Collaboration in practice under Singapore PSSCOC Option Module E and NEC4

E2.0 of PSSCOC Option Module E obliges parties to “use their best endeavours to work together in a collaborative environment and act in a spirit of mutual trust and cooperation”^[16]. A similar obligation is found in NEC4 ECC, which requires the parties, project manager and supervisor to act in a “spirit of mutual trust and co-operation”.

In both PSSCOC Option Module E and NEC4, this is a contractual requirement that is placed at the second clause of the contract, establishing a collaborative working relationship and mindset from the start. There is a focus on building open and honest communication with joint management of project developments, to better manage construction risk and related disputes, thereby reaching the most favourable and cost-effective outcome for all parties.

This emphasis also brings to fore the courts’ approach to a duty of good faith in contracts. In Singapore, the courts are ready to uphold an express term of a duty of good faith^[17] (although they have yet to reach a definitive conclusion on whether there is an implied duty of good faith in relational contracts). The general position is that the courts will not imply a duty of good faith into a contract from the leading authority Ng Giap Hon v Westcomb [2009] 3 SLR (R) 518. There may be very limited circumstances where the court would imply a duty of good faith e.g. “terms implied in fact”^[18].

It is not possible to address in this note in full how good faith is regarded under English law, save to say that while the traditional reluctance to recognise such a duty remains very much in place, the discussion is currently more focused around the concept of relational contracts. There have however been a number of decisions that addressed clause 10.1 of NEC3, which made it clear that this obligation does not mean that a party must give up any contractual rights^[19] and that such an obligation is not easy to enforce in practice^[20]. At the same time, the courts have relied on this clause as relevant context for implementing other contractual provisions^[21]and in a recent decision in 2021 it was stated that “…clause 10.1 is not merely an avowal of aspiration. Instead it reflects and reinforces the general principle of good faith in contract…”^[22].

This clause provides for an Early Notification Register to be prepared within 7 days of the works starting and both the contractor and the Superintending Officer (“SO”) are required to notify each other of any matters that affect cost, time, quality or the KPIs so that the Register can be updated by the SO. The intention is that the parties then attend regular meetings (which may be attended by sub-contractors or third parties) in order to work together and discuss how to avoid or mitigate the impact of the events that have been identified in the Register. By way of example, an insolvency in the supply chain, unforeseeable ground conditions or an increase in the costs of materials are matters that one party may be liable for but both parties, and the overall project, benefit from mitigating the impact of such events.

The purpose of this clause is to facilitate pro-active risk management and to provide an opportunity for mitigating potential projects risks collaboratively regardless of which party may be responsible for such risk under the contract. Clause E3.0(10) recognises that the matters discussed may also result in entitlement to additional time or payment under other contractual provisions, but this mechanism is very much to be regarded as a project management tool which creates a separate process from the assessment of contractual entitlement.

NEC4 has a very similar provision^[23], which provides for an early warning register to be prepared when the contract is entered into and then updated based on notices from the Project Manager and the contractor. Either party can then ask the other to attend a risk reduction meeting where they will discuss whether any steps can be taken to mitigate the notified risk. Where the contractor fails to issue an early warning, NEC4 provides that the Project Manager identifies this when instructing the contractor to submit a quotation^[24] and the compensation event is assessed as if the early warning had been given^[25]. In practice, it is important to recognise that this process is about risk management rather than contractual liabilities. The process is separate from the assessment of compensation events and a common pitfall is for a party to assume that notifying an early warning relieves it of its obligation to notify the other party of a compensation event.

PSSCOC Option Module E provides users with two alternatives – one which incorporates the use of the Singapore Infrastructure Dispute Management Protocol 2018 (“SIDP”) to assist parties to resolve their disputes, and one which does not. The former requires the employer and the contractor to establish a Dispute Board in accordance with the SIDP within 60 days of the commencement of the works, which shall assist parties in preventing, managing and resolving differences or disputes by providing assistance or mediation, or by rendering an opinion or formal determination in accordance with the terms of the SIDP. Parties may also (but are not obliged to) make a referral to the Dispute Board if either party is dissatisfied with the decision of the SO made pursuant to clause 35.1 of the PSSCOC for Construction Works 2020 (“PSSCOC 2020”), or if the SO fails to give notice of his decision within the time stipulated in PSSCOC 2020 clause 35.1.

NEC4 similarly provided the parties with options. Option W1 which is intended for general use provides for disputes to be referred to the senior representatives and if not resolved then the dispute is referred to adjudication in order to provide a temporarily binding decision, which may become final unless the matter is referred to court or arbitration. In addition, parties may choose Option W4, which provides for a Dispute Avoidance Board to be set up at the start of the project, in order to assist parties to take early action to avoid disputes or to provide a non-binding recommendation when appropriate, before the parties can refer the dispute to the tribunal (court or arbitration).

This clause provides for the key officers of the employer and the contractor, as well as key officers of their agents and sub-contractors, to attend partnering workshops aimed at enabling a collaborative environment. The cost of these workshops will be shared equally by the parties.

PSSCOC Option Module E does not identify when such workshops are to be held, but it would be ideal for them to be arranged as soon as the contract is executed and if possible before works commence on site. These workshops should continue to occur on a regular basis throughout the life of the contract. This is important in order to ensure that new key officers who join the project are part of that process but also because as the works progress, issues will come up that will need to be addressed collaboratively and such workshops provide the opportunity to share lessons learnt and embed collaborative behaviours. Indeed, challenges to collaboration often arise at the later stage of a project and this is where it is even more important to ensure that the collaborative environment is maintained and the workshops continue.

Similarly, there is no detail on what should be discussed at such workshops but in the early stages of the contract, the focus will be on ensuring that the relevant individuals understand what the contract requires in terms of collaboration and an emphasis on how that is different from other projects they have been involved with, explaining for example the objective of the early notification process, the importance of the programme and the role played by the KPIs. This will also allow individuals to meet on a personal basis and develop a closer working relationship.

In the early stages, the discussion in the workshops could use theoretical scenarios or case studies from earlier projects as a basis for discussing how collaboration could make a practical difference. By way of example, parties could look at issues that came up on earlier projects and discuss how a collaborative approach may have led to different actions and outcomes. With time the workshops could also be used to review actual events on site and any real issues that have come up, in order to agree a collaborative approach but also use such events to impart lessons about how to improve and further embed collaborative behaviours.

These workshops can be a highly effective tool in ensuring that collaboration is implemented. It is worth investing time in identifying the right contents for each stage of the project and ensuring that follow up actions are recorded and monitored and that there is a genuine and open discussion of issues at such meetings. If there is no real engagement by all parties, then the workshops will not achieve their objective.

The mechanism in E6.0 (Key Performance Incentives) of PSSCOC Option Module E and X20 (Key Performance Indicators) of the NEC4 ECC are similar insofar as KPI targets are stated in a schedule, with a positive payment (in addition to the contract sum) promised to the contractor if they meet or exceed the KPI. No penalty or ‘damages’ is involved if the contractor does not meet the KPI. Examples of KPIs set relate to stakeholder management, efficiency, sustainability, productivity, health and safety and quality, and they represent quantifiable measures that compare performance against objectives.

A key difference observed between the two suites of contracts is that under PSSCOC Option Module E, if targets are unlikely to be met, then the contractor should give early warning notice and follow the procedures under E3.0. Under the NEC4 Option X20, the contractor will submit proposals for improving performance and will be paid upon achievement of / improvement on the KPI but this is a separate process from the early warning process, because the early warning process applies on a more genera basis whether or not Option X20 is included in the contract.

In the NEC 4 Option X21 (Whole Life Cost), the contractor may propose to the project manager that the scope is changed to reduce costs of operating and maintaining an asset. Depending on the consultation between the project manager and contractor, there may be a revised programme and the change to the scope is not considered a compensation event. This is intended to reflect the fact that it is in the employer’s interest, or the ultimate user’s interest, to consider the whole life cost of maintaining and operating the asset, which will substantially exceed the construction cost. There is no express provision for rewarding the contactor with coming up with such proposals, but it is in the employer’s interest to encourage such proposals and it would be beneficial to share future long term savings even if there is an immediate cost increase.

There are other incentives that are embedded in some of the other options with the intention of encouraging better delivery. Option X22, which deals with Early Contractor Involvement, provides that where the client decides to proceed to stage two and the anticipated cost is less than the original budget, the contractor is entitled to an incentive based on a share of the savings (clause X22.7). Option X29 which deals with climate change takes a different approach. It includes a provision for a performance table which can be used for monitoring KPIs but also for financial incentives, which the contract makes clear can be positive or negative.

A comprehensive logic linked programme is essential for good project management, as is the regular updating of the programme based on actual events and progress. If that is done transparently and by agreement, it will provide all parties with an understanding of the real state of the works but will also make it easier to resolve any delay related issues as well as to identify effective mitigation measures.

Clause 9 of the PSSCOC 2020 therefore provides for programmes to be regularly submitted to the SO, so that any issues can be identified in advance and resulting in a programme that both parties accept is an accurate representation of the progress of the works. E7.0 of Option Module E expands the process for the programme to be revised, so that when it becomes clear that actual progress does not conform with the programme, the SO can instruct the contractor to provide details or revise the programme to ensure completion on time and in order to have a programme that is accepted (it is recognised that this may require a number of submissions). There are strict time periods that govern this process, and the SO is required to provide reasons when not accepting the programme, which can then be addressed by the contractor.

NEC4 has a similar process in clause 30, which provides for a comprehensive programme to be prepared and then to be regularly submitted for acceptance by the project manager, showing what is required from all parties involved in the project, not just the contractor. That is then used to monitor the works as to assess entitlement. NEC4 does not have a specific process for dealing with delay, but that is an issue that should be discussed as part of the acceptance process or as part of the risk reduction meetings following an early warning. In addition, when submitting a revised programme under clause 32.1, the contractor shows how it plans to deal with any delays. Clause 31.3 identifies what reasons can be raised when not accepting the programme and while delay is not expressly mentioned, a programme is not accepted if the contractor’s plans are not practical or realistic. In addition, there is a provision in clause 26 for acceleration by agreement.

Overall, these are useful mechanisms that encourage pro-active steps to be taken in managing delay and engaging with the contractor in order to identify what steps can be taken to avoid delay. It is important to recognise that it is not always possible to avoid delay but engaging in this process as soon as potential delay is identified should lead to a joint discussion which will help identify any mitigation measures.

One of the NEC’s core clauses focuses on employer risks which entitle the contractor to additional time and money, known as “compensation events”. Where a compensation event is notified and assessed, the contractor entitlement to time and costs is assessed under this single mechanism. The intention is that the impacts on time and costs are assessed as soon as the issue arises, on a prospective basis, and are not later revised to reflect the actual costs or time impact. In contrast, the PSSCOC 2020 deals with delay by two separate mechanisms – extension of time and claim for loss and expense. Depending on the drafting and event, it may be that the contractor is entitled to an extension of time but not to costs. A further distinguishing factor is that under the PSSCOC 2020 clause 14.2, the SO may assess the time impact either on a prospective or a retrospective basis.

In PSSCOC Option Module E, it is notable that the period of time that the SO is required to reply to the contractor’s notice for extension of time has been amended from “within a reasonable time” to within 60 days of receiving sufficient information (or a longer period agreed with the contractor). On this basis, it appears that more time and flexibility has been given for the SO to consider and respond to the contractor’s notice.

Another key feature that distinguishes NEC from other construction contracts is the prospective and sequential assessment of each delay event, in which each compensation event is evaluated on its own, and by the order they occur. As such, the idea of true concurrency i.e. the occurrence of two or more delay events at the same time, will most likely never occur. There is also a useful Practice Note produced by NEC that addresses how delay is to be assessed^[26]. On the other hand, clause 14.3 of PSSCOC 2020 as amended by PSSCOC Option Module E expressly addresses concurrent delays and provides that the SO shall “take into account any delays which may operate concurrently with the delay due to the event or events in question and which are due to acts or default on the part of the Contractor”. Given the different approaches and complexities around assessing concurrent delay, it may be that the NEC approach provides a simpler approach when assessing delay events and accordingly, the contractor’s entitlement to extension of time. That however is still very much reliant on having a fully progressed programme which is agreed by both parties.

Approach to drafting and use of plain English

An initial review of NEC4 will make it clear that its drafting is very different from traditional contracts. The emphasis is on the use of plain English and the drafting is concise and designed so that it can be understood by anyone using the contract. There is a marked absence of long complex clauses and the lack of cross referencing as well as the use of bullet points highlight the change from traditional drafting. Another unique feature is the use of the present tense in order to identify obligations rather than the term “shall”.

This is intended to make the contract easier to use in an international context, recognising the importance of the parties’ site teams being able to understand their contractual obligations but also the various mechanisms that NEC4 includes and which are designed to improve project management. In addition, this helps to reinforce the message that NEC4 is fundamentally different from traditional contracts, to discourage parties from assuming that it is the same as previous contracts they used and that there is no need to understand what the contract requires.   

Modular structure with options to allow risk allocation on a flexible basis

Another unique feature of NEC is that it does not present a fixed view on risk allocation, which parties may then seek to amend. Instead, parties must first choose the method of payment from six possible options, which includes the traditional lump sum or re-measurement payment options but also the innovative target cost options as well as a cost reimbursable and management contract options.

More flexibility is then provided by the X clauses, which can be selected in order to adjust the risk allocation, in recognition that the risk allocation affects the contract value and that by adjusting the risk based on the party that is better able to manage that risk or is willing to take on that risk, may result in better value. That means that parties choose who bears risks such as change in law^[27]or inflation^[28], which in other forms are fixed. Similarly, the deduction of delay damages^[29] or retention^[30], as well as the option for a bonus for early completion^[31], are all options that need to be chosen. The standard of design is also the subject of a specific option^[32], which if not used will usually result in fitness for purpose obligations.

In addition, NEC introduces more innovative options, for example with regard to incentives where KPIs can be used^[33] as well as low performance damages^[34]. There are two options which are of particular interest:

Option X21, which is designed to encourage the contractor to look at the whole life cost of the asset and make proposals that reduce the whole life cost, even if there is an increase to the construction costs. The Project Manager will then consider whether to implement such proposals.

Option X29, which is designed to provide a contractual framework for measures designed to limit the impact on climate change. The parties agree the Climate Change Requirements and the contractor has a climate change plan which is updated regularly, with reporting undertaken against a Performance Table which can also be used to include positive and negative incentives.    

In practice, clients will form their own views as to how they use those options and will tend to use them consistently across their contracts, but this provides a flexibility at the tender stage for a more sophisticated commercial model that can result in better value for money by limiting the risk of high risk premiums being added for events which may not materialise.

The use of target cost to align commercial interest and provide collaboration

Collaboration can only occur when both parties are incentivised to collaborate and it has to be recognised that commercial incentives will have the greatest impact. Traditional fixed price contracting meant that each party was concerned with its own risks and had no reason to cooperate in ways that reduce the other party’s risk.

NEC4 uses the target cost payment options^[35]in order to align the parties’ commercial interests, so that they are incentivised to cooperate because all parties benefit when costs are reduced and overspend is avoided. This works by agreeing a target price at the tender stage, based on an assessment of the cost of the works, plus an allowance for profit and overheads. As the works start, the contractor is paid its actual costs (subject to a few exceptions known as disallowed costs) and the target gets adjusted for employer risk events such as change in instructions. On completion, the actual costs are compared to the adjusted target costs, and the parties share any savings or overspend based on the pre-agreed percentages included in the contract.

In practice this means that the contractor is incentivised to reduce its costs even for employer risk events such as change in instructions or extreme weather, as the contractor will receive a share of such savings. Similarly, even if the contractor is in culpable delay and delay damages are applied, the employer should cooperate in finding ways to reduce the prolongation costs as they will affect the position as against the target. The fact that payment is based on actual costs means that there is transparency as to the contractor’s commercial position, which reduces some of the concerns employers have as to whether costs claimed by contractors are excessive. Disallowed costs are used to control the actual costs that are payable and mean that the contractor is not paid certain costs which cannot be justified as a shared risk.

Using a target cost contract requires both parties to understand how it operates and recognises that while the aim is to be able to share savings, it is also possible that parties will share an overspend which may be due to what would otherwise be seen as the contractor’s risk. It is also important that the initial target price is set up at a realistic level and that parties use the contract mechanism, such as early warnings and the programme to ensure efficient delivery.

The need for contemporaneous and prospective assessment to avoid final account process

Construction contracts usually use a final account approach, where the various claims that may be raised during the works period become part of a final account negotiation which is either resolved by agreement or becomes the subject of formal proceedings. That approach has the benefit of ensuring that the focus is on delivery and it can be easier to reach agreement on a large number of issues than to focus in detail on a single disputed issue. The downside of this approach is that until the final account is agreed or determined in formal proceedings there is uncertainty as to the commercial outcome and whether, for example, a budget will be exceeded or a profit will be made. In addition, the availability of witnesses and the quality of documentary evidence is usually greatly reduced when a dispute takes place a number of years after completion.

NEC therefore takes a very different approach, by including a procedure for a contemporaneous assessment of compensation events, which will usually take place on a prospective basis and over a relatively short period following, for example, an instruction that changes the works. A fully inclusive quotation is provided within 3 weeks covering both cost and time, and the project manager responds within 2 weeks. Once implemented, the time or cost impact is not changed even if the actual impact is different from the one forecast.

As a result, until NEC4, the NEC forms of contract did not have a mechanism for a final account. Even within NEC4, the final statement process in clause 53 is meant to be used for the small number of issues that cannot be assessed and finalised during the life of the project. Taking this approach requires sufficient skilled resources who can prepare reliable and accurate quotations, which requires a comprehensive up to date programme as well as timely input from the supply chain. Similarly, the project manager staff who assess such quotations need to be able to do it quickly and accurately. There is however a clear benefit in finalising costs as the project progresses and that provides much more certainty as to the ultimate commercial position. Even if there are differences, the process helps to ensure that the parties present their position and it is possible to narrow down disputed areas.

[1] Yang, Y.; Tang, W.; Shen, W.; Wang, T. Enhancing Risk Management by Partnering in International EPC Projects: Perspective from Evolutionary Game in Chinese Construction Companies. Sustainability 2019, 11, 5332

[2] Macneil, I.R. Reflections on Relational Contract. J. Inst. Theor. Econ. 1985, 141, 541–546

[3] Matinheikki, J.; Aaltonen, K.; Walker, D. Politics, public servants, and profits: Institutional complexity and temporary hybridization

in a public infrastructure alliance project. Int. J. Proj. Manag. 2019, 37, 298–317

[4] Suprapto, M.; Bakker, H.L.M.; Mooi, H.G.; Moree, W. Sorting out the essence of owner–contractor collaboration in capital project delivery. Int. J. Proj. Manag. 2015, 33, 664–683

[5] Ezani Rais Bin Shaiks Salim, The “I” in Collaborative Contracting (Three Sixty Contract Advisory Pte Ltd, Member of the Surbana Jurong Group, August 2018) (“The “I” in Collaborative Contracting”). 

[6] Construction Industry Transformation Map Launch at Singapore Construction Productivity Week (BCA, 24 October 2017).

[7] Speech by Zaqy Mohamad at the Singapore Contractors Association Limited (SCAL) Contracts and Practice Seminar on 12 March 2019. Electronic copy may be accessed from the Ministry of National Development website.

[8] Opening speech by Minister Desmond Lee at the Opening Ceremony of the International Built Environment Week 2023.

[9] See Option Y(SG)1

[10] See Option Y(SG)2

[11]  See Option Y(SG)3

[12] See Option Y(SG)4

[13] See Option Y(SG)4

[14] NEC lays the foundations for Singapore growth in collaborative contracting with release of new Y clauses (NEC, 30 April 2024).

[15] Launch of NEC4 Contract for Construction and Engineering Projects in Singapore (BCA, 29 April 2024).

[16] Clause E2.0(2) PSSCOC Option Module E

[17] HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust) v Toshin Development Singapore Pte Ltd [2012] SGCA 48

[18] As discussed in PH Hydraulics & Engineering Pte Ltd v Airtrust (Hong Kong) Ltd and another appeal [2017] SGCA 26

[19] Mears Ltd v Shoreline Housing Partnership Ltd [2015] EWHC 1396 (TCC)

[20] Costain Ltd v Tarmac Holdings Ltd [2017] EWHC 319 (TCC)

[21]  Northern Ireland Housing Executive v Healthy Buildings (Ireland) Ltd [2014] NICA 27 and Northern Ireland Housing Executive v Healthy Buildings (Ireland) Ltd [2017] NIQB 43

[22] Van Oord UK Ltd v Dragados UK Ltd [2021] CSIH 50

[23] Clause 15

[24] Clause 61.5

[25] Clause 63.7

[26] NEC4 ECC – PRACTICE NOTE 1.1 Assessing delays due to compensation events, published in 2017 and updated in 2019

[27] Option X2

[28] Option X1

[29] Option X7

[30] Option X16

[31] Option X6

[32] Option X15

[33] Option X20

[34] Option X17

[35] Options C with Activity Schedule and Option D with Bill of Quantities

[36] Klakegg, O.J; Pollack, J; Crawford, L. Preparing for Successful Collaborative Contracts. Sustainability 2021, 13, 289.