A construction project can be physically complete, successfully handed over and considered an operational success, yet still fail to deliver its expected financial return.
For many contractors, the greatest commercial disappointment does not occur during construction. It emerges months later, when the final account is negotiated and the difference between what has been spent and what can actually be recovered becomes painfully clear.
Outstanding variations remain unresolved. Prolongation costs are challenged. Backcharges appear unexpectedly. Payments are withheld, and contractors find themselves accepting significant reductions simply to bring the project to a close.
The uncomfortable reality is that contractors can spend years delivering a project, only to surrender a substantial portion of their anticipated profit during the final account process.
The question is why this happens so frequently, and more importantly, what contractors can do to prevent it.
The Illusion of Project Completion
Practical or substantial completion is a major milestone, but it should never be confused with commercial completion.
While site teams concentrate on inspections, defect rectification, demobilisation and handover, commercial teams are often left to reconcile years of instructions, variations, payment certificates and unresolved claims.
By this stage, key project personnel may have been reassigned. Subcontractors have demobilised, historical records are increasingly difficult to retrieve, and those involved in the original commercial discussions may no longer be available.
This creates a dangerous imbalance.
The contractor may believe that it is entitled to substantial additional payment, but demonstrating that entitlement can become increasingly difficult as time passes.
A final account is not simply an exercise in adding together outstanding invoices. It requires a defensible assessment of contractual entitlements, completed work, variations, claims and deductions.
Without that discipline, the final account becomes a negotiation driven by commercial pressure rather than contractual merit.
Where Contractors Commonly Lose Money
1. Unresolved Variations Accumulate
Variations are among the most common sources of final account disputes.
During construction, additional work may be instructed verbally, drawings revised, designs changed or site conditions encountered that require departures from the original scope.
The contractor proceeds with the work to maintain progress, often on the understanding that the financial implications will be resolved later.
Unfortunately, later can become a serious commercial problem.
By the time the final account is prepared, disagreements may arise over whether the work was genuinely additional, whether it was properly instructed, how it should be measured and which contractual rates should apply.
A variation register may record hundreds of items, but recording an item is not the same as establishing entitlement to payment.
The longer variations remain unresolved, the more difficult they can become to substantiate and recover.
Contractors should therefore treat variation management as an ongoing commercial priority, not an administrative exercise deferred until completion.
2. Loss and Expense Claims Lack Supporting Evidence
Prolonged projects frequently generate additional costs associated with site supervision, temporary facilities, equipment, labour, subcontractors and extended project administration.
However, incurring additional costs does not automatically establish a contractual entitlement to recover them.
A successful claim generally requires the contractor to establish the relevant contractual basis, identify the event giving rise to entitlement, demonstrate the connection between that event and the costs incurred, and provide adequate supporting documentation.
This becomes particularly challenging where costs have accumulated over several years.
For example, a contractor may seek six months of additional site preliminaries following a prolonged construction period. Yet if the contemporaneous records cannot adequately distinguish compensable delays from contractor-responsible delays, or identify the actual costs attributable to the relevant events, substantial portions of the claim may be challenged.
Equally important is the distinction between an extension of time and financial entitlement. An entitlement to additional time does not necessarily mean that the contractor is entitled to recover all associated prolongation costs.
The commercial lesson is straightforward: a claim must be supported by evidence, not merely by an assertion that additional costs were incurred.
3. Backcharges and Deductions Go Unchallenged
Final accounts frequently introduce another source of financial exposure: deductions.
These may include alleged defective work, rectification costs, contra charges, incomplete works, liquidated damages or other amounts claimed by the employer or main contractor.
Some deductions may be contractually justified. Others may be overstated, inadequately supported or disputed in principle.
Contractors sometimes accept these deductions because they are concentrated on securing the remaining payment and closing the project.
However, every deduction should be examined against the relevant contractual provisions, underlying facts and supporting cost records.
Was the contractor responsible for the alleged issue? Was the cost reasonably incurred? Was the amount properly calculated? Were applicable contractual procedures followed?
A deduction should not become an accepted liability merely because it appears in a final account assessment.
4. Contractual Deadlines Are Overlooked
One of the most serious final account mistakes is failing to recognise that contractual deadlines can have consequences beyond administrative inconvenience.
In Singapore, standard forms of contract contain specific procedures governing claims, final payment submissions, assessments and disputes.
For example, under the PSSCOC for Construction Works 2020 (Eighth Edition), Clause 32.4 requires the contractor to submit its Final Payment Claim within 90 days of the relevant Date of Substantial Completion.
Clause 32.5(4) also provides a 30-day period for a contractor to notify disagreement and submit written grounds of dispute in respect of amounts in the Final Account. Amounts not disputed within that period are deemed accepted and become final and binding on the contractor.
These provisions illustrate how failing to act within the required timeframe can materially prejudice a contractor's commercial position.
The applicable requirements will depend on the actual contract, its edition and any amendments or supplementary conditions.
Contractors should never assume that unresolved claims can simply be revisited whenever the final account is eventually negotiated.
5. Commercial Pressure Drives Premature Settlements
Perhaps the most difficult issue is the commercial pressure surrounding final account settlement.
Contractors may have substantial outstanding receivables, suppliers and subcontractors awaiting payment, or financial commitments that depend on recovering the remaining contract balance.
The employer or main contractor may propose a reduced settlement in exchange for a prompt conclusion.
Such settlements can be commercially reasonable. The problem arises when contractors negotiate without fully understanding the strength of their position.
A contractor who cannot clearly demonstrate its entitlement is unlikely to negotiate from a position of confidence.
Equally, signing a full-and-final settlement or release without understanding its consequences may compromise the ability to pursue outstanding claims.
The objective should not necessarily be to pursue every disputed dollar through formal proceedings. It should be to make informed commercial decisions based on a realistic assessment of entitlement, evidence, recoverability and dispute costs.
The Financial Impact Can Be Significant
Consider a hypothetical S$20 million construction project with an anticipated profit margin of 3%.
That represents an expected profit of S$600,000.
If S$400,000 of expected final recovery is lost through rejected variations, unsupported claims or accepted deductions, and the associated costs have already been incurred, approximately two-thirds of that anticipated profit could disappear.
The project may have generated substantial revenue, employed hundreds of workers and occupied management resources for years.
Yet its financial performance could ultimately be determined by the resolution of a relatively small number of disputed commercial items.
This is why final account management deserves attention at senior management level.
A Better Approach: Start Closing the Account Before the Project Finishes
The most effective final account strategies begin long before physical completion.
Contractors should maintain a continuously updated forecast of the final contract value, incorporating approved variations, outstanding variation submissions, pending claims, potential deductions and amounts under dispute.
Commercial teams should regularly reconcile the forecast against payment certificates, cost records and contractual entitlements.
Just as importantly, significant outstanding matters should be reviewed periodically to assess the strength of the supporting evidence and identify deficiencies while the relevant project personnel and records remain available.
As the project approaches completion, a structured commercial close-out review should address:
- Outstanding variations: Are entitlements established, properly valued and supported by instructions and records?
- Claims for additional payment: Have contractual procedures been followed, and are the underlying costs adequately demonstrated?
- Deductions and backcharges: Is there a valid contractual and factual basis for each proposed deduction?
- Final account exposure: Which unresolved items present the greatest financial risk, and what is the realistic range of recovery?
- Settlement strategy: Which matters should be negotiated, escalated or formally disputed?
Independent commercial review can be particularly valuable where substantial amounts remain unresolved or where the parties have reached an impasse.
A fresh assessment can identify weaknesses, challenge assumptions, evaluate the strength of competing positions and establish a more credible basis for negotiation.
The purpose is not necessarily to create a dispute. Often, it is to prevent one from becoming unnecessarily expensive.
Final Account Management Is About Protecting Profit
The final account should not be treated as the last administrative task on a construction project.
It is the culmination of the project's commercial management and, in many cases, the final opportunity to protect the financial return expected when the contract was awarded.
Contractors who maintain disciplined records, administer contractual procedures consistently and address disputed matters early are generally better positioned to secure commercially reasonable settlements.
Those who defer difficult commercial issues until after handover risk discovering that their negotiating position has weakened significantly.
Completing the works is an operational achievement. Closing the final account successfully is a commercial achievement. Both are essential to a profitable project.
How Constructive Advisory Can Assist
Constructive Advisory provides independent contractual, quantum and dispute advisory support to contractors and subcontractors navigating complex final account matters.
Our services include final account reviews, variation assessments, evaluation of loss and expense claims, review of disputed deductions, and commercial support for negotiations and dispute resolution.
Our objective is to help clients understand their contractual entitlements, identify commercial exposure and pursue defensible outcomes before unresolved issues escalate into costly disputes.
Contact Constructive Advisory: www.constructive.sg · info@constructive.sg
This article provides general industry commentary and does not constitute legal advice. Contractual rights, obligations and procedures depend on the specific agreement and applicable law.