The Grove Report was specially prepared at the request of
the Government of the Hong Kong Special Administrative Region.
The report involved reviewing and comparing the provisions
of 12 major international construction contracts. The reviewer,
Jesse B. Grove, III, then drew on the reviews, interviews
with major players in the Hong Kong construction industry
and his more than 30 years of experience as a construction
lawyer to recommend changes in the Hong Kong Government's
General Conditions of Contract for Construction Works. His
report to the Government, which has become known as the
Grove Report, sparked vigorous debate about the need to
modify the contract.
report, termed "controversial" by some, is the
subject a two-day international conference on November 20
and 21, 2000, in Hong Kong. The conference is described
as "An Agenda for Change in Response to the Grove Report
– Two Days of Cutting Edge Debate."
Consultant's Report on Review of General Conditions of Contract for Construction Works for the Government of the Hong Kong Special Administrative Region
By Jesse B. Grove, III
is the Final Report commissioned by the Government of the
Hong Kong Special Administrative Region ("Government")
by its Memorandum of Agreement with Jesse B. Grove, III
("Consultant"). It responds to the Consultant's
Brief in Agreement No. CE 99/97, Review of General Conditions
of Contract for Construction Works.
reviewing the General Conditions of Contract and related
documents, performing extensive interviews with Government
and industry representatives, studying international forms
and practices, and applying his own experience, the Consultant
makes the following general recommendations:
should move away from the "independent engineer"
concept toward express, reserved authority of the employer;
should move away from the remeasurement delivery system
in favor of fixed price contracts with schedules of rates
for variation valuation only;
should express and operate a preference for forward, lump
sum pricing of variations;
should make clear that breach of contract is subject to
valuation and resolution in accordance with the contract
should introduce the right to terminate for convenience;
should introduce the right to accelerate the works;
clauses should be avoided;
the Consultant makes the following recommendations regarding
the specific issues identified the Brief:
should accept the risk of unforeseeable physical conditions;
should not emasculate Clause 15 (the impossibility clause);
should require All Risk insurance coverage;
should accept the risk of lawful third party interferences,
including utility undertakings;
should accept the risk of changes in law;
should let market forces operate regarding sub-contractor
of notice should give rise to damages not forfeiture;
valuation should be simplified and tightened;
should use dispute resolution advisers widely and make
"no-decision" mediation "voluntary."
Consultant justifies his recommendations on the ground that
implementation of them will promote the public interest
in receiving best value for money in the procurement of
|1.||Prior Consideration of Changes to the General Conditions of Contract|
The Hong Kong Works Bureau has a long history
of periodic reviews and revisions of its conditions of contract
for procurement of public works. 1/ Government has
sought broad input from participants in the construction
industry as part of the review and revision process. Since
1981, this has taken the form of a "Joint Discussion
Group on the Standard Form of Conditions of Contract"
including, besides Government officials, the Hong Kong Construction
Association ("HKCA"), the Hong Kong Institution
of Engineers ("HKIE") and the Association of Consulting
Engineers of Hong Kong ("ACE"). 2/
The initial topics dealt with in the Joint Discussion
Group included: consultancy agreements, time limits, mediation,
arbitration, contractors' alternative designs, adverse sub-surface
conditions, role of the Engineer and care of the Works insurance.
Subsequently, additional topics were taken up, including:
design/build, site safety, utilities, and immigration procedures
for projects connected with the new airport. In 1990 a sub-committee
of the Joint Discussion Group, the Utilities Working Group,
was formed to consider the problems inherent in the existing
utilities situation in Hong Kong.
There have been significant changes to Government's
General Conditions of Contract ("GCCs") resulting
from such collaboration. Some examples include the introduction
of mediation (after a trial program), the improvement of
arbitration procedures, the introduction of a trial program
known as the "contractor's Method Statement" to
address the sub-surface condition risk, the clarification
of the role of the Engineer, and the introduction of a standard
form for design/build. The Utilities Working Group has engaged
in wide discussion of the problems concerning utilities,
including a survey, and has issued an extensive First Working
Within Government, another group, consisting
of representatives from the various departments of Government
who engage in public works, the Department of Justice and
the Works Bureau, has been working in parallel through the
Committee on Review of the GCCs. This Committee has taken
up the issues arising from the Joint Discussion Group and
the Utilities Working Group, and also other areas of improvement
of the GCCs.
In the course of these discussions and considerations, it
was deemed useful to seek advice from a consultant who could
provide the perspective of "best international practice"
free from any bias that might arise from personal involvement
with Hong Kong public works.
2. The Consultant's Brief
The Consultant was engaged to make a "fundamental
review of the GCCs and in particular the allocation and
management of risk in the procurement of works projects...
with recommendations on any modifications necessary in the
interests of public finance based on international best
The objective of the engagement was "to enable the
employer to make policy decisions on specific issues, and
to facilitate a revision of the procurement procedures and
the GCCs, if necessary."
In the course of reviewing and advising on management
and allocation of risk, the Consultant was asked to consider
the following particular areas of the GCCs:
conditions (Clause 13)
impossibility (Clause 15)
of the works (Clause 21)
caused by public utility works (Clauses 50 (1)(b)(ix)
and 63 (d))
and charges, new legislation, etc. (Clauses 29, 30)
to sub-contractors (Clause 69) and
time bar provisions in respect of claims (Clauses 50 (1)
The Consultant was additionally asked to advise
and recommend changes to the GCCs, where appropriate, in
of variations and financial losses with regard to disturbance
to the progress of Works (Clauses 59-64),
process in the settlement of claims and disputes, and
for the acceptance of an alternative design proposed by
the contractor after the award of the contract.
2.5 I was officially engaged as the Consultant
on 15 March, 1998.
3. The Consultant's Work Programme
Pursuant to the requirements of the Brief and
the Programme approved by the Director's Representative
3/ on behalf of the Director 4/,I first reviewed
Government's standard documents 5/ as identified
and furnished by the Director's Representative.
I then engaged in introductory meetings in Hong
Kong with the Acting Secretary for Works; the Director's
representative; representatives of Government Departments
6/, the Department of Justice and the Treasury; and
representatives from industry groups, including the HKCA,
the HKIE, the ACE, the Hong Kong E&M Contractors' Association,
the Hong Kong Institute of Architects, and the Hong Kong
Institute of Surveyors. Further and more extensive meetings
with these and other representatives of Government and industry
were held during two follow-on visits to Hong Kong. During
these sessions, I was frequently given statements of position
and background materials to consider.
From meetings and study of their general conditions
of contract, I was able to compare the practices of the
Airport Authority and the Mass Transit Railway Corporation
to those of Government.
Additionally, I received useful information
and advice from solicitors Dean Lewis of Masons, Phillip
Nunn of Simmons & Simmons, and Ernest Kwok of Kwok &
Chu; Professor Mohan Kumaraswamy of Hong Kong University;
mediator Colin Wall of Commercial, Mediation & Arbitration
Services, Ltd.; arbitrator Neil Kaplan of the Hong Kong
International Arbitration Centre; and quantity surveyor
Dennis Levett of Levett & Bailey.
For purposes of satisfying the mandate of the
Brief that any recommended modifications in the allocation
and management of risk be congruent with international best
practice, I have referred to standard forms of contract
that are used internationally and my own experience. The
standard forms are:
Internationale des Ingénieurs-Conseils (International
Federation of Consulting Engineers or FIDIC), Conditions
of Contract for Works of Civil Engineering Construction,
Part I, General Conditions, Fourth Edition (1987,
reprinted in 1988 and 1992 with amendments); 7/
Standard, AS 4000--1997, General Conditions of Contract
Institution of Civil Engineers (United Kingdom), The
Engineering and Construction Contract, Second Edition
(1995, reprinted with corrections May, 1998) ("ECC,"
formerly the "NEC");
Acquisition Regulation (United States), Title 48, Subpart
52.2, Code of Federal Regulations, Text of Provisions
and Clauses (1997);
Institute of Architects (United States), AIA Document
A201-1997, General Conditions of Contract for Construction
Advancement Association of Japan (Japan), ENAA Model
Form International Contract for Power Plant Construction
(Turnkey Lumpsum Basis),Vol. I, General Conditions (1996);
Industry Development Board (Singapore), Public Sector
Standard Conditions of Contract for Construction Works
Without Quantities, Contract for Building and Civil Engineering
Major Works, General Conditions (England, 1998) ("GC/Works/1");
World Bank, Standard Bidding Documents, Procurement of
Works (1995) ("World Bank"); 8/
Contracts Tribunal for the Standard Form of Building Contract
(United States), Standard Form of Building Contract,
Private With Quantities (1980 Edition, incorporating
Amendments issued through April, 1998) ("JCT 80");
Contracts Tribunal for the Standard Form of Building Contract
(United States), Standard Form of Building Contract
With Contractor's Design (1981 Edition, incorporating
Amendments issued through April 1998) ("JCT 81");
of Civil Engineers, Association of Consulting Engineers
and Federation of Civil Engineering Contractors, ICE
Conditions of Contract (Sixth Edition, January 1991;
reprinted with amendments, November 1995; reprinted November
1997) ("ICE 6th Edition").
are, of course, other forms that could be considered, but
the foregoing are thought by me to be representative of
international, if not always best, practice. A matrix has
been prepared showing the choices made in the above forms
with respect to the issues called out in the Brief. 9/
PHILOSOPHIES OF RISK ALLOCATION
All construction contracts allocate risks, and
there are some basic philosophical choices to be made. The
most basic of all is to choose who takes the default position.
At common law the contractor has all risk that is not specifically
accepted by the employer. This was eventually the approach
taken in the ECC although the NEC attempted to define all
risks to be borne by each party. The American Institute
of Architects takes the view that all risks belong to the
employer when no other party can either control the risks
or prevent the loss. The Government of the U.S.A. has long
held to this view. I submit that this ideological issue
does not much matter when sophisticated forms of contract
are in use because unallocated risks so rarely arise, but
there is a considerable body of thought that when "wild
card" risks do occur they are best borne by the party
who gains the long-term benefit of the project, namely the
An overlay on the whole subject of risk allocation
is that insurers should take the risk when they are willing
to do so at reasonable cost. Of course, it is the employer
who pays the premium for the insurance (regardless of who
must obtain it) so this should be seen as allocating risk
to the employer. That is a correct view, but it is also
correct that insurable risks are borne by society at large
through the insurance mechanism of risk spreading. Since
insurable risks are by definition fortuitous, that is, not
the fault nor under the control of the insured, there is
no obvious basis for allocation to the contractor.
The choice of construction delivery system is
partly an exercise in risk allocation because the accompanying
payment schemes (e.g., cost reimbursement, remeasurement,
lump sum) operate to place the cost of risk materialization
on one party or the other in the absence of specific contrary
provision. 10/ This choice does not require extended
consideration here because Government's need to protect
and manage the public fisc militates against open-ended
payment schemes except in the most unusual of circumstances.
The usual choice for Government is between lump sum and
design/build with the latter having the advantage of the
contractor bearing the risks of design error and designer
delay in circumstances not rising to the level of professional
malpractice (the risk of malpractice falls on the designer
either way). Arguably it is appropriate for the contractor
to accept the ground condition risk in design/build work
if the opportunity to investigate and design for adverse
conditions is adequately allowed.
It is always possible to share risks. Mechanisms
for this include percentage sharing of overruns 11/,
awarding time but not money 12/, limiting the types
of costs that can be recovered, setting liquidated damages
rates lower than justifiable, and using liability caps.
But I am unable to discern any logical basis for the sharing
solution except to give both parties incentive to avoid
and mitigate the risk. Since I consider that both parties
are adequately motivated already, the sharing solution has
no appeal other than the spirit of compromise.
The ultimate goal of optimal risk allocation
is to promote project implementation on time and on budget
without sacrifice in quality, that is, to obtain the greatest
value for money. The goal for a repeat employer should be
to minimise the total cost of risk on a project, not necessarily
the cost of either party. A study in the U.S.A. has shown
that 5 percent of project cost may be saved by choice of
the most appropriate terms of contract alone. 13/
The question is therefore what is "most appropriate"
and how can it be recognized? There are a variety of answers.
5. The Fault Standard
Perhaps it goes without saying that the cost
and time impacts of risks caused (or not avoided) through
the fault of a party should be borne by that party. This
unexceptional concept runs through all construction contracts
that I have encountered. It is mentioned here only because
some provisions of the GCCs run directly counter to this
6. The Foreseeability Standard
The UK ICE determined in the early 1970s that
"the contractor should only price for those risks which
an experienced contractor could reasonably be expected to
foresee at the time of tender." This theme appears
throughout the ICE forms (and to some degree in all of the
forms identified in paragraph 3.5). Although not of obvious
value to employers, this is a useful concept as far as it
goes. Unfortunately, it does not go far enough to provide
a satisfactory guide for allocation of risks that are (i)
foreseeable in general but not in specific terms, (ii) unforeseeable
but (at least partly) preventable, or (iii) unforeseeable
The usual rationale for this standard is that employers
will pay for unmaterialized risk if contractors are forced
to include contingency sums in tenders to hedge against
that which is unforeseeable. This rationale may apply in
some circumstances, but I believe that the traditionally
stiff competitive conditions in the construction industry
coerce contractors away from adding contingencies except
for large civil projects. The real disadvantage to the employer
of forcing the risk of the unforeseeable on the contractor
is that contractors who are gamblers and claims artists
will predominate among the winners of contract awards.
The foreseeability concept is subject to fair
criticism on the ground that uncertainty is introduced.
What is the baseline of deemed knowledge? What is the base
date? What is the definition of "reasonable contractor"
(at least we know the novice will be judged by the rules
applicable to old hands)? What is the dividing line when
the risk is foreseeable in general but not to the actual
degree of severity? There are no pat answers. These are
areas that require judgment applied to unique circumstances.
Consequently there will be room for disputation. On this
ground the foreseeability standard is perhaps only useful
when no other rule makes sense.
7. The Management Standard
This philosophy holds that risk belongs to the
party who is best able to evaluate and control it, i.e.,
to manage it, because that party will do the best job of
minimizing both the occurrence and severity of the risk
for the good of all parties to the process. This too is
useful to some extent, but ought to be modified at least
by also giving consideration to a party's ability to bear
the risk. A crushing risk materialization is not manageable.
The proponents of the management standard do
not explain the rationale for allocating risks that neither
party can evaluate and control, such as acts of God and
third parties, nor do they admit that allocation according
to ability to manage may be inconsistent with well-developed
notions of fundamental fairness. Consequently, it is easy
to overstate the applicability of the standard.
One must also realize that it is mostly the
employer who can reduce risks through pre-construction planning,
exploration and design effort while it is mostly the contractor
who can mitigate the effect of an occurred risk during construction.
If a risk, such as ground conditions, is subject to both
pre- and post-construction mitigation, the management standard
provides no obvious allocation rule.
8. The Incentive Standard
The NEC is said to have introduced a variant
of the management standard which might be called the philosophy
of incentive. The postulate is that risks should be placed
on the party most in need of incentive (presumably already
with the ability) to prevent and control them. This is thought
to motivate people to play their part. An examination of
the "compensation events" listed in the ECC does
not, however, demonstrate that this philosophy has been
While I do not quarrel with the spirit of this
philosophy, I think it based on a misapprehension of real
world conditions. Contractors and employers are highly motivated
to avoid and mitigate risk materialization already. Both
parties lose when a project is impacted by cost and time
overruns regardless of risk allocations. One may lose more
than the other, but both lose and everyone knows it.
9. Application of Philosophy
It is not enough to say that there should be
a "balance of risk" or "efficiency in risk
allocation" because all of us will never agree on what
is a fair and reasonable balance between the contractor
and the employer or which terms are most efficient for either
When studying the views of the proponents of,
and commentators on, the various philosophies of risk allocation,
one is tempted to conclude that the same principles underlie
them all. Certainly there seem to be the following common
party can best control the events that may lead to the
party can best manage the risk if it occurs?
or not it is preferable for the employer to retain an
involvement in the management of the risk.
party should carry the risk if it cannot be controlled?
the premium charged by the transferee is likely to be
reasonable and acceptable.
the transferee is likely to be able to sustain the consequences
if the risk occurs.
if the risk is transferred, it leads to the possibility
of risks of different nature being transferred back to
the employer. 14/
these considerations are applied, it should be possible
to achieve clear and realistic terms that are acceptable
to the employer and on which contractors are prepared to
tender at prices which do not contain contingencies for
unclear terms or for significant risks which are not possible
to estimate with some certainty or which are unlikely to
In my opinion, Max Abrahamson has come the closest
to laying down an acceptable "formula" for risk
allocation, as follows:
party should bear a construction risk where:
It is in his control, i.e., if it comes about it
will be due to willful misconduct or lack of reasonable
efficiency or care; or
He can transfer the risk by insurance and allow
for the premium in settling his charges to the other party...
and it is most economically beneficial and practicable
for the risk to be dealt with in that way; or
The preponderant economic benefit of running the
risk accrues to him; or
To place the risk on him is in the interests of
efficiency (which includes planning, incentive, innovation)
and the long term health of the construction industry
on which that depends; or
If the risk eventuates, the loss falls on him in
the first instance, and it is not practicable or there
is no reason under the above four principles to cause
expense and uncertainty, and possibly make mistakes in
trying to transfer the loss to another.
job of trying to balance the five principles in practice
is the hard one.... But at least it is best to work from
declared principles rather than undeclared and perhaps
unconscious prejudices. 15/
this as my frame of reference, I now turn to an assessment
of the GCCs.
GENERAL ASSESSMENT OF THE GCCs
In Broad Terms
The GCCs evolved from the ICE forms that preceded
the Sixth Edition. As such, they represent, in broad terms,
a fairly sophisticated and extensive set of general conditions,
acceptable internationally and congruent with risk allocation
practice followed in other international forms with exceptions
hereafter noted. I would describe the risk allocation scheme
as basically very fair.
In many respects the GCCs have already been
modernized, and this is to be commended. The modernizations
the dispute resolution function from the design function
16/ and providing for independent, de novo review
of Engineer's decisions;
away from the practice of nominating subcontractors; and
with and adoption of alternative dispute resolution procedures,
and modern arbitration rules.
are consistent with the trends in international practice.
The risk allocation choices in the GCCs are
unexceptional except as hereafter discussed. Numerous risk
management provisions (notice 18/, contemporaneous
records and site diary, particulars, valuation procedures,
etc.) are likewise appropriate except as hereafter noted.
The language and phrasing of the GCCs could
be criticized as archaic and unduly stylized. For example,
the clauses relied upon to provide contractor entitlements
often do so negatively by means of exception to disentitlement.
The benefit of staying with this language is that industry
participants have come to know its meaning through years
of operating the clauses. There will eventually be a need
to simplify and clarify the language, but I do not believe
that this is important at this time.
Move away from the "independent engineer"
concept toward express, reserved authority of Government.
The basic problem with the "independent engineer"
concept is that the Engineer can never be seen as truly
impartial because he is paid by the employer and he is naturally
disinclined to find fault with his own design. While employers
need (and should normally heed) unbiased professional and
technical advice from consultants, there is no reason for
a sophisticated employer such as Government to cede control
over commercial and contractual matters to an independent
party. The project after all belongs to and is paid for
by Government. This should bring with it the prerogative
of control over voluntary concession of extra time or money
to the contractor. The contractor has fully adequate opportunity
to dispute and contest Government's decisions through the
truly impartial dispute resolution procedures in the GCCs.
If the Engineer no longer has the decision-making function,
the assertion of the HKIS that independent (of the Engineer)
quantity surveyors should be assigned the role of determining
contractual and commercial issues on civil works becomes
academic. Their premise -- promotion of the appearance of
impartiality -- simply does not matter if the role is advisory.
The advisory role should go to the consultant who is most
qualified professionally. That could be a quantity surveyor
(who has no reason to defend design deficiencies), but engineers
also possess contractual and commercial sophistication and
perhaps more experience in resolving civil works issues,
especially technical ones.
Move away from the remeasurement delivery
system in favor of fixed price contracts with schedules
of rates for variation valuation only. 19/ The
remeasurement system places the risk of quantity variation
on the employer and detracts from Government's ability to
predict the outturn construction cost of a project. Contractors
are prepared to accept this risk because quantities are
normally well within their ability to estimate with reasonable
certainty. Indeed, it is rare that a contractor will suffer
a cost overrun through misapprehension of quantities. Labor
cost (i.e., productivity) is far more difficult to
estimate and far more frequently the cause of financial
disappointment. Consequently contractors do not need and
Government need not grant risk protection here. The exception
to this generality is, of course, where unforeseen adverse
ground conditions are encountered. If contractors must bear
the ground condition risk, then remeasurement is a way of
reducing the burden, albeit haphazardly. It is far preferable
to address the ground condition issue directly (as hereinafter
recommended). Absent the ground condition consideration,
fixed price contracting serves Government's legitimate need
for accountability and prudent fiscal management through
increased certainty of projected construction cost, and
does no disservice to contractors. This does not mean that
there is no longer any place for schedules of rates. The
use of such schedules for variation valuation can greatly
simplify that process and commensurably reduce the possibility
of disputation. Government must, however, retain the right
to reject quoted rates if they are perceived to be excessive.
Introduce breach of contract as an event
to be valued and resolved under the contract terms.
The current form of GCCs does not explicitly deal with employer
breach of contract except that Clause 86 enables the Engineer
to decide "any dispute or difference of any kind whatsoever."
This leaves open the possibility that the contractor might
have a breach claim at law independently of his contractual
entitlements which are circumscribed and subject to determination
by specified alternative dispute resolution procedures.
Arbitrators and mediators may be unsure of their ground
here. The solution is to make breach of contract by the
employer just another entitlement event under the contract.
Introduce the right of Government to terminate
for convenience. In highly unusual circumstances, Government
may wish to terminate ("re-enter") the contract
for reasons unrelated to contractor default. 21/
In order to avoid a claim for lost profits from the contractor,
it is useful to have this right spelled out and to limit
the contractor's entitlement to that which is commensurate
with work performed. A side benefit is that the termination
for default clause may be modified to provide that wrongful
termination by the employer shall be treated as a termination
Introduce the right of Government to accelerate
the works. If the works are not on schedule for reasons
that are not the fault of the contractor, the employer may
nonetheless wish to have use of the project prior to the
contractual (substantial) completion date as it may have
been revised by extensions of time. There should be an express
right for the employer to order acceleration of the work
so long as the contractor is appropriately compensated.
22/ Provided that the acceleration order is reasonable,
there is no reason to suppose that the enforceability of
liquidated damages will be affected.
Avoid catch-all clauses. Clause 50 (relating
to time extensions) contains a catch-all clause: "any
special circumstance of any kind whatsoever". This
is an invitation to stretch ingenuity, and the results are
unpredictable. This is not to say that supplemental agreements
should not be based on special circumstances, only that
such ambiguities do not belong in the contract itself. 23/
Require escrow of estimating files. The
successful tenderer should be required to escrow his full
working file showing take-offs and pricing supporting the
tender. The escrow would be opened only in case of dispute
requiring arbitration. A contractor's estimating files will
contain a world of information about what was foreseen and
how risks were priced. It will also reveal whether a contractor's
ultimate losses on a project were caused by inaccurate estimating
as opposed to subsequent events. Full access to the estimating
files will, in most cases, lead to settlement of disputes.
Therefore, I recommend requiring contractors to escrow their
estimating files upon receipt of contract award. The escrow
would not opened except in the event of a contractor claim
for extras that remains unresolved for a certain period
Use liquidated damages wherever possible.
This device avoids difficulties in administration of the
contract and reduces the possibility of dispute. Liquidated
damages already are used routinely for delay damages, but
the concept is equally applicable to damages for performance
deficiencies of the type that are (i) measurable by units
and (ii) excessively costly to make good. Some examples
might include slight failures of large equipment (say pumps,
chillers or turbines) to perform at the ratings specified.
Comparison to International Practice. The
above recommendations are consistent with best international
practice (although certainly not universally practiced)
with the exception of requiring escrow of estimating files.
That requirement does not appear in any of the forms identified
in paragraph 3.5, and to my knowledge it has only rarely
been used. While I think there are many benefits and no
legitimate objections to the practice, Government should
expect heavy resistance from the contracting community on
CONSIDERATION OF SPECIFIC ISSUES
IDENTIFIED IN THE BRIEF
Clause 13 24/ of the GCCs places the
risk of unforeseen and unforeseeable sub-surface conditions
(and other risks) on the contractor regardless of whether
the contractor was misled by insufficient or inaccurate
information given him by Government. 25/ Thus, the
contractor must bear the financial consequences (including
liquidated damages for consequent delay) of discovering
the unexpected, whether it be natural (e.g., faulting,
fracturing, quicksand vice rock, rock vice soil, voids,
material prone to settlement, peaks and valleys in rock
profile), toxic or hazardous (e.g., military ordnance,
asbestos, hydrocarbons, PCBs, industrial and human wastes),
or manmade (e.g., utilities, pilings, artifacts,
antiquities, out-of-specification embedments in reclamation
Contractors regard this provision of the GCCs
as the most repugnant of all. The risk materializes frequently
in the form of utility clashes but in that form often is
mitigated through variation of the works, which attracts
contractor compensation, thereby reallocating the risk to
Government. In its other forms, it is to be feared as a
risk that cannot be foreseen or, if foreseen, evaluated
through estimating, and because it is potentially catastrophic.
Fortunately, the risk in its other forms is unlikely to
materialize on most public works projects (which implies
that neither party should be concerned about bearing it),
but it arises often enough (usually on civil or building
foundation works) that it must be considered an important
risk allocation issue.
The risk of unforeseeable physical (usually
sub-surface) conditions is almost always borne by the employer
in international practice. Every one of the contract forms
listed in paragraph 3.5 so provides. I have only been able
to identify one other country, Malaysia, in which this risk
is allocated to the contractor. Clause 13 is right against
Government should accept the risk of unforeseeable
physical conditions. This recommendation means compensating
the contractor and extending time for performance if physical
conditions are encountered which were not foreseen and which
(i) are different from those set forth in the tender documents
or (ii) could not have been foreseen by an experienced contractor
acting reasonably in the preparation of the tender.
Justification of Recommendation
The most important way to deal with this risk
is to eliminate it through pre-tender sub-surface and site
explorations, and designs that allow for suspected adverse
conditions. I understand from interviews that Government's
designers are up to the mark in this area. The fact remains
that there will always be some risk of unexpected adverse
physical conditions despite highly professional design efforts
having been applied. If the conditions should have been
appreciated but were not because of professional error or
if the design is unreasonably aggressive, the risk will
accrue to the designer (or design/builder).
The second most important mitigator is to make
sure the tendering contractors have adequate opportunity
to make a visual inspection of the site and consider all
available geological and exploratory information. This means
that Government should take the initiative to gather such
information and give it to the contractors with explicit
warnings of indicators of difficult conditions. Contractors
may be required to make their own interpretations, but that
is not a basis for withholding interpretations by Government's
experts. Since a well-drafted clause will prevent entitlement
to extra compensation in connection with conditions actually
foreseen, it is important to give the contractor every opportunity
It may occur that the contractor is misled by
justifiable reliance on insufficient or inaccurate information
supplied by Government. If this occurs by reason of professional
negligence, the risk will fall on the designer. In any event,
the risk should not fall on the contractor. The first principle
of risk allocation -- the Fault Standard -- applies. It
is unconscionable for Government to transfer the risk of
its own misrepresentation, and possibly not enforceable
at law. It should be noted that accepting responsibility
for representations made as to physical conditions brings
with it an alternative risk sharing mechanism. Where Government
wishes the contractor to bear risk up to a certain level
(e.g., one foot of soil settlement) but is willing to accept
the risk that conditions will turn out to be worse, it can
achieve this by representing that conditions will be no
worse than the specified level.
The risk that a truly unforeseeable and unforeseen
physical condition will be encountered remains to be considered.
Those who adhere to the Foreseeability Standard (which includes
the majority of international employers) have no difficulty
concluding that this risk should not be transferred to the
contractor. Those who prefer the Management Standard argue
that this risk belongs to the employer because the employer
has the best opportunity to control and avoid the risk through
pre-tender site exploration. (It cannot seriously be argued
that the contractor has similar opportunity, and anyway
employers do not want multiple tenderers performing site
explorations for a whole host of practical reasons.) The
Incentive Standard can be argued either way, but it is noted
that this is an employer's risk under the ECC.
A compelling consideration is that this risk
has potentially catastrophic consequences beyond that which
even a large international contractor can bear. Thus a contractor
who has accepted the risk may have no alternative to an
attempt to pass it back to the employer through some stratagem
such as a strained theory of impossibility.
The risk is also impossible to quantify by estimate and
allow for in pricing. This means that contractors will either
throw a "guesstimate" contingency into the tender
price or take a gamble that all will be well. The effect
is that the winning tenderer will either be the gambler
or the low guesser. Frequently this will be the thinly financed,
low asset contractor who has little to lose. It is not in
Government's interest to attract this calibre of contractor,
nor to discourage highly competent, conservative contractors.
On a practical level, contractors refuse to accept that
this risk should be borne by them. If forced to accept the
risk, they will strive mightily to offset the burden. Excessive
claimsmanship and adversarial conduct can be expected. This
creates the breeding ground for disputation and its notorious
consumption of resources.
Another reason for changing Clause 13 is that
it is difficult for the employer to administer, and it is
probably being administered inconsistently. When an unforeseen
physical condition -- say, an utility clash -- is encountered,
Government has two choices: leave the solution up to the
contractor or issue a variation order to overcome the difficulty.
The former leaves the financial burden on the contractor,
and the latter transfers it to Government. Government's
representative is thus motivated not vary the works even
if that is (i) the most desirable or cheapest solution or
(ii) the best technical solution. This could even lead to
a viable contractor claim of impossibility notwithstanding
that a minor specification variation would obviate the problem.
13. LEGAL AND PHYSICAL IMPOSSIBILITY
Clause 15 has a proviso ("Save in so far
as it is legally or physically impossible...") that
is interpreted to mean that the contractor is excused from
performance if strict compliance with the terms of the Contract
is impossible. Presumably the contractor is entitled to
breach of contract damages if forced to struggle against
the impossibility and payment, perhaps on a quantum meruit
basis, for work accomplished prior to the impossibility
of continuing, although at common law the loss would lie
where it falls. Commercial impracticability may be seen
as the equivalent of impossibility for this purpose. There
have been a number of recent instances of contractor claims
of impossibility in connection with Hong Kong public works
The recent onslaught of impossibility claims indicates that
either the GCCs are "misfiring" in practice or
the designs for public works have become much too aggressive.
There is a root cause to be discovered and addressed. The
fault does not lie in Clause 15 or the impossibility concept
This clause arises from (and negates) the English
legal concept that a party may be bound by his agreement
to do the impossible. Similar clauses are found in other
contracts of English derivation, but not in U.S.A. forms.
It is likely that all jurisdictions will recognize in some
fashion that a contractor should be relieved of the obligation
to perform that which is absolutely impossible to perform.
26/ The question whether commercial impracticability
rises to the level of impossibility (and the definition
of it) is likely to draw varying responses depending on
the local legal system and current state of the art. 27/
Contractor claims of impossibility are rare in my own experience
and certainly not as prevalent as recently seen in Hong
Kong. Intuitively it would seem that such a claim would
only be necessary in extreme circumstances calling for desperation
Do not emasculate Clause 15. The problem
does not lie in the clause.
Justification of Recommendation
One way to change Clause 15 is to eliminate
the idea that the contractor should be relieved of his performance
obligation if performance is impossible. There is no justification
for such an onerous position which would be right against
international practice and possibly unenforceable.
Another possible change would be to define impossibility
so as to exclude commercial impracticability or at least
mild forms of same. This is unwise because commercial impracticability
is in fact tantamount to impossibility at least in its extreme
form, and it would be very difficult and counter to the
goal of avoiding disputation to attempt to draw a line between
"mild" and "extreme."
Anyway, I do not consider that Government has
much to fear from impossibility claims if the GCCs are operating
effectively and fairly. In cases of true impossibility the
problem can be dealt with by variation order or by termination
for convenience without untoward financial detriment to
Government. Tenuous impossibility claims should not ordinarily
arise because of the high risk, all or nothing nature of
the claim. This sort of claim is a desperation measure for
a contractor, and desperation circumstances should not ordinarily
exist. The fact that impossibility claims are now being
seen more frequently can be partly attributed to inappropriate
risk allocations in the current GCCs.
There is an interpretation issue related to
Clause 15 that is troublesome. It is open to argument that
impossibility of strict contractual compliance must be assessed
as of the date of contracting. From that it would
follow that the contractor is entitled to relief (excuse
from performance or damages to compensate for struggling
to perform) notwithstanding that the contractor could devise
an extra-contractual solution -- or the employer could issue
or even had issued a relaxation of contract requirements
or a variation order -- that entirely eliminates the impossibility.
There is no commercial or technical logic for such an artificial
result. Moreover, the possibility might encourage undue
claimsmanship. It makes more sense to compensate the contractor
for the cost of the struggle and for seeking and recommending
a reasonable solution to the problem even if that would
involve modification of, for example, the specifications.
Relief from performance should not apply where a solution
exists. Although I am normally averse to tinkering with
contract clauses, I recommend that Government revise Clause
15 so as to avoid this interpretation issue.
14. CARE OF THE WORKS
Clause 21 places full responsibility on the
contractor for care of the works during construction except
damage, loss or injury arising from occurrence of an "excepted
This requirement is consistent with international
Require All Risk insurance coverage. This should
be made explicit in the GCCs.
Justification of Recommendation
All Risk insurance coverage against loss to
the works arising from fortuitous perils is readily available
at reasonable premiums. It is a bright line rule of risk
allocation that risks should be insured in such circumstances.
Additionally, this protects Government against contractor
inability to make good on injury to the works from its own
15. THIRD PARTY INTERFERENCES
Utilities 28/ are required by law to place new installations
and relocate old ones as necessary to accommodate public
works projects at the cost of the utility. In practice,
it is deemed the responsibility of the contractor to determine
what is in place and to make arrangements with the appropriate
utility for performance of the undertaking. Clause 63 (d),
by exception, disallows payment to the contractor for unreimbursed
expenditures caused by disturbances to the progress of the
works by an utility undertaking. 29/ Clause 50 (1)(b)(ix)
allows an extension of time if the utility fails to perform
"in due time" so long as the contractor has taken
all practicable steps to cause the utility to do so. Thus,
the contractor must bear the financial consequences (excepting
liquidated damages for consequent delay) when an utility
fails to pursue planned locations and relocations with due
diligence. The First Working Paper of the Utilities Working
Group cites numerous examples of this type of occurrence
working financial harm on contractors.
This provision of the GCCs is also highly controversial.
The risk materializes frequently because (i) Hong Kong utility
lines are everywhere and (ii) Hong Kong utilities rarely
meet contractors' expectations and desires for prompt undertakings
(regardless of fault by the utility or unrealism by the
contractor). The consequences of this risk materializing
should never be catastrophic although likely sufficient
to eliminate the opportunity to earn profit on a project.
In international practice disturbance costs
associated with third party delays are compensable to the
contractor if arising from discovery of unforeseen physical
conditions. If not, there is no settled international practice,
although time extension is usually provided for by a force
majeure clause, and cost recovery would normally follow
from the employer's effective failure to provide the site
(it being lawfully occupied by the third party).
Government should accept the risk of lawful
third party interferences, including utility undertakings.
This recommendation means compensating the contractor for
extra costs caused by events beyond the contractor's control
such as tardy utility undertakings.
Justification of Recommendation
If the risk materializes through the act of
a Department of Government, then the Fault Standard mandates
that Government bear the consequences. If the risk materializes
in connection with an unforeseeable sub-surface condition,
my preceding recommendation, if accepted, would provide
compensation and time to the contractor. If the risk materializes
through unlawful conduct by a third party, the contractor
should look to that party for his remedy. It is where the
risk materializes through lawful, albeit disruptive, conduct
by a third party -- usually an utility -- that the allocation
criteria must be applied.
This risk is foreseeable in general, but not
in particular, and it is hard to quantify by estimate. The
occurrence and severity of the risk are not very much under
the control of either party absent legislative change although
both parties can urge the utility to act responsibly. Thus,
the usual standards for risk allocation do not yield a clear
I justify this recommendation on the ground
that public utility work is sufficiently analogous to work
by the Government itself that the consequences of interference
arising therefrom should be borne by the public through
Government acceptance of the risk. It could be argued that
only that part of the public which is directly served by
the particular utility should bear the risk, but I consider
that a minor objection to the general principle and anyway
impossible to achieve without legislative change.
If this recommendation is accepted, there should be some
accompanying risk management provisions. It would be useful
to establish an entitlement baseline by stating in the tender
documents the amount of time that the tenderer should allow
in his programme for utility relocations. The Employer should
have the right to take control of relations with the utility
if the contractor exhibits a laissez faire attitude.
It may be possible for Government to arrange with the utilities
for the contractor to perform relocation work at the utility's
expense more widely than currently done. If the work is
specialty work, the contractor could retain a specialist
sub-contractor. This would seem to be worthwhile for the
Utilities Working Group to continue exploring.
16. CHANGES IN LAW
Clause 30 places the risk of changes in law
(and regulations having the force of law) on the contractor,
and Clause 29 places the contractor at risk of unanticipated
legal imposition of licenses, levies, premiums or other
fees by duly constituted authorities. Consequently, contractors
are required to pay unanticipated fees and charges from
time to time. More importantly, contractors are exposed
to perhaps drastic changes in the cost of performing work
if environmental, safety or labor laws are significantly
changed. A recent example was a change of law affecting
worker's compensation insurance rates.
Evolution of environmental, labor and safety
laws affecting contractors' costs of performance is inevitable.
Any changes that are significant are also, however, likely
to be heavily debated over a protracted period, which will
provide warning well in advance.
Most forms of contract in international use
explicitly provide relief to the contractor if the costs
or time of performance are increased by changes of law.
Clause 30 is right against international practice.
Government should accept the risk of changes
in law. This recommendation means compensating the contractor
and extending time for performance for additional costs
and delay caused by change in law.
Justification of Recommendation
This risk is unrelated to fault unless a broad
definition of "Government" is adopted such that
Departments engaged in public works are deemed one and the
same as the legislative authority. It is likewise beyond
the control of both the contractor and Government procurement
departments. Neither can benefit from extra motivation in
this area. Because the proposed change will have been publicly
mooted (or even gazetted) prior to tender, it is foreseeable
in kind, but unforeseeability of timing and full effect
may make it difficult to estimate.
This recommendation can be justified on grounds
of fundamental fairness, which is what Abrahamson is getting
at in his fourth principle. I think, however, that the true
justification lies in the fact that the employer stands
to gain the long term benefit of the project and is thus
better able to absorb (spread, amortize) the cost of a rule
change than is a contractor, who has competed for a comparatively
short term engagement on the basis of the rules extant.
17. SUB-CONTRACTOR RELATIONS
There is nothing in the GCCs that requires Government
to intervene in payment disputes between contractors and
sub-contractors although Clause 69 mandates prompt contractor
payment of Nominated Sub-contractors 30/ failing which Government
is entitled to make direct payment. Consequently, sub-contractors
are exposed to delay by the contractor in passing through
Government payments for work performed by the sub-contractor
and to financial failure of the contractor, which affects
not only payments that should have been passed through but
also retention. There has been an unusually large number
of contractor failures in recent years, and current market
conditions cause concern amongst sub-contractors that the
failure rate will continue to grow.
Sub-contractors believe that they must do business with
main contractors on Government projects in times of recession
in order to sustain their operations. Such times feature
the highest incidence of financial failures and payment
difficulties. It must be admitted that the problem is (at
least for the nonce) genuine.
International practice is similar to the current GCCs with
respect to sub-contractor payment problems with, however,
one notable exception and two important differences.
The notable exception is found in the ECC, which
responded to the Latham Report 31/ by setting up
an elaborate trust fund arrangement for protection of sub-contractors.
The important differences are (i) the
protection afforded sub-contractors by "stop notice"
provisions parallel to mechanic's lien rights in the United
States and (ii) the requirement of payment bonds on public
works in the United States and elsewhere. Under stop notice
laws, an unpaid sub-contractor can (in lieu of a mechanic's
lien, which is impermissible on public works) file a notice
of non-payment that will cause the employer to withhold
the specified sum from future payments to the contractor
until the dispute is resolved or a bond (known as a "release
bond") is filed. Moreover, it is common practice in
the United States to require a public works contractor to
post a payment bond, upon contract award and issued by a
commercial surety, that guarantees payment to sub-contractors
of amounts justly due up to the "penal sum" (customarily
the full face value of the works).
Since none of these protective schemes are in
play in Hong Kong, it can be said that sub-contractors are
more exposed to payment difficulties than is usually the
case in international practice.
Let market forces operate regarding sub-contractor
payment. This recommendation means leaving the GCCs
unchanged with respect to sub-contractor payment security
so long as the subcontractor is free to choose whether to
enter a sub-contract with the main contractor. 32/
Justification of Recommendation
So long as Government does not require sub-contractors
to accept engagement with the main contractor, then the
sub-contractor can evaluate the financial strength and reputation
of the main contractor in order to choose whether or not
to do business with that party. This is not any different
from the frequent argument by sub-contractors (against "pay
if paid clauses") that the main contractor can evaluate
the financial strength of the employer.
Nonetheless, it is fact that sub-contractors
have suffered unfair payment problems attendant to contractor
insolvency and that it would be good for the health of the
construction industry if this could be avoided.
The elaborate trust fund scheme that was created
as an optional clause for the ECC in response to the Latham
Report is fraught with legal and practical uncertainty and
potentially is very expensive to the employer. 33/
It has not been well-received by English employers, and
it is not thought by me to be suitable for Hong Kong public
The use of payment or release bonds would solve
the problem fairly inexpensively and bring with it the side
benefit of pre-screening of main contractors by a sophisticated
commercial surety. However, commercial sureties are not
engaged in this business in Hong Kong at this time. I recommend
that Government form a joint discussion group with the sub-contractors'
association to explore the bonding alternative.
18. NOTICE AND TIME BAR PROVISIONS
Clauses 64 (1) and (2) require the contractor
to give notice of claim within 28 days of (i) receipt of
valuation notification or (ii) it becoming apparent that
an event may give rise to a claim. Clause 64 (5) imposes
a bar to any claim not timely notified. Clause 64 (4) requires
that particulars of a notified claim be furnished as soon
as is reasonable, but particulars furnished more than 180
days from the certified date of completion for the Works
need not be considered, according to Clause 64 (6). These
clauses are representative of the notice and time bar provisions
in the various GCCs that apply to the various entitlements
to additional time or money although there are time and
starting point variations amongst the GCCs and variations
in practice concerning strict enforcement. 35/
Government has a legitimate interest in timely
notices both from a management and a financial perspective.
The issue here is how best to satisfy Government's interests
and whether the forfeiture penalty is effective or desirable.
International practice is uniform with respect to requiring
written notification from the contractor to the employer
of claimed entitlement to extra time or money within some
period of time measured from some starting point. There
are, however, many variations of the allowable period and
the definition of the starting point. These variations are
not of major significance compared to the variations concerning
claim forfeiture. Here it can be said that there are three
schools of thought: forfeiture strictly enforced, forfeiture
enforced only upon occurrence of prejudice to the employer,
and no forfeiture but damages for breach if warranted. There
is no common international practice in this area.
Failure of notice should give rise to damages,
not forfeiture. This recommendation means removing condition
precedent ("time bar") language from the GCCs
but preserving the employer's right to recover for additional
costs due to tardy notice.
Justification of Recommendation
It is a maxim that the law abhors a forfeiture. That is
because it is intrinsically unfair to take one's entitlement
without any recompense. Only strong public policy reasons
are thought to justify such drastic results. As one seasoned
quantity surveyor said to me: "No reasonable person
would want a time bar."
Nonetheless time bars frequently appear in construction
contracts because employers have concluded that they do
not want to be at risk of belated claims that would not
stand up if raised contemporaneously or relate to circumstances
that could have been mitigated at the time. The problem
is that contractors understandably overreact to time bars
by "flooding" the employer with (form letter)
notices about every conceivable claim trigger. It is then
impossible to sensibly evaluate and follow up on every such
notice, and the entire process is defeated of purpose.
Government does not actually need notice from
the contractor in most cases. Government representatives
will have observed the incident or difficulty equally as
have the contractor's representatives. Government may not
know whether the contractor will use the incident or difficulty
as the premise for a claim, but an intelligent prediction
is usually possible.
What is really needed is prompt, effective communication
between Government and contractor about the problem, its
impact, its mitigation and its contractual consequences.
My recommendation regarding use of dispute resolution advisers
will go a long way toward meeting this objective.
If it occurs that the chance to mitigate is
lost through failure of notification or costs to Government
accrue as a result, then the contractor should be chargeable
with the unmitigated or accrued costs as damages. This will
give reasonable incentive to contractors to comply with
notice provisions but hopefully will not cause overreaction.
As a long stop, any claim not identified and
reserved in the final payment application should be deemed
19. VARIATION VALUATION
Under the GCCs, the contractor may recover additional
Cost (inclusive of overheads and depreciation but exclusive
of profit) in the event of employer caused site access delay
(Clause 48 (2)) 36/; delay and disruption caused
by untimely design information, variations, opening up of
works if no defect exists, other prime contractors or late
employer furnished materials (Clause 63); or suspension
orders arising from act or default of the Engineer or employer
or an excepted risk defined in Clause 21 (Clause 54). Additionally,
the contractor is entitled to a priced adjustment to the
Contract Sum (inclusive of profit) in the event of a variation
as defined in Clause 60 (Clause 61). Pricing is based on
Contract rates where possible and unless unreasonable (Clause
61). There is an overlap between Clause 63 (b) and the proviso
of Clause 61 in that both provide for additional payment
in respect of impact on unchanged work by reason of a variation
order ("ripple" or "knock-on" effect),
but the former contemplates Cost recovery while the latter
allows for the more generous price adjustment. Where appropriate,
the Engineer may elect to have extra work performed on a
daywork basis (Clause 62).
In this area, clarity, ease of operation and the avoidance
of price gouging should be the goals. Valuation provisions
also can be used as a device for sharing risk.
There is some variation in pricing techniques
mandated under the various forms of contract used internationally,
but the trend is toward a single set of pricing principles
that apply uniformly to all entitlements the contractor
may have to additional money. The ECC has captured this
Variation valuation should be simplified
and tightened. This is a series of recommendations designed
to (i) introduce clarity and ease of operation into the
process of variation valuation and (ii) eliminate unjustified
recoveries. The specific recommendations are:
the dichotomy between Cost compensation and priced compensation.
and operate a preference for lump sum forward pricing.
Eliminate or fix the rate of recovery for home office
Fix the rate for profit mark-up.
Prohibit global claims.
Eliminate the overlap between Clauses 61 and 63 (b).
Require sub-contractor pricing to be compliant.
Justification of Recommendation
Eliminate the dichotomy between Cost compensation
and priced compensation. If the contractor is entitled
to additional compensation, one wonders why he is not entitled
to a profit as well. Certainly it is expected that contractors
are entitled to receive profit mark-up on costs as part
of the tendering process. I am unable to discern why it
should be different in the extra compensation context. Elimination
of the dichotomy would allow simplification in that a single
set of pricing principles would apply to all compensation
Express and operate a preference for lump sum forward
pricing. For all the reasons that lump sum contracting
is preferred, lump sum forward pricing of variation work
also is preferable. It is the simplest method, and the possibility
of future dispute is obviated. Although there can be no
proof, informed intuition is that Government will receive
the lowest price on this basis. Alternative methodologies
such as daywork should be available if the price quoted
is considered unreasonable.
Eliminate or fix the rate of home office
overhead recovery. It is well known that standard formulae
for calculation of home office overhead produce windfall
profits to contractors in most delay cases and all suspension
of work cases. It is debatable whether home office overhead
costs are in fact increased by delay. Government can eliminate
this entitlement without causing damage to or resentment
by contractors. Alternatively, Government can fix the rate
at a very low percentage of costs.
Fix the rate for profit mark-up. Pricing
can be simplified and disputation reduced by fixing the
rate for profit mark-up. Where the entitlement is being
priced ex post facto, there need be no allowance for risk,
and the profit mark-up can be as low as 5 percent without
being unfair. In connection with forward-priced lump sum
quotations, the rate might reasonably be as much as 10 percent
to allow some cushion for risk of under-estimation and to
provide incentive to forward price.
Prohibit global claims. Global claims
(sometimes referred to as "rolled up" or "total
cost" claims) proceed from the premise that so many
things for which the employer is responsible impacted so
much of the work so pervasively that it is impossible for
the contractor to prove up his entitlement discretely and,
therefore, he should be paid for his costs plus a mark-up
for profit. Many courts have allowed such claims in principle
although putatively as a last resort. This claims methodology
is especially pernicious to employers as it assumes causation
and inverts the burden of proof. I recommend contractual
Eliminate the overlap between Clauses 61
and 63 (b). There is no reason for this confusing overlap.
It will disappear naturally if the dichotomy between Cost
recovery and priced recovery is eliminated.
Require sub-contractor pricing to be compliant.
Pricing principles that apply to the main contractor should
apply also to that portion of any claim which is based on
subcontractor pricing. Otherwise most of the value of the
claim will escape the pricing rules.
20. DISPUTE RESOLUTION
The GCCs provide for a prompt initial determination
by the Engineer, then to voluntary mediation, then to arbitration
although all kinds of alternative dispute resolution techniques
have been experimented with, including mandatory mediation,
mediation with a decision, adjudication, dispute review
boards, dispute resolution advisers and short-form arbitration.
Government needs no advice as to the available
mechanisms for alternative dispute resolution and does not
lack experience in employing them. Techniques for eliminating
delayed dispute identification and prolonged dispute resolution
processes are what is needed.
As in Hong Kong, international practice embraces
some form of alternative dispute resolution in lieu of litigation.
Partnering is now popular in the U.S.A. The use of dispute
review boards has been found to be particularly effective
for civil engineering projects (with, however, some notable
exceptions 37/). Mediation and arbitration continue
to be the workhorses for resolution of most disputes.
Use dispute resolution advisers widely and
make "no-decision" mediation "voluntary."
This recommendation means wider use of dispute resolution
advisers on projects of size or complexity and restoring
mediation to its classic form.
Justification of Recommendation
The use of a dispute resolution adviser ("DRA")
reportedly 38/ has been beneficial on several difficult
public works projects in Hong Kong. The DRA system 39/
is a hybrid of alternative dispute resolution techniques
that borrows heavily from the partnering and mediation concepts.
It promotes early appreciation of risks, open communication
and prompt resolution of difficulties. 40/ If fully
embraced, the system should nearly eliminate the possibility
of claims falling to formal resolution by arbitration. Because
it adds expense to the process, it cannot be used on every
project, and it should not be needed on routine public works,
but large, complicated projects all should be considered
candidates for a DRA.
Mediation has proved successful internationally
in resolving most of the claims submitted. Imposing the
requirement of a mediator's decision converts the process
to a mini-arbitration, which may be desirable in some cases
but which robs the mediation process of its informal, negotiative
characteristics. Consequently, I recommend against requiring
a mediator's decision (although the parties could request
it if both agree that it would be useful). I also think
it important that the mediation process be voluntary because
of the futility of forced negotiation. The objection that
a party will be viewed as weak if he consents to a voluntary
mediation can be overcome by the simple expedient of requiring
mandatory mediation with a voluntary opt-out provision.
Adjudication (whether by an adjudicator or a
dispute review board) is facially attractive because it
holds out the promise of immediate, informed, appealable
resolution of disputes when the evidence is fresh and the
parties can most benefit from knowing the view of an impartial
arbiter. It should work well for short, sharp, clear disputes.
Experience shows, however, that short, sharp, clear disputes
do not often arise on construction projects, or if they
do, they do not matter very much. Ugly, tough, complex disputes
that matter a lot do not lend themselves to resolution by
adjudication. It is doubtful that either party would want
such disputes decided by an adjudication process unless
the adjudicator has a perceived or actual bias.
21. VALUE ENGINEERING
There is no express provision in the GCCs for
acceptance of an alternative design proposed by the contractor
(commonly denoted "value engineering" proposals
in U.S.A. parlance) after the award of the contract (such
alternative design, which may be just minor changes, is
currently dealt with under a separate agreement which is
The concern that variation orders should not
be used to adopt alternative design proposals appears artificial.
Clause 60 (5) in the Design/Build GCCs has it right.
International practice is to adopt desirable alternative
design proposals by means of variation orders with an accompanying
adjustment (usually a reduction) of the Contract Sum.
Adopt Clause 60 (5) of the Design/Build GCCs
across the board.
Justification of Recommendation
The ability to accept useful value engineering
proposals without inconvenience is obviously desirable for
The objective of these recommendations has been
to promote the public interest in receiving best value for
money in the procurement of public works. Yet, several of
my recommendations (offset perhaps by others) involve changing
the risk equation in favor of contractors. That will cause
the cost consequences of risk materialization to fall on
Government. The issue, then, is whether changing the risk
equation is consistent with the objective. There are several
reasons to think so.
23. The Answers
To the extent that contractors are including
contingencies in their tender pricing for the risks in question,
then Government is paying for the risk whether it materializes
or not. Over many projects, this could be a substantial
waste of public funds as it will aggregate to a greater
amount than the direct costs of rarely occurring materialized
To the extent that contractors are not including
contingencies, the current risk allocations tend to encourage
gambling and guessing, which in turn leads to lower calibre
contractors receiving Government awards. These contractors
will consume more Government management resources and deliver
lower quality work less reliably than their more conservative
and competent competitors. They are more prone to financial
failure during performance and more likely to embroil Government
in disputes. Over many projects, this too could be a net
waste of public funds.
Even the most reputable and competent contractors
will do their utmost to transfer risk back to the employer
or recoup losses by other means if the risk allocation is
viewed by them as inappropriate, unfair by international
standards or threatening to company survival. This means
disputes. 41/ And the disputes likely will be hard
to resolve because they will be thin on legal and contractual
justification and long on desperation. The cost to Government
of dispute-ridden projects is enormous. The direct costs
of defending alone are very high. The indirect costs of
losing focus on and control of the construction process
can be much greater. In my opinion, these costs will be
higher than the direct costs of accepting the risks which
I have identified as candidates.
I cannot prove the cost equation by empirical
evidence, and I do not believe that others can. Moreover,
I do not fully trust surveys of contractors, even though
the contractors have the best information. But, I can say
that many who have studied these issues agree with my conclusions.
To begin with, every Government, every international
employer and every financing party (such as the World Bank)
that has adopted GCCs with risk allocations congruent with
those I recommend has done so not out of altruism but because
of a conclusion that there is financial justification.
The sponsors of the international forms of contract
identified in paragraph 3.5 (ICE, FIDIC, etc.) can be taken
The Mass Transit Railway Corporation can be
taken to agree.
The Construction Industry Institute, the Center
for Public Resources, the American Society of Civil Engineers,
and the Risk Allocation Subcommittee of a Joint Working
Party of the Australia National Public Works Conference
and the National Building and Construction Council all agree.
A plethora of respected industry savants 42/
have expressed agreement in their published works.
To the contrary, however, many employers take
the view that their interests are best served by transferring
as much risk to the contractor as the market will bear.
I suggest that there usually are special reasons for this
which do not apply to Government public works. Certainly
the rationalia are different for the one time or occasional
employer than for a repeat employer on the scale of the
Government of the Hong Kong SAR.
These recommendations need not be viewed as
a package; each will stand on its own feet. However, three
of them -- ground conditions, utility interferences and
impossibility -- are interrelated and lend themselves to
joint consideration. I also think that the recommendations
work well together as a group. In general, the recommendations
assign unfathomable risks to Government while tightening
the compensation rules so as to avoid unwarranted recoveries.
If adopted, they will appropriately balance risk allocation
on Hong Kong public works projects.
I trust and hope that Government will find this
Report to be worthy of consideration and implementation.
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The current revision of, e.g., the General
Conditions of Contract for Civil Engineering Works, is the
1993 Edition, but a 1998 Edition has been prepared. The
Airport Core Program featured numerous revisions in 1992
The Joint Discussion Group evolved into the Contracts Committee
of the Construction Advisory Board.
M.J. Byrne, Principal Assistant Secretary (Works
Policy and Safety).
Secretary for Works.
Index at Appendix
Viz, Architectural Services Department, Drainage
Services Department, Housing Department, NAPCO, Territory
Development Department, Water Supplies Department, Highways
Department, and Electrical and Mechanical Services Department.
The Asian Development Bank has adopted this
form with some minor amendments to, e.g., the dispute resolution
clause (adjudication required).
The World Bank has prepared its Standard
Bidding Documents, Procurement of Works ("SBDW,"
as used in this footnote; "World Bank" as used
in text above) for use by borrowers in the procurement of
admeasurement type of works contracts through international
competitive bidding. The SBDW is mandatory for use in works
contracts financed in whole or in part by the World Bank
that are estimated to cost more than US$10 million unless
the World Bank agrees to the use of other standard bidding
documents that it has prepared.
current edition of the SBDW (dated 1995) is based on Part
I of the fourth edition of the FIDIC Red Book (1987, reprinted
in 1992 with amendments), as well as changes to it resulting
from the Bank's experience. The following FIDIC Red Book
sections referenced in the attached Appendix
B have been modified by the SBDW: (i) Changes in Law;
(ii) Variation Valuation; and (iii) Dispute Resolution.
For example, the use of a remeasurement form
largely transfers the risk of ground conditions to the employer
notwithstanding a clause like Clause 13 as confirmed by
the Privy Council in Mitsui v. The Attorney General of
The FIDIC Orange Book Guidance Notes suggest
As is current Government practice with respect
to, e.g., disturbance to the progress of the work arising
from Utility undertakings.
The Business Round Table. Contractual Arrangements:
a construction industry cost effectiveness report. U.S.A.,
1982. For a collection of estimates of price savings through
"rational" risk allocation, see Smith, Allocation
of Risk -- The Case for Manageability, 13 International
Construction Law Review ("ICLR") 549, 1996.
The foregoing list was drawn from Engineering
Construction Risks by Thompson and Perry, Science and
Research Council, 1992.
Abrahamson, Risk Management, 2 ICLR 241,
It has been suggested that further separation should be
accomplished by assigning to independent (from the Engineer)
quantity surveyors the Engineer's traditional roles of variation
valuation and contract interpretation on civil works. I
am not persuaded that this is necessary or desirable. See
paragraph 11.1, infra.
The first bullet item is a feature that should
be common to all construction contracts, according to the
Latham Report (full cite at fn. 31).
The Airport Core Program notice provisions are
very well done.
In considering my following recommendations,
I have assumed that the delivery system will not include
either remeasurement or fluctuations clauses, both of which
operate to place substantial risk on the employer.
This welcome development was introduced in the
ECC, Clause 60.1.
Some examples might include a failure of funding,
revised needs, a reassessment of side effects, or even a
realization of impossibility of performance.
Clause 55 of the GCCs for the Airport Core Program
captures the concept.
I do not foresee any risk that time could
be set at large in the absence of this catch-all. The premise
for the fear is that there could be a "justified"
basis for time extension not covered by the specific grounds
set forth in Clause 50. The premise is self-contradictory.
If the event is not listed in Clause 50, it cannot be a
justified basis for time extension.
References to clause numbers are to those
in the General Conditions of Contract for Civil Engineering
Works unless otherwise noted.
An alternate Clause 13 shifting the risk to
Government is available in the Design/Build GCCs, but it
is rarely used, perhaps because of the difficulty of tender
comparison thereby introduced.
See, Knutson, Common Law Development of the
Doctrines of Impossibility of Performance and Frustration
of Contracts and their Use and Application in Long-Term
Concession Contracts, 14 ICLR 298, 1997.
Long ago, an English judge thought it impossible
to retrieve a coin from "deep" water.
Two of the utilities in Hong Kong are Government
Departments: the Water Supplies Department and the Drainage
It arguable that Government Departments are not utilities
for this purpose.
Nominating sub-contractors is archaic and
not often done by Government.
Constructing the Team by Sir Michael
Latham, the Final Report of the Government/Industry Review
of Procurement and Contractual Arrangements in the UK Construction
Industry, July 1994.
This is an important condition. The recommendation
would be different if the "nominated sub-contractor"
practice were in effect.
For a critique of the trust fund scheme, see
Cornes, The Second Edition of the New Engineering Contract,
13 ICLR 97, 1996.
The reason why the clause is optional is that
the authors anticipated that there would be those, like
myself, who are unmoved by this recommendation of the Latham
For example, the Project Administration
Handbook (at Chapter 7, 8.1.1 (c)) advises against strict
enforcement of the time bar related to time extensions where
no prejudice has occurred to the employer as a result of
Except that a daily rate is frequently made
applicable by special condition.
Including the Channel Tunnel Project, the Los
Angeles Metro Project and, I believe, the Chep Lap Kok Airport
Project. The reason is that DRBs are good at resolving technical
issues but not so good at difficult commercial and contractual
For example, Stipanovich, The Multi-Door
Contract and Other Possibilities, 13 Ohio State Journal
on Dispute Resolution at 387, 1998.
For a complete description, see The Use
of Dispute Resolution Advisor System in Building Projects,
Architectural Services Department, 1996 and The Dispute
Resolution Advisor System by Colin J. Wall, Commercial,
Mediation & Arbitration Services, Ltd., 1995.
The special expertise and experience of the
quantity surveyor suggests their fitness to serve in the
role of DRA.
Contractual misallocation of risk is the
leading cause of construction disputes in the United States,
according to the Center for Public Resources, Inc. in Preventing
and Resolving Construction Disputes, 1991.
Some are listed in Appendix
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