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

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

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

Construction Tender Process And The Need For Compilation of Contract Document

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

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

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

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

Tender Documentation That Are Commonly Subject To Amendments During Contract Compilation

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

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

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

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

When To Compile Construction Contract Document

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

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

How To Compile Construction Contract Document

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

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

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

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

What Should be Excluded From Construction Contract Document

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

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

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

Conclusion

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



Koon Tak Hong Consulting Private Limited

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

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

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

SIA vs PSSCOC – entitlement to loss and expense claims

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

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

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

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

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

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

SIA vs PSSCOC – treatment of different heads of claims

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

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

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

SIA vs PSSCOC – unforeseen ground condition

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

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

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

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

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

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

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

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

Conclusion

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

Koon Tak Hong Consulting Private Limited

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

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


SIA vs PSSCOC – Why the comparison?

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

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

Architect vs Superintending Officer (SO) – Independent Certifier

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

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

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

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

Architect vs Superintending Officer (SO) – Delegation of Authority

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

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

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

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

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

Architect vs Superintending Officer (SO) – Instructions and Directions

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

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

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

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

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

Conclusion

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

Koon Tak Hong Consulting Private Limited

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

Infrastructures Within Building That Are Subject To Periodical Maintenance

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

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

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

Original Equipment Manufacturer (OEM) vs Third Party Vendor

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

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

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

Relevant Regulatory Frameworks

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

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

Procuring Through Integrated Facilities Management (IFM) and Managing Agents

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

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

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

Procurement Challenges for Maintenance Contracts

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

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

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

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

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

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

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

Conclusion

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



Koon Tak Hong Consulting Private Limited

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