of subcontract form stipulates that when the nominated subcontractor makes an application of extension of time with the main contractor, a copy of such application shall be issued to the SO. This is to enable the main contractor to comply with the corresponding 60 days requirement stipulated under Clause 14.3(1) of the main contract mentioned above. This effectively streamlines any communications and notifications between main contract and subcontract to avoid unnecessary confusion and miscommunication. It bears repeating that these timelines and notifications are condition precedents which mean that failure of strict adherence can result in denial of having contract period from being extended, causing liability to liquidated damages. Therefore having a back to back provision is not merely to enable ease of contract administration but also can have significant contractual ramifications. Finally under Clause 24(4) of the nominated subcontract, the main contractor could impose the same requirements of requesting for further details on the nominated subcontractor assuming the SO exercises his rights under Clause 14.3(2).

It is important to note that the above illustration merely cited the example of extension of time mechanism. In reality, there are multiple contractual mechanisms that are in need of back to back provision including on issues pertaining to valuation of variations, loss and expense claims, arbitration agreement etc.

Domestic Subcontract Form

Given the illustration above on the necessity of having back to back provisions between main contract and subcontract, what happens if the main contractor uses a bespoke in-house subcontract form to engage its domestic subcontractors? It is not uncommon for main contractor to have its very own bespoke subcontract form used for all its project regardless of the type of standard form being used for its main contract with the Employer. One may notice that it may contain a frequently used phrase of ‘mutatis mutandis’ or its equivalent in such bespoke form. This phrase in general means that when reading the bespoke form, one should interpret it in conjunction with the main contract form on the basis that there should be changes made to areas where change is required. One can argue that such phrase can be vague and grey whilst others who favour the use of such phrase will look at it as a way of enjoying great flexibility in its interpretation. 

Under situation where the main contract form is drafted in a manner that is less detail and less prescriptive, the use of mutatis mutandis may be sufficient. However under Clause 14 of the main contract PSSCOC form, it is highly unlikely that such phrase will give the main contractor sufficient coverage. Using the very same hypothetical example above of a delaying event caused by other contractor hired by the Employer affecting the scope of certain nominated subcontract works, the main contractor may have limited recourse against its subcontractor. In specific terms, if the main contractor is unable to to fulfil its 60 days notice requirement, the mere phrase of mutatis mutandis offers limited recourse to the main contractor as compared to the corresponding Clause 24 of nominated subcontract form.

If the main contractor simultaneously adopts nominated subcontract form for its nominated subcontractor and domestic subcontract form for its domestic subcontractor, this give rise to two different subcontract regimes to be administered in parallel under a single project. Such dichotomy can be an administrative burden to say the least. This conundrum give rise to the question of whether the main contractor should adopt nominated subcontract form for all its subcontract engagement. In other words, can the nominated subcontract form be used for domestic subcontractor? If yes, does the nominated subcontract form require any amendments prior to its use for domestic subcontract engagements? This will be explore further in the next section of this article.

Some may argue that the different contract form used for domestic subcontractor is a risk that can be managed quite effectively by the main contractor because of the business relationship. Unlike nominated subcontractor, the engagement of domestic subcontractor is subject to discretion of the main contractor. In large part, these relationships are developed over time which promotes trust and good will. These elements can arguably be of help in case parties encounter difficult issues on site that involves claim where pure rights and obligations are not the only factors of consideration.


Amendments to Nominated Subcontract Form for Domestic Subcontractor

If the main contractor is in favour of using an amended version of nominated subcontract form for the purposes of its domestic subcontract, the following could be useful points of considerations. In general, the scope of amendment to the nominated subcontract form shall pertain to provisions that are unique to nominate subcontract arrangement. By way of example certain payment concessions could be made by the Employer as part of commercial negotiations with the nominated subcontractor during the stage of procurement. Such payment concession may include direct payment by the Employer to the nominated subcontractor in case it fails to receive any payment from the main contractor. This concern is not uncommon especially if the nominated subcontractor lacks any working experience with the main contractor and the demands of cashflow is significant in the subcontract works concerned. Therefore these provisions should be deleted as it lacks relevance. 

Another point of consideration for the main contractor is whether the domestic subcontractor should take instructions directly from the Employer or its consultants. Certain main contractors prefer a direct control over its domestic subcontractor for fear that the main contractor could lose its leverage, especially if the instruction concerned a contentious works where parties dispute whether there is entitlement to additional payment or additional time. Other main contractors take the opposite position that if the Employer or its agent’s instructions are deemed the main contractor’s instruction, it avoids communication bottle neck and facilitates progress of works. In reality there is no absolute right or wrong and is dependent on the nature of the domestic subcontract works. If the main contractor allows direct instructions from the Employer and its agents, it should simultaneously safeguard its interest to make certain that any compliance with such instruction shall not be deemed as automatic entitlement to additional payment or additional time. This is particularly important if the construction works are under an extremely fast pace and the contractual paper work may lag behind the actual works done.


Conclusion

The choice of contract form for subcontract works is not merely an administrative decision. Proper deliberation and an informed decision making process sets the risk allocation philosophy of the organisation. Whilst the Employer may have less desire to interfere and impose its preferences on domestic subcontract arrangements, it ultimately affects the construction project as a whole particularly as it pertains to rights and obligations of all parties involved.

Koon Tak Hong Consulting Private Limited

When the Employer arrange for issuance of instructions to the main contractor to carry out additional works after its project achieves practical completion, it seems baffling to most people. Why carry out additional construction works when the project is completed? Is this permissible under the construction contract? In reality most construction practitioners would find that this is quite commonly practised particularly if the project involves major additions and alterations to a building that is in operation throughout construction period. This article deals with various aspects of this unique phenomena by first understanding the rationale behind this practice.

Why Instruct Additional Works After Practical Completion?

Commercial buildings such as shopping centres, hotels, airport, office towers are upgraded and rejuvenated regularly through additions and alterations initiatives. This is done as part of active asset management efforts in order to improve its operational efficiency, keep up with evolving needs and to refresh its image. Additions and alterations are usually executed in phases where construction works are carried out in different geographical locations of the building at different point in time. The remaining parts of the building are kept in operation to generate rental revenue. Therefore the construction works are carried out simultaneously whilst the building is in partial operation. 

Buildings are in constant need of maintenance to keep the building in operation. These maintenance activities ranges from the most miscellaneous activity like changing of directional signage to the more significant ones such as replacing electrical power infrastructures. As a matter of organisational structure, the maintenance team is usually separate and distinct from the construction team, of which the latter manages additions and alterations works. As and when maintenance works arise, there is a natural inclination to have the additions and alterations contractor to execute those maintenance works which usually involve certain degree of construction activities. This natural inclination stemmed from the fact that the maintenance team can do away with procurement and tender process of engaging a separate contractor after its maintenance budget is approved. The justification for ‘leveraging’ on the additions and alterations contractor or the main contractor is the avoidance of having too many contractors working simultaneously on site that may result in clashes, conflicts and the need for coordinations. Further, the maintenance team usually takes advantage of the fact that the main contractor had been vetted by the construction team prior to carrying out the works in the building concerned and would now have acquired sufficient experience and knowledge specific to the building’s operations. The avoidance of carrying out tender and orientation of a new contractor should in theory be beneficial in saving time for the maintenance team. 

After the budget for the maintenance works is transferred from maintenance team to construction team, the latter will then arrange for instructions to be issued to the main contractor for additional works. In terms of timing, such instructions are generally issued towards the tail end of the construction works or even after practical completion. The reason for such timing is because this is usually the period when construction team will arrange for handover of completed works to the maintenance team. During these handover inspections, the realisation of the need for maintenance works on interfacing systems arises. Further the main contractor would usually have more bandwidth and resources available to carry out additional maintenance works when significant portion of its additions and alterations are completed. There is also profit incentive for the main contractor to carry out such additional works. In other words, there is a meeting of minds between all parties, at least commercially for such unique practice to prevail.

So why the maintenance works are not planned in advance and bundled under the additions and alteration works construction contract to begin with? It would appear that any advance planning is more sensible. It allows the Employer to take advantage of economies of scale by aggregating works together and also the ability to programme the works holistically.  There are many reasons for the lack of advance planning. Firstly, maintenance works are usually planned in a calendar cycle based on structure of financial year. These maintenance planning cycle may not coincide with the construction schedule. Secondly, certain maintenance works can be reactive rather than proactive where certain building systems malfunction incidentally. This could also explain why the need for an expedited procurement approach by sole sourcing the works to the existing main contractor.

Is This “Allowed” Under Standard Forms of Contract e.g. SIA Contract / PSSCOC?

Whether the practice of instructing additional works after practical completion is provided for under the contract is a debatable matter. Whilst there is no express provision on instructing additional works in this manner, one may interpret the contract based on other  general provisions that may be relevant. These provisions include the certifier’s power to instruct additional works through variation order, the definition of practical completion, the period for the main contractor to vacate the site during certification of completion etc. It should also be pointed out that parties are free to contract. Therefore, if there is meeting of minds between the parties on the need to carry out additional works albeit belatedly, the contract should reflect the intentions of the parties. This section of the article however deals with the question of whether the general conditions in unamended standard forms of contract are capable of accommodating such arrangement or is there a need for parties to enter into a supplemental agreement. In this regard, two commonly used standard forms of contract are referred to namely the Singapore Institute of Architect (SIA) Building Contract 2016 and the Public Sector Standard Conditions of Contract (PSSCOC) Eight Edition July 2020.

It appears that there are two competing arguments on this matter. Firstly the interpretations of certain conditions do supports the argument that instructing additional works after practical completion is contractually provided for under the said standard forms. Clause 19.2 of the PSSCOC which deals with the superintending officer’s power to order variation, states amongst others that he may at any time issue an instruction in writing requiring a variation. The phrase ‘at any time’ does not appear to be circumscribed by the expiry of contract completion date. Similarly Clause 12 (1)(a) of the SIA contract states amongst others that the Architect shall have power ‘at any time’ to give directions or instructions requiring a variation. The definition of variations under both standard forms appear to be wide enough to include works that may be a departure from the nature of the original scope of works. This should include maintenance works beyond the original additions and alterations works. Clause 22 of the SIA contract deals with the certification of completion. Clauses 22(3) and 22(4) in particular expressly state that apart from stipulating the date on which the works appear to be completed, the Architect shall separately specify the date on which the contractor shall vacate the site and the date on which the Employer shall take over the works. It appears that the SIA contract makes express distinction between date of completion, date to vacate the site and date for the Employer to take over the works. This implies that there is potentially a time gap between the contract completion date and the date on which the works are officially taken over and be under the responsibility of the Employer. This time gap when interpreted in conjunction with the Architect’s authority to order variation works ‘at any time’ opens up the possibility of instructing additional works after practical completion. If the date of taking over of works coincides with contract completion date, it would have quashed any possibility of instruction of additional works post completion. Similarly under Clause 17.2 of the PSSCOC, although the contractor’s license to occupy the site is terminated upon date of substantial completion, the contractor is allowed to re-enter the site not just to carry out defects rectification works but also carry out ‘any outstanding works’. 

On the other hand, the wordings in other general provisions appear to limit the power of the certifier to instruct variations after contract completion date. Even if one disagrees that these provisions give rise to such limitation effect, these provisions should caution one from instructing additional works belatedly. These provisions which include insurance clauses, liquidated damages clauses, valuation of variation clauses etc will be expanded further in subsequent sections of this article.  

Insurance Implications

The insurance provision is one of the more critical obligations on the part of the main contractor, where it is required to procure the necessary insurance policy coverage prior to commencement of any works on site. Such obligation is so critical that apart from producing a copy of the policy, the main contractor is also required to produce a copy of the receipts to prove that payment is made in respect of the premiums for such policy. Under Clause 28.1(1) of the PSSCOC, the main contractor shall maintain insurance of the construction works until 14 days after the date of substantial completion. Such insurance coverage shall also be maintained during defects liability period but only limited to losses arising from a cause occurring prior to the commencement of defects liability period. Clearly, the scope of coverage is reduced during defects liability period to insure defects related risk rather than any new works instructed after practical completion. Similarly under Clause 20(1)(c) of the SIA form, the main contractor shall maintain the insurance coverage for the construction works until completion. 

Given that the insurance for the construction works shall only be maintained until completion, one can reasonably take the view that the standard forms of contract do not anticipate instruction of additional works after completion. If such instruction is anticipated, the insurance provisions would have made allowance for the maintenance of such policies either until the expiry of defects liability period or completion of any and all works on site. In fact the requirement to procure insurance is so strict that it had to be done prior to commencement of any works on site. Therefore, the protection from insurance is so critical that it would be illogical to construe that the requirements are somehow scaled down by allowing works on site without the insurance coverage after completion. After practical completion with the completed works in place, the need for such insurance protection would arguably be higher. As mentioned earlier, some of the belatedly instructed works may be significant in scale and risk such as replacement or improvement of electrical infrastructure of the existing building. If such works are instructed on the purported benefit of time savings as a result of a simplified procurement process, this may well be penny wise pound foolish. 

Liquidated Damages Implications

One of the more effective deterrent against the main contractor for delaying completion of works beyond contract completion date is liquidated damages. Most standard forms of contract would have provisions to allow the Employer to recover liquidated damages if the construction works remain incomplete beyond the stipulated completion date. What happens if there is delay to works instructed after practical completion? The Employer is likely to lose its rights to liquidated damages for such delay and also the deterrent effect associated with such provision. Under Clause 16.1(1) of the PSSCOC, the main contractor shall pay liquidated damages only if works are not substantially completed within the time for completion i.e. before the contract completion date. Likewise under Clause 24(2)(a) of the SIA contract, the Employer shall be entitled to recover liquidated damages from the main contractor upon receipt of a delay certificate, which in turn is issued when the works remain incomplete after the date of completion. 

The practice of instructing additional works after practical completion involves a wide variety of works, including certain maintenance works. Whilst admittedly not all works are time sensitive, the deterrent of late completion is still necessary especially if works are carried out in an operational building. This is why under Clause 22(5)(b) of the SIA contract, the Completion Certificate may include a list of outstanding works with corresponding deadlines for such works to be completed. The main contractor shall provide a written undertaking to comply with those deadlines stipulated by the Architect. It is unlikely however for the Employer to be in the position to impose any liquidated damages if any of those deadlines are breached. 

It is also unlikely that the Architect is authorised to stipulate any supplemental liquidated damages for these belatedly instructed works. It is however interesting to note that under Clause 3(6) of the SIA contract, the word ‘completion’ shall include completion of any outstanding works notified by the Architect pursuant to Clause 22(5) as included in the Completion Certificate. It is important to note that the SIA contract is unique in that the issuance of Delay Certificate is a condition precedent to the recovery of liquidated damages. It is debatable whether the Architect is authorised to issue any Delay Certificate after the issuance of Completion Certificate for the very same works. 

Valuation of Additional Works Instructed Post Completion

As the practice of instructing additional works post completion is debatable, valuation of such works can be a subject of considerable complexity as well.  Is the valuation of variation mechanism commonly found in standard forms of contract applicable to such works? To answer this question, one has to have a basic understanding of this valuation mechanism. Whilst different forms of contract prescribes mechanism with slight differences, the basic principles remain unchanged. In general, the mechanism is structured on a tiered basis where the choice of unit rates and prices used to value such works is dependent on amongst others, the timing when the variation works are instructed. If the main contractor is instructed to carry out additional works in a manner where it is out of sync with its construction programme resulting abortive works and the need for additional resources, such additional works can be more costly. The reverse is true, where the unit rates and prices which were previously subject to competition can be used as the basis of valuation if the additional works are instructed to be carried out under similar conditions to the main contractor’s prevailing programme. The logic to this mechanism is quite straightforward. It is always commercially advantageous to utilise unit rates that were agreed upon during tender where the prices are more competitive. 

Whilst valuation of variation works is more of an art than science with considerable scope of debate, there is still merit in having such provisions included in the contract. This is because once the construction agreement is formed, most if not all of the variation works will by default be carried out by the main contractor. The Employer would have very limited latitude to appoint other contractor to carry out any additional works, which means the Employer’s bargaining power on the costs of those variation works will be de minimis. Therefore having an agreed valuation mechanism provides the necessary structure and balance in assessing variation costs.  

Intuitively, if works are instructed post practical completion, the contract unit rates would not be applicable since most if not all of the significant construction works would have been completed. In other words, any additional works should entail remobilisation of plant, equipment and machinery on site to the extent that it is required. These entail additional costs. If post completion additional works are required, the conventional arrangement will be for the main contractor to provide a quotation in advance prior to issuance of the instruction. This quotation will usually be negotiated and agreed if possible. 

So how does the Employer go about negotiating such quotation? For most construction projects, there are usually a long list of variation works instructed during the construction period that are pending valuation as part of the process to finalise the accounts. The Employer could consider using these variation works as the basis of negotiating any aforementioned quotations. Under the valuation of variation mechanism, there is a method of valuation using daywork rates. This method is adopted when the variation works is completely out of sync with the construction programme. Under this method, the main contractor is essentially compensated based on actual resources utilised on site based on recorded daywork sheets. This method of valuation could be used as a starting basis of negotiating the amounts proposed in the main contractor’s quotation. In essence, the amounts included in the quotation should not be much higher than the amount derived through daywork rates. The Employer could also use any records of actual productivity during construction period as an estimate for the level of resources and period of works required for the post completion works to be carried out.


What is the Actual Completion Date?

Instructing additional works post completion involves an additional layer of complexity when the actual completion date is not often immediately clear until weeks later. Under most standard forms of contract there are procedures in place for the main contractor to issue a notice to the certifier for a joint site inspection for the purposes of completion certification and very often the completion date is not certified on the very day of completion. The certification of completion could take even longer if the certifier is required to assess various extensions of time applications made by the main contractor due to the voluminous contemporaneous records that had to be examined. In view of the above, it is not uncommon for the main contractor receiving such instruction for additional works to be unclear whether to make application for extensions of time especially when the certification of completion is pending. If the instruction is received after the certificate of completion is obtained, it will be safe to say that the main contractor is not required to make any extensions of time application. 

Should the main contractor decide to err on the side of caution by making extensions of time application upon receipt of instruction, the quotation for such additional works may also include any loss and expense claims to the extent that such claims is contractually provided for. This would obviously inflate the costs for any additional works. Therefore from the Employer’s perspective, it is advisable to arrange for the issuance of such instruction in a wise and timely manner to avoid these unnecessary complexities.


Conclusion

Assuming one is of the view that the general standard forms do accommodate instructing additional works post completion, it would be wise to still do so in a cautious manner. Having a convenient process to procure contractor for certain ad hoc works should not be on the expense of the smooth and clear administration of a construction contract. In other words, whilst it may be permissible, it is not a wise move.




Koon Tak Hong Consulting Private Limited

This article examines the different types of drawings issued in construction projects. These drawings will be reviewed from a contractual perspective. Construction law is unique in that it is a blend of both legal matters and technical matters. Various documents that are typically considered ‘technical’ such as drawings, specifications, programmes etc are not reviewed by legal professionals with the same rigour as compared to ‘legal’ documents such as particular conditions, bond, guarantee, warranty etc. A legal examination of technical drawings is important because drawings are possibly one of the more common sources of contractual disputes that do not usually attract adequate legal attention. Having certain level of technical proficiency of the types of drawings, its purposes, timing of issuance, common points of contentions etc will greatly facilitate a holistic understanding of the project’s risk profile.

There are various types of drawings produced by various parties throughout a typical construction project, each with its own unique contractual implications. Even under the traditional procurement route of design-bid-build with comprehensive design in place prior to the engagement of main contractor, the main contractor or its subcontractors are still expected to produce certain types of drawings throughout the construction period. In other words, one is expected to produce drawings even when it generally does not shoulder design responsibility. Therefore, issuance of any drawings should be done with great caution for avoidance of ambiguity as regards design responsibilities. The subsequent sections of this article address different types of drawings issued chronologically throughout a typical construction lifecycle under a traditional procurement route.

Tender Drawings

Tender drawings are produced by designers engaged by the Employer to communicate the scope of works to contractors bidding for the project to facilitate pricing. Tender drawings are essential component of the Employer’s invitation to treat in order to shape the scope and nature of offers from the contractors. The tender drawings’ clarity will in turn enable provision of offers which are defined and unambiguous which then facilitates acceptance. A constant change in invitation to treat creates ambiguity in the scope of offer, which can be a recipe for contractual disaster. Indeed, one of the inherent characteristics of a construction tender is the common changes in tender drawings even before the contractors have the chance of submitting its offer, and it continues to change even after the offer is made. 

One of the reasons to the above phenomena is because the tender exercise commences even before the design is fully developed. This consequently  results in changes in scope of works during the tender period causing the issuance of revised tender drawings. Where the tender drawings are revised during the pricing period, these are ‘tender addendum drawings’. On the other hand, ‘post tender drawings’ refers to revised drawings issued after the pricing duration such as during tender interviews. These revisions could be necessitated by feedback from contractors to clarify drawing details or adopt ion of certain suggestions that enhances ‘construct-ability’ or revisions in design as part of commercial negotiations.

Whilst it is not advisable to have multiple revisions to drawings after the commencement of tender, it remains a common practice. It is important to note that there are typically multiple designers producing tender drawings including architects, structural engineers, interior designers, building facade consultants, mechanical and electrical engineers etc. Therefore, the change in one set of architectural tender drawings potentially implicates consequential revisions to tender drawings of other disciplines. Ideally, various consultants are well coordinated and move in complete locked-step in ensuring design consistency. In reality however, every change or revision in drawings increases risks as it relates to design consistency and conflicting interpretations. Occasionally, changes in design are not even appropriately reflected in revision to drawings but rather casually annotated in hand sketches, part prints etc all of which are not accompanied with the relevant details and also not drawn to scale. Ultimately, it makes the process of compilation of contract document that much harder and complex, which will be further elaborated in the next section of this article. 

Contract Drawings

Contract drawings illustrates the final scope of works agreed between the Employer and the selected contractor which are included in the construction contract document. Contract drawings formed the basis of the original contract sum. Substantively, contract drawings represent the penultimate version of tender drawings. The selected contractor’s offer is accepted by the Employer via the execution of Letter of Acceptance or Letter of Award which is known as an ‘LOA’ in short. The actual formal contract document with complete set of contract drawings are usually compiled and formalised several months after the signing of the LOA. It is important to note that the LOA itself is not accompanied by a physical set of contract drawings. The LOA merely provides a list of correspondences between the contractor and project consultants during the tender period which identifies the timing of issuance of tender drawings or any revisions thereof. In other words, this list of correspondences in the LOA sets out the ‘referencing paper trail’ of the design changes from a chronological perspective. As a result of the duration taken for the preparation of contract drawings, the initial phase of construction project may proceed for months without a physical set of contract drawings in place. This could be contractually risky as there is an absence of documentation clarity in the agreed scope of works during this period. It is not uncommon for the contractor with its tender team being separate and distinct from the project execution team. Once the tender phase is completed and the project is secured, its execution is handed over to another team with different skill set and focus. A new team without the legacy knowledge of what was the scope of agreement, coupled with the absence of physical contract drawings for a period of time may be the recipe for contractual disputes.

Although the formal contract document and contract drawings are important to properly administer the project, there are no associated compilation and formalisation deadline stipulated within the standard forms of contract. One of the time consuming aspect to the formalisation of contract drawing, is the effort to create the penultimate version of tender drawings especially if the original tender design was revised multiple times during the course of procurement and commercial negotiations. The superseded versions of tender drawings are excluded for avoidance of confusion and where necessary any hand sketches previously produced are converted into appropriate format such as the ‘computer aided design’ or CAD version. Generally each contract drawing carries a unique drawing reference which would indicate how many previous version(s) had been produced prior to its final form. 

For reasons that will be further elaborated in the next section of this article, the production of further drawings will continue even after the construction contract is concluded. These drawings are known as ‘construction drawings’. In theory these construction drawings should be substantively identical to that of the contract drawings. However it is quite common for these new drawings to include additional details. These additional details are quite common sources of dispute if the contractor believes that these amounts to variations to the agreed scope of works that give rise to entitlement to additional payment or even extensions of time. Therefore, one of the reasons why the formalisation of contract document and contract drawings can be time consuming is because the contractor’s team may review every draft contract drawings issued by the consultants. These review processes can be protracted and detail oriented as the contractor wishes to avoid inadvertent inclusion of construction drawings with supplementary details as contract drawings. Where such mistakes occur, it may well jeopardise the contractor’s entitlement to additional payment or time.

Construction Drawings

Construction drawings refers to drawings issued by the consultants to the contractor to illustrate the actual scope of works that are to be constructed on site. The contents in construction drawings may be different from contract drawings from time to time for a variety of reasons. In manufacturing industry, every item produced is virtually identical due to standardisation in the production process. By way of example, the mobile phone of a specific model from a specific brand should be no different whether you purchase it from shop A or shop B. In the construction industry however, no two buildings are completely identical even if these are designed by the same architect and build by the same contractor. This is because no two plots of land are completely identical in shape or soil condition or geographical orientation or urban zoning regulations or its neighbourhood etc. In a building design process, it is often a balance between end user requirements versus taking advantage of the inherent characteristics of the site condition. Construction of buildings are therefore often described as being “prototypical”. Whilst building designers often adopt standardisation as much as possible to increase efficiency and productivity, these are somewhat constrained by realities. Some of these realities are uncovered when the actual construction process commences where adaptation of design are required. These adaptations are required notwithstanding the best effort exercised during the conceptual design. 

Tender drawings or the subsequent contract drawings are sufficient to communicate the design details for the purposes of pricing the construction project. These drawings are however inadequate in respect of details to actually complete the construction works due its prototypical nature. Therefore after the execution of LOA, it is common for the architect and engineers to issue construction drawings to enable the contractor to carry out its construction works in accordance to the site circumstances. From time to time, these construction drawings include details that depart significantly from the contract drawings such as actual dimensions, specific choice of finishes. Under such condition, the contractor would request for an instruction from the architect, or engineer pursuant to the conditions of contract to acknowledge its entitlement to additional payment or even additional time. Some of these requests may be contentious in that the project consultants consider any differences exhibited in construction drawings are part of the contractual risks allocated to the contractor and that the prices shall be inclusive of expenditures that are indispensably necessary to complete the works. Therefore these requests for instructions are rejected resulting in disputes. Whether one is advancing or defending against such claims, it is crucial to compare the relevant construction drawings with contract drawings to appreciate the scope of works in dispute. Such disputed scope of works should be reviewed in conjunction with the relevant conditions of contract so as to determine the merit of such claims. It should be noted that the extent to which the architect or engineer issue construction drawings is dependent on the type of specifications included in the contract. In the case of performance based specification where the contractor’s obligation is to construct to achieve a stipulated outcome or requirement which is common in the domain of mechanical and electrical works, the issuance of construction drawings is considerably less. In this case, the contractor has more freedom and flexibility to dictate the choice of materials or brands of systems, as long as it fulfils the said performance specification.

Combined Services Drawings

The combined services drawing or ‘CSD’ in short is usually produced by the main contractor or mechanical and electrical (M&E) subcontractor rather than the consultant engineer. These drawings show the locations, layouts and sizes of all M&E services such as electrical cabling, ventilation ducts, fire sprinklers system, CCTV, plumbing works etc. These drawings coordinates the layout of various services from different M&E trades normally carried out by different subcontractors. The main contractor is therefore by default in the best position to execute these coordination efforts due to its supervisory role in respect of all subcontractors. The main goal of CSD is to determine the optimal layout of these services within a confined and congested space such as above false ceilings. Occasionally, certain cables or pipes are required to penetrate through structural elements such as concrete beams or slabs. Therefore the CSD illustrates the interface between architectural, structural and M&E domains. 

From a contractual perspective, it is important to note that the production of the CSD is effectively a detail design development process based on a set of objectives stipulated under the performance based specifications. Notwithstanding under the approach of design-bid-build where the contractor is expected to build based on a given design, it is in actuality a form of partial design and build. This is because the main contractor and M&E subcontractors through production of CSDs develop detail design on the routing of services based on performance based specifications. Therefore there is no pure traditional procurement approach unless the consultant M&E engineer is also responsible for production of CSD, which is rare. By way of example, the consultant engineer prescribes the capacity or performance requirement of a particular M&E trade and it is usually up to the subcontractor and the main contractor to propose systems that meet those requirements. The production of CSD is therefore part of the process to demonstrate that those requirements can be achieved based on certain proposed systems. 

There are critics who would understandably disagree and argue that the design responsibility continue to be shouldered by the consultant engineer because the proposed system is ultimately approved by the consultant engineer notwithstanding proposals made by the contractor. In this regard, it is important to examine the commonly found provisions in the standard forms of contract pertaining to any design proposals raised by the contractor. Even under the standard forms of contract for traditional procurement approach, there are provisions therein that anticipates some level of design responsibility that resides with the contractor where the choice of workmanship or material or performance of the actual works is made by the contractor. In this regard, it is important for any contractor to pay special attention to these provisions and if necessary negotiate particular conditions that is consistent with the acceptable scope of responsibility. Where there is agreement for the contractor not to shoulder any design responsibility, it is important for the corresponding CSD to exhibit the relevant disclaimers for avoidance of doubt.

Shop Drawings

The main contractor or its subcontractors are usually responsible for the  production of shop drawings. The shop drawings is in essence a graphical interpretation by the contractor of the consultant’s design of certain systems that are to be prefabricated off site by including field dimensions, installation details that were previously not available in contract drawings. There are certain building components or systems that are usually fabricated off site such as structural steel members, precast concrete units, air handling units, standby power generators etc. Prior to fabrication, the precise site dimensions are included in shop drawings for the consultant engineer’s approval. Upon approval, these shop drawings are then handed to fabricators for manufacturing based on those precise dimensions so as to avoid abortive modifications on site.

From a contractual perspective, the review and approvals of shop drawings can be a source of contractual dispute particularly if the engineer makes annotation on shop drawings that is perceived as variation from the original design. Where the installation details annotated on the shop drawings warrants additional works that goes beyond what was originally priced by the contractor in the contract sum, it can be tricky to objectively determine if those annotations indeed entitles one to additional payments. This is because the main purpose of producing shop drawings is to incorporate details that were previously not available in contract drawings. Therefore differences in contract drawings from approved shop drawings are to be expected and cannot be the sole evidence that variations were indeed instructed. Parties in such situation are advised to refer to other parts of the contract documents such as pricing schedule, preambles or specifications for further clarity. Where parties believe that certain annotations on shop drawings may give rise to contractual dispute, it would be prudent for the claimant i.e. the main contractor or subcontractor to formally request for an instruction in compliance with any condition precedents. One should not assume that annotations or hand written notes on shop drawings by the approver amounts to an instruction for change in scope of works. 

The very need to develop shop drawings, or even the CSD reinforces once again the fact that contrary to popular belief, contract drawings are sufficient for pricing but inadequate to complete the construction works. Once construction works begin, the level of details that are expected are usually higher than the information available during tender. That is why the types of drawings issued during construction project can often be a fertile ground for contractual disputes.

As Built Drawings

As built drawings are produced by the contractor upon practical completion of the construction works to illustrate the full and final completed works. It includes all variations instructed during the construction period, apart from the abortive works. These drawings can often serve as useful points of reference for parties to settle final accounts because it illustrates any changes to the original scope of works. The provision of a complete set of as built drawings is usually a condition precedent stipulated prior to final tranches of payments to the contractor, in addition to other deliverables such as warranty documents. 

Whilst on one hand it marks the completion of a construction project, as built drawings are also important if and when the next construction project commences. Assuming the completed building is subject to certain future additions and alterations works or maintenance works, the next team of design consultants will use the as built drawings as the basis of their design development. Likewise, during tender for the next project, the as built drawings are usually distributed to the contractors for their pricing reference as it relates to the scope of works required. In view of the above, the accuracy of as built drawings becomes crucial. Errors in as built drawings can cause disputes in subsequent projects. Unfortunately, during the initial production of as built drawings when the project is originally completed, its accuracy is rarely the subject of much scrutiny as it is almost inconsequential to the completed project. Fortunately there are regulations in most jurisdictions that require the full and comprehensive as built drawings to be submitted to the relevant authorities for its record and in exchange for issuance of statutory approvals. Any material inaccuracies included in these as built drawings may result in fines and penalties.

Given that as built drawings are usually due for submission by the contractor after the project is substantially completed, the question that may occasionally be raised is whether the act of requesting for as built drawings by the architect or engineer implies that the contractor’s work is deemed satisfactorily completed. This argument arises because the architect is usually required to submit a full set of as built drawings to the relevant authorities for its issuance of statutory approvals. On the other hand the architect may refuse to issue practical completion certificate to the contractor due to existence of defects or other non conforming works. In reality, it is possible for the project to be both substantially completed and for a list of defects to exist. In fact it is rare for project to be substantially completed and be literally defects free. The question for the certifier to decide impartially is whether those outstanding works are indeed acceptable defects as defined under the contract or was it so significant that there is a delay to completion. This issue in turn raises the question of how practical completion is defined under the construction contract in hand. From the main contractor’s perspective however, the as built drawing should illustrate the state of the works that was built or constructed at the point when the drawings were produced. If the architect accepts the as built drawing submitted by the main contractor and even relies on those drawings for the purposes of submission to statutory authority, there is a strong argument that the construction works would have been completed from the perspective of the architect. In other words, as built drawings can effectively be a form of evidence.

Conclusion

Whilst drawings are usually deemed “technical documents” that are rarely the subject of much legal scrutiny, it is evident that this cannot be any further from the truth. Based on the preceding sections of this article, a holistic examinations of all documents including drawings should be part and parcel of a comprehensive legal review exercise.

Koon Tak Hong Consulting Private Limited

This article highlights some of the tricky issues that a subcontractor is usually confronted with when it reviews a subcontract tender document. Whilst some of these issues varies based on the trades of work, there are general issues that are non trade specific. In other words, a building facade subcontractor may face issues similar to an electrical subcontractor during their respective tender processes. An understanding of such issues can facilitate consolidation of certain best practices for subcontractors. Additionally with such discussion, main contractors, project consultants and the Employer are able to appreciate issues from subcontractors’ perspective which helps to foster greater mutual understanding. 

Pricing Scope of Works Under a Dynamic Site Conditions

Subcontract tenders are carried out after the main contractor is appointed and when the construction works are likely to be in significant progress. Given the dynamic nature of construction works, circumstances changes on site resulting in reshuffling of priorities. During the procurement of various subcontract trades, subcontract tenderers should ideally be provided with the most up to date and relevant information to facilitate their pricing of the subcontract works. However, the constant changing circumstances on site meant that occasionally subcontract tenderers may be relying on obsolete or superseded information as the basis of their pricing. Not only this potentially affects the availability of competitive pricing, it may result in disputes after the subcontract is awarded if the subcontractor felt misrepresented. By way of example, a ceiling works subcontractor may have submitted a bid on the basis that it is required to commence works on site once the mechanical and electrical (M&E) services above the false ceiling are fully installed. If there are delays to the M&E works due to design changes, the commencement of the ceiling works will correspondingly be delayed. Occasionally, the ceiling works subcontractor may be subject to new arrangement where it is now required to install its ceiling panels in multiple phases so as to be in tandem with the progress of M&E works. These new circumstances could give rise to additional cost and additional time if it results in loss of productivity due to congestions on site and the need to share site resources such as scaffolding.  The entire duration of a subcontract tender may take two to three months and it is not uncommon for site conditions to change, critical path of the master programme to shift etc during this period of time. 

In light of the above, subcontractors will need to pay special attentions to certain provisions that are commonly included in its tender document that may affect their future entitlements to contractual relief. Whilst it is generally true that the subcontractor may claim for additional payments and time to the extent that it is aggrieved and prevented from completing its subcontract works, one should also be cognisant of the presence of any contractual provisions that may limit or even deny such claims. The presence of such limiting provisions in tender document should be the subject of review and negotiations during tender. To this end, there are a few notable examples of limiting provisions that can be found in most standard forms of subcontract included in tender document. 

For ease of reference, this article shall utilise the subcontract form that is used in conjunction with the Singapore’s REDAS Design and Build Conditions of Contract (Third Edition, October 2010). Under Clause 2.8 therein, the subcontractor shall amongst others, be deemed to be fully acquainted with and have obtained all necessary information as to risks, contingencies and other circumstances which may influence or affect the subcontract works. The subcontractor shall further ensure the smooth and efficient execution and coordination of its subcontract works with the works of other contractors, subcontractors and authorities. There shall be no entitlements to any additional payments or time due to the lack of such understanding. 

The language above puts a fairly onerous requirement on the subcontractor. Unless the subcontractor’s construction team is already deployed on site, be in attendance of all site meetings, in receipt of all reports and programmes etc it will be extremely challenging for a mere tenderer to be privy to such volume of information that will allow it to satisfy those requirements. It should be noted that the said Clause 2.8 states that the subcontractor shall “be deemed” to have obtained all necessary information. This implies that the tender document may not sufficiently communicate to the subcontractor all relevant information. Where more information is required, the burden is on the subcontractor to request for supplementary documents during tender that is necessary for it to discharge its obligations therein. The failure to request for supplementary information may extinguish any of the subcontractor’s entitlement to future relief. Therefore the subcontractor should not take the position that it could passively expect that it be given all necessary information so as to appreciate the risks and obligations under the subcontract.

Access to Main Contract Information

Based on the previous section of this article, there is no doubt that there is an expectation for the subcontractor to proactively seek out certain information by its own initiative during tender. This includes information contained in the main contract document. One should note that main contract document typically represents a full and final commercial agreement between the main contractor and the Employer. Therefore it invariably contains  details that could be commercially sensitive or confidential. If a main contractor had given special discounts or offered contractual concessions to certain property developer, it would be reasonable to assume that the main contractor would not want this to be disclosed widely in the market and be used as future precedents. In this regard, there is a delicate balance that had to be achieved by the main contractor when providing the subcontractor access to its main contract information. 

Under Clause 4.1 of the above mentioned REDAS subcontract form, the subcontractor shall be provided with access to main contract document, other than parts irrelevant to the subcontract works and the main contractor’s prices. Notably, such main contract document is not enclosed to the subcontract tender document for unfettered review and examination but merely be made available for inspection by the subcontractor, presumably at the main contractor’s premises. With the opportunity of inspection be made available, the subcontractor shall be deemed to have full knowledge of the provisions of the main contract applicable to the subcontract works, particularly the main contractor’s obligations and liabilities under the main contract. Once again, the burden is on the subcontractor to notify the main contractor in case of any discrepancy between the provisions under the subcontract and main contract. The main contractor’s clarification or decisions in respect of the identified discrepancy shall be complied by the subcontractor who shall in any case not be entitled to any additional payment or time arising from such clarification. 

The decisions made by the main contractor on what is considered relevant to the subcontract works can be subjective and evolved over time. By way of example, if certain of the main contractor’s construction method is adopted and is included in the main contract document as the basis of main contract pricing, such method may be subject to change depending on site conditions. The main contractor may also choose not to disclose such information to the subcontract tenderer on the basis that these information involve the main contractor’s pricing and may be perceived as irrelevant with the subcontract works. However, the subcontractor may disagree as it is required to price its subcontract works based availability of site resources for its use and the extent to which it may be required to work concurrently with other contractors. This could indicate the likely congestion on site which influences its productivity. If and when the subcontractor’s reliance on the information provided deviates from reality, the subcontractor may face difficulties in mounting a claim by virtue of the said Clause 4.1. Further, the subcontractor is not in possession of the main contract document that it had referred to and relied upon during tender since it was only available for visual inspection. The subcontractor is therefore advised to record any pertinent information that it gleaned from such inspection and to formally include such information in its tender correspondence. 

The question that remains is if the main contractor decides wrongly not to disclose certain information based on its mistaken perception of irrelevance, would the subcontractor bear the brunt of such mistake? According to Clause 4.2.2 of the said REDAS subcontract form, it appears that the subcontractor may be taking the short end of the stick. Under this clause, the subcontractor is required to assume all obligations and responsibilities of the main contractor under the main contract in relation to the subcontract works. This is on the basis of a “flow down” or “back to back” principle. Such obligations included under the main contract document shall be deemed incorporated in the subcontract by reference. Based on the plain reading of Clause 4.2.2, it appears that the subcontractor will have limited recourse if it is aggrieved by the main contractor’s failure to make the relevant disclosure. It follows that it is incumbent upon the subcontractor to proactively make the necessary enquiry to ensure it is aware of the full spectrum of responsibilities that may be foisted upon it. 

Programme

As pointed out in the preceding section of this article, there may be provisions under the subcontract standard conditions that stipulates the “flow down” or “back to back” principle where the main contractor’s obligation to the Employer could trickle down to the subcontractor. Whilst the main contractor may be willing to shoulder the main contract risks in return of the potential profit under a large magnitude contract, this calculation may not be applicable to a subcontractor with a very different financial standing. Therefore it is incumbent upon the subcontractor to be honest about its risk appetite and examine those back to back risks that it may be exposed to. To this end, the construction programme provides a classic illustration of how a main contract risk that flows down to subcontract may be magnified disproportionately. 

To appreciate this, one has to first understand that not all subcontract works are equally critical under the main contract master programme. Certain subcontract works may be more critical than other subcontract works from a timeline or schedule perspective. A subcontract works is said to be on the main contract’s critical path when any delay to such subcontract works will cause an equal delay to the main contract works. Using the example of construction of a simple house, the construction of a house cannot be deemed completed unless its front door is fully installed. In other words, if the door installation is delayed by 10 days, the completion of the house should correspondingly be delayed by 10 days. This example is simple because the house cannot be habitable and be completed if its main entrance cannot be secured. Therefore, in this example, the door subcontractor is described as being on the critical path of the main contract of construction of a simple house. In reality, construction projects are far more complex where different activities may be organised in a web of logic and sequences. In this regard, certain activities or subcontract works may not necessarily be on the critical path of the main contract programme. Such non critical subcontract works are sometime characterised as being on the construction programme float. Where a subcontract works is on the float, any delay to such non critical works do not give rise to delay to the main contract works. This can often be achieved when the master programme under the main contract is re-organised to achieve an alternative path of criticality. There are also certain types of subcontract works where its completion is not a condition precedent to the completion of the main contract. Certain subcontract works such as external landscaping works to a condominium development do not affect the development’s ability to secure its statutory completion certificate.

It is not uncommon to find certain subcontract works that are small in financial magnitude but are on the main contract’s critical path. In other words, such subcontract sum could be say a mere 1% of the main contract sum but its delay could potentially give rise to an equal extent of delay to the main contract works. Using the back to back principle alluded to earlier, whilst these subcontractors on critical path do not enjoy the profit under a large contract, however they shoulder every delay risk that emanates from it, disproportionately so. When reviewing a subcontract tender document, one of the key priorities is to determine whether such subcontract works are on the main contract’s critical path. Unfortunately such information is not readily available. Generally the subcontract tenderer is only provided with its subcontract duration and the stipulated subcontract completion date. If not already issued, the subcontract tenderer should request the prevailing approved master programme including clear indications of whether the proposed subcontract works is on the critical path. This information is crucial in various ways. Firstly, it allows one to learn whether the subcontract works is on critical path and if yes, be able to price the works and negotiate the terms accordingly. Secondly, it informs what are the preceding critical activities prior to the commencement of the proposed subcontract works. If those preceding activities are in delay, there may be reshuffling of activities resulting in potential change in critical path for the entire project. Alternatively, it may also affect any of the subcontractor’s entitlement to extensions of time. Lastly, the prevailing approved master programme provides insight into subsequent activities that commences upon the completion of the proposed subcontract works. If those subsequent activities are in delay, it is questionable whether the subcontractor should be made to bear the full brunt of delay to the main contract on a simplistic back to back principle. 

The above issues should be reviewed at length and negotiated if necessary in line with an appropriate risk to reward ratio. 

Subcontract Liquidated Damages

Under Clause 7.5 of the REDAS subcontract form, the subcontractor shall pay liquidated damages to the main contractor for delay to its subcontract works. Such delay is defined as failure to complete the subcontract works within the stipulated time for completion. Such sum of liquidated damages is usually stated in the Appendix to Conditions. 

One of the ways to commercially mitigate disproportionate risks arising from back to back principle is ensuring that the subcontract stipulates subcontract liquidated damages as opposed to main contract liquidated damages. A subcontract liquidated damages should be unique and distinct in its sum payable per day from main contract liquidated damages. The subcontract liquidated damages should also be a rate that is proportional to the magnitude of subcontract sum. The following is a mathematical illustration. If a main contract sum of $50million stipulates a main contract liquidated damages of $50,000/day, from a commercial perspective it appears disproportionate for a subcontract sum of $5million to be shouldering an identical liquidated damages sum of $50,000/day. If the subcontract profit is 5% of the subcontract sum, this could be entirely wiped out from a mere 5 days of delay. Therefore in any review of subcontract tender document, the subcontract liquidated damages should be lower than main contract liquidated damages and proportional to the magnitude of subcontract works. If the subcontract works falls on the critical path of the main contract works and there is difficulty in negotiating for a lower liquidated damages, it is not uncommon for the subcontract to stipulate a maximum cap to the total subcontract liquidated damages payable in the event of delay.

One should note that the concept of subcontract liquidated damages is not adopted universally. There are other forms of subcontract standard conditions that stipulates general damages as opposed liquidated damages. This is on the basis that certain subcontract works can be critical where despite its lower financial magnitude, its delay is capable to exposing the main contractor to the full brunt of main contract liquidated damages. Therefore particularly in the case where the subcontractor is nominated by the Employer usually due to commercial motivations, the main contractor may not accept such nomination if there is discrepancy between main contract liquidated damages and subcontract liquidated damages. Under a general damages arrangement, the main contractor is still allowed to recover the full damages it is liable for due to subcontractor’s delay but subject to proof. From a subcontractor’s perspective, there may be certain merit to such arrangement as it is liable to pay only to the extent that causation is proven and established. 

Instructions and Approvals

Whilst the subcontract is strictly an agreement between the subcontractor and main contractor, some have argued that the main contractor is substantively a “payment conduit” on behalf of the Employer and its consultants. In this regard, the subcontract works are inspected and approved by the consultants and that the subcontractors are to comply with instructions issued by the consultants. In the case of nominated subcontractors, they are generally selected by the Employer and its consultants with the main contractor being instructed to enter into a subcontract agreement with their entity of choice. Therefore, these realities and practical considerations are seemingly at odds with the undeniable fact that there is strictly no privity of contract between the Employer or its consultants with the subcontractor. Any subcontractor that deals with the main contractor as merely a proxy may do so to the detriment of its ability to recover any future contractual recourse. 

In view of the issues presented above, the following are some of the commonly found provisions in subcontract standard conditions that one should pay special attention to during tender document review. Clauses 8.1, 8.2 and 9.1 of the REDAS subcontract conditions state amongst others that any instructions issued by the Employer or its representatives shall be binding on the subcontractor, provided that such instruction is notified and confirmed by the main contractor’s representative. These provisions appear to reinforce the strict privity of contract between the main contractor and subcontractor in recognition of some of the practical realities discussed earlier. By contrast, under Clause 9 of the Singapore’s Public Sector Standard Conditions of Nominated Subcontract (Fifth Edition December 2008) the subcontractor is required to comply with the instruction of the Superintending Officer under the Main Contract. In this case, no confirmation in writing is necessary from the main contractor as a follow up to such instruction. Whether one prefers the REDAS or the Public Sector approach is clearly a subject of debate that may be dependent on the nature of the subcontract works. Subcontract works that are aesthetically driven such as marble claddings to grand lobby may be subject to more design approval scrutiny that are usually subjective as compared to other more ‘functional works’ such as casting of concrete. Where the subcontract works are aesthetically driven, the main contractor that does not have any design role would naturally have very limited input on whether or not certain subcontract works fulfils the architectural design intent. Whilst the main contractor is the counter party to the subcontractor, it generally defers to the Employer or its consultants on those subjective design decisions. If the subcontractor is aggrieved by having its subcontract works wrongly rejected by the consultants, the only contractual recourse is to commence legal action against the main contractor. The main contractor would not make payments to the subcontractor for the subcontract works that are in issue if the consultants do not correspondingly certify payments. The subcontractor should therefore anticipate these dynamics and reduce the scope of subjectivity as much as possible by increasing clarity in the specifications on what is acceptable and what is unacceptable. In the event that words may not accurately and sufficiently describe what would comply with the design intent, the subcontract document should at least be able to prescribe the steps that had to be complied by the subcontractor in the execution of its works. The costs of any legal action against the main contractor for actions of the consultants can be high and disproportionate to the magnitude of dispute.

Conclusion

One can only be effective in reviewing the subcontract document when it is able to identify commonly occurring problems that may arise in future. Reviewing a subcontract tender document blindly and aimlessly will only result in cosmetic and frivolous amendments. Therefore it pays to be critical and discerning when reviewing any subcontract tender document.

Koon Tak Hong Consulting Private Limited

Standard forms of contract in Singapore such as SIA, PSSCOC and REDAS typically include contractual dates as part of express requirements imposed by the Employer on the main contractor. These contractual dates are deadline obligations to be fulfilled by the main contractor. This article focuses on different types of contractual dates, where the main contractor shall achieve certain objectively defined physical status of construction works no later than an agreed date or even dates. There may be associated financial consequences for any delay such as being liable for liquidated damages that may be imposed by the Employer.

There are various commercial imperatives behind the desire to impose such contractual dates. From the Employer’s perspective, timely completion of its project could mean timely receipt of rental revenue, ability to sell completed development or avoidance of unnecessary extended financing costs.

Some of these contractual dates should be taken seriously because it carries the metaphorical “teeth” in its enforcement when validly administered. It is usually enforced with the support of various accompanying provisions under the contract. These contractual mechanism ought to be unambiguous and fair.  In general contractual dates have differences in characteristics. It is crucial to understand what are these  differences between contractual dates as such knowledge can be useful whether one is administering a contract, advancing claims or even defending claims. 

Practical Completion Date/ Substantial Completion Date

Practical completion date is the most commonly used contractual date. It is the date by which the contractor is required to substantially or significantly complete the construction project. Practical completion date embodies the five typical characteristics of what constitute a “contractual date”. Most standard forms of contract are drafted with these characteristics in mind and are described in the paragraphs immediately below.

Firstly, contractual date is usually a deadline by which the construction works shall attain certain objectively definable status of work. Completion of a construction project is largely an objectively definable status of work because the completed works would physically represent and manifest the agreed design on drawings and that it can henceforth be occupied by the intended occupants. Save for certain minor defects that do not prevent the completed building from being occupied, the developer could hand over the completed building to its purchaser or that the tenants could commence its own renovation or fit out works to the designated units within the completed building. In this regard, practical completion is largely a definable status of works. 

Secondly, a certification process must ensue for an objective and fair assessment to be made by a certifier appointed under the contract, on whether the stipulated status of work had been achieved by the contractual date. Contrary to popular belief, assessment of status of work can be subjective and requires a certain degree of judgment call. It is not as black and white or binary as what it is often perceived. Practical completion is also known as substantial completion. It meant that the works are practically completed or substantially completed. The terminology used would suggest that the construction works is not fully completed or completed in its entirety. If the landscaping works remain outstanding at the common areas but does not prevent the purchaser from moving into their apartment units, should the main contractor be deemed to have delayed its completion and be liable for liquidated damages? What if the club house, fitness centre or water feature fountain remain incomplete? Do these disamenities qualify for the project to be deemed as being in delay or incomplete? These issues are likely to draw different responses depending on whether one takes a pragmatic view on the situation. This is why the term substantial completion appears to provide some leeway for the certifier to make a judgment call based on the specific set of circumstances. 

Thirdly, there should be mechanism for the stipulated date to be extended under certain grounds, where the main contractor cannot be held liable for excusable delay.  This happens when the construction schedule is delayed at no fault of the main contractor such as change in design by the Employer or inclement weather. In such a case, the main contractor is expected to make an application to the certifier for the practical completion date to be postponed based on an expected period of delay. Whilst on surface this mechanism seem to favour the main contractor for the schedule relief that it gets, in reality the Employer actually benefits. This is because extended practical completion date preserves the Employer’s right to impose liquidated damages in the event of any further delay. Under the law, the Employer could not have insisted on the original practical completion date if it had prevented the main contractor from performing its obligation. The extension of time mechanism addresses this concern.

Fourthly, the failure to accomplish the required status of work by the stipulated date would result in certain adverse financial consequences such as liquidated damages. As alluded to earlier, any delay beyond the practical completion date or extended practical completion date may result in liquidated damages being imposed by the Employer on the main contractor. This liquidated damages represents an anticipated sum of financial damages suffered by the Employer that was pre-estimated and agreed prior to the conclusion of the construction contract.

Lastly, the accomplishment of the objectives associated with the contractual date would result in a corresponding reduction in the scope of responsibility that the main contractor has in respect of the works. Once the construction works are certified to be practically completed, the main contractor’s responsibility is transitioned to that of maintenance, defects rectification and completion of minor outstanding works. With this reduction in the scope of responsibility, the insurance policy coverage in respect of the works changes correspondingly. With this accomplishment, the main contractor would be entitled to half of its retention sum, which typically represents 2.5% of the original contract sum. Any attempt to instruct the main contractor to carry out any ad-hoc or additional works after practical completion would not be advisable given that it would not be covered by the insurance policy. The main contractor is also expected to demobilise its plant, equipment and machineries off site due to a corresponding restriction to site access.

Phase Completion Date

Certain projects that are large in financial value and/ or in floor areas are usually divided geographically in phases or sections. Each phase is contractually treated like a contract of its own with separate commencement date, practical completion date including other consequential contractual treatment such as certification process giving rise to commencement of its maintenance period, cessation of insurance coverage, reduction in scope of responsibilities etc. This is notwithstanding the fact that the parties only entered into one construction contract.

When any one phase of the works is examined on its own, it embodies the five contractual characteristics alluded to in the previous section of this article. In other words, phase completion date is also a contractual date. Firstly, much like practical completion date, a phase completion date is a deadline by which the construction works shall attain certain objectively definable status of work. The geographical location of such phase, including the associated scope of works within such area are usually very clearly defined in the contract document. Upon completion of works within a particular phase, the main contractor hands over the site concerned back to the Employer with proper hoarding to protect the completed works from any on-going construction activities. 

The certification process of assessing whether the phase has achieved practical completion is carried out by the certifier appointed under the contract. Apart from the usual subjectivity that the certifier had to grapple with much like in the case of overall practical completion, there is a unique consideration as regards phase completion. This relates to infrastructural compartmentalisation. This means that in deciding how the overall project should be divided into different phases, one should ensure that upon phase completion, each phase is able to operate and function on its own without any major inter-dependency. Where this is physically not achievable, any completed phase’s operability should at least not be dependent on another phase which has a later phase completion date. Each phase completion date should have its own liquidated damages where damages due to delay to each phase is pre-determined separately. Any delay to a phase would not have given rise to damages if such phase could not be put in operation without the completion of a subsequent phase.

Much like the overall practical completion date, there should be mechanism for the phase completion date to be extended for excusable delays.  Under extensions of time provisions of most standard forms of construction contract, the extensions of time also applies to phase completion date. This extension mechanism therefore preserves the Employer’s right to liquidated damages by extending the completion date on occasions where the Employer may have caused or contributed to the delay. Once a phase of works is certified as practically completed, it will be handed over to the Employer with a corresponding reduction in the main contractor’s responsibility. This then commences the maintenance period for the phase concerned. It is also quite common for the Employer to introduce particular conditions to ensure the maintenance period only ends, usually twelve months after the completion of the final phase of works. This meant that phases of works that were completed earlier would have a longer maintenance period than the final phase of works. Therefore all phases of work would have its maintenance period expiring simultaneously. It should be noted that the commencement and completion of maintenance period also triggers the release of the first half and second half of retention sums. It is likely that certain particular conditions would be included to make certain that the release of first half of retention sum only happens upon the commencement of maintenance period of the final phase of works.

Whilst some may not favour the practice of dividing the project into multiple phases due to the associated logistical and administrative burden, phasing does bring about clear financial advantage to the Employer under the right circumstances. Phasing allows one to prioritise where to deploy construction resources and allow the project to be completed in multiple parts sequentially thereby enabling the receipt of rental income of completed parts of property first. These could ease the property developer’s cashflow by reducing borrowing costs through channeling its rental income to finance the on-going construction works. In Singapore with dense urban environment, most large developments are likely to interface with other adjacent developments particularly those initiated by the public sector. This could mean that certain parts of the development had to be completed earlier for reasons such as to facilitate integration with district cooling system, or creation of underground connection with train stations as well as completion of certain public roads to ease vehicular congestion. These arrangements are likely to be in place as part of the statutory approval for commencement of development. Therefore, phasing becomes inevitable as it pertains to compliance with law and regulations. 

Conventionally phases are necessary if certain parts of the works are required to be completed earlier for reasons described above. In this regard, one query that occasionally arises during construction planning is whether it made any sense to have phases that have identical commencement and completion date. At the first blush, this arrangement does not make any sense since phases with identical commencement and completion date could be bundled or merged together. However there may be merits to having phases despite its identical scheduling requirements especially if the overall works is significantly large. By way of example, under a mixed development which comprises hotel, retail malls and office building with identical commencement and completion dates, it will be prudent to split these three components to separate phases. Apart from the fact that these components have different operational requirements, one should avoid the situation where an isolated delay say in the retail mall implicates the certification of completion of the hotel and office components in the absence of phasing separations. Some may argue that even in the absence of phasing, the Employer could rely on standard provisions of early occupation of parts of the works that is included in most construction contracts. These provisions usually stipulate that the main contractor’s possession of site is non exclusive and is only provided to the extent necessary to facilitate the progress of works. Where parts of the works are completed but are not contractually defined as a phase or section, the Employer nevertheless reserves the right to occupy those required parts even without the consent of the main contractor. Under such situation, the certifier is required to certify those handed over parts as completed and there will be a corresponding proportionate reduction in liquidated damages to reflect the outstanding works. Whilst this may be true, the utilisation of these provisions may cause other residual problems such as the difficulty in making a fair assessment of what should the percentage reduction in liquidated damages. This arises due to the fact that value of works commonly fluctuates during the course of construction due to variation orders and are often negotiated and agreed upon during finalisation of account. Therefore in order to avoid any potential dispute, structuring the works into phases helps even if those phases have identical scheduling requirements.

Stage Completion Date

Whilst phase completion divides project based on geographical sections, stage completion on the other hand divides the project based on construction trades. Therefore stage completion date means the deadline by which certain defined trade or trades of work shall be completed. Such construction trades refers to amongst others mechanical works, electrical works, facade works, brick work, piling works, concreting work, structural steel works, painting etc. 

Stage completion is more relevant for a main contractor that manages multiple trade subcontractors who work in sequence with one another. It is admittedly less relevant for the Employer who relies on the main contractor to sort out the sequences by which the construction works packages shall be arranged and organised. There are also rare exceptions for large developments where the Employer personally takes on the management contractor’s role by engaging various trade contractors directly. These developments are so large, often valued in billions of dollars whereby very few main contractors would have the risk appetite nor capability to single handedly manage such development.

Most standard forms of contract used in the industry are heavily influenced by the needs and requirements of the Employer. Therefore unlike the concepts of practical completion and phase completion which are commonly found in standard forms of contract, stage completion is not often used. Although one would expect the subcontract agreement between main contractor and subcontractor would utilise stage completion more commonly, this is unfortunately not the case because the subcontract forms are usually determined by the choice of main contract forms. By way of example, if the Employer and main contractor enters into an SIA Building Contract in Singapore, the subcontract form used is usually the SIA Subcontract which dovetails with the framework and structure of the main contract. This often ensures some back to back coverage between the main and subcontract. 

In reality most subcontractor are organised by trades and therefore, the completion of works of a trade subcontractor is usually more appropriately defined based on stage completion rather than phase completion or practical completion. In most construction projects, there is a logical sequence of work methodology where the completion of one trade leads to the commencement of another trade. Taking the example of the construction of a commercial building, the completion of the structural concrete works facilitates the commencement of installation of facade panel upon those concrete frames. The completed facade works provides a weather proof environment to enable the commencement of electrical works. In essence, the delay in one trade would have a schedule ripple effect on the subsequent trade. Taking this logic to its natural conclusion, a delay in a trade may cause delay to the overall practical completion date. 

Should liquidated damages be stipulated for any culpable delay to stage completion date? Or should one apply general damages for such stage delay where proof of financial losses is required? There are two competing school of thoughts on this issue. On one hand, the application of liquidated damages provides certainty and clarity of the risk exposure to any trade contractor in case of culpable delay, which in turn allows the trade contractor to submit its tender price based on its own risk assessment. If necessary the main contractor and trade contractor could negotiate for a maximum cap in the total amount of liquidated damages that can be accrued due to delay. On the other hand, not every trades of work are of equal schedule criticality. Certain trades are on main contractor’s critical path where the delay would most certainly cause a corresponding delay to the subsequent trades resulting in an overall practical completion date being delayed. However other trades may be on the schedule’s float which means it is not on the critical path, thereby having certain buffer or tolerance in respect of schedule disruption. In cases where the construction trades are on critical path, any delay by the trade contractor may well cause the main contractor to be liable to the Employer for the full main contract liquidated damages. There are also circumstances where the main contract programme is revised in the midst of the project causing non critical trades to become critical. Given the fluidity of the different permutations in scenarios, it appears that stipulating any liquidated damages to stage completion date can be problematic. In view of this, some argue that general damages would be more appropriate in that it would be extremely difficult to have a reasonably accurate pre-estimate of losses that may be suffered by the main contractor. Whether one decides to adopt the approach of general damages or liquidated damages it requires either drafting of bespoke contract or a fairly significant modification of any existing standard forms of contract. 

Unlike the achievement of practical completion or phase completion, trade completion does not mean that the works are done and can be taken over by the Employer for occupation. Trade completion very often happens in the midst of construction works where the trade works merely had achieved a status that is sufficient for the next trade contractor to take over for its next cycle of works. By way of example, the completion of erection of brick wall  enables the commencement of plastering and painting on the surface of the brick wall. The construction works are not practically completed per se. Therefore the usual accompanying provisions relating to practical completion such as commencement of maintenance period becomes of limited relevance. The maintenance responsibility of the brick works trade contractor is somewhat diminished and impractical once it achieves its stipulated stage completion. It is impractical to stipulate that the brick works trade contractor shall “maintain” the completed brick wall when the surface of such wall is now plastered and painted. As a result of these practical considerations, the usual consequential contractual provisions in respect of maintenance period such as the gradual release of retention sums, the provision of as-built drawings etc had to be abandoned. Once again, the use of phase completion or practical completion under the trade contract works becomes incompatible. The one aspect that is relatively straightforward when it comes to trade contracts is the determination on whether the trade works are indeed completed as it is more self evident.

Statutory Completion Date

As alluded to earlier, the assessment on whether a project had achieved practical completions or phase completions could at times be subjective for  above mentioned reasons. From the perspective of the Employer, the completion of its project should not be subjective. Project completion marks an important date by which the Employer is able to handover the corresponding parts of the building to buyers of apartment units, tenants of commercial units etc. In other words, purely from the Employer’s perspective, the project is not completed until it is fit for occupation. In Singapore, the question of whether a building is considered completed and fit for occupation involves a statutory certification process administered by the relevant authorities. In this regard, there are two commonly used acronyms namely ‘TOP’ which refers to Temporary Occupation Permit and ‘CSC’ which refers to Certificate of Statutory Completion. TOP is issued by the authorities when the development is completed to the extent that the occupants are safe to move in. At this stage, there may be certain outstanding works on common facilities. The CSC is finally issued after TOP when those outstanding works are completed and the development is also found to have complied with all building requirements. In other words, it is a two stage process. This process allows occupants to be able to move into the development earlier without compromising any safety considerations. 

In view of TOP and CSC regime, some property developers favour having the contractual arrangement where the issuance of certificate of practical completion is dependent on the achievement of TOP. This means the adoption of statutory completion date. The advantage to this approach is that it removes ambiguity as to what constitute practical completion and takes the element of subjectivity out of the hands of the certifier appointed under the contract. The disadvantage is that occasionally the TOP may not be issued on time for matters not relevant to the main contractor’s obligations. This is because the consultants such as architect and engineers engaged by the Employer are effectively leading these statutory certification process. If there are administrative paper work errors on the part of the consultants resulting in delay, the main contractor should not be deemed to be in culpable delay. Therefore some may well reasonably argue that it is problematic for the main contractor to shoulder obligations that it could not possibly discharge.

Milestone Date

Finally, milestone dates are often found in construction programme or schedule. These are essentially important dates in that it signifies the achievement of crucial construction activities such as the fulfilment of certain inspection activities, testing and commissioning of plant and machineries, complete approval of mock up units etc. These milestone dates are important because it often involve complex and critical activities that require the presence of the consultants and the Employer’s representatives. However, it does not necessarily mean that the project is completed per se or that certain contractors have fully discharged its contractual obligations. It merely indicates that risky or high profile activity is completed and there could be a corresponding reduction in project’s contingency sum. There are usually no financial ramification to the breach or delay to any of the milestone dates. In this regard, it is considered more “benign” than the other contractual dates discussed above.

Conclusion

The use of contractual dates can be helpful as part of the carrot and stick approach provided it is supported by the necessary contractual provisions and also administered appropriately. One should be discerning and clear about the differences between various contractual dates which often requires a solid appreciation of both construction law and commercial management.



Koon Tak Hong Consulting Private Limited

This article provides a general overview of the concept of preliminaries in respect of its functions as a commonly found costs component in the construction industry. Whether a quantity surveying consultant who is estimating the construction cost of a building project, or a tenderer who is preparing its bid price or a subcontractor who is making its claim for additional preliminaries that it has incurred, everyone appears to have a slightly different perspective of what preliminaries actually entail. This is because whilst indeed a common feature in pricing of construction works, preliminaries can mean different thing to different people and thus may be approached differently depending on circumstances.

In general, preliminaries is known as the overhead costs incurred by the contractor to facilitate its running and operation of the construction site. Such overhead cost typically include plant, machinery, equipment, site perimeter hoarding, utility bills, site safety and security staff, site office, scaffolding, site cleaning, maintenance of ingress and egress to site, protection to completed works, provision of shop drawings and as-built drawings etc. Such overhead cost usually excludes the completed building or construction end product. Using the analogy of a cookie business, preliminaries excludes the costs of the direct ingredients to bake the cookies but includes the indirect overhead costs to facilitate the running of the business such as the cost of electricity, rental, marketing, advertisement, transportation etc. Whilst the distinction between direct costs and indirect costs is conceptually clear, the more granular aspect of classification of costs can be subjective. In the context of construction costs, such distinction has very real implications and could result in disputes. One should have a good grasp of the basic concept of preliminaries first in order to understand how it may occasionally appear vague.

Scope and Coverage of Preliminaries Costs

Tender documents prescribes amongst others, the manner in which the tenderers shall populate their pricing breakdown. The selected tenderer’s tender document subsequently formed the basis of the contract document between the parties. In order to have an accurate understanding of the definition of preliminaries and what such expenditure covers, it is imperative that one examines the actual tender document and how the contractor decides to distribute its pricing therein. In reality, tender documents are prepared by cost consultants or quantity surveying firms engaged by the Employer. Whilst the definition of preliminaries in general is widely understood and accepted in the industry, the granular details may differ from project to project. Therefore in dealing with issues that require one to accurately understand the scope and coverage of preliminaries, it is advisable to always refer to the actual contract document. Very often, tenderers may choose to distribute their pricing breakdown in a different manner from the format given in the tender document for various strategic reasons. Therefore certain pricing sections in the tender document may have certain tenderer’s annotation or remark such as ‘included’, which means that such items of work had already been included in the tender sum but are allocated elsewhere in the tender document.

To accurately understand what constitute preliminaries costs, one is required to be familiar with certain sections of the tender document that is of particular relevance. The preliminaries costs is usually found in the very first part of the pricing section of the tender document. This pricing section can be called ‘schedule of works’ or ‘bills of quantities’ depending on the procurement nature of the contract. The preliminaries costs should always be read in conjunction with the standard conditions of contract as well as preambles to schedule of rates and/or schedule of works. This is because apart from preliminaries section which would usually provide a list of items which constitute preliminaries costs, there are other sections of the tender document that similarly stipulates the scope and coverage of unit rates and prices. It is not uncommon to find that some of these sections may mistakenly include overlapping provisions that could give rise to duplicative claim in future. 

The SIA Building Contract 2016 that is widely used in Singapore, has a unique feature in this regard. Clause 5(1) therein stipulates amongst others that the contractor is required to provide a breakdown of its unit rates submitted with percentages allowed for labour, materials, plant and overheads expenditure. On the other hand Clause 5(2)(a) which deals with preliminaries requires the contractor to annotate those items of expenditures with the alphabet of either ‘Q’, ’T’ or ‘F’. Q means such items may require cost adjustment due to changes in quantities of work. T means such items may need cost adjustment due to changes in time to carry out the work. F means those items that shall be fixed in cost despite any changes in time or quantity in that regard. Further, Clause 5(2)(b) requires a precise indication of all categories of expenditure contemplated by those Q, T and F items which shall not be included in other unit rates. When construed in its entirety, Clause 5 appears to ensure that there should be no overlap in cost coverage between unit rates of the construction works and items of expenditures in preliminaries. By way of example, since Clause 5(1) anticipates allowances for plant and overheads expenditure amongst others within the unit rates of various construction works, then by operation of Clause 5(2)(b), the very same plant and overheads expenditure should not be included in preliminaries. This expectation however may not be realistic since one could often find plant, machineries, equipments and overheads expenditure listed in the preliminaries section prepared by quantity surveying firms. This is because there are various plant and machineries that may be used for the entire project as opposed to be dedicated only for certain trades of works. By way of example, tower crane and mobile crane may be used to hoist building materials within construction site whether the works in hand pertains to structural works or any other general builders works. Therefore, from a pricing perspective it may not be practical to expect a percentage allowance of plant within the unit rate of say concrete. However if the tenderer decides to exclude the cost of plant from the unit rate of concrete and instead allocate such cost under preliminaries, the tenderer may reasonably be doubtful as to whether it may be adequately compensated in case of variations instructed to carry out additional concrete works. This is because it is not unusual for the valuation of variation works to utilise the unit rates of construction works concerned without any inclusion of preliminaries. Given the realities presented above, certain seasoned contractors with sophisticated tendering teams may decide to distribute their cost breakdown in a strategic manner which can then affect the coverage of preliminaries expenditure concerned. It can never be over emphasised that one should always refer to the actual contract document when dealing with issues that involve preliminaries. 

Apart from standard conditions of contract, another relevant section of the tender document that is worth examining in conjunction with preliminaries is the preambles to the schedule of rates. In general, the preambles refers to the explanatory notes of what should be deemed included in the contractor’s prices and unit rates. These preambles are often presented based on individual construction trades depicting what are deemed included in the unit rate on a supply and install basis. If the construction contract involves supply and installation of concrete works, the associated unit rate would usually be deemed to include all plant and heavy machineries required to install the concrete works such as batching plant, concrete tank, conveyor, paver, pump, crane etc. These very items can often times be allocated under preliminaries as well. This is because these plant and heavy machineries could be leased for the purposes of the project and the contractor would prefer to be paid via preliminaries for its mobilisation cost, demobilisation cost and be charged on a time basis due to the nature of its rental. In other words, the preambles of the schedule of rates may cause overlapping allowances with the preliminaries in the pricing section. Once again, whilst the general idea of preliminaries is well understood in the industry, the devil is in the detail.

Pricing Preliminaries – Consultants’ Perspectives vs Contractors’ Perspectives

As illustrated in the previous section of this article, the manner in which the contractor chooses to distribute its costs in respect of preliminaries related expenditure can be fluid. It may be influenced by the preambles, standard conditions of contract, cashflow or other strategic considerations. From the contractors’ perspective, pricing of preliminaries is an art rather than science. Whilst one may argue that the tenderer ought to allocate its pricing strictly in accordance with the format presented in the tender document for avoidance of ambiguity, it is often the conflicting provisions within the very tender document that contribute to the problem. 

The perspective of a consultant quantity surveyor in respect of preliminaries can be quite different from that of a contractor quantity surveyor. This is because the deliverables expected from them are quite different. A consultant quantity surveyor primarily produces cost estimates whereas the contractor quantity surveyor produces an actual bid price. The pricing accuracy of a bid price is more consequential than an estimate. As regards an actual bid price, a 5% above the lowest tenderer may result in a lost of business opportunity. On the other hand as regards a cost estimate a 5% above the lowest tenderer can still be considered as an estimation that is fairly respectable. To this end, the perspective and approach in respect of the costing of preliminaries can be vastly different. 

From a perspective of a contractor quantity surveyor, the pricing of preliminaries is often approached from a bottom-up method or what is also known as first principle method. Under this approach, every line item of expenditure will be calculated separately, such as the rental of tower crane, the salaries of head office staff, the cost of scaffolding and hoarding, allowances of electricity and water costs etc. Anything and everything that may be required by the contractor to operate a construction site will be included in this first principle method, including any other lines of expenditure that may not be listed in the tender document. In addition to that, the calculation will take into consideration the proposed construction method and programme where there are supplementary information such as whether the site office, perimeter hoarding, site access etc are to be shifted from time to time to accommodate the progress of works on site. These costs are also calculated as part of the preliminaries. Finally when the gross amount is derived, the contractor will make strategic decisions as to how it chooses to distribute the gross amount taking into consideration cashflow demands. A contractor who is extremely motivated to win the tender may even include pockets of potential sums of discounts in its preliminaries in anticipation of price negotiations. The calculation will then be complete when the gross amount is subject to these strategic adjustments.

On the other hand, the perspective of a consultant quantity surveyor is relatively different and somewhat straightforward. A consultant would typically derive the preliminaries costs in a cost estimate based on a percentage of the direct construction works. This percentage usually ranges from 10% to 20% and varies based on complexity of works or execution risks that may entail additional resources. In general the higher the complexity, the greater the percentage allowance will be made for preliminaries cost in the consultant’s estimate. This approach is also known as top-down method. This difference in approach may pose a challenge during the production of tender report where the consultant is required to perform cost reconciliation between different tender prices as compared to the consultant’s pre-tender cost estimate. This is because such comparison will not yield any meaningful insight if it is not performed on a like to like basis.

Pricing Preliminaries – Main Contractors’ Perspectives vs Sub-contractors’ Perspectives

The manner in which a main contractor approaches the pricing of its preliminaries which was elaborated extensively in the preceding sections of this article differs from its subcontractors. Unlike the main contractor that is overall in charge for the operations of the project site for the entire construction period, the subcontractors’ involvement is usually over a shorter period of time. This subcontract period is typically determined based on the time frame within which the subcontractor’s trade is planned to be carried out based on the main contractor’s master programme. Therefore, the main contractor would have a good grasp what are the site office space, scaffolding, machineries, storage space, equipment etc that are available during this time frame that could be used by the subcontractors. From a commercial standpoint, the main contractor would include the subcontractor’s share of the preliminaries costs in its contract sum vis-a-vis the Employer. The subcontractor therefore should be selective in what it chooses to include in its preliminaries since a considerable amount of resources will be provided for more economically by the main contractor. The subcontractor however is still expected to provide other machineries, equipment  and associated overhead expenditure that are unique to its trade and specific to its needs.  In other words, the percentage of preliminaries costs in a subcontract sum is usually lower than that of the main contract sum. 

Whilst the main contractor is expected to allocate its preliminaries resources to various subcontractors with relative ease given the roadmap provided by its approved master programme, things can get complicated in reality. Its is quite common for the main contractor to reorganise its schedule and sequence of work based on the challenges that arises on the ground. It follows that there may be occasions where a particular subcontractor is expected to commence work whilst the other subcontractor carrying out a preceding trade is still on site finishing up its works. This presents bottle neck in terms of availability of resources and could result in dispute and claims for additional payments. It is therefore quite common for the main contractor to include a disclaimer under its subcontract terms for the subcontractor to be responsible for all resources that are considered “indispensably necessary” to carry out the subcontract works. 

The Employer usually do not interfere with the private arrangements between the main contractor and subcontractors as regards the allocation and availability of on site resources which are included in the preliminaries costs. However, in instances where the Employer decides to nominate subcontractors to the main contractor, the Employer would inevitably be involved at least from the initial procurement standpoint. Under the procurement of nominated subcontractor, it is the Employer and its team that issue tender document and negotiates directly with the subcontractors before making its nomination to the main contractor. In doing so, the consultants who prepares the subcontract tender document would draft the scope and coverage of the subcontractor’s preliminaries costs which would subsequently formed the subcontract agreement. Whilst there may be some form of commercial benefits to the Employer in nominating subcontractors, it also exposes risks of claims to the Employer in case the subcontract document that it prepared resulted in gaps and inadequacies in respect of preliminaries resources. These gaps are not uncommon because the Employer and its consultants are not in the best position to have visibility on how the resources are deployed on site, particularly when construction programme are modified regularly. Therefore in order to address this situation, the nomination instruction by the Employer or its agent is usually supplemented by contractual avenue for the main contractor to raise any objections to nomination. These objections are usually premised on certain prescribed grounds stipulated under the main contract. These grounds for objections are effectively double edged sword. Whilst it allows the main contractor to raise objection to protect itself, any failure to do so in a timely manner may prejudice the main contractor’s right to claim for additional payment if it subsequently takes issue with the subcontract terms.  These issues are less relevant in the case of a domestic subcontract where the procurement of subcontractors are primarily within the control and purview of the main contractor.  

Preliminaries Allowance in Remeasurement Contract vs Lump Sum Contract

The manner in which preliminaries costs are distributed and derived could also be affected by whether the construction contract is structured as a lump sum contract or a remeasurement contract. In general a lump sum contract is an agreement to carry out a defined scope of works at a fixed price. On the other hand, remeasurement contract can be described as an agreement to carry out a provisional scope of works that will be valued and paid based on agreed unit rates. One of the reasons for having these two contrasting commercial arrangements is due to the different level of certainty in respect of the nature and magnitude of works to be done. Most infrastructure works such as provision of underground utility pipes or foundation works are often confronted with unknown adverse subterranean conditions which makes it challenging to quantity the scope of works with absolute certainty. Such works are usually structured as a remeasurement contract. On the other hand, a contract to construct a building based on a defined set of specifications and drawings are usually lump sum by nature.

Anecdotal evidence shows that the percentage of preliminaries cost under a remeasurement contract is usually lower than that of a lump sum contract. This is because the contractor is incentivised to include bulk of its costs, including site overheads and other traditional preliminaries related expenditure in its agreed unit rates for the construction works. These unit rates are multiplied against quantity of work done which then formed the basis of payments to contractor. Where the actual works carried out is higher than originally anticipated, the contractor gets compensated accordingly including preliminaries related expenditure. By including those preliminaries costs in the unit rates, the contractor avoids the hassle and effort to claim preliminaries separately if and when it believes that the perceived additional works warrants supplementary compensation. Claims for additional preliminaries have often been associated with loss and expense claims. By way of example, under the public sector standard conditions of contract in Singapore, loss and expense is defined as claims for, amongst others, costs of an overhead nature that are actually and necessarily incurred on the site. Where claims for additional preliminaries is reasonably classified as loss and expense claims, it invokes certain additional contractual obligations that it imposed on the contractor. These obligations are effectively condition precedents, where its fulfilment is a mandatory requirement prior to any successful claim. These conditions precedents involve amongst others, the requirement to give notice within a stipulated time period after the event giving rise to such claim is deemed to have occurred. There is a need to continue to provide detailed substantiating particulars within further time frame after the notice is given and to finally provide additional particulars by the end of such event. Where required, the contractor is also mandated to provide unfettered access to additional information on an open book basis to support such claims. Whilst these notices and disclosures may be rooted in good intentions, it is undeniable that it represents additional administrative burden to the contractor that could reasonably be avoided by seeking payments through unit rates. It should also be pointed out that any quantities of work included in a remeasurement contract are provisional. Any works carried out above and beyond provisional quantities are not variation of works per se. It follows that the certifier appointed under the contract is not expected to issue any instructions for these so called additional works. Therefore, the contractor may well receive payments for additional preliminaries through unit rates without the usual contractual formality that is associated with variations works and loss and expense claims. 

One may ask if a contractor under lump sum contract could derive the same benefits by distributing its costs in the unit rates rather than to itemise it separately under preliminaries section? One should appreciate that the contract is administered differently under lump sum arrangement as compared to that of remeasurement. Firstly, there are no provisional quantities included in lump sum contract. In fact, there are no quantities at all under lump sum contract as the contractor is required to measure the quantity of works by itself during tender and be responsible for such self measured quantities. If the actual quantities of work turn out to be higher than what was measured by the contractor, there is no entitlement to additional payment. The contractor would only be entitled to payment for additional works if the certifier issues an instruction to vary the design by increasing certain quantities of work. In such a case, the schedule of rates submitted by the contractor would become the basis of valuation of such variations. If the contractor submits a disproportionally high unit rates, it may well result in larger sums of omission if and when the certifier decides to instruct an omission to the concerned scope of works. Therefore, the unit rates function as a double edged sword under lump sum contract. Consequently, contractors under lump sum contract have reason to continue to reflect its preliminaries cost accurately, in which case may well be higher in percentage than under a remeasurement arrangement.

Conclusion

The preliminaries cost serve a very unique function under construction contract and draws different perspectives from different contracting entities. Whilst it is well understood as a general concept, the intricacies of preliminaries are often embedded within the details of the contract. 

Koon Tak Hong Consulting Private Limited

The process of compiling construction contract document usually happens after the agreement between the parties is formed. This practice is quite unique to construction industry in that a voluminous contract document is physically collated to “formalise” an existing agreement that was previously signed by the parties by way of Letter of Acceptance or sometimes also known as Letter of Award, or LOA in short. The compiled construction contract document represents the physical bundle of all documents previously referred to in the agreed LOA. The compiled contract document is suppose to be substantively identical to the LOA.

The practice of compiling a contract document to be signed by the parties after an agreement was previously formed seemed odd and duplicative at the first blush. This is because the signed contract document should ordinarily be the only document agreed upon by the parties where all terms and conditions are captured within the four corners of that signed contract. This singularity avoids misunderstanding or dispute over what were precisely agreed upon by the parties, or in the contract law parlance ‘battle of the forms’. 

To understand the origins and rationale behind the practice of compiling construction contract document, one needs to understand the relevant aspects of a construction tendering process, which will be illustrated in the next section of this article.

Construction Tender Process And The Need For Compilation of Contract Document

The tender document issued by the Employer represents the requirements of its proposed construction project. Tenderers are invited to submit a tender price based on the said requirements. In an ideal world, the Employer accepts the best offer via an LOA and that should be the end of the contracting process. However in reality, this simple and direct process rarely happens because a construction project is quite a complex endeavour. At the point of tender, the requirements may well be significantly defined but can never be completely defined. That is why construction projects are often described as being ‘prototypical’. Even at the point when the tender document is issued to the bidders, project requirements continue to evolve particularly at the granular detail aspect of its design. These changes go beyond the scope of works originally included in the tender document. The Employer at this point could not merely accept the original tender price via an LOA without including additional document that reflects those changes that occur after the issuance of tender document. This is why, superseding documents such as tender addendum or even post tender addendums are quite commonly issued above and beyond the original tender document.

The continuous evolution of design is not merely initiated unilaterally by the Employer and its team. Occasionally the Employer may well tweak its design based on feedback and comments from the tenderers. The tenderers being builders by profession often interprets building design, drawings and specifications from a different perspective from the design consultants appointed by the Employer. The tenderers may propose alternative design that could be more buildable, or using more cost effective material that achieves the same design intent or other value added initiatives. Certain tenderers may view its proactiveness in offering value added options as a way to distinguish itself from its competitors. Where the Employer and its consultants decide to adopt these design improvements, certain parts of the original tender document and tender drawings would have to be superseded by new details. These amendments would invariably need to be included in the agreement between the parties. Depending on the nature and extent of these changes, it may well involve issuance of various new drawings, specifications and pricing schedule which could be time consuming. Therefore whilst the LOA may describe these changes as clearly as possible, it comes with a certain limitations. This explains why, a contract document will need to be compiled and signed after the issuance of an LOA for clarity in documentation.

The construction tender process typically include tender interview or even a series of interviews so that the Employer and its consultant would have the opportunity of directly interacting with the tenderers to better evaluate their proposals. Certain tender questionnaires which consist of various tender clarifications would usually be circulated to the shortlisted tenderers prior to these interviews. These questionnaires are usually drafted by the consultants based on their initial evaluation of the tender proposals received from the tenderers. Therefore these questionnaires often include points of clarifications such as the reason for certain qualifications of contractual terms, the origins of certain proposed materials, whether certain proposed construction approach had been previously approved by the statutory authorities etc. Whilst these clarifications are not strictly design changes, it direct affects the manner in which the eventual agreement ought to be interpreted, often with associated financial implications. Once again, the responses to these clarifications if acceptable are required to be included in the agreement between the parties. As the tender evaluation process including interviews of a large project could take a few months to complete, this results in hundreds if not thousands of pages of clarifications and responses to the questionnaires. Whilst the LOA would usually refer to these clarifications as part of the agreement, it is during the compilation of contract document that these documents are physically bundled together and signed by the parties as a way of formalisation. 

Parties negotiate prices during the tender process especially in the advance stage when the Employer is about to make its decision for an award. Occasionally parties negotiate face to face for hours which culminated in an agreement for a price reduction in exchange for say the acceptance of an alternative design proposal. Typically the outcome of these negotiations gets documented via a letter from the contractor to the Employer setting out the precise agreed scope of concession. This letter is then included in the LOA as part of the list of correspondence that formed the agreement. The agreed price discount which can be expressed in the form of a percentage reduction of the original tender price or as a lump sum reduction in amount will subsequently be incorporated into a revised pricing schedule. This discount could be administered as a percentage in which case will be applied to any future increase or decrease in the revised contract sum. Alternatively this discount could be administered as a lump sum amount where the price reduction gets distributed evenly or selectively across the pricing schedule. In the latter case, the lump sum discount would not have any effect on future increase or decrease in contract sum.  The mathematical treatment of such matters are usually carried out at the point when the construction contract document is compiled rather than in the LOA as it can be time consuming and administratively laborious. 

Tender Documentation That Are Commonly Subject To Amendments During Contract Compilation

In order to better demonstrate the necessity and complexity of contract compilation process, the following hypothetical example will be used for illustration purposes. This example assumes an Employer and a shortlisted tenderer enter into an advance stage negotiation in respect of a tender to engage a main contractor for the construction of a commercial building. The tenderer counter proposes an alternative steel beam which is thinner, lighter and has a smaller cross section in lieu of the existing design included in the structural tender drawings. According to this tenderer, despite this alternative beam being lighter and thinner it is able to meet the load bearing specification prescribed and is compliant with the relevant code of practice as well as industry standards. This alternative beam is also more cost effective and involves a shorter construction period. The Employer is persuaded to adopt this alternative design because in addition to the aforementioned benefits, it also offers a larger floor to ceiling height due to the adoption of a beam with smaller cross sectional area. This in turn makes the commercial development more marketable. After a considerable negotiation, the Employer agreed to in-principle award the tender to the tenderer based on certain price discount. The LOA was swiftly signed by the parties and eventually followed by the process of compilation of the construction contract document. So how should one navigate the compilation of contract document in view of the design alternatives, pricing discounts, representations made during the negotiations? 

Firstly the sections included in a typical contract document is quite similar to the tender document that was issued to the tenderers. The sections included in contract document are usually interrelated, as making certain amendments to one section will affect the other sections. Going back to the example used above, since the alternative steel beam is used in lieu of the existing design, the corresponding types of structural tender drawings that are affected including the elevations, cross sections, structural details, plan views etc will need to be revised by the structural engineer. These revised drawings including the remaining structural drawings will be issued and labelled as ‘structural contract drawings’ which will formed part of the contract documentation. Next, the architect will have to perform a similar exercise to its architectural drawings for the purposes of production of ‘architectural contract drawings’. In this case, it is likely that the number of drawings that needed to be revised will be relatively less. Whilst architectural drawings do not show the structural components of the building, the floor to ceiling height was affected and should be amended in the corresponding architectural drawings. Since these changes to architectural drawings are rather localised, for the sake of clarity the changes should be denoted with ‘cloud markings’. As regards the mechanical and electrical drawings produced by the services engineer, the size of the structural beam may affect the manner in which the associated cables, ducts, wirings are routed. The additional floor to ceiling height may even affect the calculation of any cooling load. Therefore subject to the production of combined services drawings and shop drawings that will be produced by the main contractor in future, the mechanical and electrical contract drawings will be amended in the same manner as the architectural and structural drawings mentioned earlier. 

Apart from the drawings, there are also specific sections within the contract document that will be affected. The structural specification within the tender document will need to be replaced in so far as it is affected by the change in type of steel beam. The other affected section relates to the pricing schedule. The relevant descriptions in the pricing schedule will need to be amended including any reference to drawings that were superseded. One aspect of amendment to pricing schedule that can be tricky relates to the pricing discount mentioned earlier. As pointed out in an earlier section of this article, pricing discounts can be administered by way of a percentage discount to the original tender price or as a reduction of a lump sum amount. However as the change in steel beam is likely to affect its corresponding unit rate, there is a question of whether the discount should be reflected by a reduction in the unit rate. This is quite different from a percentage discount to the contract sum in that a discount to unit rate will have a valuation impact on future variation works to the structural steel beam. Whilst it is advisable to have these issues sorted out during negotiation, it is quite common for these details to be overlooked in an executive level negotiation. This is why the contract compilation process becomes the natural avenue for the intricate yet important detail to be ironed out.

As evident from the steps illustrated above, there are various sections within the tender document that have to be revised in addition to tender drawings leading to the formation of a complete contract document. Whilst these details are theoretically included in the LOA by reference to the letter from the contractor to the Employer, the necessary details are often unclear. In most large organisations, the team managing the tender could be different from the subsequent team that executes the project. Therefore, the documentation of detail in the contract document above and beyond the LOA is crucial to ensure that the agreed deal makes commercial sense, not just at the point of inception but also until completion and closure of final accounts. 

When To Compile Construction Contract Document

One should plan to compile the contract document as soon as possible preferably within the first few weeks after the issuance of the LOA. In reality however most projects will have its contract document compiled and signed towards the end of the project for various reasons, primarily due to busy schedule, workload and other miscellaneous reasons. The relationship between the contractors with the Employer and its consultants can be adversarial and contentious at times. As evident from the preceding section of this article, there remains some minor scope of negotiations between the parties during the process of contract compilation. When the relationships sour, one may find that the parties’ ability to negotiate and compromise is adversely affected. Therefore it certainly pays to strike the iron while it’s hot.

In any case, there are various contract administration tasks that cannot be properly performed without a fully compiled contract document. By way of example, a revised pricing schedule where necessary is required for monthly interim progress payment. Therefore the complete compilation of contract document in many ways facilitates the interim progress payments.

How To Compile Construction Contract Document

Contrary to popular belief, contract compilation process involves thoughtful professional judgment calls as opposed to a mere administrative exercise. This is because some of the points of clarifications, amendments or concessions made at the downstream of the tender process could supersede certain project requirements originally set out in the tender document. One should also consider how the contract documents shall be interpreted and construed as a whole, particularly when there are conflicts or inconsistencies within the contract document. In this regard, there are usually provisions included in the standard form of contract or the LOA which sets out the rule on construction of contract documents. These rules are important because it is quite common to find contradictory or conflicting parts of the contract document despite care that had been taken in removing obsolete portions of the tender document during the compilation process. After all, different sections within the contract document are produced by different consultants. 

The different standard forms of contract used in Singapore prescribes different methods to construe the contract document. By way of example according to the Singapore Institute of Architects Building Contract 2016 (the SIA Form), it is stipulated amongst others that the contract document shall be read and construed as a whole and that no special priority other than accorded by law shall apply to any one group of documents. The public sector forms of contract on the other hand prescribes that the conditions of contract shall take precedence over other documents forming the contract. Amongst the conditions of contract, the particular conditions shall take precedence over the standard conditions. In other words, one group of document shall take priority over other group of documents in case of conflict or inconsistencies. There are also LOA which prescribes that the terms included in the LOA shall prevail and in case of inconsistencies in other parts of the contract document, then succeeding correspondence and documents in terms of date shall override and take precedence over the preceding correspondence and documents. In this case, the chronology of events shall have priority over groupings of documents.

As alluded to earlier, the various parts of contract document are arranged in a manner similar to the tender document. The information, details and particulars submitted by the selected tenderer which were populated in the tender document becomes the basis of the contract document. Various material correspondence exchanged and documented after the tender document was submitted by the selected tenderer are usually populated separately at the penultimate section of the contract document. These are usually known as ‘contractual correspondence’.

Using the earlier hypothetical example pertaining to the alternative design of steel beam structure, prior to compiling the contract document, the obsolete portions of tender document that were superseded by the adoption of alternative design shall be removed. If this project adopts the public sector form of contract, one should include a particular condition documenting this incorporation of alternative design as the mere reference to the letter from the contractor documenting this agreement is arguably insufficient. On the other hand, if the LOA adopts the rule of construction based on chronology of events, the adoption of particular conditions may not be necessary.

What Should be Excluded From Construction Contract Document

Clearly only documents that are essential and material should be included in the contract document. Emails, letters or correspondence that are administrative or even perfunctory should be excluded. Occasionally, tenderers do include catalogue, brochure or marketing materials in their tender submissions. The general rule is to exclude these documents since the contractor are still required to adhere to the specification regardless of their proposals. The deliberation and assessment of any specific model of equipment or finishes are usually considered part of post contract submissions that are subject to the relevant consultants’ approval. The inclusion of such catalogue or brochure opens up the debate as to whether such proposals supersedes and overrides the original specification on the basis that tender document precedes the dates of submission of these proposals.

The same argument applies for construction method statement which are usually required for submission by the tenderers for demonstration of their approaches and their general competence. Whilst the method statements are useful for the purposes of tender evaluation, it is by no means an accurate representation of the actual site condition. Any accidental inclusion of method statement may open up the debate as to whether additional cost or time incurred resulting in departure from the prescribed method statement may entitle the contractor to legitimate claim. 

Similar to method statements and marketing materials which are frequently subject to change, an initial proposed construction programme which depicts the various timelines, milestones and critical path should also be excluded from the contract document. Construction programme is arguably one of the most dynamic document that is subject to frequent changes. Whether these changes entitle one to extensions of time should be a matter reviewed and assessed carefully by the independent certifier appointed under the contract. Any inclusion of programmes into the contract document similarly attracts the debate on the basis of any entitlements to extension of time, and also potentially the associated loss and expense claims. 

Conclusion

Contract document is arguably one of the most important document in any construction project since it sets out the rights and obligations of the parties. Naturally, one should dedicate sufficient time and care in the compilation of contract document so that any agreements made as a result of long drawn negotiations are accurately documented and recognised.



Koon Tak Hong Consulting Private Limited

As regards loss and expense, the most notable difference in approach between the SIA Building Contract and the Public Sector Standard Conditions of Contract (PSSCOC) is that only the latter included an express provision addressing such claim. Does this mean that any main contractor that entered into the SIA form is therefore “not permitted” to claim for loss and expense? The answer is no.  This article aims to provide explanation as to why and in doing so provide certain perspectives on the different approaches between these two forms of contract.

This article is part 2 of a series of articles comparing the SIA form against the PSSCOC form. Part 1 of this series compares the role of  certifier appointed under these two different forms. Similar to part 1, this article refers to SIA form published in 2016 and the PSSCOC published in 2020 for the purposes of discussion and comparison. One of the key functions of a certifier is to independently assess and certify claims for additional payment. A certifier’s power is invariably dependent on the scope of his authority as prescribed under the contract. Part 2 of this series examines the extent to which loss and expense claims are allowed under these different forms, which in turn will affect the functions of the certifier.

In examining the different contractual treatments of loss and expense, it is imperative that one is precise and accurate on what specifically is being claimed. In reality loss and expense are presented based on specific heads of claims. Different heads of claims under the broad umbrella of ‘loss and expense’ could be treated differently depending on the forms of contract used. Therefore, this article highlights the relevant types of heads of claims with particular emphasis on how claims could be labelled strategically. Finally, depending on the form of contract used, the same type of heads of claim could be treated differently based on the root cause of the trigger event. This is because different contract is drafted based on different risk allocation philosophy.

SIA vs PSSCOC – entitlement to loss and expense claims

Any main contractor’s entitlement under PSSCOC to loss and expense claims are expressly provided for under, amongst others clauses 22 and 23 therein. These clauses set out causative events of loss and expense where claims are permissible, sufficiency of contractual compensation as well as condition precedents to be fulfilled prior to advancing such claims.  On the other hand, there are no express provisions under the SIA form. Main contractors under the SIA form have traditionally advanced their loss and expense claims as general damages pursuant to their common law rights. Where the main contractor suffers damages due to any contractual breach, damages are meant to place the main contractor in the same position as if the contract had been performed. In this context, loss and expense are the damages to compensate the aggrieved party. Certain provisions that are not expressly stated under the contract may well be implied in law. 

To this end the PSSSOC limits the main contractor’s ability to pursue damages under common law by virtue of its Clause 22.2 which deals with sufficiency of loss and expense. Under this clause, the main contractor shall amongst others, not be entitled to recover any loss, expense, costs or damage except in accordance with the express provisions under the contract. Whilst some may understandably argue that this clause is restrictive by limiting the avenue and procedure of claims, others may disagree and are in favour of express provisions. This is because the adoption of expression provision allows loss and expense claims to be managed with greater degree of upfront certainty rather than allowing the problem to fester and deteriorate with the passage of time. Also, the certifier will then be authorised to certify payments associated loss and expense incurred and substantiated to facilitate main contractor’s cashflow. By contrast, the Architect who is also the certifier under the SIA form is confronted with such restriction of power by virtue of Clause 31(12). Under this clause and in the absence of expression provision, the certifier shall have no power to decide or certify claim arising from breach of contract. Consequently the main contractor’s avenue for recourse can either be through commercial settlement or legal action such as arbitration.

Loss and expense can be classified under various heads of claims including amongst others (1) prolongation costs such as on-site overheads, off site/ head office overheads, idling cost, financing costs, (2) disruption costs such as loss of productivity, price escalation, acceleration costs and (3) other miscellaneous costs such as cost of preparation of claims and loss of profit. It should be noted that some of these heads of claims have positive correlation with period of construction and quantity of works. In other words, the longer the period of construction and quantity of works, the higher these costs could be. 

If and when the main contractor had to operate the site for a longer period of time due to breaches of contract on the part of the Employer or its agent, the main contractor’s claim for compensation such as prolongation cost may well be justified. It should also be noted that under the pricing section of the contract document, the main contractor usually indicates its preliminaries costs which would similarly include its on-site overheads, head office overheads, as well as the rentals of certain plant, machineries and equipment which in turn constitute idling cost. Therefore loss and expense claims are often associated with claims for additional preliminaries. 

In this regard, Clause 5(1) of the SIA form requires the main contractor to provide a breakdown of its prices and unit rates to indicate the proportionate amount attributable to amongst other, plant and overheads expenditure. Further Clause 5(2) requires the main contractor to indicate in its preliminaries costs amongst others, items of expenditure that require adjustment based on quantities of work (or ‘Q’) and time required to carry out those works (or ‘T’). Whilst these breakdowns and disclosures are aimed to facilitate valuation of variation of works or measurement of the works, these lines of expenditure are essentially identical to those heads of claims under loss and expense. 

The upshot to these observations is that whilst there are no express provisions per se for loss and expense under the SIA form, Clause 5 therein provides an avenue to claim for certain heads of claims which are effectively loss and expense. Admittedly, these Clause 5 provisions are not meant to address compensations arising from the Employer and its agents’ breach of contract but rather as valuation tools in respect of variations instructed under the contract. Whilst instruction of variations are not breaches of contract, it does give rise to loss and expense claim. By way of example, under Clause 22.1(a) of the PSSCOC, variations are one of the reasons for loss and expense. Therefore the operations of Clause 5 under the SIA form under prescribed circumstances can arguably be seen as an informal express provision for loss and expense claims. The ability to utilise an express provision of contract provides the certifier with the relevant authority to assess the claim under the interim progress payment regime thereby facilitating cashflow. It behooves the main contractor to be conversant with the different claims avenues available and be able to label the claims appropriately.

SIA vs PSSCOC – treatment of different heads of claims

In this section of the article, a comparison is made between SIA and PSSCOC to understand whether the various heads of claims are treated differently under the respective forms. As regards PSSCOC, Clause 22.2 which deals with sufficiency of loss and expense stated that the main contractor is entitled to recover through express provisions any loss, expense, costs or damage whatsoever resulting from any disruption, prolongation or other material effect to the regular progress or completion of the construction works. The wordings are rather broad with no apparent restriction of claim to any specific type of heads of claims or category of expenditures. It is noteworthy that apart from making specific references to prolongation costs and disruption costs, the PSSCOC additionally refers to an open ended phrase of ‘damage whatsoever’. 

By comparison since the SIA form does not include any express loss and expense provisions, it therefore makes any default recovery of damages to be pursued via the main contractor’s common law rights. In the absence of any restrictive clauses, the main contractor is open to claiming any heads of claim subject to the usual standard of proof under civil proceedings. It bears repeating that any claim for damages is financial compensation arising from breach of contract by the Employer or its agents. Therefore such claims are outside the certification powers of the Architect and could not be assessed and paid under the contractual interim progress payment regime. Unlike the PSSCOC, the SIA does not restrict the commencement of arbitration for recovery of damages before practical completion of the construction works. Whilst that may theoretically offer some comfort as it relates to cashflow concerns on the part of the main contractor, in reality arbitration may not always provide speedy recovery of compensation. 

As alluded to earlier, the main contractor that prefers to claim under express provisions of the contract could refer to Clause 5 of the SIA form. It should be noted that not all heads of claims are permissible. Clause 5(1) only refers to plant, equipment, overhead expenditure that are included in the unit rates and prices, with the corresponding proportionate amount expressly identified. Further the expenses must be caused by instruction of variation of works. Pursuant to Clause 5(2) other preliminaries types of expenditures that are not already included in unit rates but are instead allocated in the preliminaries section of the pricing schedule should be identified with the letter ‘Q’ or ’T’ for these heads of claims to be admissible. Therefore whilst Clause 5 offers substantive loss and expense claims to be assessed and paid under certification regime, the types of heads of claims are relatively restricted. In view of this unique mechanism under the SIA form, it raises the question of whether the main contractor under the PSSCOC could similarly claim for additional preliminaries through their unit rates and prices. If possible, this effectively allows one to bypass Clauses 22 and 23 of the PSSCOC by the inclusion of preliminaries type expenditures in unit rates and prices as an alternative path to recovery of loss and expense. To this end, Clause 20.5 authorises the certifier to decrease any unit rates that are deemed excessive by replacing such rates with one that is in line with fair market value. Therefore Clause 20.5 in a way prevents one from evading the requirements under Clauses 22 and 23.

SIA vs PSSCOC – unforeseen ground condition

One of the more contentious causes of loss and expense relates to unforeseen ground conditions due to the significant financial impact and potentially severe delaying effect. Typically both the disputing parties take the position that the risk was so unpredictable and the effects are so crushing that they should not bear the brunt of its ramifications. Therefore an examination of how the SIA form and PSSCOC deal with unforeseen ground condition helps to illuminate the differences in approach to loss and expense respectively. In general only the PSSCOC includes express provisions that allow the main contractor to claim for loss and expense arising from unforeseen ground conditions albeit under prescribed circumstances. On the other hand, in addition to not having expression provision, the SIA form appear to allocate such risk to the main contractor.

Unforeseen ground condition in and of itself is quite a unique type of risk. Where projects involve constructing underground structures such as foundation works or building basement levels, the Employer usually commissions a third party geotechnical surveyor to carry out sub-soil investigation. The associated report is then disseminated to the tenderers with the usual disclaimer on the reliance on any information included therein. These reports have its limitations as the presence and extent of underground boulders, cables, abandoned pipes and other relevant obstructions can hardly be conclusively identified. As the element of unpredictability persists despite best effort on due diligence, the risks allocation philosophies under different forms of contracts become particularly relevant.

Clauses 5, 22 and 23 under the PSSCOC are instructive to understanding how loss and expense arising from unforeseen ground conditions are addressed. Clause 5 stipulates, amongst others that the main contractor’s entitlement to loss and expense is allowable only if the adverse physical conditions could not have been reasonably foreseen by an experienced contractor. This is a question of fact. If the obstruction exist at a level that is beyond the typical depth of bore holes, there may be a strong argument that the adverse condition was not foreseeable. If the tender period was insufficient for any reasonable attempt to carry out supplemental sub soil investigation, there may be a case to made in favour of the main contractor. Therefore tenderers of public sector projects which may involve considerable underground works are advised to be cognisant of the requirements under Clause 5 and be both proactive and communicative with its risk assessment. Clauses 22 (g) recognises that adverse ground condition is a contractual ground for loss and expense claim whilst Clause 23 sets out the relevant procedure to comply with in making such claim.

Article 8 and Clause 13(1)(b) of the SIA form stipulate that main contractor’s prices and unit rates are deemed to be inclusive of all works, including those that may contingently become necessary to overcome difficulties and bring the works to satisfactory completion. These provisions appear to deny any of the main contractor’s claims for damages for overcoming difficulties, which arguably include underground obstructions even if such work may not have been expressly identified in the contract document but are necessary to complete the project. It is unmistakable that these provisions are broadly worded to cover a wide range of scenarios pertaining to adverse site conditions. It places the onus on the main contractor to include all such risks in its pricing. Critics of these provisions argue that the contractor should not be expected to price for risks that are not foreseeable as it effectively encourages tenderers to blindly inflate their prices to cater to an event that could not be reasonably assessed. In any case, it is up to the tenderers to negotiate these provisions to their satisfaction which may involve certain form of risk sharing that is similar to the approach under the PSSCOC. The Employer would be motivated to compromise if any concession is matched with an appreciable reduction in construction cost.

SIA vs PSSCOC – how the differences in loss and expense approach affect main contractors’ claims administration and practices?

The advancing of loss and expense claims, the associated claims assessments and if necessary defending against those claims are part and parcel of construction business. Every contractor should put in place a claims administration system at the outset of every project and not only when the project runs into trouble. Every project are typically inundated with various contemporaneous records, site diaries, minutes of meetings, correspondences, interim reports, revised drawings and part prints, instructions etc. To most untrained casuals, these documents are mere paperwork but in reality these are evidence. How these records are organised and presented are influenced by the type of contract used. Given the differences in loss and expense approach between the SIA form and the PSSCOC illustrated above, this section of the article examines how should one’s claims administration system be structured accordingly.

The PSSCOC has a very detail and strict claims procedure which can be found in its Clause 23. Under Clause 23.1(1), the contractor shall give notice in writing of its intention to make any claim for additional payment within 60 days after the event giving rise to such claim has first arisen. Such notice  which is a form of condition precedent, shall specify the event and its consequences. The failure to serve any such notice will detrimentally affect the contractor’s entitlement to such claim. Whilst theoretically it should not be difficult for the contractor to serve such notice within 60 days, how the notice should be worded can be delicate and challenging. This is because in reality, multiple events usually happens on site concurrently and it may be premature to commit with absolute certainty in respect of cause and effect. The contractor could encounter underground boulder in the midst of its building foundation works whilst there are simultaneously changes to the structural design due to alterations to architectural layout as a result of modifications to end user requirements. The site diaries may include documentations that could be managed separately between the different disciplines such as architectural, civil and structural as well as interior design. The situation could further exacerbates under Clause 23.3 where the contractor is required within 30 days of its initial aforesaid notice, to provide detailed particulars to further substantiate its claim. At this stage, the contractor faces a tight balancing act. If it changes the description of event that causes the claim, it may have exceeded the 60 days condition precedent time frame included under Clause 23.1(1). If it continues to commit with the initially described event, it may compromise the legitimacy of its claim if the evidence does not corroborate with the event. After the initial report filed within 30 days of its notice, it may further required to produce additional interim reports as well as a final report within 30 days of the end of the effects resulting from the event. These interim and final reports serve to funnel the contractor into a concrete, defined and particularised cause of event. If the claim is denied by the Superintending Officer and subsequently gets resolved under arbitration, the contractor’s lawyer’s flexibility to plead its case differently may be limited. In view of these mechanisms, the contractor’s interest could be well served if its claims administration adopts some fluidity and flexibility in its presentation of claims. The elaborate and detail mechanism of Clause 23 would also mean that its claims are audited and reviewed frequently to ensure not just compliance with all conditions precedents but also sufficiency in contemporaneous records.

The SIA form on the other hand do not have an express loss and expense provision and therefore is relieved from a highly structured regime found under the PSSCOC. Any contractor who decides to pursue damages under arbitration for loss and expense are not shackled with condition precedents, production of multiple reports, surrendering various accounting records etc. Whilst this may be viewed as advantages in terms of fluidity and flexibility in claims process, it could also back fire resulting in sloppy and half hearted claims administration in the absence of upfront discipline. On the other hand, contractors who decide to pursue additional preliminaries due to increased in quantity of works and construction period that entails could refer to Clause 5 as alluded to earlier in this article. Clause 5 under the SIA is fundamentally different from Clause 23 of the PSSCOC in terms of claims approach. The former utilises unit rates and prices provided by the contractor under the contract whereas the latter is based on actual costs incurred in so far as it can be substantiated by contemporaneous records. If a project is extended from 12 months to 18 months due to additional works, the contractor’s site security costs will be additionally compensated by $50,000 based on the original price of $100,000 under Clause 5 of the SIA form. On the other hand, the contractor will need to produce actual receipts, invoices or other accounting records at the appropriate intervals to claim what it actually incurs under Clause 23 of the PSSCOC.

Conclusion

The SIA and PSSCOC presents a very different approach in respect for claims for loss and expense. Whilst having express provisions for loss and expense appear to portray upfront certainty in respect of such claims, any onerous condition precedents and demands for record keeping may nullify the perceived advantage. On the other hand, the absence of express provision could be a blessing in disguise if one favours flexibility and fluidity in claims administration. 

Koon Tak Hong Consulting Private Limited

There are various types of standard forms of contract used in construction industry. Each type of form is developed by different institutions and notably exhibits different characteristics. In deciding which form of contract should be used in any given project, it is important to have certain  level of practical working knowledge of the distinctions between each form. This appreciation is important no matter which side of the equation one may be on, whether it is the consultant administering the contract, the contractor considering the risks prior to submitting its tender bid or the Employer who  usually plays a dominant role in deciding the types of form used. 

In construction industry of Singapore, there are three main forms of contract used namely the SIA Building Contract, the Public Sector Standard Conditions of Contract or PSSCOC in short and the REDAS form. This article will be the first part of a series of articles that aims to compare the SIA form and the PSSCOC form. Whilst these articles are by no means an in-depth legal analysis of the pros and cons of each form, it provides a general understanding of certain practical distinctions between the forms.


SIA vs PSSCOC – Why the comparison?

In Singapore the SIA Building Contract and the PSSCOC form makes an obvious choice of comparison since the former is widely adopted in the private sector whereas the latter is the form of choice for most public sector projects. For avoidance of doubt, this article refers to SIA form published in 2016 and the PSSCOC published in 2020. The public sector utilises public funds in its construction projects and are therefore subject to certain level of scrutiny, accountability and political imperatives which are unique relative to private sector. These standard forms of contract are essentially standard terms of agreement between the Employer and main contractor. The nature of relationship between the Employer and contractor in construction industry is often described as adversarial and prone to disputes. However the statutory boards or government agencies playing the role of the Employer in public projects are acutely aware that its counter party to construction contract i.e. the main contractor are effectively members of the public too. Therefore it is inevitable for the drafting philosophy of PSSCOC to include certain element of fair play, certainty and even fostering of collaborative relationship. This is often contrasted with private sector commercial philosophy where parties are free to compete and negotiate the best deal for themselves which often leverages on different bargaining power. Private entities are after all responsible to its shareholders in respect of profit maximisation. By understanding the overarching backdrop of the drafting philosophy, one would be able to better appreciate the intention behind certain clauses and how it should be interpreted.

Even if one is not presently required to select which contract to be used, there are still compelling reasons to compare different contract forms. This is because comparison of forms will give rise to a better understanding of the gaps, vulnerabilities and opportunities in the contract form that is being used. Comparison is often the means to an effective qualitative assessment. By way of example, the PSSCOC has provisions dealing with claims for loss and expense whereas such provision is noticeably absent under the SIA Building Contract. Even if one is not presently required to decide on whether to use SIA or PSSCOC, this distinction should trigger an intellectual inquiry on whether one is able to claim for loss and expense under SIA despite the absence of those provisions and if so, how can it be done?

Architect vs Superintending Officer (SO) – Independent Certifier

As mentioned earlier in the preceding section of this article, the relationship of contracting parties in construction industry is often described as being adversarial. The differences between parties usually relates to amongst others, claims for additional money, additional time for completion and whether certain parts of the works complies with the contractual specification. In view of these commonly occurring disputes, most construction contracts incorporate a certification regime so that certificates can be issued from time to time to prevent disputes from causing the project to grind to a halt. The certification regime is administered by a certifier who is an identified individual appointed under the contract. Under the SIA form, the certifier is the Architect whereas under the PSSCOC the certifier is Superintending Officer, or otherwise known as ‘SO’. There are similarities and differences in the certification regime between SIA and PSSCOC. It is important to contrast the regimes under these two different contracts as it enables one to navigate the contractual landscape in an informed manner.

The individual responsible for issuing certificates under the contract is usually the certifier. Whilst the contract may require the identification of various important parties such as the Quantity Surveyor, the Contractor’s Representative, the Employer’s Representative, none of them issues certificates. Certificate is essentially a formal decision by a certifier on various important matters such as the sum of money payable for any given month based on a determination of work done, whether a certain phase of works are practically completed, whether the contractor is entitled to any extension of time etc. To this end, the Architect and the SO issues various certificates under their respective contract forms. It is important to appreciate that these certification functions are not merely an administrative duty. Under the law, the certifier is expected to act independently, fairly, honestly and impartially. Failure to do so may result in the certificates being challenged legally resulting in the reversal of any decisions contained therein. The Architect and SO shoulders the same responsibility. However it is important to point out that not every named individual under every contract form who is authorised to issue certificate is under the same legal duty of independence and impartiality. By way of example, based on recent case laws such as CEQ v CER in 2020, it was held that the Employer’s Representative under the REDAS Design and Build form, who issues certificates of payment is neither an independent certifier nor a referee between the parties in that the certificates are not an objective assessment of works done and monies due. Since the REDAS form is outside the scope of comparison of this article, this unique distinction will be explored further in a separate article in future.

As the independence and competence of a certifier have far reaching contractual implications to both parties, the SIA form and the PSSCOC have fairly unique ways of managing its appointment process. Under Article 3 of the SIA form, in the event that the Architect’s employment is terminated by the Employer, the main contractor has a significant level of influence over the appointment of a replacement Architect. The main contractor could object over the Employer’s choice of a replacement Architect and thereafter make an application with the SIA for the President or Vice President of the SIA to make a nomination for an alternative Architect. Such nomination by the SIA may take place if the objection by the main contractor is not on unreasonable grounds and there was also no delay in such application. The Employer shall thereafter accept such nomination and shall remunerate this replacement Architect based on terms that may be fixed by the President or Vice President. This decision shall be final and conclusive. If the Employer fail or refuse to engage such nominated Architect, then the main contractor shall have the right to terminate the contract. It is thus evident that the independence of the certifier is so inviolable that a contractual mechanism is put in place to ensure an appropriate individual is appointed for this position by way of assistance of a neutral and external institution namely the SIA. Obviously this elaborate mechanism begs the question of whether a similar regime is in place for the appointment of the very first certifier? The answer is no because the presumption is that if the main contractor is dissatisfied with the choice of the initial certifier, it could well decline to participate in the tender for the project. The identity of the certifier would usually be provided in the tender document. 

Interestingly, under the PSSCOC there is no equivalent provision for the appointment of the replacement SO if the existing SO’s employment is terminated. In other words, the Employer could technically appoint a replacement SO despite the objection of the main contractor. Does this mean that the element of independence of SO is accorded with less priority under the PSSCOC appointment regime? It is important to understand the context of the employment of SO by the Employer. It is quite common for the public sector project to be initiated by a government agency or statutory board which then assumes the role of the Employer under the PSSCOC. The SO appointed by the Employer is usually its employee on its payroll. This SO is also likely a senior executive working in that organisation. This can be contrasted with the relationship of the Architect and the Employer under the SIA form where the Architect is an external party or ‘independent contractor’ of the Employer. Some argue that an employee to an organisation is unlikely to be impartial as compared to an independent contractor to the Employer. This lends credence to the argument that the PSSCOC should have an appointment regime of a replacement certifier equivalent to that of the SIA. Firstly it is worth reiterating that since the SO is usually the employee of the Employer there is no equivalent independent professional institution like that of an SIA in this regard. Secondly, the PSSCOC appears to have adopted express provisions in the drafting of its conditions to make certain that the requirement of independence of certifier is abundantly clear. By way of example, under Clause 14.3(4), the certifier is expressly required to exercise its responsibilities in a fair and reasonable manner in respect of certification of extensions of time even if the information supplied to him by the main contractor may not be sufficient. This duty binds the authorised SO be it the existing one or his replacement.

Architect vs Superintending Officer (SO) – Delegation of Authority

Since the SO under PSSCOC is likely to be an employee who holds a fairly senior position within the Employer’s organisation, it follows that he is unlikely to be engaged in the project’s day to day operational matters. Recognising the need to mitigate this issue, the PSSCOC expressly provides for delegation of SO’s duties and authorities to one or more Representatives. In order to ensure sufficient presence and representation of the SO further down the value chain, the SO and its authorised Representatives may further appoint any number of persons as their ‘Assistants’. 

The PSSCOC made subtle distinction in regard to the duties and authorities between Representatives and Assistants indicating the different level of executive functions between these positions. As regards the Representatives, any act done by him shall have the same effect as though it had been done by the SO so long as those acts are pursuant to powers that are delegated under Clause 2.3. As regards the Assistants, Clause 2.4 stipulates that unless authorised, they have no authority to issue any instructions unless such instructions are necessary to enable them to carry out their duties and ensure that the works are done in accordance with the contract. Whether certain works in dispute is carried out in accordance with the contract is a matter of interpretation of the conditions which in and of itself can be contentious. This in turn raises the question of whether any instructions issued by the Assistants are valid when challenged. Projects that require SO to appoint Representatives and Assistants are likely to be of considerable scale. Such project usually requires the engagement of external project consultants as well. It is unclear what would be the distinction between the role of Assistants and Representatives as compared to the project consultants and whether there are overlapping responsibilities that may be confusing and counter productive.

SIA on the other hand does not appear to provide any power for the Architect to delegate its duties and authorities that are of equivalence to SO under PSSCOC. Article 4 of the SIA recognises that a professionally qualified Quantity Surveyor, a named individual whose duty will be to assist the Architect in all matters of valuation or measurement under the terms of contract. There are certain certificates issued by the Architect that are predominantly matters of valuation and measurement such as interim progress payment, final accounts etc. This appear to suggest or at least tacitly recognise that the Architect does not have the professional expertise in these matters. Therefore it begs the question of whether the Architect is expected to discharge its certification duties independently when he is assisted and reliant upon the Quantity Surveyor on matters that are objectively outside his scope of expertise. Any party challenging the validity of the Architect’s certificate in this regard would be wise to highlight the fact that the Architect is merely assisted as opposed to have delegated or outsourced its certification functions entirely.

There are practical concerns when the Architect for a large projects are theoretically expected to undertake his certification functions single handedly without any authorised representatives or assistants as found in PSSCOC. In reality, the Architect does rely on a team of individuals in the discharge of his functions except that under the SIA, these individuals are not contractually authorised. In other words, the viability of this informal arrangement is dependent on whether the team of representatives on the ground are adequately savvy and sophisticated to keep the Architect briefed on contractual matters that may demand the required level of independence. Indeed to expect that this arrangement is contractually robust may require an excessive level of optimism. 

Even in the case of SO who is supported by a team of Representatives and Assistants, there are also practical concerns that one had to be conscious of when the certifier delegates his functions. This relates to Clause 2.3(b) which states amongst others that if the main contractor disputes any act of the Representatives, it may refer the matter to the SO who shall confirm, reverse or vary the act or decision of the Representative. At the first glance, this provision appear to make sense since the SO should reserve his right to make his very own decision despite any delegation of any duties or authorities. Is delegation of duties or authorities synonymous with delegation of independence? This issue appears debatable. If indeed the Representatives’ act fulfils the independence requirement demanded under the law, it is hard to explain why such independence is dependent on the final decision of the SO? This provision appears to function like an avenue for “appeal” in case where the main contractor takes issue with the Representative’s decision. What if the main contractor fail to refer the disputed matter to the SO? Does that mean that the main contractor had effectively prejudiced its future right to challenge the validity of such decision on grounds of independence? There are certainly room for further clarity in regard to this provision.

Architect vs Superintending Officer (SO) – Instructions and Directions

In most standard forms of contract, it is customary for the certifier to be authorised to issue some form of written instructions to the main contractor for various reasons such as amongst others, to vary the scope of works or to secure compliance in adherence to certain contractual requirements. The SIA has a unique approach in this regard in that Clause 1(2) therein provides for ‘Direction’ and ‘Instruction’ with difference in definitions and more importantly consequences. Firstly, the term ‘Direction’ shall mean an order of the Architect compliance with which will not under the terms of the contract entitle the main contractor to additional payment or compensation but may result in reduction in contract sum. On the other hand, ‘Instruction’ shall mean an order of the Architect compliance with which will in principle entitle the main contractor to additional payment or compensation or to an increase in the contract sum. Whether the order of the Architect is a Direction or Instruction, it is contractually distinguished from suggestions, recommendations or agreements with proposals made by the main contractor. 

In reality, it is not uncommon for the Architect not to be entirely certain whether a particular order give rise to entitlement to additional payment to the main contractor at the point when the order was given. By way of example, if the Architect changes his design mid way through the construction, there may be abortive works such as hacking of work done, omission of existing design and implementation of new design. Whilst notionally the new design may appear to be a more cost effective option, the actual cost consequences may be otherwise. Likewise, if the Architect makes an order to the main contractor in what the Architect originally believes was merely an insistence on what was already contractually provided for according to his interpretation of the conditions, the eventual arbitrator, adjudicator or judge may disagree with the Architect’s interpretation. Therefore Clause 1(2) under the SIA which presumes the Architect to be fully informed of the actual cost implication of his order may not be practical in reality. This is particularly so when the order was made under time pressure, as it usually happens in construction project. 

If the Architect is indeed uncertain of the actual cost implication of his order, he is naturally more inclined to take the more conservative position that all of his orders are issued as Direction. This then puts the burden on the main contractor to challenge the classification of Direction in order to reserve its position to claim for additional payment. Under Clause 1(5) of the SIA, the main contractor has 28 days from the receipt of such order to dispute its classification to be an Instruction rather than Direction. If the main contractor fails to do so, it will be conclusively deemed to have undertaken to comply with the Direction without an increase in contract sum or any additional payment or compensation. The main contractor’s time grace of 28 days can be increased by a further 14 days if it requests the Architect to inform in writing under which provision of the contract the Direction was issued. One should be aware that the number of such orders may be in the hundreds or even well above a thousand for large projects. The frequency with which such orders may be issued presents a real challenge to the main contractor in terms of workload. Again, taking a conservative approach, the main contractor may be inclined to challenge every Direction as a knee jerk reaction in order to reserve its rights to claim for additional payment sometime down the road.

On the other hand, the PSSCOC does not make any distinction between Direction or Instruction. Every order made by the SO is deemed instruction and it may not necessarily amount to an admission from the SO that such instruction entitles the main contractor to additional payment. The onus is on the main contractor to determine whether instruction issued give rise to entitlement to additional payment. By way of example, Clause 19.2 under the PSSCOC it is possible that an instruction does not state whether it involves a variation. Under such case, it is up to the main contractor to assess whether a variation is instructed and if so, the main contractor shall within 14 days of receipt of such instruction to confirm in writing to the SO that such instruction involves variation.

Both the SIA and the PSSCOC takes a similar approach in that it puts the onus on the main contractor to notify the certifier in writing within a certain time frame that certain order could give rise to additional payment. The philosophy behind this approach is likely to stem from the fact that there is a presumption that the main contractor is in a better position to assess whether certain order involves additional payment and if so, the Employer through the certifier may have an advance notice of such cost implication. The Employer would therefore be less likely to be surprised by the end of the project of any budget overrun. In reality, the main contractor outsources a significant portion of the construction works to its subcontractors and in turn rely on the subcontractors to provide the necessary advance notice in respect of claims for additional payments. Therefore the burden is effectively being transferred down the supply chain. Some argue that since the Employer has a bird’s eye view of the financial health of the project with the assistance of its consultant Quantity Surveyor, it may not be wise to shift the burden down the supply chain. After all, most of the variations ordered originated from the Employer’s desire for change and the Employer should theoretically be cognisant of the cost implication of any changes made out of its own volition.

Conclusion

The above sections of this article which deals with general comparison of the role of certifier between the SIA and PSSCOC underscores the different drafting philosophies. Admittedly there is no absolute right or wrong in the respective approaches and it is up to the user of the standard form to be cognisant of these differences and make an informed decision on the choice of forms. 

Koon Tak Hong Consulting Private Limited

During tough economic times, property developers that hold significant amount of real estate space often explore ways to reduce its maintenance costs and overhead expenditure. Property maintenance is often part of the cost cutting considerations since building infrastructures such as lifts, elevators, building management system, back up power generators etc require periodic maintenance that can be costly and incurred on a recurring basis. During cost cutting exercise, maintenance contracts are often scrutinised by asset managers with the view of finding ways of reducing frequency of maintenance or explore more cost effective alternatives. However these exercise are often futile and has fairly limited cost saving opportunities. The real opportunities are often found way before the maintenance contracts are formed i.e. at the point when these infrastructures are designed, procured and manufactured. In this regard there is a need to review the procurement risks and challenges in respect of maintenance contracts. This article therefore examines some of the inherent commercial characteristics of maintenance contracts.

Infrastructures Within Building That Are Subject To Periodical Maintenance

Whilst most buildings would require regular upkeeping in respect of landscaping, pest control, general cleaning etc, the focus of this article relates to various mechanical and electrical infrastructures installed in a building that commonly require periodical maintenance. Building owners, asset managers of real estate properties or facilities managers therefore would enter into certain maintenance contracts with the relevant service providers. To appreciate what these services actually entail, an overview of maintenance in respect of certain common parts of mechanical and electrical installations are illustrated in the following paragraphs. The concept of periodical maintenance can be broadly divided into two categories namely preventive maintenance and predictive maintenance. As regards the former, it is carried out on a time based or schedule basis, whilst the latter is based on the physical conditions of the assets or on a need basis. The need for maintenance can be identified in turn based on the data measured from those physical assets.

Lift systems or elevators is a classic vertical mechanical transportation system that is subject to periodical maintenance. There are various components in a lift system that must be kept in a working condition for the lift system to continue to be in service. Therefore lift systems maintenance regime would generally require a manual inspection including visual examination of these myriad components and is usually performed by a  team of lift maintenance technicians. The services include amongst others ensuring availability of emergency power supply for lift car lighting and ventilation, ensuring the lift machine and its moveable parts are well lubricated, preventing grease contamination on brakes of lift machine as well as making certain that lift car stops at the permissible tolerance level relative to the landing floor. These maintenance regime are often based on a check list of areas of inspections and are carried out at approximately three months interval. During these inspections, lift components and the associated parts that are found to be worn out will also be replaced.  

Unlike a lift system that is commonly found in buildings which most people can relate to, a building management system or BMS in short plays a critical role but often a lot less conspicuous to the public. As buildings are usually equipped with various systems that are complementary to one another such as air-conditioning system, power control, fire fighting, building access, ventilation etc, the BMS integrates all these systems to facilitate control and monitoring. The BMS usually is equipped with various monitors and sensors placed around the building to measure data that in turn will be transmitted to a central computer system. If the measurements exceed a certain threshold or when trigger events are detected, the building manager will be alerted so as to attend to the detected issue. BMS too requires periodical maintenance often in conjunction with the complementary systems connected to it. A BMS can often be described as an electrical network connected to a software and therefore is quite different from a mechanical system such as an elevator. This difference in turn affects the way in which maintenance is carried out. As regards BMS maintenance, given that it involves a central computer powered by software, part of the maintenance can be done off site as various data pertaining to the performance of the system is available on cloud computing. The physical aspect of maintenance involves occasional software updates, calibrating and checking of sensors installed on site as well as general cleaning of equipment or replacement of worn parts. As BMS monitors and controls various specialised systems, the interfacing with these systems are also regularly examined to ensure continuous and seamless integration. 

Original Equipment Manufacturer (OEM) vs Third Party Vendor

The original equipment manufacturer or OEM in short of any systems installed in building is perceived as being more familiar with the system in hand and therefore makes a compelling choice as the maintenance service provider. Apart from the perception of familiarity with the system, the OEM is likely to be in the position to readily supply relevant parts and accessories for the system as and when these components are worn out with the passage of time. From the OEM’s perspective, there is a clear financial motivation of positioning itself as the maintenance service provider of choice. This is because maintenance expenses are typically incurred on a recurring basis which therefore provides a steady stream of income for the OEM. This can be contrasted with the supply and installation of the system which are considered capital expenditure which fluctuates based on market condition. Capital expenditures being substantive investments are often avoided during market downturn.

The third party vendor provides an alternative option to the OEM as the maintenance service provider. What makes the third party vendor a viable alternative as it is often argued, is that there is no reason for building owners to pay a cost premium over the market rate to OEM when the scope of maintenance services are considered standard, regular and non proprietary. Further, having a third party vendor for maintenance ensures the OEM’s feet are held to the fire in that any defects in the quality of the systems supplied are addressed as part of the warranty rather than being suppressed as a maintenance issue. Therefore for building owners who desire for cost efficiency and having the relevant independence to execute the maintenance regime would potentially favour third party vendors.

However the third party vendors are dependent on the OEM in terms of supply of accessories and spare parts if the systems are designed in a bespoke manner. This puts third party vendors in an awkward situation of both competing against the OEM and relying on the OEM simultaneously. In the next section of this article relating to regulatory framework, it is clear that there are legislations in place to address these situations especially if it give rise to monopolistic behaviour. Legislative solutions however well intentioned are often a reactive rather than proactive in respect of these issues. As mechanical and electrical building system invariably becomes technologically more advance, which incorporates computing capabilities that allows sending and receiving of data through a proprietary walled garden, the third party vendors’ ability to compete with OEM will be significantly compromised. 

Relevant Regulatory Frameworks

As alluded to earlier in the preceding section of this article, OEMs have a natural advantage as the vendor of choice for maintenance services due to its perceived familiarity with the systems in hand as well as its ability to supply certain parts of the system that may be designed in a bespoke manner, such as the motherboard for the lift systems. Third party vendors may from time to time face obstacles in getting supply of these bespoke parts from the OEM, compromising its ability to compete in open tender for maintenance services. This situation is envisaged under Section 47 of Competition Act 2004 in Singapore which deals with the issue of abuse of dominant position. Under this section, an abuse of dominant position is prohibited where the conduct in question amounts to, amongst others predatory behaviour towards competitors, limiting production, markets or technical development to the prejudice of customers etc. Whilst the state may assist through the enactment of such legislation which criminalises anti competitive behaviours, building owners should also be aware that they have a role to play too. This is because the manner in which building owners decides to procure any of its mechanical and electrical systems prior to construction directly impacts its ability to gain access to cost effective maintenance services down the road.  Even if building owners are able to secure the spare parts from the OEM and have it supplied to its third party vendors, there is a concern of whether the manner in which the third party vendor carrying out maintenance works could compromise the warranty or guarantee provided by the OEM. Separately, the OEM may also be concern whether they will be unfairly implicated for supplying the parts if the workmanship of third party vendors are not up to mark.

Another example of legislation that relates to the issue of maintenance is the Regulations 2016 under Building Maintenance and Strata Management Act in Singapore. This legislation governs private apartments and condominiums amongst others in which there are regulations which pertain to periodic maintenance of lifts and escalators. It is stipulated that such systems shall be maintained either once every three months or at the intervals recommended by the OEM, whichever is more frequent. Therefore the OEMs could not only affect the level of competition for maintenance works but also the nature of the maintenance regime. In view of this, when assessing the procurement risks and challenges of maintenance contracts, one should take cognisance of the level of influence that can potentially be exerted by the OEMs.

Procuring Through Integrated Facilities Management (IFM) and Managing Agents

Building owners and asset managers of properties would typically have a dedicated facilities management or FM department to deal with the myriad of maintenance issues. These issues ranges from overseeing the maintenance regime of various mechanical and electrical installations, to handling complaints from tenants or building occupants, to facilitating any interactions with the authorities on matters pertaining to inspections and certifications. In a bid to streamline the significant FM related workload, building owners commonly outsource such functions to a single entity which is an integrated facilities manager or an IFM. Depending on the specific commercial agreement between building owners and its IFM, there are occasions where the wide variety of maintenance service providers are engaged and paid directly by the IFM, that in turn recovers these expenses from the building owner, in addition to its service fee. These contracting practices whilst effectively streamlines workload and enable outsourcing of non core functions, distances the building owner from certain critical details of its maintenance regime. 

In the case of private apartments and condominiums in Singapore which is under the strata management model, the common facilities also require maintenance. The management council made up of elected subsidiary proprietors of these residential developments would usually engage a managing agent to deal with the wide variety of maintenance issues. Consequently, the regular subsidiary proprietor or home owner is less likely to be familiar with the critical details of the maintenance regime even though they are paying for these services through contribution to management fund and sinking fund. 

The contracting practice of bundling all maintenance services contract under a single outsourced entity no doubt provides a certain measure of convenience to building owners, but often at a cost. This cost is not merely the service fee paid to the IFM or managing agent, but also in the form of relinquishment of knowledge and agency over the manner in which the maintenance funds are utilised.

Procurement Challenges for Maintenance Contracts

Based on the preceding sections of this article it is clear that the choice of brand of systems installed in the building will influence the choice of maintenance service provider. This in turn will have an influence on the frequency of maintenance performed on that system. Once the procurement decision is made by the building owner on the brand of systems installed, it loses considerable of its negotiation power on the maintenance costs to be expended for many years down the road, in so far as the lifespan of that system. The practice of contracting through an IFM entity for all the maintenance services further distances the building owner from the critical details to enable effective management of its maintenance cost. It would therefore appear that the critical window of opportunity for the building owner is at the upstream stage of the building lifecycle i.e. during design development and procurement of the building in its entirety.

It does not help that the team engaged by the building owner to design and construct its building is usually different from the team that subsequently manages the operation and maintenance of the completed building. Teams in question are usually different because the skillsets required are different, and likewise their priorities are different too. The maintenance team may not even be in place during the construction phase of the building. By way of example, the property developer of a residential building will relinquish much of its initial maintenance responsibility once the development is sold and the apartment owners will in turn form its management council to oversee the maintenance. The realities of the manner in which teams are structured and how handover is executed present very real procurement risks and challenges in respect of maintenance contracts. Therefore building owners should not be surprise when they face difficulties in cost cutting exercise as it relates to maintenance expenses. 

Most would argue that the solution to problems illustrated above can be approached by a “mindset shift”. In reality however a construction director responsible for completing the construction project on time and within budget will hardly advocate for a particular brand if it has a longer delivery time even though it results in lower maintenance cost down the road. Most astute vendor supplying building system understands these realities and would therefore offer an appealing proposition from a construction delivery perspective in the spirit of deferred gratification. 

One way to overcome these differing priorities between construction and maintenance is to assess various brands during procurement not merely based on the immediate cost and delivery time frame but also total cost of ownership of the systems. In other words, the costs considered for any system should take into account the initial supply and installation costs as well as future maintenance cost. Clearly, there are limitations to this approach as well because it presumes the OEMs shall also be the maintenance service provider. This effectively eliminates any possibility for third party vendor for the provision of future maintenance. For this total cost of ownership method to be meaningful, the OEM is required to provide an offer based on a set of figures in respect of future maintenance expenses that becomes binding upon acceptance by the building owner. Parties would have to work through some nitty gritty detail such as how those maintenance figures would be impacted if it can be established that there is an increased wear and tear due to problems or mishandling on the part of the end user.  Also, parties would have to agree on any price adjustments based on price inflation in future especially if such maintenance agreement spans over a considerable period of time. 

There is also another school of thought that the cost competitiveness of engaging third party vendors is likely to exceed any financial benefits arising from upfront negotiation on total cost of ownership with the OEMs. Building owners who subscribe to this approach would be wise to ensure that such third party vendors are able to secure bespoke spare parts and accessories from the OEM by some form of tripartite agreement. If this fails, building owners should at least make the effort to ensure during design development that the systems procured are not excessively specified based on bespoke components with exclusive supply. 

Building owners that still prefers OEMs over third party vendors may consider making a projection of future additions and alterations works to its building as part of its continuous asset enhancement plans. This is particularly relevant in the case of commercial buildings, retail malls and hospitality development. This projection of future enhancement initiatives can be a good bargaining chip to negotiate for a more competitive maintenance fee as the OEMs are likely to be required to perform upgrade works to its system in addition to the regular maintenance regime. These enhancement works could mean additional income for the OEM that will provide extra commercial heft and scale to the business relationship.

Apart from effective management of maintenance costs, one area that is particularly challenging is the form of contract agreed between the building owners and the maintenance service provider. Construction industry in which damages arising from disputes commonly runs into millions of dollars has created an awareness of the importance to having access to fair and equitable forms of contract. This in turn contributed to the creation of a range of standard forms of contract which caters to varying needs. Unfortunately the maintenance services industry does not enjoy the same level of maturity and sophistication in terms of availability of standard forms of contract. Whilst it is common for firms within construction industry to have an in-house contracts and commercial department that specialises in issues pertaining to claims and disputes, this is not the case within the maintenance service industry. It is therefore not uncommon for building owners to enter into agreements with maintenance service provider based on the latter’s standard form of contract with either very minimal or no contractual negotiation. Occasionally the “form of agreement” is merely a purchase order. This phenomena presents both a procurement risk and opportunity for the maintenance service industry.

Conclusion

The maintenance team should work in conjunction with the construction team during the upstream phase of a construction project. Apart from facilitating a better handover and sense of ownership of the completed building, it also opens up various commercial opportunities down the road.



Koon Tak Hong Consulting Private Limited