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

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

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

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

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

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

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

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

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

Challenges In Accurately Determining Solvency of Contractor Through Its Financial Statements

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

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

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

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

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

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

Element of Profitability 

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

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

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

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

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

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

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

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

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

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

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

Advance Agreement to Cost of Variations

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

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

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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

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

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

General Rule of Valuation of Variations

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

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

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

How Do SIA and PSSCOC Deal With Valuation of Variations?

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

Tier 1

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

Tier 2

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

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

Tier 3

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

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

Tier 4

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

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

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

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

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


Conclusion

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





Koon Tak Hong Consulting Private Limited

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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




Koon Tak Hong Consulting Private Limited

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