Before one signs on the dotted line, the terms and conditions should be reviewed to ensure that these are acceptable. One’s ability to carry out an insightful review is dependent on the level of understanding of the clauses in hand. In the process of review, one is essentially examining whether the terms give rise to any risk and if so, can the risk be managed? There are usually various parties involved in reviewing any draft agreement including  commercial manager and legal counsel. Rightly or wrongly, arbitration clause is often deemed a “legal matter” and therefore falls within the purview of the legal counsel as opposed to commercial manager. Whilst a legal counsel could advise whether a clause is “legally operable”, an effective commercial manager provides an additional perspective of whether it makes business sense to shoulder certain risk even if the clause is entirely operable or enforceable. Unfortunately when it comes to the subject of arbitration, it often give rise to the perception of being pure legal issue and in turn lacks a balance commercial scrutiny. This article therefore provides a basic understanding of arbitration clause and how it can be reviewed commercially. Indeed there are commercial dimensions to any arbitration clause that remain under appreciated. 

What is Arbitration?

Typically parties in dispute commence their legal actions in a state court where a presiding judge would hear the merits of their arguments and make a judgment that is binding and legally enforceable on both parties. This dispute resolution process is known as ‘litigation’ and the proceedings are governed by the prevailing rules of the court. Arbitration is an alternative method of resolving dispute where the contesting parties are relatively in greater control over the process. Arbitration operates by consent of the parties where disputes are referred to arbitrator(s) instead of a judge. The rules of the arbitral proceedings including the appointment of arbitrator are based on parties’ choice and matters are heard in a private forum instead of a court. The outcome of an arbitration is an arbitral award in which the decisions are also legally binding on both parties. 

Therefore the one distinctive element of an arbitration is the parties’ freedom or autonomy to dictate the manner in which their disputes will be resolved. This freedom can be an advantage if parties’ have a good understanding of the mechanism of arbitration and be able to negotiate an arbitration clause that make sense both legally and commercially. Any asymmetry of knowledge and expertise between the parties in respect of arbitration may have a profound financial implication down the road. This is because once parties include an arbitration clause in their contract, either party is not at liberty to revert back to the conventional court litigation without the consent of the counter party. The state court respects the parties’ decision to refer their disputes to arbitration and would not interfere under ordinary circumstances. There are also legislations in place in most jurisdictions that limits the state court’s ability to interfere with arbitral proceedings. The fact that an arbitration is conducted in a private forum does not make it less worthy in its legal force.

The scope within which the parties are free to stipulate their terms of arbitration can be identified from the wordings in their agreed arbitration clause. Arbitration clauses are included in standard form of construction contract and are usually found at the tail end of the contract form. Such clause usually include amongst others, the types of disputes that can be referred to arbitration, the number of arbitrator, the arbitration institutions and its rules that would govern the proceedings, when can the parties commence legal action, any condition precedent prior to the commencement of arbitration, the applicable arbitration law, the seat of arbitration etc. The breadth of issues in respect of an arbitration agreement that can be agreed upon by the parties are wide ranging.

Where Can The Outcome of Arbitration Be Enforced?

The outcome of an arbitration is often referred to as the ‘arbitral award’. This is the decision rendered by the arbitrator based on the issues that are within his scope of jurisdiction. An arbitral award is widely recognised which allows it to be enforced internationally in countries which are state parties of the New York Convention. To date there are 172 state parties globally under the New York Convention. By contrast, the judgment of a state court does not enjoy the same level of international enforceability as that of an arbitral award. Court judgment has a relatively limited international enforceability and are almost exclusive to countries with some form of reciprocal enforcement of foreign judgment arrangement. These reciprocal arrangements are often instituted either bilaterally or regionally. This limitation is due various reasons including amongst others the issue of sovereignty of nations, varying legal system with different legal principles and also certain matters are deemed national interest where foreign interference are not permissible. One of the ways in which New York Convention addresses some of those concerns is by establishing a common legislative standards. Through UNCITRAL Model Law, state parties have a better chance of being able to streamline their respective arbitration laws in harmony to one another. It also provides a legal framework in respect of the relationship between the state court and an arbitral tribunal. In supporting international arbitration, state parties agreed for a limited curial intervention against arbitral award except in rare instances of procedural error committed in the arbitral proceedings. This in turn provides certainty and trust in the arbitral proceeding in terms of the finality in dispute resolution. As compared to international arbitration, domestic arbitration face less cross border enforcement challenges in that both disputing parties are domiciled within the same jurisdiction.

The international enforceability of an arbitral award is an advantage when carrying out construction projects in a foreign country where legal risk is a significant consideration. This leads to the next section of this article on some of the reasons why arbitration is widely adopted.

Why Arbitration?

In an international transaction where the construction contract is between the Employer from Country A and the main contractor from Country B with the project being carried out in Country C, arbitration clause can be useful. Both Party A and Party B being foreign entities are unlikely to have much assets in Country C. Even if either party obtains a favourable judgment through the state court in Country C, it is unlikely to amount to much practically. Assuming there is no reciprocal of enforcement of foreign judgment arrangement between either countries A or B with C, the winning party will face an uphill task in securing the losing party’s assets. In this regard, an international arbitration clause helps resolve these cross border legal issues. This is an important commercial consideration before one decides whether to spend a considerable amount of legal costs to pursue any claim.

Even if both disputing parties and the location of the project are within the same jurisdiction, there are also merits to having an arbitration clause. This is because parties have considerable freedom and latitude to agree on the dispute resolution framework and structure. By way of example, parties may agree in advance to appoint certain arbitrator with technical background in construction dispute which could boost parties’ confidence in the dispute resolution process. Usually the litigants under a court system do not have the freedom to pick and choose their judges who will preside over their case. 

One of the advantages to having an arbitration as a mode of dispute resolution is that is provides the disputing parties privacy. Some businesses may view getting embroiled in legal tussle as damaging to their reputation and brand. These businesses often avoid pursuing legal actions especially if they are actively bidding for projects for fear of being seen as being claims conscious or outright litigious. The arbitration rules are usually drafted with these concerns in mind. With parties’ mutual consent, arbitral proceedings incorporates privacy safeguards. Court system on the other hand upholds open justice principle where judicial proceedings are usually carried out in a transparent manner with much public scrutiny. 

Any parties that ever get involved in disputes will acknowledge that once the relationship sours, the disputing parties could hardly ever agree on anything. The animosity can spread from the core issues to other peripheral issues which could have been easily agreed but for the underlying disputes. This makes it that much harder for disputing parties to ever negotiate or mediate their dispute. Any party that initiates such reconciliatory measures are concern of being seen as ‘weak’. To overcome this problem, certain arbitration clauses incorporate condition precedents as part of their tiered dispute resolution mechanism. This means that no parties are allowed to commence an arbitration, before attempting to resolve those disputes through either negotiation and/or mediation. These conditions precedents are usually well defined in terms of duration within which these needs to happen and certain written communications between parties to signify the formality of  commencement of these condition precedents. This is to provide a mandatory pathway for parties to at least make the effort of negotiation or mediation without the party initiating being seen as weak. The flip side to these condition precedents is that if such measures are not adequately fulfilled, any reference to arbitration will be deemed premature and could compromise the jurisdiction or authority of the subsequent appointed arbitrator. Any multi tiered dispute resolution provision therefore can fundamentally affect the question of when can disputes be referred to arbitration. This issue will be examined in further detail in the next section of this article. 

When Can Disputes Be Referred to Arbitration?

As alluded to earlier, the effect of any multi tiered dispute resolution mechanism meant that parties are not permitted to immediately refer any dispute to arbitration before first resorting to negotiation or mediation that may be specified as a condition precedent. Whilst these condition precedents opens up the possibility of reconciliation and parties’ control over the outcome of resolution of dispute, it can also be abused as a delaying tactic when either party does not have any genuine intention of settling their differences. Settlement of dispute usually require parties to compromise rather than finding fault. Some are cautious of making any compromise for fear of causing prejudice to their legal positions if negotiations or mediation subsequently fails. Occasionally the representatives of either disputing parties are not incentivised to settle expeditiously especially if their employment ceased upon the financial closure of the project. For all these possible scenarios, condition precedents may not necessarily assist with dispute resolutions.

Most standard forms of construction contracts provide for a certifier who can either be the architect, engineer, employer’s representative or others. This certifier is usually a named individual with certain powers provided for under the contract. Some conditions of contract would require that parties refer their disputes or differences firstly in writing to such certifier and the certifier will then be required to make a decision within a specified duration. The party that continue to be dissatisfied with that decision can then refer the certifier’s decision to arbitration. Whilst this may be seen as yet another time consuming condition precedent, there may be good reasons for such mechanism to be in place. One aspect of dispute resolution that is often gets overlooked is “crystallisation” of dispute. When one party is required to articulate their claims on a specific matter formally in writing, it forces one to be specific with its position. The other party will therefore be given a chance to counter with its specific position or to reject the claim with logic and reasons. This process when carried out with mental clarity allows the real dispute to crystallise and be itemised in a discrete manner. Even if one party is dissatisfied with the certifier’s decision, it allows issues subsequently referred to an arbitrator to be properly framed and defined.

There are also conditions of contract that prohibits any reference of dispute to arbitration until the project is substantially completed. It is fair to say that once parties in a construction contract commences legal action under arbitration, their relationship is severely compromised. At that point there is a real prospect of the project not being able to continue to the point of completion. Therefore arguably this condition precedent safeguards the Employer’s interest of at least being able to complete its project before dealing with any claims and dispute under arbitration. If the contractor has issues with the Employer involving progress payments and claims, there are statutory adjudications recourse available assuming there are legislations such as Security of Payments Act in place that aims to facilitate cashflow.

When disputing parties are finally able to refer their disputes to arbitration, it is crucial to understand the different points of contact, institutions or administrative parties and their respective roles that will facilitate the commencement of the arbitral proceedings. 

Who are Relevant Parties Involved in An Arbitration Proceeding?

The party initiating the arbitration is usually referred to as the Claimant whilst the counter party is known as the Respondent. Apart from providing its defence, the latter occasionally makes its counter claim against the Claimant. The Tribunal refers to an arbitrator or a panel of arbitrators presiding over the proceedings and resolving or determining the disputes submitted by the parties. The number of arbitrator(s) is usually decided by the parties.

It is not uncommon for the parties to also dispute over interpretation of the arbitration clause including how many arbitrator to be appointed and the manner in which the Tribunal shall be constituted. Therefore it is often useful for the parties to agree on an institutional arbitration agreement as opposed to an ad hoc arbitration agreement. Under institutional arbitration agreement, the parties would have agreed upon a defined arbitration institution to administer the arbitral proceedings including a set of arbitration rules that governs the conduct of the proceedings from inception to completion. The absence of any agreed set of procedural rules before the Tribunal is constituted could give rise to a tricky legal terrain for any party to navigate. There are various arbitration institutions such as the International Chamber of Commerce (ICC), Singapore International Arbitration Centre (SIAC), London Court of International Arbitration (LCIA) etc. Ad hoc arbitration on the other hand, relies primarily on the arbitrator to set the rules as the parties at the stage of arbitration are unlikely to agree on much issues. Where parties had entered into standard form of construction contract, the arbitration clause included therein would typically provide for an institutional arbitration. Therefore the arbitration institution is an important component of dispute resolution mechanism for parties to be familiar with from the outset. 

Within an arbitration institution, there is usually a Registrar or Secretariat as well as the Court within the institution. Generally, the Secretariat is the party that receives a request for arbitration from the Claimant. It plays an important administrative function prior to the constitution of the Tribunal in ensuring the parties submits the relevant information and documents as required under the arbitration rules including payment of any fees. The Court within the arbitration institution does not resolve the substantive disputes between the parties but plays an important role in making determinations as to whether the arbitration should proceed and hears challenges that either party may have on the authority of the Tribunal. Any decision made by the Court is usually without prejudice to the Tribunal’s subsequent authority to decide on its own jurisdiction should the Court decide that the arbitration shall proceed.

How to Refer Disputes to Arbitration?

Once the condition precedents if any, are fulfilled and exhausted, the party initiating the arbitration namely the Claimant should refer to the arbitration institution and its prevailing arbitration rules mentioned in the arbitration clause. For the purposes of this article which focuses on construction contract, it is assumed that the parties had agreed on an institutional arbitration rather than ad hoc arbitration clause. This is because most construction contracts are based on certain standard forms adopted by the industry which typically include an institutional arbitration clause. Whilst it is common for parties involved in legal action to hire lawyers to drive these arbitration processes, it is still advisable for the disputing parties to have good practical knowledge of the relevant proceedings.

Different arbitration institutions has different expectations as to what is required from the Claimant, in particular how defined and certain should the claims be submitted to the Secretariat or Registrar at the outset. These requirements are usually prescribed in one of the arbitration rules which pertains to Request for Arbitration, Notice of Arbitration etc. There is typically a list of items required from the Claimant that includes amongst others, the arbitration clause, the identity and contact details of the disputing parties, nature of claims including any quantification of damages sought, proposed arbitrator etc. There is usually certain requisite filing fees that shall be paid when arbitration is initiated. The counter party is either copied by email in this initial process or to be notified by the Secretariat once the submissions from the Claimant is deemed complete.

The arbitration institution would typically provide a fee schedule to guide the parties on the relevant costs or deposits that are payable. This fee schedule is usually proportionate to the magnitude of claim or quantum of damages sought. Therefore parties should be as accurate as reasonably possible in its initial quantification of claims. This fee schedule in addition to any legal fees would provide a reality check as to whether such legal action is justifiable and commercially worthwhile.

The Claimant being the party that initiates the arbitral process usually retains the element of surprise. Prior to pulling the trigger, the Claimant, its lawyers or any claims consultants would have discussed, considered and debated over the merit of its case, the strategy including the availability of witnesses or documents to support its case. On the other hand, the Respondent usually does not enjoy the same amount of time as the Claimant in preparing its response or defence including any counter claim. Therefore, as part of the initial process, the Respondent either provide a brief response which usually amount to some form of blanket denial and putting the Claimant to strict proof. Depending on the nature of the claims, the Respondent might reserve its position to mount a counter claim at the later stage to the extent permissible. Therefore, it is clear that whether a party is the Claimant or the Respondent, the ability to achieve the required readiness to engage in the process is an important element that one should be prepared for as early as possible, preferably during the review of any arbitration clause.

How to Review Arbitration Clause Commercially?

Most construction contracts provides for an interim monthly progress payment regime where contractor is paid progressively based on the work done. In other words, the contractor would have to finance the works first before getting paid based on the agreed rates and prices. When parties are in dispute, the progress payments usually get adversely implicated. When the Employer or its consultants rejects the work done on the basis of not being compliant with specification, or the Employer disputes whether certain work done entitles additional payment or for any other reasons, the contractor who finances the work would not get paid until such time when the disputes are resolved and is found to be in the contractor’s favour. This explains why contractors are usually the Claimant in most arbitrations, due to their pursuit for payment, rightly or wrongly. The Employer on the other hand would be financially protected by amongst others, the access to performance bond and being able to make payment only based on work done. Therefore, when one reviews any arbitration clause, it would be useful to first make an educated guess as to whether one is likely to be the Claimant or the Respondent in case of disputes. This assessment will influence the way one decides what elements of the arbitration clause is important or likely to be important. The same dynamic described above equally apply to the relationship between the main contractor and subcontractor. 

If one believes that it is likely to be the Claimant, it will be incentivised to resolve the disputes as soon as reasonably possible so as to gain access to the outstanding funds. To this end, the speed at which the proceedings can progress becomes crucial. Thus it is important to understand what are the options available amongst different arbitration institutions based on their prevailing rules. In pursuing speed of dispute resolution, it needs to be balanced with the ability for one to still being able to present its case. It is often a case of trade off. In certain arbitration institutions such as the ICC, the Claimant is expected to be relatively precise and certain with its claims when making a request for arbitration whereas the other institutions merely require a brief statement at the point of notice of arbitration. This is because these other institutions would usually have a separate step for parties to file their statement of claims at a later stage of the proceedings. An arbitral proceeding with clarity and certainty in the scope and issues in dispute can usually progress at a higher pace. It is also quite common for arbitration institutions to offer the option of an expedited procedure to cater to such needs. Any potential Claimant is more likely achieve agreement on an expedited procedure or the choice of arbitration institution that promotes certainty of issues at the outset before any dispute arises. Occasionally parties may agree to opt for proceedings conducted in a memorial style format where statement of claim is filed together with witness statements and expert reports. This format whilst saves considerable time is quite different from the traditional adversarial approach used in common law system where the witness statements and expert reports are filed a later stage after the submissions of statement of claims and statement of defence.

In view of the above it is evident that a good understanding of the mechanics of arbitral proceedings could be beneficial from a commercial perspective. With this understanding in mind, any potential Claimant would be wise to put in place a robust documentation system during the construction duration. This is to facilitate access and retrieval of letters, emails, drawings, or any documents that offers high evidentiary value during any arbitral proceedings. One should be mindful of the fact that personnel and individuals may come and go due to natural attrition and completion of project. Having a robust documentation system can address any such preventable loss of information.

Conclusion

Whilst arbitration is traditionally viewed as a pure legal matter, that cannot be any further from the truth. In reality, most issues in our day to day life are rarely packaged neatly as a pure subject of certain domain knowledge. Issues are usually a complex amalgamation or blend of different domains of knowledge. In case of arbitration provisions, it pays to appreciate its underlying commercial value despite the common perception of it being a pure legal matter.

Koon Tak Hong Consulting Private Limited

Occupants of any internal units of commercial building are expected to carry out some construction activities throughout its usage of that space. This could be the initial fitting out works of office units at the inception of the lease, or even retrofitting works in the midst of its occupation by installation of new equipment to improve the performance of that space. Occasionally, the occupant may also carry out restack works to increase density of the spacing between workstations or meeting rooms. Restack works could also refer to the reshuffling of locations of various business units to improve workflow or to fulfil certain regulatory compliance requirements. Given the magnitude and variety of construction activities expected, the procurement and contractual risks commonly associated with building construction projects are also applicable to the above mentioned fit out works. Whether those construction activities pertains to fitting-out, retrofitting, or restacking in respect of an internal commercial space, these works share a fairly similar set of procurement challenges and contract risks. For ease of reference, this article shall use the term fit out works to refer to these collective types of construction activities.

Unique Nature of Fit Out Works

The appreciation of procurement and contract risks of fit out works begins with an understanding of the unique nature of these works. The occupants referred to in this article means amongst others banks, financial institutions, insurance companies, law firms or technology companies which tend to occupy a significant amount of commercial real estate space. These occupants are also referred to as ‘the Employer’ in the context of construction contract, in that they directly engage architects, engineers, interior designers, fit out contractors etc to carry a significant amount of fitting out works over a period of time. 

These fit out works could be driven by various business imperatives. These could range from leasing of additional real estate space to accommodate business expansion or to consolidate all business units located in multiple buildings into one single “campus” that now spans across multiple floors in a single building. It could also be reduction of commercial space arising from business contraction or work from home policy. It may also stem from the need to change office environments to facilitate a more collaborative “open” working environment concept. Occasionally it could refer to construction of physical barriers between different business units or introduction of engineering redundancy for compliance with regulatory requirement due its mission critical banking activities etc. Whatever the underlying reasons it may be, these fit out works typically involve amongst others supply and installation of new walls, floors and ceiling finishes, system furniture, fittings and equipment, as well as mechanical and electrical services to accommodate a revised internal layout. Beyond the traditional builders works, it could entail the creation of “technology room” that may require computer room air conditioning (CRAC) units, uninterruptible power supply (UPS) units which could involve installation of new raised floors.

These fit out works are often carried out in a “live” environment namely within an occupied building with limited hours within which these construction activities are permitted. Works usually had to be carried out after regular office hour or over the weekend. Additionally there are various rules administered by the building management office or its managing agent that principally regulates the manner in which the works are to be carried out so as to minimise disturbance to other building tenants. Unlike the traditional construction of a new building where the main contractor retains much control over the way its site is managed, a fit out contractor by contrast is not provided with much latitude or flexibility. Certain grade A commercial building with high profile tenants may have even stricter requirement where the specific construction activities planned by the fit out contractor is required to be shared with the building management office in advance so as to facilitate timely communication with neighbouring tenants. This is to avoid scenarios where certain hacking works are carried out during ‘peak period’ of neighbouring tenants when they may be working in their offices throughout the night, resulting in complaints and even abortive work.

The usage of commercial real estate by the Employer often lags behind its evolving business needs. By way of example, if an investment bank decides to retrench a significant number of its employees in response to an unexpected bearish market condition, it may execute its plan swiftly. This result in the need to surrender a significant portion of its real estate space back to the building owner and to restack the workplace of remaining staff. The corporate real estate manager of such bank may have limited amount of time to execute those construction activities as these initiatives can be announced in a sudden surprise. The compressed construction period poses a unique challenge to fit out works as compared to construction of a new building which typically would entail months if not years of preceding due diligence period. Therefore corporate real estate fit out works are often required to be operationally ‘nimble’. 

Given the unique features of corporate fit out works and the special circumstances within which it operates, it would be beneficial to review some of the procurement and contract risks that it is confronted with.

Standard Form of Contract for Fit Out Works

There are various standard forms of contract used in the construction industry across different jurisdictions. By way of example of Singapore, the Public Sector Standard Conditions of Contract (PSSCOC) is widely used in public sector projects initiated by the government. On the other hand, the private sector projects in Singapore often rely on other standard forms of contract such as the SIA form and the REDAS form. These standard forms of contract are often modified to suit the bespoke needs of the project in hand. Whilst these forms of contract are drafted in fairly general terms to ensure its flexibility in being used for multiple types of projects, these forms are drafted in anticipation of a more conventional project. Such conventional project would typically refer to the construction of a building or certain infrastructure erected on any land. The main contractor in this regard is given possession of site by a certain commencement date of the contract period and is typically provided with a reasonably uninterrupted site access, management and control. The contract would also specify a contractor administrator or a certifier, who is empowered to supervise the main contractor’s works and is also the arbiter in case of certain disputes. The corporate fit out works however is different from such conventional projects and all parties involve should be aware of the limitations in using such standard forms of contract. 

Particularly in Singapore, there is no standard contract form that caters specifically to corporate fit out works. Therefore parties often use the conventional forms of contract with significant modifications, which arguably defeats the original purpose of having standard forms of contract. For the purpose of this article, a few notable examples will be raised to highlight the mismatch between the conventional forms of contract as it relates to characteristics of corporate fit out works.

Firstly, most conventional standard forms of contract would have provisions for adversity that may be encountered by the contractor in respect of sub-surface and ground conditions. These provisions anticipate a typical construction of a building on any given land where certain hardship, difficulties and challenges may be encountered by the contractor during the construction works. These challenges may include presence of underground services, subterranean boulders or marine clay that could give rise to significant additional costs and time to carry out the works. These provisions would typically specify the manner in which risks are to be allocated between the contractor and the Employer. These risk allocation philosophies in turn gets incorporated into other relevant provisions such as valuation of variations or entitlement to extensions of time. However in the context of corporate fit out works, these issues are not applicable. 

Secondly, the same conventional standard forms of contract anticipates significant number of plant, machineries and equipment used in construction site which are either owned by the contractor under certain financing arrangements or leased from a third party. Consequently, there are provisions of contract that stipulates that such plant, machineries and equipment that are deployed on site shall be deemed vested in the Employer throughout the construction period. On the other hand, interior fit out works rarely involve heavy plant, equipment and machineries due to the nature of the works and the confined tenanted space in a commercial building. One may argue that these provisions could quite simply be ignored if it is not applicable. However, the contract documents of projects are often circulated to other third parties such as financial institutions or insurance companies to procure bond or insurance coverage. Any simplistic desktop analysis of these documents could unnecessarily elevate the risk profile of the projects, causing an avoidable rise in project costs. 

Whilst there is an existence of provisions that are not applicable to corporate fit out works as illustrated above, by contrast there is an absence of provisions which ought to be in place that are specific to fit out works. The effects of such absence will be elaborated in the following sections of this article. 

Risk vs Reward – Liquidated Damages

Most business transactions are exemplifications of the balance between risk and reward. The transacting parties often assess what is the potential gain or reward in exchange for the risks that it had to shoulder. Corporate fit out agreements in a business sense is no different. As regards risks, the fit out contractor had to contend with the possibility of, amongst others being in culpable delay and consequently get imposed with liquidated damages. Liquidated damages are genuine pre-estimate of losses that may be caused by the party in default as a result of delay in completion. In the context of corporate fit out works involving investment banks, financial institutions etc, any delay to completion that deprives these firms from using its business premises may result in significant damages. This is particularly so if the estimation of losses are measured based on the loss of revenue in which case could amount to millions of dollars. On the other hand, the contract sums for fit out works varies considerably depending on the nature of the works where some of the lower end of the spectrum could only be a few hundred thousand dollars. Assuming a fit out contractor makes 10% profit for these smaller scale works, it could hardly justify any potential losses as a result of delay to completion. 

Unfortunately in using the conventional standard forms of contract, the recourse for the Employer for any delay is typically in the form of liquidated damages and the disproportionality between risk and reward can be a problem. Whilst admittedly the concept of liquidated damages is useful in most traditional construction of buildings in that it provides certainty in amount of damages payable without the onus of proof, that could also be an impediment in the context of fit out works. Liquidated damages provisions work hand in hand with other provisions in standard form of contract such as extensions of time. Consequently any amendments to liquidated damages provisions may be cumbersome given the spillover effect on other provisions. The following section of this article will illuminate the effects of extensions of time provisions and how its application may give rise to anomalies as regards fit out works.

Anomaly in Delay and Extensions of Time

To appreciate the the limitations of conventional extensions of time provisions in the context of fit out works, it will be useful to set out a general overview of a typical extensions of time mechanism. A contractor is entitled to extensions of time when the delay to the project is excusable based on the grounds provided for under the contract. Once an extension of time is granted, the original completion date is extended and be replaced with an extended completion date. The extended time is usually granted based on a certain number of calendar days. In the context of fit out works, the measurement of calendar days may not be suitable in certain occasions. This is due to the restrictions on the timing during which construction activities are allowed in an occupied commercial building. 

As alluded to earlier in this article, carrying out construction works in a ‘live’ building environment entails various challenges especially when one is expected to comply with the regulations administered by the managing agent of the building. In certain grade A commercial building with prominent tenants from technology companies, law firms, investment banks etc, there is an expectation that their working hours are extended well into the night.  The building management regulations are therefore influenced by the needs of such tenants. For a regular weekday, construction activities could be allowed just before midnight and shall cease by 5:00am the following morning. As such the fit out contractor could only work productively for approximately five hours in a given weekday. However, certain works may need to be executed continuously within a single session that may take beyond the five hour durations based on a certain productivity that would justify the associated mobilisation and demobilisation costs. Under such circumstance, these works can only be carried out over the weekend, where construction activities may commence around midnight on Friday and not end until the subsequent Monday 5:00am. This continuous duration is more conducive for certain works to achieve meaningful progress.

Given the restrictions depicted above, it may be a problem if the original completion date falls on a weekday say Tuesday and the contractor is granted five days of extension of time which extends the completion date to Sunday. Assuming the outstanding works cannot be accommodated within the typical weekday 5-hour block, the contractor can only utilise the two days over the weekend to achieve the originally planned productivity. In this case, the contractor is actually not benefiting from the five days extension of time at no fault of its own. This may expose the contractor to liquidated damages for outstanding works beyond the extensions of time granted. As such, the typical extension of time provision in standard forms of contract does not precisely address such nuances at present moment. 

Challenges in Attracting Competitive Tender

Whilst fit out works may present certain unique contractual challenges illustrated above such as extension of time and liquidated damages, in reality these considerations are not at the forefront of most contractors’ mind when considering whether to carry out such works. The key consideration for most contractors, rightly or wrongly is the potential of profitability of fit out works. In this regard, the primary rule of thumb is the magnitude of the works or the contract sum. This is because a modest percentage of profit of a large sum is still quite an attractive proposition. Whilst the scale of fit out works can be large financially, particularly during the commencement of a lease in a new building, the more frequent fit out works that occur in the midst of the lease are those with more modest scale such as restack works or retrofitting works. These works may range from a few hundred thousand dollars to several million dollars, which is modest in the context of construction projects. It can be a challenge to attract competitive bids during procurement of such modest fit out works. 

Therefore corporate real estate managers representing the Employers had to be creative to attract sufficient competitive tenders. This is not merely to obtain competitive pricing but also to build up a diverse source of contractors, vendors and suppliers to improve redundancy and also to avoid putting all eggs in one basket. It would not be in the interest of the Employer to only have one regular contractor carrying out all its works. Apart from from the likelihood of paying a premium due to lack of competition, the Employer may be left in the lurch if the regular contractor becomes unavailable for various reasons, in particular if the restack work in hand is especially urgent. Working in a ‘live’ commercial building with confined space and restricted construction hours entail quite a steep learning curve in the beginning. It also takes time to build a reservoir of good will and productive working relationship with the building’s managing agent. It is usually not advisable to engage a fit out contractor that is completely new to the Employer and the building’s managing agent for a larger scale fit out works. Therefore, the strategic approach is to leverage on the smaller fit out works as opportunities to incrementally build the necessary institutional knowledge. This is critically important if the Employer anticipates a large fit out work in its pipeline of projects in a not too distant future.

Apart from smaller scale restack projects not being commercially attractive, even certain mid size fit out project could face difficulties in attracting interest and participation from the market players. This is so when the project in hand is subject to strict design standards. Certain large financial institutions may implement regional or even global design standards. These standards can be highly prescriptive in terms of choice of specific corporate colour for internal furnishings, model and brand of system furniture, choice of glass partitions etc. Very often these design standards are created in ensuring consistency in its aesthetic appeal that cater to certain branding objectives. Therefore, the fit out contractor will be given a list of designated suppliers to procure the relevant material and finishes with standardised pricing. In this regard, the latitude within which the contractor will be able to carry out its procurement from its very own sources is limited. It follows that there is certain limit to its profit margin. Contractors typically thrive financially when it is given certain flexibility to find creative ways to source and construct the works and yet still meet the stipulated performance specification. Therefore design considerations may conflict with commercial interest occasionally if one fails to assess its corporate real estate strategy holistically.

Conclusion

The unique features of corporate fit out works may give rise to certain contractual and procurement risks as illustrated above. When planning and strategising for corporate fit out works, it pays to appreciate the risks discussed above and be thoughtful in devising a pragmatic implementation solution.


Koon Tak Hong Consulting Private Limited

The subject of construction insurance is not as widely discussed in construction project meetings despite its undeniable importance. In fact it is rarely an issue that draws attention until and unless certain incidents or accidents happened on site and there is a desire to find out whether such incident was an insured risk that entitles one to compensation. Construction insurance policy is often reduced to mere a functional document that is deliverable under the contract that remained tucked away after submitted. 

Unlike the more popular subjects such as extensions of time, variation claims or loss and expense, construction insurance does not get the focus and attention that it richly deserved. This perhaps contributed to the relative lack of awareness amongst construction practitioners on this subject. This article therefore attempts to provide some basic concepts of construction insurance that hopefully provides a catalyst for greater awareness.

Construction projects are inherently risky. It involves cranes hoisting steel beams around densely populated urban environment and labourers scaling great heights with just a safety harness. There are other examples to illustrate the point. Accidents, injuries or even deaths occur from time to time even with the best safety plans. There are various express provisions in contract making main contractors or subcontractors shoulder civil liability since they are ultimately responsible for carrying out these works. There are also legislations enacted such as Workplace Safety and Health Act in Singapore to impose criminal liability to those who are liable. 

In reality most contractors rely on prompt cashflow and continuous stream of projects to remain solvent. They possess relatively limited assets to be able to cushion the hefty damages that arises due to accidents on site which often runs into millions of dollars. Therefore safeguards such as indemnity provisions under the contract have limited utility if its reliability is questionable. Notwithstanding this, it is useful to understand some relevant indemnity clauses and insurance clauses under a typical standard form of construction contract.

Indemnity and Insurance

In most standard forms of construction contracts, indemnity clauses and insurance clauses are often positioned side by side due to the correlation between these provisions. Whilst the contractors are contractual required to indemnify or to provide financial guarantee in favour of the Employer for any accidents that may occur on site, they are simultaneously required to procure and effect the necessary insurance policy. It is a recognition that the contractors are not likely to have the financial heft to underwrite or guarantee payment in case of large sums of damages. Therefore construction insurance will provide the relevant safety net when necessary. It is also a relatively inexpensive safety net. Very often, the insurance clauses are worded in such a way that the procurement of insurance coverage is without prejudice to the contractor’s obligation for indemnification. This avoids any misunderstanding as if the insurance substitutes the contractor’s responsibility to indemnify the Employer. This construction insurance therefore does not limit or reduce the contractor’s indemnification obligations. 

The double recovery rule prevents the Employer from getting payments twice for the same incident. This avoids the Employer from profiting from the insurance by getting paid by the insurer via the coverage of insurance policy and simultaneously getting indemnified by the contractor. 

It should be noted that there are often gaps in most insurance policies in terms of coverage. These are often couched as deductibles or co-insurance or outright exclusions. As the indemnification clauses and insurance clauses are meant to work in conjunction with one another, it follows that the indemnification provisions will financially plug any such insurance coverage gaps. However it can be tricky if the Employer actively prescribe the types of insurance, the limits of coverage, approves the insurer and the associated policies etc. The contractor may argue that it has discharged its contractual obligations upon complying with the detail requirements set out by the Employer. Therefore based on such argument any gaps that persist are deemed excluded from the contractor’s scope of liability. Ideally the Employer should limit its interference by relying on the contractor to manage its insurance coverage based on the contractor’s self understanding of the limits to the scope of its indemnification. However in reality if the contractor has insufficient insurance coverage and consequently becomes insolvent, the Employer is left to its own devices with limited recourse. This may explain why most standard conditions of contract are still rather prescriptive in its insurance clauses despite the risk of doing so. 

CAR Insurance – All Risks vs Named Perils

Whilst most insurance clauses in construction contract specifies the types of risk that requires insurance coverage, it does not specifically name the actual insurance policy in question. The Contractors’ All Risks insurance policy or ‘CAR’ is the insurance policy that it typically refers to. One unique feature of CAR is the element of ‘all risks’. This element makes it different from other conventional insurance policies that one would encounter in their day to day life such as travel insurance policy. Under the conventional insurance policy, its coverage is based on the list of perils that is specifically named. To know if a specific event entitles one to compensation under the policy, one will need to refer to the list of perils. By way of example if cancelled or delayed flights are provided for under the list of named perils in one’s travel insurance policy, then one can file a claim and be compensated as soon as such event happens. The reverse is true for CAR policy which has the ‘all risks’ element. CAR policy covers everything unless it is expressly excluded. As an example, a common exclusion of CAR policy is damages caused directly or indirectly by events of strikes, riot, civil commotion, war etc. There is a reason for this. If event such as war occurs, it is likely to be nationwide or even region wide which means multiple projects will be affected simultaneously. It is unlikely to be isolated to a single project for a limited period of time. The scale and magnitude of damages that ensue in such a widespread manner would not be financially manageable for a primary insurer, thus the exclusion. 

The structure of any CAR is quite typical in that it consists of two sections. Section I deals with Material Damage whilst Section II deals with Third Party Liability. Under Section I, the coverage include the construction works for the project in hand as well as any property of the Employer adjacent to the construction works. The coverage usually amounts to the contract sum including any professional fees, cost of removal of debris off site as well as associated plant, machineries and equipment. Under Section II, the coverage includes physical or bodily injuries of any third parties including damages to their properties. The descriptions on Sections I and II above are intentionally abbreviated as it is to provide a broad perspective on the nature of the coverage.

Endorsements

Due to the standard exclusions to most CAR policies, gaps in insurance coverage exist as a matter of standard market practice. The larger the gaps are, the more the Employer would need to rely on the indemnification provision for any recourse. In case where the Employer prefers to rely on the guarantee of an insurer rather than the balance sheet of a contractor, there are options available to Employer to plug those gaps. The Employer could specify certain endorsements to be included in the policy, which typically would attract additional premium charges. Endorsements are generally amendments to the base CAR policy to broaden its coverage. Endorsements therefore can be viewed as the opposite of exclusions. 

By way of example, a standard exclusion as alluded to earlier in this article pertains to strike, riot and civil commotion or otherwise known as SRCC. It is possible to remove such exclusion of SRCC by purchasing an SRCC endorsement. Endorsements are typically listed in the Schedule portion of the insurance policy and would be included in the tenderers’ offer price at the point of tender.

Whilst it is possible to select the types of endorsements to plug the gaps from standard exclusions of CAR policies, there are times when the insurer may include exclusions based on the nature and specificity of the project. The insurer may upon its review of the project scope of works decide that certain parts of the works be excluded from insurance coverage. By way of example, the risks arising from marine piling works or seabed dredging works in respect of coastal infrastructure project may be excluded from insurance coverage as these may be deemed to have unmanageable risk profile. The Employer may not be aware of these bespoke gaps at the inception of the project if it is a contractor controlled insurance policy where the insurer’s assessment only arises after the main contractor is appointed. Therefore the Employer will be well served to either allocate certain provisional sums under the main contract to effect additional insurance endorsements where necessary or to invite an insurer to review the project at the outset on a without prejudice basis to understand the project’s risk profile.

Uberrimae Fidei – Utmost Good Faith

An insurance policy is ultimately a commercial agreement between two contracting parties namely the policyholder and the insurer. In simple terms, the insurer agrees to provide financial guarantee on certain agreed risks in consideration of premium paid by the policyholder. It is trite that the principle of freedom to contract is upheld in most jurisdictions including Singapore. Under this principle, parties are free to negotiate at arms length and to act in their self interest. The court rarely steps in to rescue a party from what is perceived as a raw deal due to the lack of due diligence from one party prior to signing on the dotted line. The court expects the buyer to beware, or caveat emptor. This is especially so if the party who cries foul has superior if not equal bargaining power. Whilst the principles above is generally true, it is arguably not entirely applicable in the context of construction insurance. This is due to the concept of uberrimae fidei or utmost good faith in Latin. Uberrimae fidei is in fact the opposite of caveat emptor.

The insurer decides whether or not to provide insurance coverage based on material facts that it receives about the project. This enables the insurer to perform its risk assessments. If the insurer decides to proceed to offer insurance coverage, the risk profile that it perceives based on those material facts will determine the premium that it charges on the policyholder. The policyholder typically is in possession of the material facts and the insurer is dependent on the policyholder to share those material facts. By way of example of a medical and hospitalisation insurance policy, the insurer would not be aware of the policyholder’s medical history and lifestyle unless the latter decides to provide a full and frank disclosure. If the policyholder decides to suppress and conceal its lung cancer medical history and regular smokes cigarettes, the insurer’s ability to make an informed risk assessment will be compromised and the amount of premium charged will also be distorted. Therefore by the same token in the context of construction insurance, the insurer takes the position that all material facts and relevant information about the project should be disclosed, failing which the policy may be rescinded. 

The full and frank disclosure of all material facts under uberrimae fidei principle may seemed straightforward in regular insurance scenarios but can potentially be vague and contentious in the context of construction insurance. This is because the main contractor being the policyholder may not be in the position to appreciate what constitute material facts beyond sharing with the insurer the scope of works, project schedule and the construction method statement all of which are subject to change based on the dynamic site condition. The policyholder of a medical insurance is expected to disclose its medical history based on a retrospective perspective of events happened in the past. On the other hand, the main contractor could only disclose material facts prospectively based on its best guess of what will happen during construction period. There is always a fear that the insurer may not honour a covered claim on the pretext of non disclosure of material facts. It is advisable to agree and document with the insurer prior to the conclusion of any policy of the specific scope of disclosure and to what extent an update is required after the policy is concluded.

Subrogation Right

The insurer typically has the right provided for under the policy to seek reimbursement from the third party at fault after paying the insured the compensation for the covered risk. This is known as the insurer’s subrogation right. This right ensures that the insurer continues to be financially viable even after responding to the claim of a covered risk under the policy. Assuming the supplier who is not covered under the main contract insurance policy causes damages to the construction works, the insurer could seek reimbursement from such supplier upon compensating the main contractor. The main contractor not only gets compensated relatively quickly but is also relieved from the burden and cost of pursuing such claim directly from the   supplier that is at fault. 

However this raises the question of what if the Employer or its agent were at fault for causing those damages? Theoretically, the insurer would similarly have the same subrogation right against the Employer or its agent. This is why the standard form of contract would generally specify that the main contractor shall arrange for insurance policy that additionally names the Employer as the “insured”. As a general rule, the insurer does not have the right of subrogation or to seek indemnification from the insured. The terms under the policy would typically ensure that such arrangement is effected. This is why upon the procurement of the draft insurance policy, this aspect will be reviewed by the Employer’s contract administrator or the consultant quantity surveyor prior to facilitating progress payment for the cost of the policy. It should also be noted that the additionally insured named under the construction insurance policy would usually be protected if the accident arises only out of the ordinary execution of the construction works.

Workmen Compensation Policies

Whilst risk of injuries suffered by workers during construction works is real and undeniable, it is somehow treated quite differently from other construction related risks. In certain jurisdictions such as Singapore, there are legislations enacted by Parliament that focus on amongst others, how such risks should be addressed. Unlike other construction risks such as material damage and third party liabilities where contracting parties are free to agree on how such risks are to be allocated and be dealt with among themselves, workers’ injuries seemed to take treated with a higher level of sensitivity. This may not be surprising given the additional political dimension associated with optics of rank and file workers not being taken care of adequately when they work in dangerous environments. In many jurisdictions around the world, there are examples of workers who get organised amongst themselves to carry out demonstrations and industrial strikes when they believe that they are not being treated fairly. 

In Singapore, the Work Injury Compensation Act plays an important role in prescribing, amongst others the types of coverage and minimum compensation amount that are required under relevant insurance policies relating to construction works injuries. The subject of workers injuries can often be vague and complex. This is because the contracting companies hiring such workers are required to procure insurance policies to cover injuries sustained at work but at the same time the building project under which those very companies are engaged would typically effect certain workmen compensation policies. In other words there are risks of duplicity and ambiguity between the companies’ policies and the project policies. Since January 2021, the Work Injury Compensation Act made it clear that risks of workers’ injuries shall be covered under the approved policies procured by the contracting companies rather than the project’s insurance policies. However any injured worker is free to either pursue his claim under the regime of Work Injury Compensation Act or via litigation based upon his common law rights. As regards the latter, any contracting companies or the Employer may choose to procure additional project level insurance policies so as to mitigate any such risk of claims.

Owner Controlled Insurance Programme

Based on the above, what is clear so far is that the main contractor shoulders the responsibility of procuring construction insurance for the project. This is consistent with the relevant provisions under the standard form of construction contract which follows the industry norm. The owner of the project, being the Employer establishes these arrangement via its choice of form of contract. The owner indirectly pays for these insurance policies when the main contractor includes the costs of the premiums in its tender price. This arrangement serves the owner’s interest but unfortunately leaves much of the other participants in the lower end of the supply chain such as the subcontractors and suppliers exposed. 

This is because as compared to the main contract with fairly prescriptive insurance requirements, the insurance requirements at the subcontract level remain vague other than the general requirement for the subcontractor to observe, perform and fulfil the insurance conditions under the main contract. Further, the subcontractor are expected to effect any other supplemental insurance policies in such a manner that the main contractor and the Employer remain indemnified. Ironically, it is the subcontractors and suppliers that physically carry out much of the construction works as the main contractor typically outsources a significant portion of such works externally. Consequently, gaps and duplicative coverage occur as regards the insurance policies procured at the lower end of the supply chain. Any duplicative coverage would inevitably give rise to unnecessary higher construction cost. The effect could be considerably magnified for projects of a larger scale, say $100million and above. 

Therefore, an alternative arrangement which is known as the Owner Controlled Insurance Programme or OCIP in short is commonly adopted for larger construction projects. Occasionally, such programme are also known as the ‘project wide blanket insurance’. As the name of this programme suggests, this scheme reverses the conventional arrangement where it is the owner or the Employer that procures, effects and directly pays for the insurance policies. The Employer is the policyholder. The nature of coverage such as material damage and third party liabilities remain largely unchanged or could be enhanced based on the risks of a large scale project. The terms of such policy would then be shared with the contractors for them to effect any supplemental policies where necessary based on their unique needs. This arrangement appear to resolve much of the gaps and duplicative covers that exist under the conventional approach. However it should be noted that for every alternative arrangement that seeks to resolve certain existing problems, it may inadvertently give rise to unintended new issues. 

This is because the OCIP would be effected at the inception of the project presumably at the stage of initial design development phase prior to the engagement of main contractor, subcontractors and suppliers. The OCIP insurer may regard certain contractors to have a higher risk profile and failure to disclose every participant in such project could constitute failure to disclose material facts. As mentioned earlier in this article, the principle of utmost good faith assumes an information asymmetry between the policyholder and the insurer. The lack of full and frank disclosure may result in having the policies rescinded. The insurer may also require an additional premium if the project involves certain main contractor or subcontractor that are deemed risker by the insurer. At this juncture, the Employer has limited  negotiation leverage as it would be manifestly unwise to change an insurer in the mid stream of the project. These issues should be discussed and agreed upfront so that a mechanism can be built into the OCIP policies to cater to these scenarios.

Conclusion

As illustrated from the nuances and intricacies above, construction insurance is indeed an important and complex subject which should not be reduced to a mere deliverable under the contract. It deserves to be discussed and explored widely during the planning and execution of construction works. Admittedly, site accidents that require responses from insurance policy do not occur on a daily basis, thus giving the perception of less urgency. However it is worth noting that what is important may not always be urgent. 

Koon Tak Hong Consulting Private Limited

The process of creating a comprehensive scope of works through design development for any given building project can be an extensive exercise that is carried out over a considerable period of time. On the other hand, the  interest charges arising from financing of building project compels property developers to find ways to complete their project in the shortest time possible. The urgency for completion is compounded by the fact that under certain jurisdiction such as Singapore, property developers are liable for stamp duties if they are unable to sell all their residential development units within five years of land purchase. Clearly there is a tug-of-war in terms of competition for time between design development and completion of sales. Where tender process can be accelerated in a sensible manner, this may cushion the competing demands for time. This article explores some ways in which tender process could be accelerated by having a proper understanding of the correlation between design development and tender process. The term ‘acceleration’ used in this article refers to reduction in overall time needed through overlapping of various activities.

The principal purpose of design development is to provide a comprehensive scope of works for the project in hand. This scope of works is used by tenderers as the basis of their pricing during the procurement process. In an ideal world, the tenderers should receive a fully developed scope of works at the inception of the procurement process to facilitate their pricing. However in reality, the scope of works could be produced in instalments or tranches based on planned sequence of execution of works. In other words, a staggered schedule approach may be used. To this end, there are various methods that can be considered such as the use of provisional sums, prime cost sums for nominated subcontracts, novation of contracts as well as issuance of addendum during tender.

Design Development and Production of Scope of Works

Construction projects that have complex and demanding design development process are typically large scale developments which are initiated by seasoned property developers. One of the reasons as to why the design development process can be time consuming is because large property developers have internal governance framework that provides check and balance. In other words, the internal departments are intentionally structured to have competing priorities. 

By way of example, facilities management department would favour a tried and tested design that eases maintenance but marketing and sales department may prefer avant-garde design that are iconic in the hope that it captivates potential buyers. Likewise, the cost and commercial management department would naturally be inclined to be budget conscious but the architectural department may view this as a constraint to its ability to explore the most luxurious and aesthetically appealing furnishing and finishes. Whilst these checks and balances ensure a well considered decision making process, it can be time consuming. The appointed team of external project consultants that comprises architects, engineers, interior designers, quantity surveyors, project managers etc would have to examine these competing demands and present various iterations of design options to facilitate decision making process. These iterations of design options then gets progressively approved through the multiple layers of executives and management within the property developer’s organisational structure. 

When everything is said and done, the final design then gets documented into a set of tender drawings that is now ready for issuance to the tenderers for their pricing. In an ideal world, the design approval process involving management and executives is carried strictly in accordance with planned schedule and that the approvers’ feet are held to the fire when decisions are not forthcoming. In reality, there is an understandable reluctance from a career longevity standpoint to refrain from exerting time pressure on the executives and management for decisions. That is why, it is not surprising that design development often takes longer than planned, sometimes for valid reasons and other times less so. In view of this, it will be wise to anticipate these issues and devise ways to work around the constraints. In order to do so, one should have a basic understanding of sequence of construction works for a typical project and how these are planned within a construction schedule.

Staggered Schedule Approach

As alluded to earlier, it is entirely possible for scope of works to be produced in tranches or instalments by segmenting the design development process. By doing so, it could facilitate the production of tender drawings in appropriate batches based on sequence of construction. The objective is to overlap activities where possible so as to reduce overall duration. When decision making process is broken down into bite sizes, one could focus only on key issues with less distractions. Decision making milestones are not foisted upon executives and management indiscriminately. This method is not an option without risk since it could prevent a holistic assessment of design. When design development is broken down in tranches, tender drawings are bundled in various packages and likewise the tender process will be organised accordingly. 

In a typical construction project, the scope of works can be broadly classified into the following four phases. Phase 1 relates to site clearance and building foundation such as piling works. After Phase 1 is completed, structural works will commence which entails the construction of columns, beams and slabs under Phase 2. Once the structural frame of the building is established, Phase 3 will follow which involves architectural and builders works such as cladding and facade, erection of internal walls, internal finishes, plumbing, mechanical and electrical works. Final phase i.e. Phase 4 pertains to ancillary works such as hardscaping and softscaping works around the development’s common areas. Whilst these four phases are executed sequentially, there are some areas of overlap whereby Phase 3 works could commence on the lower floors whilst Phase 2 are still in progress on the upper floors. 

Design development for Phase 3’s scope of works typically takes the longest time because decisions are made on critical ‘touch and feel’ items such as internal finishes, choice of colour palette, types of electrical appliances etc. These are areas where the right choices will potentially strike a chord with potential buyers or tenants. The buyers’ or tenants are relatively less concern about the choice of building foundation or piling systems as long as it is safe and works. Given these priorities, the tender process could be accelerated by allowing tender for Phase 1 works to proceed whilst the design development for Phase 3 are in progress. Where possible, Phase 3 should not be an impediment to the progress of preceding phases of works.  There are also certain scope of works typically found in Phase 3, such as the lift systems or standby power generators included in the building works that have long lead time. These systems are manufactured off site, usually overseas, in a manner that is bespoke to the unique requirements of the building. These works can be procured in advance

Given the reasons to bundle the project’s scope of works in various packages as a result of segmenting the design development process, the question is how can this specifically be done? What are the specific provisions within the standard form of contract that may facilitate such efforts?

Prime Cost Sums, Provisional Sums, Novation and Addendums

I) Prime Cost Sums

Prime cost sums are essentially various packages of scope of works under the main contract where the design details are outstanding at the point of procurement of main contract works. In view of the outstanding design details, the main contract tenderers are not expected to provide their pricing on these packages of works other than profit and attendance to manage, supervise and oversee these works in future. There is a sum of monies allowed for each prime cost sum and the tenderers for main contract would typically price its profit as a percentage of these budgetary allowances.

Under the general conditions of standard form of contract commonly used in the industry, there are provisions pertaining to nominated subcontractor and prime cost sum or ‘PC Sum’. These provisions include its contractual definitions, the mechanism to ‘instruct’ the main contractor to enter into nominated subcontract with nominated subcontractors and grounds that can be raised by the main contractor to object to any such nomination. These provisions stipulates the contractual mechanism to utilise prime cost sums which in turn can accelerate the tender process. This is because Phase 1 and Phase 2 works can proceed whilst pockets of Phase 3 works are still being developed. There is no hard and fast rule as regards the extent to which packages of prime cost sums should be allowed for under the main contract. However commercial common sense should prevail. Certain main contractors may be lukewarm in participating in tenders where they have limited opportunity to physically carry out the construction works other than administratively supervising a group of subcontractors that are to be nominated. This is because such limitation may impact its anticipated level of profitability. 

The nature and types of works that are typically bundled under prime cost sums are typically works found under Phase 3 as alluded to earlier in this article. This is due to the considerable design development duration that these works entail. It will be wise to select prime cost sums that comprises those scope of works that are deemed outside the core area of expertise of the main contractor. Some of the typical types of prime cost sums include mechanical and electrical works, marble and granite claddings to walls and floors, sanitary wares and fittings etc. 

The Employer may also decide to bundle certain works as prime cost sums to directly negotiate with the subcontractors to enhance commercial leverage. Upon agreeing to a deal, the main contractor is then instructed to execute a nominated subcontract with the chosen subcontractor. It can be tricky if the main contractor objects to such nomination. One of the common reasons for such objection may be the selected subcontractor’s inability to execute its works in accordance with the main contractor’s master program resulting in potential delay. Therefore, if not done correctly, the use of prime cost sums with the original intention of accelerating the tender process may back fire. There could be delays arising from the process of nomination when there are conflicts between the selected subcontractor’s schedule and main contractor’s schedule.

II) Provisional Sums

Provisional sums refers to an estimated sum of monies allowed for certain scope of works which lacks both certainty in being implemented and design details during the inception of the main contract. In other words, there is a possibility that the provisional sum in question may not be utilised at all by the end of the project and no design details ever get developed. This can be contrasted with prime cost sums whereby the Employer has every intention of implementing those scope of works and there is even a group of tenderers in mind that will be invited to bid for the prime cost sum related works.

The provisional sum is included in the main contract tender document so that the main contractor is alerted of the possibility for such element of work, and therefore should duly include any planning related activities in its master programme. There are also provisions in the standard form of contract that affirms the programme requirements so as to avoid any dispute over additional time or cost claims. 

By way of example, the Employer may consider expending more resources to upgrade the internal building furnishings or to install its company logo on the building facade for marketing purposes. These decisions and the necessity for any design development efforts can be contingent upon various external factors such as funding availability, level of sales of units developed or even the market trend. These are typically works included in Stage 3 or Stage 4 of the construction works where decisions are not that critical at the initial stage of the main contract. Therefore the usage of provisional sums enables the main contract procurement and construction process to proceed and defers certain decisions  which are not time sensitive.

Unlike prime cost sums works which are typically executed by nominated subcontractors, the provisional sums may well be carried out by the main contractor via the issuance of an instruction. Therefore the main contractor when tendering for its works may take a more favourable commercial assessment for provisional sums as compared to prime cost sums. In this regard, there are usually no allowances for the main contractor to price its profit and attendance on these provisional sums as the main contractor’s profit would be included in its quotation for the provisional sum works. The Employer therefore should be aware that works executed under provisional sums may cost a premium due to limited bidding competition where such works are not subject to a tender process. It is as if the provisional sum works is likely to be sole sourced to the main contractor. This is the commercial trade-off that the Employer grapples with when it decides to defer its decision making process to a later stage of the construction works. 

The provisional sums and prime cost sums are similar in that it allows the Employer to save time by proceeding to engage a main contractor whilst pockets of the main contract works are still being designed. Contract novation however is a different approach which will be discussed in further detail in the section below.

III) Novations

Novation allows the initial phases of works such as demolition of existing structures, site clearances or building foundation works which are typically not carried out by main contractor to proceed with its execution first. These initial works are carried out by contractors that are engaged directly by the Employer. Within the initial works contract between the contractor with the Employer, there are usually express provisions that allow the Employer to be substituted by the main contractor as a replacement contracting party at a later stage. The act of substituting one contracting party with a replacement party is called novation. Upon novation, the contractor will have a direct contractual relationship with the main contractor. In case of the novation of building foundation contract, it is important to ensure that the completed foundation works is integrated seamlessly with the building’s superstructure which consists of beams, columns and slabs. Therefore, the contract novation ensures that the main contractor that is responsible for constructing the superstructure continues to be contractually liable for the integrity of the structural system in its entirety. 

Novation is not exclusively used for building foundation works. There are other mechanical and electrical systems embedded within the building that involves long lead procurement time that are often subject to similar novation arrangement. This expedites the procurement process since those long lead items are procured first without being impeded by the typically time consuming design development process of other general building works in Phase 3. Examples of such long lead items of work include lift system, building standby power generator etc. These systems are often procured directly by the Employer before the main contractor is contracted with the express provision allowing similar novation arrangement. Therefore in the tender document procuring main contract works, all tenderers shall be notified in advance of such future novation intentions to allow those tenderers to provide their consent and to price any associated risks especially in regard to interfacing works. Likewise, these contractors carrying out the long lead items of work or any initial works should agree to such novation agreements in advance too. The template for novation agreement should therefore be included in the tender documents for the relevant initial works as well as main contract works. The inclusion of the novation agreement template is critical because every sentence in such agreement is expected to be scrutinise in detail as it entails assuming certain risks with long term ramification. This includes the provision of warranty or guarantee and possibly contracting with an unfamiliar party without any prior working relationship.

Whilst the use of novation, provisional sums or prime cost sums may provide a significant schedule benefit, there are also other ad-hoc tools such as tender addendums that could yield a more moderate time benefit. This will be examine in some detail in the next section of this article.

IV) Addendums

Tender addendums refer to issuance of new documents in the midst of tender process with the aim of either supplementing the existing tender information or superseding information previously issued. These new documents may appear in the form of parts of tender document or parts of tender drawings. Unlike the use of provisional sums, prime cost sums or novations with schedule savings often amounting to months in duration, tender addendum offers a relatively modest schedule benefit, which is often measured weeks.

Tender addendum accelerates tender process because not all information included in the bundle of tender document and tender drawings are equally critical. Some tender information can be issued later without holding up the launch of a proper tender. Upon receipt of such tender package, the primary objective of the tenderer is often to provide its pricing or costing to various scope of works. Certain scope of works such as regular ceramic tiles to the back of house of a hospitality establishment or regular concrete are deemed ‘commoditised’. These products are carried by most subcontractors and suppliers in the market and therefore the tenderers for main contract can get the quotations relatively quickly. Occasionally, these commoditised products are so commonly used that its prices are well established with very limited fluctuations. Therefore, main contract tenderers could even obtain the necessary pricing information from their in-house database without reaching out to any external parties. These result is quick pricing process. By contrast, other elements of works could be more bespoke to the specific design  requirements of the building and therefore require a longer pricing duration. In crafting the strategy of tender addendums, these pricing duration has to be taken into consideration. Drawings and specification related information for commoditised elements of work can be issued as tender addendum without must disruption as compared to other bespoke design works. By way of illustration, in the event that the layout of a particular floor level is changed resulting in corresponding change in volume of concrete required, these can be addressed via tender addendums so long as it does not necessarily lengthen the tender duration as a whole. 

In the issuance of any tender addendums, tenderers should be given advance notice where possible to avoid unnecessary pricing disruptions. Tenderers should also be given the option of requesting for additional time where it is necessary. This obviously should be exercised judiciously to avoid nullifying the original objective of accelerating the tender process. The tender document should also be structured wisely so that elements of work that are subject of addendums are well compartmentalised. Additional tender drawings issued via addendums should be clearly clouded to indicate the areas of design change and an explanatory narrative should be provided to enhance clarity. The consultant leading the tender process on behalf of the Employer should coordinate and manage any cross disciplinary spill over effect. For example, any change in structural layout could implicate the mechanical and electrical works in terms of structural penetration or layout of services.

Conclusion

It is quite clear from the above that whilst tender addendums, prime cost sums, provisional sums and novations could accelerate tender process by a varying degree of duration, it is not without cost. If not administered well, there could be grievances on the part of main contractors as well as relevant subcontractors. This ironically may necessitate more time for dispute resolution down the road. Therefore, these measures if taken should be well planned in advance and clearly communicated to all parties involved.

Koon Tak Hong Consulting Private Limited

Under a traditional procurement approach, the Employer engages an Architect and Engineer to design its building and separately engages a Main Contractor to construct based on the given building design. As design responsibility and construction responsibility are undertaken by two or more separate and distinct entities, the Employer could be in a bind if and when defects arise due to finger pointing between relevant parties. The Design & Build (D&B) approach may be advantageous in this regard because the Employer is presented with a single point of responsibility in that one entity is responsible for both the design and construction of the building. 

Whether D&B delivers the purported advantages remain keenly debated. However, those who are keen to adopt the D&B approach may be wise to have a reasonable understanding of how to administer the procurement of D&B project. This is to ensure that one is able to select the most suitably qualified D&B contractor with the most compelling commercial proposition including the appropriate terms and conditions. 

Procurement is in essence the process of soliciting offers from tenderers. These offers are shaped by the nature and extent of information provided to the tenderers. In general, the more project design details are provided to the tenderers, one would reasonably expect more complete and comprehensive offers in return. The reverse is true as well. This can quite accurately be summarise through a computer science parlance of ‘garbage in, garbage out’. Whilst this principle holds true under a traditional procurement approach, it may not necessarily be applicable under a D&B procurement approach. This is because the tenderers that are being considered to perform D&B are also responsible for the building design. Therefore these tenderers are not expected to be provided with much project design details. In fact, different tenderers may be suggesting different design proposals as part of the appeal of D&B. When considering ways to administer the procurement process of a D&B project, it is therefore critical to recognise that if the tenderers are relieved from extensive design requirements to comply with, the more design flexibility and latitude are given to the tenderers. Therefore it is less meaningful to make direct pricing comparison between tender offers due to very different underlying scope of works. By contrast if the Employers wishes to have greater control over the design requirements and design development, the lesser design latitude would translate to greater basis of pricing comparison between offers. The trade off between design control and pricing comparison should be the key consideration in the administration of procurement and subsequent process of tender evaluation.

With this trade off in mind, there are in general three methods to administer the procurement of a D&B project namely:

Method A – Tenderers are given complete design
Method B – Tenderers are given partial design
Method C – Tenderers are given minimal design

In developing a comprehensive method of administering the procurement process, it is important that such process facilitates proper evaluation of various offers, provides clarity to tenderers as to what is expected from them in their submission of tender offer and ensuring a level playing field between the tenderers. To this end, it is critical that the tender documents which includes design brief, tender drawings and tender evaluation criteria are presented clearly. The following sections in this article will further elaborate the intricacies involved in the said methods.

Method A – Tenderers Are Given Complete Design

At first blush, it seemed contradictory to provide D&B tenderers with complete design when any of these tenderers if appointed is expected to design the building in hand. Is the selected main contractor expected to design if design is already place? The short answer is that occasionally the Employer is keen to look for a financially established main contractor to be contractually responsible for the integrity of an existing design rather than for a main contractor to develop design from scratch. This could be driven by the Employer’s motivation to establish a single point responsibility for the design and construction of its building. Where defects in building arises after its completion, it is often not immediately clear whether such defects are caused by design default or workmanship related problem. The Employer may be required to expend considerable amount of time, effort and money to carry out investigation in order to identify the root cause of the problem. Single point responsibility effectively eliminates any of such concern that the Employer may have. 

On the other hand, with the right amount of financial incentive, an established main contractor may not be averse to being responsible for design developed by a third party if the associated risks are manageable. This is particularly so where the building in question serves a functional purpose with regular design e.g. an industrial warehouse, school etc. 

The pre-existing design developed by a third party refers to the team of consultants comprising structural engineer, architect as well as mechanical and electrical engineer engaged by the Employer weeks or even months prior to the D&B procurement. The design would have been developed completely by this team of design consultants in a manner similar to one under the traditional design-bid-build approach. For this pre-existing design to be effectively subsumed under a prospective D&B contractor, the consultancy agreements with this design team would have to be novated from the Employer to the eventual D&B contractor. In other words, the design consultants must agree for a change in contracting party through an eventual substitution of the Employer with the D&B contractor via novation. The design consultants might object to such novation if they are surprised since they could have offered a deal to the Employer that would not have been offered to a contractor or any other parties. This in turn highlights the importance of ensuring that the D&B approach had to be agreed and established by the Employer as early as possible even before the design consultants are engaged. This ensures the inclusion of novation provision in the consultancy agreements with the design team as well as clear demarcation of tranches of consultancy fees payable at different junctures of project milestones including at the point of novation. Clearly, after the point of novation, all remaining design fees will be payable by the D&B contractor to the design consultants.

Under the traditional procurement approach, the supervision and quality control during construction phase of the project is undertaken by the design consultants. This is because firstly, being the party that conceptualised the actual design, these consultants are in the best position to determine whether or not the design intents are met by the contractor. Secondly, the design consultants are deemed “independent” from the contractor due to the absence of any direct contractual relationship. However, under the D&B approach where the design consultants are now contractually managed and paid by the D&B contractor, conflict of interest arises. Therefore, as part of the administration of procurement of D&B project, the Employer should consider retaining a suitably qualified consultant who will not be subject to novation such as a project management consultant or quantity surveyor. Such consultant would then be required to perform the supervisory and quality control role that was vacated by the design consultants. As a natural extension to such supervision role, this consultant should also be required to assume the role of a certifier under the D&B contract to carry out certification functions such as interim progress payment, practical completion, issuing instructions for variation works etc. Under the traditional procurement approach, such certification functions are typically performed by an Architect or Engineer. 

Clearly, prior to the procurement of D&B contractor there are various preparatory procurement activities that are required to be performed as illustrated above. These include the novation provisions in design consultancy agreements, appointment of a contractual certifier such as a project management consultant etc. Therefore the D&B route should not be approached as an ad-hoc and last minute decision. Another important aspect to the procurement preparatory activities include the shortlisting of D&B tenderers. In an ideal world, the most competent D&B tenderer with the most competitive commercial proposal should be selected, which after all is the objective to any procurement exercise. To this end, an appropriate shortlist of D&B tenderers should be created based on merit. If and when the Employer decides that its team of design consultants will be involved in the shortlisting process including the eventual tender evaluation, it is of paramount importance to ensure that the assessment criteria continues to be strictly based on merit. Some may argue that the design consultants participating in the assessment process may not be entirely driven by merit but rather its ability to establish a comfortable working relationship with the D&B contractor. Employer has to be acutely aware that having certain healthy professional tension between the design team and the D&B contractor may be necessary to an effective project execution. By way of example, a competent D&B contractor that pushes for absolute clarity in design documentation or challenges the design philosophy during procurement may not be entirely popular with the design team. However such design clarity may be both essential and beneficial to the Employer in understanding what exactly it is paying for. 

The procurement process is also an opportunity for the Employer to understand the costs it may be incurring in exchange for the benefits of single point responsibility. This is primarily a commercial decision by the Employer. In the administration of the procurement process, D&B tenderers should be requested to identify clearly the costs or premium that it is charging for assuming the design risk vis-a-vis the Employer. Whilst the D&B tenderer may pursue any design liability separately against the design consultant, such assumption of design risk is not insignificant. An unusually high risk premium proposed by the D&B tenderer may be quite revealing as it potentially indicates certain design issues from the tenderer’s perspective or that the tenderers foresee a considerable degree of effort required working with the design team in the construction phase of the project. These are issues worth further investigation on the part of the Employer. 

Prior to the issuance of tender document to the D&B tenderers, it is also important to examine the standard form of D&B contract that will be used to ensure that the terms therein are modified where required. Most D&B type of standard form of contract may anticipate that the design is produced by the contractor and can therefore be defined as the ‘Contractor’s Proposal’. It may be contractually defined as design submitted by the contractor to satisfy the Employer’s requirements. Where the design was fully developed prior to being presented to the D&B tenderer for acceptance, these sequence of events may be at odds with the strict contractual definition included in the standard form of contract. Therefore, certain modifications are required to ensure that the actual events are congruent with the terms and conditions between the parties. This is not merely to provide administrative clarity but it also carries certain legal significance in defining the scope of responsibility of the D&B contractor. If the D&B contractor is only responsible for proposals that it submitted, there may be an argument whether or not it is responsible for third party’s design which it had not submitted.

In the next section, we will examine a different method of administering procurement of D&B project where the tenderers are now given partial design.

Method B – Tenderers Are Given Partial Design

There are instances where D&B tenderers are provided with partial design as the basis of the tender process. Admittedly, the term ‘partial’ is somewhat subjective and vague. How much design had to be developed for it to be considered ‘partial’? This query relates to the basics of the process of design development. The Royal Institute of British Architects (RIBA), as an example, through its RIBA Plan of Work 2020 organises the lifecycle a building into eight stages. For the purposes of this article, Stage 2 to Stage 8 are of relevance. These stages are described in the sequence of concept design, spatial coordination, technical design and construction, which effectively illustrates the gist of a design development process. Whilst this article is not intended to delve into the details of these prescribed stages of work, it illustrates the idea that design development process as an incremental process of adding layers of details and granularity to an initial architectural design, commencing from a very basic concept design.

Even under traditional procurement approach where the main contractor does not undertake any design responsibility, the main contractor routinely produces various drawings during construction phase such as shops drawings, coordinated services drawings etc to ensure that the construction works complies with the intended design. Therefore, a competent main contractor  should be familiar with the development of detail design as part of the downstream phase of the design development process. When D&B tenderers are given partial design, the key premise is that not every single design detail are needed to be made available before the works can be priced by a tenderer with reasonable level of accuracy. Part of the art of being successful in any tender is the ability to price risk which involve commercially grappling with the unknown. Where necessary, the tenderers could hedge their risk by outlining their pricing assumptions to provide a basis to their tender offer. Therefore where there is a meeting of minds in terms of risk appetite between the Employer and D&B tenderer, it is viable for parties to enter into a D&B agreement based on partial design. It cannot be over emphasised that such D&B approach is not without risk. This is because the portion of detail design that has yet been developed at the point of agreement could be a source of dispute if the subsequent detail produced by the D&B contractor is not up to the Employer or its consultants’ requirement. Therefore, parties are advised to include performance based specification rather than prescriptive specification in respect of down stream detail design that has yet been developed. This would provide some objective standards for parties to adhere. 

Given the inherent uncertainties involved in this method, what could be the advantages that compensates for the risk? One key advantage is time savings. This method does not require every detail design to be fully developed before appointing a main contractor to commence construction works. The D&B contractor can develop the detail design in parallel with the construction works. In other words, it enables the construction activity and design development activity to overlap. By way of example, the D&B contractor could commence with erection of structural works whilst concurrently developing detail design for carpentry and joinery works as part of the internal furnishings.

There is no exact science in terms of the ideal level of design that needs to be developed prior to launching this method of D&B procurement. With reference to the RIBA Plan of Work, one may choose to issue concept design to the tenderers whilst others may prefer to issue technical design which is relatively more developed. The more developed the design becomes, the more defined the scope of works are when received by the tenderers. On the flip side of the same coin, the less opportunity there is for time savings as there is now less overlap in activity between design development and construction. In short, it is a trade off between schedule benefit and clarity in scope of works. 

So how should the tender offers be evaluated under this approach apart from price comparison? Ordinarily price competitiveness remain the predominant evaluation criteria. This is because the tenderers are usually not expected to produce any design as part of their tender submissions since any detail design development would be undertaken after entering into an agreement. The Employer should be careful if it stipulates that the tenderers submit their respective detail design development as part of their proposal to facilitate evaluation. This may give rise to several issues. Firstly this may erode any potential schedule benefits since ultimately the detail design would still be developed prior to commencement of construction. Secondly, potential contractors may be reluctant to participate in a tender exercise which require expending considerable design resources that may not yield any return if they fail to secure the project. Finally, it remains questionable how could the detail design be reasonably meaningful in distinguishing one bid from another for the purposes of tender evaluation.

In the next section of this article, we will proceed to examine the third and last method of administering the procurement of D&B project, with the issuance of minimal design.

Method C – Tenderers Are Given Minimal Design

Under this method, D&B tenderers are expected to receive either minimal design or just the design brief. Companies shortlisted to participate in such tender are typically large contracting firm with strong design capability or joint venture companies between contracting firms and architectural/ engineering firms. Relative to the first two methods discussed above, this method gives tenderers the most latitude and freedom to express their architectural and aesthetic flair. For this procurement exercise to generate adequate interest, enthusiasm and participation from tenderers of this scale and competence, the project should be sufficiently large and iconic with promising investment returns. All participating tenderers should expect to commit considerable time, effort and resources in this competition. The Employer would primarily be motivated to explore creative architectural ideas that may be offered by the market to fulfil its property development objectives.  This is in addition to its other conventional objectives such as to find the most cost competitive and competent D&B contractor. The benefit of tapping on D&B contractors as opposed to pure architectural or design consultancy firm is that it provides an immediate reality check in respect of the construction feasibility and financial impact of any creative design that pushes the envelope. The Employer is usually a seasoned property developer that understands the reality that every real estate decision is primarily a trade off between novelty and pragmatism. When the Employer is presented with a captivating architectural design, it will simultaneously be confronted with its price tag and any execution risks that it may entail. This is unlike the traditional procurement approach where the construction cost of any given design is unveiled many months down the road. Critics may disagree in that the Employer remain advised by its consultant quantity surveyor at early stages of the development process who will alert any financial concerns as and when it arises. However there is a fundamental difference between a professional assessment and binding tender offer. This is akin to the saying that the true value of one’s property is not the professional valuer’s opinion but what a buyer is willing to pay for. 

The project that would be the subject of this procurement approach is likely to be of considerable scale and financial magnitude. In this regard, the Employer may need to manage a large and diverse group of stakeholders comprising its sales and marketing team, financiers, maintenance department, shareholders etc. Therefore the drafting of its design brief, which is the key component to the procurement exercise can be a challenging process given the diverse input which occasionally can be conflicting as well. Notwithstanding this, D&B tenderers’ proposal will be guided by the scope of this design brief which needs to be coherent. How much architectural latitude is given to the tenderers depends on how the design brief is shaped. Is the document prescriptively specific or is it broadly defined? The Employer should consider only including the absolute necessity in its design brief in order to make the most out of this procurement process. Assuming it’s a mixed development project that will be developed and sold, the design brief should include design parameters that fulfils certain financial objectives. This may include the percentage of strata areas over the total gross floor area which indicates the commercial efficiency of space layout. This will impact the possible financial return based on real estate space that can be sold. The design brief should also set out any requirement for the building’s appearance to comply with in particular any of the government authority’s urban planning zoning rules. The design brief should steer clear away from subjective aesthetic consideration unless it is of absolute necessity such as inclusion of corporate colour, building signage etc. Where possible the design brief should also avoid vague and subjective terms such as ‘vibrant space’, ‘clean and sleek lines’ etc. 

The manner in which the design brief is drafted impacts the procurement process. This is because the degree to which the brief is worded objectively affects the ease with which the proposals can be evaluated amongst a diverse group of stakeholders. The stakeholders who will participate in the evaluation of tender proposals should provide their input for the design brief in respect of their departmental requirements. The leader of the procurement process will need to carefully streamline the different requirements in the drafting of the design brief to ensure that the D&B tenderers are not presented with contradictory and confusing design requirements. By way of example, marketing departments may be inclined to explore novel or even avant-garde design to enhance the development’s aesthetic appeal whilst the facilities management department may have reservation that such design could cause difficulties in maintenance.

A clear and concise design brief not just provide clarity to the D&B tenderers but also facilitates a focused and objective tender evaluation process. Price comparison alone would not be an effective criterion of evaluation since every proposal would be submitted with a completely different design. Since design evaluation is inherently a subjective exercise, the design brief plays an important role. Where the D&B tenderers had conceptualised their design proposals based principally on the requirements included in the design brief, it would seem contradictory if the evaluation process is done in isolation from those very same requirements. In this regard, the design brief can be the reference framework for the design proposal evaluation. The D&B tenderers should be provided with tender evaluation criteria that sets out the assessment criteria for the design proposal at the inception of the tender process. This evaluation criteria should include weightage assigned to different assessment criteria including how the tender price will be taken into consideration in conjunction with the design proposal.

Once the D&B contractor is selected, the parties should also agree on a set of performance based specification for the selected design to facilitate building material and internal finishes selection during the construction stage. Likewise, the drawings submitted by the D&B contractor as part of their design proposal will be included in the contract document as the basis of the scope of agreement.

Conclusion

D&B can be an effective way of enhancing value to any construction process if the procurement process is administered effectively. There is no ideal method of procurement as each option is effectively a choice based on certain trade offs. 

Koon Tak Hong Consulting Private Limited

When evaluating tender offers for main contract works, one is effectively looking to answer three key successive questions namely:

Question 1 – Whether the tenderer is capable of carrying out the works to the required standards?
Question 2 – If yes, whether the tenderer is able to finance the works based on the expected cashflow?
Question 3 – If yes, whether the tender offer is in compliance with the proposed terms and conditions?

The lowest bid tenderer that achieves an unequivocal ‘yes’ to all three questions above should have its offer accepted. This method is different from the conventional approach of evaluating tenders based on a pre-defined list of evaluation criteria. Admittedly, there is no one universal method of evaluating tender offers. Some favour the said conventional approach involving a panel of assessors scoring various weighted evaluation criteria. Others favour simply awarding to the lowest price compliant offer. In general, there are a variety of methods which involve evaluating both the quantitative and qualitative aspects of tender offers. The variety of methods available to evaluate tender bears testament to the fact that it is an exercise of art rather than science. The three key successive questions proposed above, attempts to remove as much subjectivity as possible from the evaluation process.

In any tender evaluation process, one is presented with multiple variables and factors of consideration. These factors include amongst others, tenderer’s track record of completing similar project, workplace safety record, price competitiveness, tenderer’s understanding of the proposed scope of works, adherence to conditions of contract, proposed organisational structure etc. To this end, different tenderers will naturally have different strengths and weaknesses in respect of these factors of consideration. Whilst it is methodical for one to delve into these criteria point by point, one should not be distracted from the fundamental question of whether tenderers under consideration are capable of carrying out the works to the required standards. After all, it will be futile to award to any given tenderer if it is not capable of carrying out the works to the required standards, notwithstanding any of the other positive attributes. The conventional evaluation criteria alluded to above are essentially to facilitate a desktop assessment of whether the tenderers are actually capable of carrying out the proposed works to required standards. Any desktop assessment involving multiple variables can often be reduced to a mere academic exercise aim at establishing a paper trail of the assessment process. It can be a distraction from focusing on the key issues if the process is designed to ‘tick the box’ by eliciting feedback from a broad group of stakeholders. A democratic process of making decision by committee particularly in a corporate environment may not always be the most effective tender evaluation approach. After all consensus involves making compromises.

One should also be cautious of being overly reliant on track record as a means of assessing tenderers’ competence. This is because the past does not always accurately reflect the future. To this end, it is not uncommon to select a contractor that performs poorly but had submitted a glowing track record and competitive pricing during the tender process. There may be various reasons behind such discrepancy such as high staff turnover, challenging site conditions, poor relationship with stakeholders, project consultants etc.

Instead of assessing tender offers based on the conventional list of evaluation criteria, one should focus on the three key successive questions mentioned above. This approach offers a different perspective because tenderers are firstly required to demonstrate with reasonable certainty that it is capable of carrying out the proposed works to the required standards. Once this is achieved, the evaluation process proceeds to the next step of examining the tenderers’ ability to finance the project based on the projected cashflow. This is an important process because cashflow is the lifeline to any construction project. Once the issues of competence and financial ability are addressed, the tenderers are finally assessed based on whether there are any departures or qualifications from the proposed terms and conditions. 

The following sections of this article provide illustrations of how to evaluate tender offers for main contract works by applying these three fundamental successive questions.

Question 1 – Whether the tenderer is capable of carrying out the works to the required standards?

Contractor that is capable of carrying out the required works invariably demonstrates a viable level of productivity. It will be able to show that in order to complete certain section of works within the prescribed duration, what will be the required level of manpower resources based on a defined methodology. In short, productivity is a function of three variables namely manpower, time and methodology. Information in respect of these three variables can be extracted from proposals included in tender submission i.e. manpower schedule, construction programme and method statement.

Assuming the project in question is a commercial building with 10 levels of identical floors, a contractor would have a proposed method statement included in its tender offer as to the sequence of works for a prescribed method of construction. Upon completion of foundation works, the structural works which consists of reinforced concrete columns, beams and slabs could be constructed from bottom to top on a floor by floor basis. The method statement will indicate the other trades of works that immediately follow the completion of the structural works of a particular floor such as erection of internal walls and cladding of internal finishes. Therefore any trade of work can be viewed in a cycle. Once a cycle of works is identified, next step is to ascertain the duration for such cycle. As regards the concreting works for a floor cycle, the duration that the contractor dedicates for that cycle can be found in its proposed construction programme. With the cycle of works and associated duration identified, the final step is to review the manpower resource chart which typically provides for the level of manpower resources to execute such cycle of works. These resource level is commonly expressed in either man/hour or man/day. 

The reason for identifying a cycle of works, its duration and the manpower level is to determine the contractor’s productivity. In the example of concreting works to a floor cycle, its productivity level as proposed by the contractor is derived by the manpower level dedicated to complete concreting works for any given floor for a planned duration. Apart from concreting works, other trades of works could be viewed and examined in cycles as well. By way of further example, the laying of internal floor marble tiles could similarly be framed in cycles where the productivity level is expressed as the manpower level required to complete the laying of floor marble tiles for a prescribed duration. The productivity level is in essence, an expression of X number of workers to work over Y days to complete Z m² of floor areas.

Once all major trades of works are framed in productivity cycles, one can then make a holistic assessment of whether any given tender offer proposed by the contractor is capable of achieving practical completion within the stipulated contract period. This is done by making a cumulative assessment of all cycles of works that are on the ‘critical path’ of the construction programme. Critical path is generally understood as the longest sequence of activities from start to finish that must be completed to ensure practical completion.

It is also worth noting that the standards of works specified directly affects the proposed productivity. As an example, a grade A commercial building with Italian marbles specified for its floor and wall finishes could involve extensive works carried out off site. These off site works include approvals of quarry source and its marble supply control range, cutting of marble blocks to marble panels, dry lay inspections, shipping from quarry to site etc. These off site works if disrupted could compromise any planned productivity cycle carried out on site. The tenderers’ ability to factor in these off site risks reflects the practicality of its proposal, which is a key factor of consideration in tender evaluation. 

If the proposed productivity level is found to be highly provisional or lacks supporting details, it may be worthwhile to examine the reasons behind it as part of the evaluation process. There could be multiple reasons for this anomaly.

Firstly, there are occasions where the main contract tender was carried out with a significant amount of prime cost sums and provisional sums. In general, these sums are scope of works subsumed under the main contract but lacks details for these to be priced at the point when the main contract tender was carried out. These works could be intended to be carried out by certain subcontractors to be nominated by the Employer after the main contractor is appointed. Therefore at the point of main contract works tender, the tenderers are both unable and not expected to price and plan for these works with any reasonable granularity. It is not uncommon for the estimated costs for these works to amount to close to half of the estimated main contract costs. Where the tenderers for main contract works are only presented with approximately half the scope of works for the project in hand, the main contractor’s estimated productivity level is likely to be provisional. When this occurs, it should prompt the Employer and its consultants on whether it is appropriate to postpone such main contract tender until such time when more design details are made available. Therefore, it may well be that the tender offers are not sufficiently define at no fault of the tenderers but nevertheless remain inappropriate for any award to be made.

Secondly even if the design details are available, certain tenderers for main contract works may desire to outsource much of the works to certain subcontractors which have yet been appointed. The main contract tenderers is not likely to award any works to its subcontractors until itself being appointed, for obvious reason. This occurs quite commonly when the main contractors traditionally focuses on supervision, management and coordination activities rather than self performing the underlying construction works. In such a situation, the tenderer is generally unable to provide a realistic productivity level proposal as it is also unsure which third party would actually carry out the physical works. This should also be a point of concern in tender evaluation since the tender price offered is derived purely as a commercial decision without actually demonstrating the ability to physically carry out the works.

Question 2 – Whether the tenderer is able to finance the works based on expected cashflow?

Once a tender offer submitted by a main contractor demonstrates its ability to complete works to the required standard, the evaluation process proceeds to the next stage. In this second stage, the evaluation focuses on whether the tenderer is able to finance the works based on expected cashflow. The main contractor usually is paid on a monthly basis via an interim progress payment regime. This regime is stipulated in detail and described within the relevant provisions of the standard form of contract. In general such progress payment regime stipulates the duration between the moment the main contractor submits its payment claim to the day it is expected to receive payment. This is the payment cycle duration. This duration varies based on the types of standard form of building contract agreed by the parties, which could range from 40 days to 60 days. A typical payment cycle consists of several distinct processes. Once a payment claim is submitted by the contractor, the certifier appointed under the contract, i.e. the Architect or Engineer or Employer’s Representative, as the case may be, will have certain number of days to assess and determine the amount that is due and payable based on his assessment of actual work done. This assessment is made in conjunction with the consultant Quantity Surveyor, which culminated in the amount certified to be due and payable. Under certain jurisdictions such as Singapore, Australia or United Kingdom etc, construction contracts and its payment regime are governed by Security of Payment Act which allow, amongst others the Employer to provide a Payment Response to account for any difference between amount claimed and amount certified to be payable. After certification or payment response is completed, the contract may provide for a certain period for the contractor to issue its tax invoice based on the sum certified following which there will be a further period for the Employer to honour payment based on the sum certified. Whilst each process is designed with the intention of giving certain order and structure to the payment regime, these processes invariably consume time.

If a contractor makes a payment claim of $1million under a payment cycle of 50 days, it follows that the contractor will likely to receive its payment after 50 days from the day it submitted its claim. Where the contractor’s payment obligation to its supplier, vendor and subcontractors are less than the 50 days, the contractor need to demonstrate its ability to finance the works based on the expected cashflow. Any contractor that possesses the competence to carry out the required works but lacks the financial muscle is unlikely to successfully deliver the project to completion. Therefore the evaluation process should be sufficiently robust to identify such risk. Downstream vendors, subcontractors and suppliers could be of a smaller business in terms of scale relative to a main contractor. It is fair to assume that the main contractor is expected to make significant payments before it is actually paid. Likewise there are other internal costs such as head office staff overhead which requires salary payments be made on a monthly basis, much shorter than the 50 days payment cycle. 

Despite interim progress payment cycles being administered on a monthly basis, the reality is that most payments are only received beyond the traditional monthly 30-day cycle. This give rise to both retrospective and prospective financial implications which can be illustrated in the following example. Assuming a contractor submits a payment claim of $1million on 1st of January for works completed in the preceding month of December, under a payment cycle of 50 days, it will likely to receive payment latest by 19th of  February. Assuming this is its first payment claim for the project, from the retrospective financial perspective the contractor would need to finance the December works until 19th of February. Additionally, from a prospective financial perspective, the contractor should also be prepared to finance the project for the whole of January until 19th February. In other words, at any moment in time during the contract period, one should expect the contractor to not just financing the completed works but also considerable imminent works that is due to be carried out after submitting its payment claim until payment is actually received. 

Given the financial considerations illustrated above, it is imperative that one scrutinises the tenderers’ financial ability during tender evaluation process by applying the project specifics. Under a payment cycle of 50 days, one should assess the estimated costs of works completed based on the projected productivity cycles within the said period. By way of example if the proposed productivity level is projected to be X number of workers being engaged to complete Z m² of floor areas within the 50 days, these could be translated to an estimated amount of construction cost that the contractor may be required to finance. One could thereafter compare such amount of construction cost with the free cash flow of the contractor which can be derived from its financial statements submitted with its tender offer. In general, the contractor’s free cash flow is the amount available to the contractor for monthly operations by deducting interest, tax and any fixed asset purchase from its operating cashflow. Admittedly, financial statements are merely historical records that could have been prepared months earlier. Therefore any contractor that is actively tendering for other project may be stretched financially if it clinches further projects in due course. This should also be a point of consideration in determining whether the contractor has the  means to finance the works based on the expected cashflow.

Once the contractor is deemed to have the satisfied the financial concerns satisfactorily, the evaluation process proceeds to the final stage which is whether there are any departures or qualifications from the proposed terms and conditions. 

Question 3 – Whether the tender offer is in compliance with the proposed  terms and conditions?

The proposed terms and conditions broadly refer to obligations that the contractor are required to comply with if its offer is accepted by the Employer. These obligations can be found in various parts of the tender document, in particular the general conditions of standard form of contract. Some of these requirements are put in place to address any risks that may arise in case the contractor appointed defaults in its performance under the contract. Tenderers may from time to time decide to qualify its offer by departing from some of these requirements. The tender evaluation process will therefore need to focus on the reasons behind these qualifications as and when it arises including whether these are unacceptable. 

Most standard form of contract stipulates that the contractor is required to provide an unconditional bond or performance bond within a certain period upon being awarded with the project. These bonds are usually in the form of bankers guarantee but occasionally insurance bond are acceptable too. The amount prescribed in these bonds is usually 10% of the initial contract sum. It should be noted that depending on the contractor’s creditworthiness and banking relationship with its financier, such requirement may be a considerable financial burden to the contractor. Coincidentally, the contractor’s financier is also uniquely positioned to appreciate the contractor’s financial health based on the contractor’s ability to meet any of its financial obligations with the said financier. Where the contractor qualifies that it is unable to provide a performance bond or that it can only provide a bond with an amount lower than required, this should be a red flag that warrants further inquiry. If it is found that such non compliance stemmed from its financial constraints, this may well be an overriding factor even if the tender offer is of the lowest price.

There are various types of qualifications or departures from tender requirements that may be proposed by the tenderers, each merits a separate assessment based on the specific circumstances. In summary, the reason behind these departures are often times more important than other considerations.

Conclusion

The is no universally accepted method of tender evaluation. How one decides to evaluate tender proposals depends on the nature and risk associated with the project, market conditions as well as the bargaining power of the Employer.

Koon Tak Hong Consulting Private Limited

Tenderers bidding for construction project make their offers via a tender document. The Employer assesses those offers and subsequently accepts the best offer. A tender document is therefore a medium through which an offeror makes its offer to an offeree. Once an offer is accepted by the Employer, the construction contract is formed between the selected Contractor and the Employer. 

Under the tender process, tender documents are firstly issued to tenderers, followed by bid assessments and negotiations resulting in the Employer’s acceptance. The tender document ensures that the tenderer’s proposal is presented as an offer to the Employer. The right to accept such offer remains with the Employer. 

So why is the tender process not designed in the reverse where the Employer makes an offer to compliant contractors for an acceptance? The general reason is because the Employer typically enjoys a bigger bargaining power thus seeks to position itself as the party with the ‘final say’. Having the final say in a tender process meant that it decides whether or not to enter into an agreement, if so with whom and at the time of its choosing. The Employer desires to be the party making the acceptance to enjoy the greatest commercial latitude and flexibility. If the tender process is executed in the reverse manner, the Contractor becomes the offeree depriving the Employer from having the final say. The agreement is formed once an offer is accepted. This principle is crucial in understanding the purpose and nature of a tender document. This also explains the sections or components within a typical tender document.

What are the sections typically included in a tender document?

The tender document comprises various sections. Each section serves a significant and unique purpose. The subsequent parts of article will explore the significance of every section in greater detail. Collectively, these sections shape the format in which the offers from the tenderers are presented. Whilst the tender document conveys to the tenderers the nature of the proposed scope of works, it also defines the manner in which the risks are allocated between the parties. In this regard, the tender document fulfils dual functions. The tenderer therefore will make commercial assessment on the risks that it shoulders and also the scope of works that it is required to carry out.

In general a typical tender document for building, construction or infrastructure works consists of the following sections:

1) Form of Tender
2) Conditions of Tendering / Instructions to Tenderers
3) General Conditions of Standard Form of Contract including any Particular Conditions and Appendices
4) Tender Evaluation Criteria
5) Pricing Schedule/ Bills of Quantities
6) Schedule of Rates including any Preambles
7) Technical Specifications
8) Appendices/ Specimens
9) List of Tender Drawings
10) List of Submission Requirements by Tenderers for Method Statement, Construction Programme, Organisational Chart, Environment Safety and Health Plan etc

Whilst the ten sections listed above are generic, these are nevertheless fairly representative of a typical tender document. From the tenderers’ perspective, its primary objective is to calculate its bid price based on the collective information presented via these sections. As one can imagine, it’s usually easier to calculate the cost for any given scope of works than to calculate the cost of assuming certain risk. Risk is inherently a concept of uncertainty, thus making risk pricing an art rather than science. 

Section 1 – Form of Tender

A ‘Form of Tender’ is a document that frames the bid submitted by the tenderer as an ‘offer’ to the Employer. Form of Tender reinforces the intention for the Employer to be the party with the right to ‘accept’ such an offer. It also highlights the fact that an agreement will only be formed once the offer is accepted by the Employer. It follows that the invitation to tender issued to the tenderer is merely an ‘invitation to treat’ rather than an offer. An invitation to treat is a solicitation of an offer.

The Employer through the Form of Tender directly shapes the conditions of offer. Such conditions of offer include, amongst others validity period of the offer, an exclusion of being bound to accept the lowest price offer, or to accept any offer at all. Under ordinary circumstances, the offeror defines the conditions of its offer. However the Form of Tender reverses this practice by allowing the offeree shaping the conditions of offer. The party preparing the tender document, namely the Employer tend to draft the document in favour of its own position. 

A typical construction project involves various types of building materials, equipment and labour where its costs could fluctuate over a period of time based on market condition. A common condition included in the Form of Tender stipulates that the bid price shall remain valid and open for acceptance for a period of time, usually 90 to 120 days. This is not an insignificant risk. The Form of Tender effectively allocates the risk of any price increase to the tenderers. Tenderers are expected to assume such risk in exchange for the mere prospect of being awarded with the construction project. As alluded to earlier Form of Tender usually stipulates that the Employer is not bound to award the tender to the lowest price bidder or to any bidder at all. This protects the Employer from any legal liability even it is subsequently established that the tender was not carried out with a genuine intention of awarding the project to any contractor but a mere “market testing exercise”. Considering that the tenderers are likely to incur costs for its participation in a tender, caution is therefore warranted.

Section 2 – Conditions of Tendering/ Instructions to Tenderers

This section of the the tender document contains a set of rules governing the conduct of the parties throughout the tender process. The said parties include the tenderers, the Employer’s representatives and the project consultants issuing various tender drawings and documents. The tenderers are deemed to have agreed to these set of rules by its participation in the procurement process. There are few principles underpinning these rules. 

Firstly, this section provides certain structure and framework in the procurement process to instil confidence amongst the tenderers they will be treated fairly and be given equal access to tender information. No contractors are likely to spend time, effort and money to participate in a bidding process if there is a perception that it lacks reasonable prospect in securing the project due to unequal access to tender information. From the perspective of the Employer in particular those from the public sector utilising public funds, the element of transparency and accountability are of paramount importance. Any suspicion that one tenderer is favoured over others could compromise the principle of fairness. In this regard, it is common for public sector driven tenders to stipulate more stringent conditions of tendering. 

Secondly, the conditions of tendering demonstrates the nature of the transaction between the tenderers and the Employer. The transaction here refers to what the tenderers will get in return for the time, costs and effort that they will be expending for the purposes of the tender process. Indeed, there is a transaction between the tenderers and the Employer even prior to any formation of construction contract. Typically, the tenderers are required to pay a tender deposit prior to receipt of tender documents, and such amount may be thousands of dollars depending on the scale of the proposed project. The tenderers will also need to dedicate resources to review the tender document, examine various drawings and specifications before calculating its bid price. The tender duration may be weeks if not months. Typically, the conditions of tendering may qualify that despite the certainty of the costs to be incurred by the tenderers, the Employer is not bound to award the project at all. Even if the Employer does proceed to award, it may not necessarily do so in whole. The Employer may decide to award the project only in part or parts of the original scope. If this happens and to the extent it affects the originally anticipated economies of scale, the conditions of tendering should provide some arithmetical clarity of any possible price or rate adjustments.

Section 3 – General Conditions/ Particular Conditions/ Appendices of Standard Forms of Contract

This section sets out rights and obligations of both the Employer and appointed Contractor which are only in force after the Employer accepts the Contractor’s offer. It is common for the parties to rely on a certain standard form of contract widely used in the industry as opposed to a bespoke contract negotiated from scratch. The reliance on a familiar set of industry standard conditions would presumably reduce duration required for the tender process. In fact, the presumption of familiarity is so entrenched that it is quite common for the standard form of contract not physically attached to the tender document but merely included by reference. Such standard form of contract document are only physically inserted in the formal contract document at the stage of contract formalisation some weeks or even months after the contract was awarded to the Contractor. Whether parties are actually familiar with the actual terms and conditions in the standard form of contract remains debatable, but in any case are deemed to have agreed and acknowledge those very terms. 

Although general conditions included in standard form of contract are considered widely accepted and adopted by the industry, it is oddly common for amendments to be made to these general conditions by way of special conditions or particular conditions. Under commonly found rules of interpretation included in general conditions, it is stipulated that particular conditions shall take precedence over general conditions. In this regard, particular conditions are usually physically included in the tender document unlike the general conditions. Obviously from the tenderers’ perspective it would be advisable to review these particular conditions in conjunction with the general condition for a more comprehensive appreciation of the purpose of those particular conditions. So why are particular conditions commonly introduced when there is already a set of industry standard conditions? The reason is because different consultant quantity surveying firms engaged by the Employer tend to recommend certain set of particular conditions which are believed to be more protective of the Employer’s rights.

As regards the Appendices to the standard conditions, these are pro-forma document which provides details of project related information. These information include time for completion or duration of the project, whether the works are divided into phases with different completion dates, the duration allowed for defects liability period, percentages of retention sums etc.  As these information are typically considered more commercial driven than legal issues, it gets more attention from the tenderers and becomes the subject of subsequent negotiations. 

Section 4 – Tender Evaluation Criteria

This section of the tender document provides clarity on the method in which bids will be assessed by the Employer and its project consultants. This section is more commonly found in tender document of public sector projects. Admittedly bid assessment is a highly subjective and qualitative process as it predominantly include both quantitive and qualitative considerations. As regards the former, it pertains to tender price whilst in the latter, it involves subjective variabless such as contractor’s competence, qualification, track record and understanding of the proposed project. 

Some have argued that the tender assessment should only focus on the most competitive tender price on the basis that only qualified tenderers are shortlisted to participate in tender. In other words, the qualitative assessment should been completed prior to the issuance of tender document. On the other hand, there are also alternative views that the qualitative consideration should include the bidder’s understanding and risk appreciation of the proposed project in hand, which could not be assessed unless the bidders had a chance to meaningfully examine the tender document. Therefore qualitative consideration remains valid as part of the evaluation criteria.

In any case, specific mechanism that goes into the tender evaluation criteria ought to be agreed upfront amongst the Employer’s tender assessment team in the interest of fairness. Employers operating under a large corporate structure with multiple stakeholders rely on these tender evaluation criteria to arrive at consensus on the choice of selected tenderer. From the tenderers’ perspective, the insight into the tender evaluation criteria provides a guide on how it could put forward the most compelling tender taking into consideration both quantitative and qualitative considerations.

Section 5 – Pricing Schedule/ Bills of Quantities

In this section of the tender document, tenderers provide a breakdown of their tender price according to the list of works itemised in the schedule. From the Employer’s perspective, this section provides certain transparency on the make up of the tender prices received. The Employer compares the costs breakdown between the tenderers upon their submission including a cross reference with the pre-tender cost estimate prepared by the quantity surveying consultant. From the tenderers’ perspective, this section of the tender document allows tenderers to present its offer price based on an itemised schedule. Tenderers should be cautioned that the list of works included in the schedule typically comes with a disclaimer as being a non-exhaustive list. If there are works reflected in other parts of the tender documents or shown on tender drawings that are not included in the list, it is incumbent upon the tenderer to include those costs in the pricing schedule. In other words, the Employer does not usually warrant that the pricing schedule is entirely exhaustive. 

Under a lump sum contract with quantities or re-measurement contract, Bills of Quantities are used as pricing document where quantities are provided in the pricing schedule. These quantities are measured by the consultant quantity surveyor and included in the tender document. The tenderers will derive their tender price based on the given quantities. Under such arrangement, the tender offers received by the Employer are based on the same set of quantities for the proposed works. Therefore, the commercial distinction between different bids received are due to varying unit rates offered by the tenderers.

Subject to any adjustments made during negotiation, the pricing breakdown recorded in the schedule becomes the basis upon which monthly progress payment are made to the selected contractor. A commercially savvy contractor typically provides its breakdown in a manner that addresses its cashflow requirements. Likewise, the Employer are usually concern if the breakdown enables the tenderer to ‘front load’ its costs.

Section 6 – Schedule of Rates including Preambles

This section provides a list of unit rates expressed in accordance with the standard methods of measurement. These unit rates facilitate valuation of variations to the works instructed under the contract. It is extremely rare for construction projects to be carried out without any variations from the original scope of works. Variations under the contract are part and parcel of construction contracts, often times necessary in order to accommodate unforeseen circumstances on site or to cater to changes in design requirements. Such variations are so common that the tenderers are required to submit its unit rates so as to enable a determination on whether any costs associated for future variation works remain commercially competitive. In other words, tenderers are expected to provide its pricing not just for scope of works presented during tender, but also pricing for any potential changes to such scope of works.

Where the contract adopts Bills of Quantities, the tender document would usually include an additional Schedule of Rates as well albeit with some criticisms. Tenderers are expected to quote unit rates for potential works to be undertaken included in the Schedule of Rates without any knowledge of the volume of works concerned. One would imagine that the unit rate of say concrete is quite different for 1,000m³ of concrete works versus 10m³ of concrete works. Economies of scale is a function of price competitiveness. 

There are also unique circumstances where the Employer would include market rates in the Schedule of Rates so that these becomes part of tender offer. In other words, these Schedule of Rates are already ‘priced in advance’ for the tenderers’ concurrence. These market rates are obtained from publications of construction cost database compiled by various quantity surveying firms. Under such approach, the tenderers are effectively deprived from the opportunity to quote by its own initiative. The use of such published unit rates can be contentious as these are typically calculated based on an average derived from various comparable historical projects. Apart from the fact that these rates could be out dated, it bear limited commercial relevance to the project in hand.

Another important component of Schedule of Rates is the preambles. Preambles set out what the unit rates deemed to have included. By way of example, the unit rate for metal works typically are deemed to have included labour costs associated with production and installation of the works, the metal costs, any equipment costs incurred to hoist the metal components to its intended positions. The preambles are meant to be read in conjunction with standard methods of measurement as well as drawings, specifications and pricing schedules. Once the coverage of each unit rates are defined, these rates can be used during valuation of variation including any adjustments or extrapolation that may be required. 

Tenderers should also be cautioned that variations under the contract could manifest not just in the form of additional works or but also omission of works. An extremely high unit rate serves as a double edged sword. A high unit rate could result in a high deduction of contract sum where it is used for omissions.

The general conditions of standard form of contract referred to in the tender document typically provides for a contractual mechanism governing the methods of valuation of variations. The Schedule of Rates should be reviewed in conjunction with this provision for a complete understanding of how the contractor will be compensated when variation works are instructed. In general, the stipulated mechanism provides that the rates could be extrapolated or adjusted. For these adjustments to be permitted, the circumstances of when the works were instructed must have substantively departed from the contractor’s programme. In other words there is a clear deviation from the original basis of unit rates. In the extreme cases, the contractor could claim for additional payment based on valuation using the first principles where compensation is based on actual cost incurred. Whether the circumstances justify claims based on first principles or permit extrapolation of unit rates is dependent on the facts and contemporaneous records.

Section 7 – Technical Specifications

This section of the tender document defines the material and workmanship standards to be achieved by the contractor for the works. Metaphorically specification is akin to the final destination of a construction journey. In this regard there are two types of specifications. Where the Employer dictates the exact path to be taken to reach the destination, these are ‘prescriptive specifications’. If the Employer does not dictate the specific path other than the location of the destination, these are ‘performance specifications’. Under the latter option, the tenderers are given greater latitude to achieve those performance standards and are therefore deemed to have undertaken greater risks. The offer price is dependent on the types of standards set by the Employer. 

The technical specifications are typically presented in various elements of the building e.g. floor finishes, mechanical and electrical works, external facade etc. Certain building elements such as external facade, or internal wall finishes to main lobby are the core aspects of the aesthetics to the building. The Employer usually has a strong desire to control the exact method of construction and ultimately how the end product looks where the elements relate to building’s aesthetics and consequently its marketability. Therefore prescriptive specifications are adopted in this regard. This can be contrasted with other more functional elements of the building such as ducting of ventilation systems or electrical wiring above the false ceiling which typically remained concealed. These are usually stipulated under performance based specifications.

Whether the specifications are stipulated on a performance basis or prescriptive basis, it will influence the commercial opportunities available to tenderers. Specialist contractors typically have greater domain knowledge of their trades than the Employer as well as the project consultants. Whilst the Employer and its team may have a good idea of the standards and requirements of the end product that they desire, it is the specialist contractors that are in a better position in knowing the construction details including various value engineering options. Therefore, performance specifications can be commercially attractive for contractors with deep expertise as they are able to achieve the requirements economically. These expertise may well translate into more competitive tender price or greater profit margin.

Section 8 – Appendices/ Specimen

This section contain various document templates that the selected contractor are expected to comply with in their submissions to the Employer after the tender is awarded. During tender, tenderers are expected to examine these template documents in detail and make certain that they are in the position to produce post contract submissions based on the exact wordings included in the template. These documents include the unconditional bond, warranties and guarantees of various products, parent company guarantee etc.

The choice of words and structure of sentences included these template documents are carefully drafted in ensuring that it carries the desired legal effect. Therefore in including these specimen in the tender document, tenderers are expected to factor in the costs of submission of these exact document in its tender price. By way of example, in the absence of these specimen and template documents, it is quite common for the contractor to submit its unconditional bond that may well appear to be worded in the form of a conditional bond. This may not be acceptable to the Employer as it would compromise the level of security that it expects as regards risks management. The upfront agreement to the template document also avoids the hassle of negotiating the wording in these documents after the tender is awarded. The Employer would then lose its bargaining power to dictate its preferred terms and any protracted negotiation could delay the submissions of these documents. 

The tenderer should not unilaterally review these documents during tender. They should proactively seek concurrence and confirmation from their banks, financiers, insurers etc based on the prescribed templates. After all, the production of these documents would invariably involve third parties other than the selected contractor and the Employer. It is also common for the general conditions of standard form of contract to stipulate certain types of financial penalty in case of delay in the submission of these documents. These penalties could be in the form of withholding of certain percentage of monthly progress payment until such time when the submissions are completed.

Section 9 – List of Tender Drawings

The tender documents are commonly issued to the tenderers with a set of tender drawings. Tender drawings when read in conjunction with the tender document provides a comprehensive view on the scope of works. As picture is worth a thousand words, tender drawings usually provide a more complete illustration of the scope of works. It is therefore important to pay close attention to the list of tender drawings included in the tender document as it also defines the basis of the tenderer’s offer price. In general, any construction details that are not depicted in the drawings nor described in the tender documents are not included in the tender price. Therefore, if any additional works are required subsequently, an instruction for variation works is to be expected which entitles additional payment and/ or additional time. An astute tenderer with an eye for detail typically combs through the list of tender drawings with the view of identifying such commercial opportunities prior to deciding its final tender price. A common strategy for tenderers is to put forward a relatively low tender price to secure the project, with the aim of ‘recovering’ the profit through the instructions for potential additional works. These are identified based on the completeness in depiction of scope of works from the tender drawings. Therefore this list usually attracts considerable attention during the tender process.

The list of tender drawings is usually presented through various building elements such as reflected ceiling plans, floor plans, wall elevations, building elevations etc. A main contractor usually outsourced much of the physical construction works to its subcontractors and therefore distributes these elemental tender drawings to various prospective subcontractors based on their trades or craft of specialisation. Notwithstanding that, it is imperative for the main contractor to maintain a bird’s eye view of the pricing strategy as a whole rather than simply collating and summing the collective quotations received from various subcontractors. The coordination across different trades and the adequacy of tender drawings to reflect those points of interface are usually where the profit opportunities lies.

From the Employer’s point of view, the list of tender drawings is also a good starting point to examine whether the design details are sufficient for tender. Usually these drawings are produced by engineers and architect or interior designers. One should get the consultant quantity surveyor to provide a pricing estimate based on the set of tender drawings and to compare such estimate against the expected cost per square footage. There should not be much deviation between the figures derived from different basis.


Section 10 – Submissions Requirements by Tenderers

The tender offers submitted by the tenderers are subject to various assessments both from qualitative and quantitative perspective. These submissions are stipulated based on tender assessments methodology. These submission documents include construction method statements, construction programmes and timelines, proposed organisation chart, environment health and safety plan etc. Tenderer that demonstrated a higher calibre and competence could be rated more favourably even if it had not submitted the lowest price. Therefore, the submission requirements stipulated in tender document could provide an insight to the best tender strategy.

Apart from being able to put your best foot forward for evaluation purposes, setting out the basis of your tender price through these submissions provides a baseline for any potential claims for additional monies or time. There are provisions under general conditions of contract that allow unit rates to be adjusted if the variation works are carried out under very different circumstances from what was originally planned. To this end, the construction programme and method statement submitted pursuant to this section may be useful. On the other hand, if these submission documents are presented in an overly detail manner, it could also work against the tenderer. This is particularly so if the tenderer is unable to perform in accordance with those expectations due to unforeseen circumstances. Therefore it is important to strike a balance in deciding the level of granularity exhibited in these submission documents.

Conclusion

The tender document allows tenderers to present their offers to the Employer. It simultaneously allow the Employer to shape the manner in which the offer is structured to facilitate evaluation. Apart from using tender document as a means to deciding which tenderer to be selected, this very document usually contains important details that could influence any future claims and disputes.

Koon Tak Hong Consulting Private Limited