Construction-related claims on the rise

Source : Business Times - 11 Nov 2008

Contentious litigation also expected to rise in tandem
THE bottleneck of development projects, coupled with the slowdown in the economy, may lead to a rise in construction-related claims, say some construction cost consultants.
Contentious litigation is likely to rise in tandem.
Already, one firm - US-based Hill International - says it has seen a 30 per cent increase in this segment of its business. The firm is a construction risk management consultancy.
Hill’s previous projects include the North-East MRT Line, which opened after a seven-month delay in mid-2003 and was reported to have cost the operator ‘tens of millions’.
On the increase in claims today, Hill’s senior vice-president and managing director (Asia Pacific) John Brells said: ‘This is due in part to the current climate in the marketplace, where the developer will be looking to shift more of its risk to the contractor to cover its risk of financing the project. This will have a knock-on effect of increasing the contractor’s tender price as it tries to cover its lost profit margin.’
Other construction cost consultants say that claims business has not increased significantly. However, one consultant said he does expect this to increase with the economic downturn.
Construction-related claims generally involve developers, construction companies, and suppliers.
To give an idea of how much the claims can add up to, Mr Brells says he has seen a multi-phase commercial project with liquidated damages of $150,000 for each phase with no cap on the total amount levied even though there is usually a 10 per cent cap of the contract value.
‘If the contractor was late on three of the phases concurrently, it could see $450,000 a day being levied. For a 100-day delay, this would be $4.5 million, which could be more a penalty than a liquidated damages issue, which raises questions of legality,’ he added.
Typically, there are standard liquidated damages clauses in many contracts and the estimated amounts of those costs are typically agreed as genuine estimates of the loss that would be incurred by the owner should its project not be delivered on time. Mr Brells adds that usually, if the works are not substantially completed within the time for completion due to circumstances attributed to the contractors’ performance, the developer will be entitled to levy liquidated damages on the contractor.
Of course, it should not be assumed that the fault necessarily lies with the contractor.
‘From the contractor’s perspective, there are numerous delaying factors that one can experience during the course of the project such as the failure to receive access to a particular area of work, suspension of the works, delay in receipt of design approvals, and variation instructions that would entitle it to an extension of time to the project completion,’ explains Mr Brells.
If delays are the fault of the developer, the contractor can claim on the basis of prolongation loss. In Singapore, claims and disputes generally get settled amicably but litigation may sometimes be necessary.
Law firm Wong Partnership has also seen its construction-related claims business increase by 5-10 per cent, month-on-month, in recent months. Wong Partnership is involved in both contentious and non-contentious work, and acts as counsel on major arbitrations and High Court cases.
Christopher Chuah, a partner at Wong Partnership, said: ‘Most of these claims are related to non-payment or disagreements over final accounts. The bulk of these are prosecuted through adjudication under the Security of Payment Act.’
He added: ‘As projects begin to slow down with the effects of the credit crunch kicking in, we would expect such claims to increase.’
In this environment, analysts have begun to downgrade the construction sector. Citigroup recently downgraded the world’s largest crane rental company Tat Hong Holdings to ’sell’, highlighting that the ‘recent credit squeeze on project owners is likely to trickle down the construction chain’. Citigroup added: ‘The higher risk of bad debts can no longer be ignored - large-scale developments in Singapore and Macau are already facing financing difficulties.’
There is, however, some light amid this gloom. United Engineers Ltd managing director and CEO Jackson Yap says: ‘Claims arising from an increase in material cost would likely see a reduction as some commodity prices are starting to come off.’
In a separate report, Citigroup also noted that the price of steel rebars, which peaked at around US$1,000 per tonne in the middle of the year here, has since fallen to around US$900 per tonne.