The delay in development projects and slowdown in the economy may cause a rise in construction-related claims, with a likelihood of contentious litigations rising in tandem.

Hill International, a construction risk management consultancy, reported a 30 per cent increase in this segment of its business. One of the US-based firm’s previous projects was the North-East MRT Line, which opened after a delay of seven months in 2003. It was reported to have cost the operator “tens of millions”.

Hill’s senior vice president and managing director (Asia Pacific), John Brells attributes the increase in claims to the current climate in the marketplace.

“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,” said Brells.

According to Brells, there have been multi-phase commercial projects with liquidated damages of S$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 S$450,000 a day being levied. For a 100-day delay, this would be S$4.5 million, which could be more a penalty than a liquidated damages issue, which raises questions of legality,” he added.

Standard liquidated damages clauses are typically found in many contracts and the estimated amounts of the costs are agreed as genuine estimates of the loss that would be incurred by the owner, should its project be delayed. If works are not substantially completed within an agreed time frame due to reasons attributed to contractor’s performance, the developer would be entitled to levy liquidated damages on the contractor.

However, it should not be assumed that contractors are always at fault. For the contractor, there are many delaying factors which could crop up 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. These factors entitle the contractor to an extension of time to complete the project.

In the case where the delay is caused by the developer, the contractor is allowed to claim on the basis of prolongation loss. In most cases, claims and disputes are generally settled amicably but litigation may sometimes be necessary.

Wong Partnership’s construction-related claims business increased by five to 10 per cent, month-on-month, in recent times. The law firm is involved in both contentious and non-contentious work, and acts as counsel on major arbitrations and High Court cases.

Partner at Wong Partnership, Christopher Chuah noted that most of the claims are related to non-payment or disagreements over final accounts, the bulk of which are prosecuted through adjudication under the Security of Payment Act.

“As projects begin to slow down with the effects of the credit crunch kicking in, we would expect such claims to increase,” said Chuah.

With this, analysts have started downgrading the construction sector. Citigroup recently downgraded Tat Hong Holdings to ‘sell’, on the back of “recent credit squeeze on project owners’ being likely to trickle down the construction chain”. Tat Hong is the world’s largest crane rental company.

Citigroup said: “The higher risk of bad debts can no longer be ignored – large-scale developments in Singapore and Macau are already facing financing difficulties.”

On a lighter note, claims arising from a rise in material cost would most likely see a reduction as some commodity prices are starting to come off, said Jackson Yap, managing director and chief executive officer of United Engineers Ltd.

Citigroup also reported that the price of steel bars, which reached US$1,000 per tonne in the middle of the year, has fallen to approximately US$900 per tonne.