adr digest winter 07

7/30/2019 ADR Digest Winter 07

1/8

ADR Digest 1

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Digest Winter 2007Issue 2

Contractors Beware:the new Handbookand prolongationcosts

ByJames B Longbottom BSc(Hons) LLB(Hons) FRICS

FHKIS FCIArb RPS - Managing Director, ADR Partnership Ltd

IntroductionIn December 2006, the Government o the Hong Kong

Special Administrative Region introduced its controversial

Handbook or Preparing Bills o Quantities or Civil

Engineering Works (the Handbook) which is to replace

the Standard Method o Measurement or Civil Engineering

Works, 1992 Edition (the SMM). ADR understands that the

Handbook will be issued on a trial basis on 10 new tenders

although there have been comments rom within the

industry that the trial projects chosen by Government

appear to be either small or term contracts and, thereore,

are inappropriate or any meaningul evaluation.

The HandbookThis article is the rst o two articles analysing some

o the changes in the method o measurement in the

Handbook rom those in the SMM, and concentrates on

one aspect o the new Handbook which is the paying or

prolongation costs through pre-priced measured items

in the Bills o Quantities (BQ) and the eects that the

provisions have on overhead recovery rom variations.

Prolongation CostsIn the Handbook, the measurement o extended time

based preliminaries during a period o Contract overrun

is based on the ollowing principles:

Preliminaries other than the Contractors overheads

(eg. temporary accommodation or the Engineer and

In this issue:

1 Welcome

1 Contractors Beware: the new Handbook and

prolongation costs

5 Compromise: Recovering the settlement that

shouldnt have been

Welcome

In this edition o the ADR Digest, James Longbottom takes

a look at the Hong Kong Governments new Handbook

which replaces the Standard Method o Measurement or

Civil Engineering Works. James considers one aspect o the

new Handbook which is the paying or prolongation costs

through pre-priced measured items in the Bills oQuantities and concludes that the changes are bad news

or contractors and or the industry in general.

Our guest writer in this edition o the ADR Digest is Timothy

Hill, Partner o the law rm Lovells. Tim considers a recent

English court decision on compromise settlements and

oers some practical advice or parties aced with a problem

o whether to settle a disputed claim and then look to

recover the settlement at a later date rom third parties.

In this edition, we also commence the ADR Analysis series

which will address key commercial and contractual

principles arising on construction projects. The rst in the

series considers what happens i there is delay caused to a

project by inclement weather within an extended periodater the original date or completion.

As part o our continued growth within the region we

extend a warm welcome to three new members into our

team - Derek Dixon, Travis Ling and Kaymond Lam -

see our news section or urther details.

Finally, we would like to wish you all Seasons Greetings

and a very prosperous New Year.

Patrick J ONeillDirector

7 ADR Analysis: Inclement Weather

8 ADR News


2/8

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photographs) are measured during an extended time or

completion; and

Contractors overheads (eg. personnel, plant, temporary

accommodation, site and o-site overheads) are measured

during an extended time or completion which is due to

causes relating to the direct actions o the Employer /

Engineer (these are dened in Figure 1 and reerred to in

this article as compensable extensions o time).

In the Preace to the Handbook, Government argues that

these provisions:

... do away with the time consuming and resource

demanding Cost ascertainment exercise associated with

excusable delay by measuring and paying such Cost

through items in the Bills o Quantities.

However, a closer look at the provisions reveals that they raise

serious problems with respect to a Contractors entitlement

to the recovery o Contractors overheads arising rom

variations and prolongation.

VariationsTypically, Contractors overheads are priced in both the

Preliminaries and the items or measured works in the BQ.

However, paragraph 1.2 o the Preamble to the Handbook

deems that the Contractors overheads, including the

overheads o his subcontractors o any tier, shall be included

exclusively in the rates or Contractors overheads and not

against other items o work in the BQ.

This means that i the Contractor ollows the Handbook the

valuation o variations based on existing BQ rates or items o

measured work will no longer include or the recovery o

Contractors overheads. Moreover, Special Condition o

Contract (SCC) Clause E(3) which accompanies the Handbook

provides that:

...the provisions in General Conditions o Contract Clauses

59(4)(b) and 61... shall have no application to the rates

inserted by the Contractor against the items o work under

the sub-heading Contractors overheads in the Bills o

Quantities.

Thereore, any adjustment or increased quantities rendering

BQ rates unreasonable or inapplicable (GCC Clause 59(4)(b)) or

the valuing o new rates (GCC Clause 61) will also exclude

Contractors overheads. The upshot being that:

any additional or thickening o Contractors overheads

arising rom variations which materially aect the progress

o the Works (eg. additional supervisory sta and head

oce support) will have to be recovered as Cost pursuant to

GCC Clause 63(b) ie. a reversion back to the time consuming

and resource demanding Cost ascertainment exercise!;

where any additional or thickening o Contractorsoverheads arises rom variations which do not materially

aect the progress o the Works, the Contractor will not

have any contractual grounds or recovery and will lose

money; and

Contractors will also lose money on variations which

include price related Contractors overheads (eg. levies).

Pricing Contractors OverheadsThe guidance notes in Part III o the Handbook state that the

number o months inserted or Contractors overheads in the

Quantity column o the BQ should include or:

the original time or completion o the Works;

a reasonable allowance or compensable extensions o time

that may be granted; and

the Maintenance Period.

In other words, monthly rates priced or Contractors

overheads should be calculated as a composite average based

on the above estimated costs divided by the number o

months inserted in the Quantity column o the BQ.

The rst point to pick-up on is the inclusion o the

Maintenance Period in the overall duration or Contractors

overheads. This has the eect o articially reducing the

average BQ rate priced by the Contractor (see Figure 2).This in turn distorts and backloads the recovery o overhead

expenditure placing the Contractor in negative cash position

which the Contractor has to nance until the end o the

Maintenance Period. This is nonsensical and ADR understands

Figure 2:Example o Monthly Overhead Expenditure

GCCClause

Causes of Delay Causes Relatingto Direct Actionsof the Employer /Engineer

50(b)(i) Inclement Weather No

50(b)(ii) Tropical Cyclone No

50(b)(iia) Black Rainstorm No

50(b)(iii) Ambiguity or Discrepancy Yes

50(b)(iv) Variation Yes

50(b)(v) Substantial Increase in Quantities No

50(b)(vi) Late Possession Yes

50(b)(vii) Disturbance Yes

50(b)(viii) Suspension Order Yes

50(b)(ix) Utility Company No

50(b)(x) Nominated SubContractor No

50(b)(xi) Special Circumstances No

Figure 1:Causes o Delay Relating to the Direct Actions o the

Employer / the Engineer

2 Winter 2007


3/8

that Government has undertaken to amend this and that the

latest drat o the Handbook actually does so. It is worth

mentioning this point, however, since the published version

available in the public domain refects the above wording.

More importantly, it shows the extent to which the new

provisions have not suciently been thought through.

Competitively Priced DelaysThe next point to pick-up on is the allowance or compensable

extensions o time. Putting aside the act that it is bizarre that

a project should include an estimate or overrunning beore it

has even got started, this provision means an increased

amount included or the allowance or compensable extensions

o time will increase the tender price. Put another way, i a

tenderer prices the allowance low, his overall tender price will

thereore be lower is this what Government wants,

competitively priced delays?

SCC Clauses E(1) to (3) which accompany the Handbook re-

dene the meaning o Cost to exclude prolongation costs andprovide that the measurement o Contractors overheads

whether or not resulting in payment, shall exonerate the

Employer rom any urther liability in respect o overheads,

whether on or o Site including head ofce overheads, cost o

fnancing and depreciation in the value o Construction Plant,

o the Contractor and any o his subcontractors o any tier

under the Contract. Thereore, the Contractor is stuck with

his pre-priced rates or valuing prolongation and there is no

mechanism or recovering any shortalls as Cost under

GCC Clause 63.

In situations where the Contractor under estimates or simply

prices his Contractors overheads competitively so that they no

longer refect his actual costs, the Employer will gain a nancialbenet or any prolongation. This contradicts the established

principle o putting the Contractor back in the position it

would have been but or the compensable delay.

Moreover, can an average cost ever airly and realistically

refect the nancial eects o a delay throughout the

construction period o a major civil engineering project?

It is a recognised principle that prolongation costs should be

ascertained during the period that the delaying eects are

elt. This is an important concept as usually a Contractors

overheads will gradually increase, peak and then decrease

during the construction period. Thereore, the nancial eects

o a delaying event are likely to be greater mid-way through

construction than towards the end o project when resources

are starting to wind down. This is why in Figure 2 the

allowance or compensable extensions o time was priced at

the peak o the curve; ie. a belts and braces approach was

taken to cover the worst eventuality. However, i the

Contractor priced the allowance at a lower point on the

expenditure prole to keep his tender price competitive, this

would result in the under recovery o prolongation costs elt

at the peak o the curve.

The Risk of Time OverrunsI the compensable extensions o time or the project

described in Figure 2 transpired and the rates or Contractors

overheads realistically represented the Contractors actual

costs, then all should be well.

However, i the project nished later than the period measuredin the BQ or compensable extensions o time, then the

Contractor would make a nancial loss (the converse would occur

i the project nished earlier than the period measured in the

BQ; ie. the Contractor would in theory make a nancial gain).

For example, in Figure 2, the period measured in the BQ or

compensable extensions o time was 3 months. However, i

the compensable delay was actually 4 months, the actual cost

o the additional month o prolongation (assuming the eects

were elt at the peak o the expenditure curve) would be HK$4

million. I this prolongation was measured using the BQ rates

(excluding the Maintenance Period), the Contractor would

recover only an additional HK$3.2 million, a shortall o

HK$0.8 million.

Further, extensions o time in Hong Kong are oten granted

retrospectively ater the Contract has nished so the

measuring and valuing o the prolongation costs using

pre-priced measured items in the BQ is likely to make little

dierence in reality, in the Contractor receiving reimbursement

o the additional expenditure any earlier.

A Possible Solution for ContractorsWhere the allowance inserted in the BQ or compensable

extensions o time is elt to be inadequate, one possible

solution could be to strategically price the Contractors

overheads using a period which realistically refects thelikelihood o prolongation. However, this solution is not

problem-ree and is raught with risks:

How does a Contractor assess whether a Contract will

ADR Digest 3

... the Contractor is stuck with

his pre-priced rates or valuing

prolongation and there is no

mechanism or recovering

any shortalls as Cost under

GCC Clause 63.


4/8

suer compensable extensions o time? The Contractor is

required to blindly predict the timing o the eects o likely

delays which may or may not occur and their expected

duration this is a gamble which could potentially reap

nancial windalls or generate huge losses depending on

where the delays all and the pricing strategy adopted.

The Contractor may have to load disproportionate sums

o money in relation to the overall Contract Sum into the

Contractors overheads.

Any additional monies which have been strategically priced

into the Contractors overheads would have to be taken

o other rates elsewhere in the BQ. However, the BQ rates

which have been reduced in value will no longer refect

the cost o the work being perormed. This leaves the

Contractor exposed to urther risks i the quantities o

such works are subsequently increased.

ConclusionsThe methodology used or the pre-pricing o prolongation

costs in the Handbook is not avourable to Contractors.

Generally, they will be worse o that is worse o in terms

o recovery o Contractors overheads or prolongation and

variations. I the new provisions are to ... do away with the

time consuming and resource demanding Cost ascertainment

exercise associated with excusable delay ... ie. to bypass

prolongation Cost claims, then they appear ill conceived andinadequately thought through.

Surely, the position has got to refect that it is equitable or

both parties to ocus on ascertaining the actual additional

Cost incurred and or the Contractor to receive a air recovery

on the basis o this actual additional expenditure.

What is the consequence o all o the above? Well, Contractors

who have not been able to strategically price the Contractors

overheads and/or that realise that their project will not receive

commensurate nancial compensation or the delays will no

doubt pursue alternative avenues to ensure that they receive

their air entitlements and this, in our opinion, will inevitably

lead to a heightened claims environment.

In conclusion, to quote one major contractor, the new

Handbook is reducing what was already a high risk bidding

process, into a blind gamble which is beyond the control o the

Contractor.

The December 2006 version o the Handbook can be

downloaded at:

www.cedd.gov.hk/eng/downloading/index.htm

For urther inormation contact:

[email protected]

To quote one

major contractor,

the new Handbook is

reducing what was already

a high risk bidding process,into a blind gamble

which is beyond the control

o the Contractor.

4 Winter 2007


5/8

Compromise: Recoveringthe settlement thatshouldnt have been

ByTimothy Hill, Partner, Lovells

From an early age children are taught that they cannot

get into trouble i they are not in the wrong, it would

thereore seem surprising i a party could ace a substantial

award o damages even i they were not in the wrong.

However, the English Technology and Construction Court has

decided just that in the case oJohn F Hunt Demolition Co Ltd

v ASME Engineering Limited [2007] EWHC 1507, (2007) 23 Con

LJ T99. When put in these terms the conclusion is surprising

but in an environment where parties are encouraged to settle

their dierences it is perhaps less remarkable.

In any complex construction project the successul completion

o the project is a team eort. It involves a complex inter-

relationship o parties with distinct obligations. Faced with

these challenges project sponsors and indeed increasingly

contractors look to package parcels o responsibility to third

parties. This can lead to diculties when problems are

encountered or projects go wrong. In a typical scenario a

project sponsor will look to its contractor to be responsible

or damage which has occurred without wishing to become

involved in an inquiry as to which o a number o sub-

contractors or suppliers was responsible or the loss.

The contractor will look to its sub-contractors or suppliers to

indemniy it against the liability or to contribute to that loss.

However, very oten the contractor will discover that the sub-contractor or supplier will deny responsibility. In an ideal world

the contractor may seek to resolve the main contract and

sub-contract disputes at the same time, but this is not always

possible. There are a number o reasons or this, or example

the breadth o the obligations owed by the contractor to

the project sponsor may be such that i the contractor

cannot avail itsel o the same type o argument as the

sub-contractor deploys, the contractor may consider the

sub-contractors arguments unsustainable or there may be

procedural or other obstacles preventing the issues being dealt

with at a common time in a common orum. In these

circumstances, a contractor is aced with a dilemma. It may

not wish to get drawn into long and costly proceedings but at

the same time it is likely to wish to ensure that it can rely

upon any settlement reached with the employer in its claim

against the sub-contractor.

The basic issue was considered in the well known decision o

Biggin & Co Ltd v Permanite Ltd [1951] 2 KB 314. In this case

Biggin supplied materials which had been sold to it by

Permanite to a third party. The materials proved to be

deective and as a result Biggin paid compensation to the

third party, it then sought to recover this compensation rom

Permanite, basing its claim upon the settlement which had

been achieved with the third party. The Court o Appeal

considered that the settlement was relevant to the

assessment o damages at the sub-contract level.

Firstly it stated that the settlement was to operate as an

upper limit on the level o damages which could be awarded.

Clearly it would be unreasonable to suggest that a contractor

who achieved a avourable settlement with a project sponsor

could seek to prot rom this by making a ull recovery against

its sub-contractor. The second more controversial conclusion

was that the settlement could be accepted by the Court as

the correct measure o damages i the settlement was a

reasonable one and somewhere around the level o damages

which would be awarded. The Court made the observation

that the party seeking to rely on the settlement could becross-examined as to its reasonableness and that in an

appropriate case the deendant might show that some vital

matter had been overlooked. This let open the prospect that

a sub-contractor could challenge a settlement both as to the

undamental question o whether liability existed and as to

the level o the settlement.

One o a number o loose ends let at the conclusion o this

case was what happened i the sub-contractor contended

that the main contractor had no liability to pay the employer.

This problem was touched upon in a decision Comyn Ching &

Co Ltd v Oriental Tube Co Ltd [1979] 17 BLR 47. Here the

supplier challenged the contractors liability to pay the

settlement sum. The case turned largely on the construction

o the relevant documents and as a result the Court did

not have to decide the question o principle. Comment was

however made that a loss could be sustained i the claim arose

ADR Digest 5

The ... more controversial

conclusion was that the

settlement could be accepted

by the Court as the correct

measure o damages i

the settlement was a

reasonable one...


6/8

rom the reasonable settlement o a claim which had some

prospect or a signicant chance o success. Thus it could be

said that the settlement o a claim with a prospect o success

might be relied upon, but what i the contractor was plain

wrong in deciding to settle a claim?

The 8th Edition o Keating sits neatly on the ence, stating

that:

it will usually also be necessary to establish the claimants

liability to the third party and the deendants liability to the

claimant since evidence o the compromise is relevant only

to the measure o damages.

This issue however ell or consideration inJohn F Hunt

Demolition Co Ltd v ASME Engineering Limited. In the case the

deendant, ASME, was a sub-contractor engaged to undertake

welding work. Unortunately, sparks rom this work set light

to bitumen elt weather-proong on another part o the

project, which caught re. Hunt, who had engaged ASME,

received a claim rom the employer and main contractor or

approximately 250,000. The sub-contractor oered

approximately 150,000 to settle these claims, which was

accepted. Hunt then sought to recover the sum rom ASME.

For the purpose o the hearing it was accepted that a sum

in excess o 100,000 o the settlement sum could not

properly have been claimed by the employer against the

main contractor. Consequently, Hunt could not have been

responsible to pay the sum. ASME thereore resisted payment

o this sum to Hunt. ASME argued that the settlement with

The Court recognized

that the settlement o an

intrinsically weak claim in order

to avoid the uncertainties in

the expensive litigation maywell be reasonable.

the employer and main contractor was irrelevant or, at the

very least, unreasonable because Hunt had ailed to realize

and/or act upon the absence o any liability. The Court did

not accept this argument, although let a possible way out

or ASME.

The Court said that in deciding whether a settlement sum

could be recovered the starting point would be a consideration

o whether the breach o contract caused Hunt to incur theloss or damage suered as a result o its decision to

compromise the claim. I the claim was (or was reasonably

considered to be) o sucient strength reasonably to justiy a

settlement and the amount paid in settlement was

reasonable having regard to the strength o the claim, the

settlement might be relied upon to justiy the recovery o the

loss even i the claim would ater urther examination and

perhaps a trial have ailed. The Court recognized that the

settlement o an intrinsically weak claim in order to avoid the

uncertainties in the expensive litigation may well be

reasonable. It said that this conclusion was entirely consistent

with the normal rules o oreseeability and remoteness o

damage, because it considered that it was reasonably

oreseeable at the time o the contract that a party maysettle the claim brought by another aris ing out o the same

subject matter, even i on a detailed analysis, liability may be

hard or even impossible to establish.

The Court considered the question o reasonableness was a

question o act in each given set o circumstances. This nal

observation allowed the Court to avoid a nal determination

o the specic issue in the case, because o the need or a

actual inquiry as to the circumstances in which the

settlement was made.

The eect o this decision is thereore to make it clear that in

appropriate circumstances a paying party may recover the cost

o a settlement even i on urther analysis it was not liable topay the claim. I aced with a problem o whether to settle a

disputed claim it would thereore be prudent or a party to

take appropriate proessional advice and to make sure that its

reasoning in concluding that the proposed settlement oered

a commercially attractive means o settling the case is

recorded. This case may be seen as urther evidence o the

Courts willingness to oster a climate in which parties are

encouraged to arrive at a commercial resolution o their

disputes and dierences.

For urther inormation contact:

[email protected]

6 Winter 2007


7/8

ADR Digest 7

ADR Analysis

Inclement Weather

Some standard orms o contract do not list inclement

weather as an excusable event (see Figure 1). Thereore, the

contractor assumes responsibility or both the nancial and

programming eects o inclement weather.

What happens then i there is delay caused by inclement

weather within an extended period ater the original date

or completion? The contractor will not have made any

allowance or such delays and the Contract Administrator

(CA) is supercially not empowered to grant extensions o

time i inclement weather is not listed as an excusable event.

The answer is simple. Delays caused by inclement weather

in an extended period should be considered as part o the

eects o the primary delaying event (ie. the excusable event)

or which extensions o time have been or should be granted.Generally, the principle is that inclement weather in an

extended period qualies or urther extensions o time i it

was incurred due to the consequential or knock-on eects o

ExcusableEvent

CompensableEvent

HKIA/HKICM/HKIS

Standard Form

of Building Contract,

Private Edition

Yessee Clause 25(b)

& (c)

No

Swire Properties Ltds

Standard Form

of Building Contract

No

No

Governments GCC

for Civil Engineering

Works

Yessee Clause 50(1)(b)(i),

(ii) & (iia)

No

KCRCs GCC forCivil Engineering

& Building Works

Nosee Clause 45.4(d)

No

Figure 1: Inclement Weather Provisions in Hong Kong Standard

Forms o Contract

an excusable event. Authority or the principle can be ound

in the Canadian case oEllis Don v The Parking Authority o

Toronto (1978).

Most standard orms o contract also provide that the CAs

assessment o an extension o time should be air and

reasonable, which should take into account all o the eects

caused by an excusable event including inclement weather.

Generally, a delay caused by inclement weather is not a

compensable event giving rise to additional payment or

recompense. However, based upon the principles established

above, the contractor may be entitled to recover the

additional costs incurred due to delays caused by inclement

weather, which costs were incurred due to the knock-on

eects o a primary excusable / compensable event.


8/8

EVgicZgh^c6aiZgcVi^kZ9^hejiZGZhdaji^dc

8 Winter 2007

CIArb Young Members Group

Social Evening

ADR Partnership was proud to be a sponsor o the Chartered

Institute o Arbitrators Young Members Group social gathering

held at Grappas Restaurant, Central. Great company, good ood

and a plentiul supply o drink was the ideal recipe or a most

enjoyable evening.

ADR Partnership Limited

17A Seabright Plaza 9-23 Shell Street North Point Hong Kong

t: (852) 2234 5228 : (852) 2234 6228

e: [email protected] www.adrpartnership.com

ADR Partnership Limited and the contributors to ADR Digest do not accept any liability for any views, opinions or advice given in this publication.

Readers are strongly recommended to take legal and/or technical specialist advice for their own particular circumstances.

Designedby:w

ww.ichicoodesign.com

Tel:+44(0)1274560220

ADR News

Expanding the ADR Team

It has been a busy ew months or us at ADR Partnership and we

are pleased to announce that the ollowing consultants have

joined the ADR team:

Derek Dixon

FRICS

Managing Consultant

Derek is a Chartered Quantity

Surveyor with over 40 years

experience in commercial and

contractual matters. He has

acted as an expert witness in

arbitration and High Court

hearings on numerous occasions

and has extensive experience working at a senior level in the

preparation and deense o contractual claims.

Travis C K Ling

BBuild MFM MRICS AAIQS

Consultant

Travis is a Chartered Quantity

Surveyor currently studying or

a degree in Law. He has a wide

range o civil, inrastructure,

building and building services

experience having advised clientson commercial and contractual

matters on some o the largest projects in Hong Kong and Macau.

Kaymond H C Lam

BEng(Hons) LLB(Hons) MSc DIC

MHKIE MICE CEng PCLL

Consultant

Kaymond is a Chartered Engineer

with a degree in Law and has also

completed the Post Graduate

Certifcate in Laws. He has

provided a broad range o services

on various engineering projects in

Hong Kong, including providing support in both arbitration andmediation proceedings.

Further details o all our consultants and directors can be ound

on our website: www.adrpartnership.com

Chartered Institute of Arbitrators Young Members Group

Spot the Young Member!

Based in Hong Kong, ADR Partnership Limited is a dynamic practice

o construction proessionals providing specialist commercial and

contractual services to the construction industry.

I you would like to discuss any o the articles published in this Digest

or your project requirements, please contact James Longbottom,

Patrick ONeill or David Longbottom at ADR Partnership Limited on

(852) 2234 5228 or e-mail us at [email protected]

adr digest winter 07

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