Contents

INTRODUCTION .....................................................................................................1

PAYMENT ISSUES ..................................................................................................2

CAUSES OF PAYMENT ISSUE IN CONSTRUCTION INDUSTRY ...................5

a. Paymaster's poor financial management .............................................................5

b. Paymaster's withholding of payment ..................................................................6

c. Local culture/attitude ..........................................................................................6

d. Conflict among the parties involved ...................................................................6

e. Contractor’s default.............................................................................................6

f. Contractor’s work performance...........................................................................7

Delayed payment caused by contractors.................................................................7

Delayed payment caused by clients ........................................................................8

Delayed payment caused by contractual matters ....................................................8

RELATED FORM .....................................................................................................9

Certificates relating to payment ..............................................................................9

Determination of Employment by Contractor ......................................................10

Suspension of Works and Interest Charge ............................................................10

PAYMENT ISSUES RESOLUTION ......................................................................11

CONCLUSIONS ......................................................................................................14

REFERENCES.........................................................................................................16
INTRODUCTION

Malaysian construction industry is one of the biggest industries in this state.

It accounts for around RM 40 billion worth of production. It represents 5% of the
Malaysia gross domestic product. It employs a workforce of about 2 million people
and it engages support services from a wide range of skilled professional from
architects to engineers, from arbitrators to quantity surveyors, from accountant to
lawyers. Also, it produces some of the best examples of engineering and building
work in the world like Kuala Lumpur Twin Tower, Kuala Lumpur International
Airport and Sepang Formula One Circuit.

However, it is common to find that the problems of contractors on the

shortcomings of the payment regime in the Malaysian construction industry as
reported in the press. Nevertheless, such practices were never an issue during good
times when jobs were aplenty and many contractors or even sub-contractors will
tolerate late payments or even part payments. However, these problems will magnify
when the construction industry is deeply scathed by bleak market sentiments and
falling construction demand (Lip, 2006).

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PAYMENT ISSUES

Undoubtedly, payment is an essential part of any economic transaction as it is

the best incentive for getting any work done. the payment is the lifeblood of the
construction industry. The performance of the various parties linked to a
construction activity is dependent upon an uninterrupted monetary flow through the
activity. Regularity of money flow is significant in the construction industry because
its activities take a long time, the products are expensive and also because payment
is usually made for work already done (Ameer-Ali, 2006).

Over many decades, there has been a multitude of industry epithets about the
relationship between the construction industry and its many varied payment
procedures. Payment and cash flow are the life blood of the industry; there are
fundamental to the process of construction, they are the root of many of its problems.
Payment problems are an old age issue that has been spread in Malaysian
construction industry over the long time.

In 2004, a survey of payment performance conducted in UK revealed that

construction is clearly at the lower end of payment periods with payment taking on
average 56.51 days after invoices or applications for payment have been rendered
(Experian, 2003).

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 In the local scene, many complaints have been voiced about the events of late
and non-payments but the information has been mainly in the form of hearsays
whether there really is a problem on payment in the Malaysian construction industry.

A survey was conducted by Master Builders Association of Malaysia

(MBAM) among its members who comprised of contractors and sub-contractors
(MBAM, 2005). It was about 80.3% indicated that they had encountered slow
progress payment. The respondents who encountered difficulties in getting progress
payment were involved equally in public and private sector’s projects. The survey
also showed that the contractors are facing delay of payment for more than 91 days
and up to 12 months compared to the contractual date. In summary, the analysis
revealed that the issue of late and non-payment has persisted in the Malaysia
construction industry for quite some now, but have yet to be fully resolved.

Just recently, Construction Industry Development Board (CIDB) Malaysia

also conducted a survey on late and non-payment to address the current problems in
relation to late and non-payment issues encountered by main contractor, sub-
contractors and consultants in the local industry (CIDB, 2006). The survey was
conducted on two sets of construction players, namely the contractors and the
consultants. 44.1% of the contractors reported that they had encountered late
payment situations in government funded projects while 53.5% had experienced late
payment in private funded project. About 14.4% of the indicated that they had
experienced non-payment situation in government funded projects and 33.3%
pointed out they had not been paid by their private clients.

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 It was evident that consultants have also faced similar difficulties in getting
their professional fees. Based on the consultant’s responses, 63.3% and 73.5%
reported that they had encountered late payment of professional fess in government
funded projects and private funded projects respectively. Also, 16.3% indicated that
they had experienced nonpayment of fees in government funded projects while
61.2% reported that they had not been paid for the services rendered by their private
clients.

In addition of that, CIDB Working Group (WG) Report on Payment reported

that it appears 100% consensus that payment and related issues are considered to be
a problem in the construction industry. In short, problems on payment range from
(Noushad, 2004):

a. Failure to pay

b. Refusal to pay

c. Setting-off from sums certified or due

d. Allegations of under and over certifications and failure to certify

e. Delayed payments

f. Associated problems of getting paid even with certificates in hand including

significant delays in enforcing rights to payment

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CAUSES OF PAYMENT ISSUE IN CONSTRUCTION
INDUSTRY

The route to understanding the inherent difficulties over payment lies in identifying
the many complex factors that are present in the industry. Based on the research
conducted by Construction Industry Development Board (CIDB) Malaysia, both
contractors and consultants have agreed that the most frequent causes of late and
non-payment, the study includes are (CIDB, 2006):

a. Paymaster's poor financial management

According to Abdul Rahman et al. (2009) poor financial management is one of the
causes of late and non – payment. Based on the research done by Hasmori et al.
(2012), the factors in paymaster’s poor financial management are:

1. Deficiency in client’s management capacity

2. Lack of proper process implementation
3. Bankruptcy or winding up of paymaster other business activity
4. Client’s need money to roll

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b. Paymaster's withholding of payment
Based on the research done by Yee and Abdul Rahman (2010), identified clients
delay for their own financial advantages, delay in releasing of the retention money
to contractor and willful withholding of the payment for personal reasons are the
cause of paymaster’s withholding of payment.

c. Local culture/attitude
The research by Yee and Abdul Rahman (2010), contractors in Malaysia perceived
that delay for few days less than 5 working days is acceptable and accepted late
payment from the clients.

d. Conflict among the parties involved

Based on Hasmori et al. (2012), they indicated that payment not unexpectedly, has
always been in the main subjects of disputes. It is anticipated that conflict if unsettle
will escalate into dispute which can also cause late and non – payment.

e. Contractor’s default
Based on result analysis by Yee and Abdul Rahman (2010), delay in certification by
parties involve in the project might also cause of late payment issues. The parties
involve may delay in approving the application for payment claim due to certain
reasons which may arise because of his own or other parties involve.

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f. Contractor’s work performance
Mohamad et al. (2012) indicated that contractors fail to agree with the valuation of
work at site. This would then result in conflicts between clients and contractor and
the claims would not be certified and consequently, late payment occurred.
Undoubtedly, the process of construction is complicated and fragmented. It involves
many different commercial parties operating in supply chain under a range of
contractual arrangements where risks are devolved throughout the supply chain
(Pettigrew, 2005).

Delayed payment caused by contractors

Most of the time, contractors would blame clients when they receive late payment;
however, contractors also contribute to this situation. In his work Reeves (2003)
stated that one of the main reasons for delayed payment is when there are errors in
submitting claims. This includes claims without adequate supporting documents,
wrongly calculated claims and those submitted without using the correct procedures.
When this is the case, contractors need to resubmit the claims after making the
necessary corrections. Another factor contributing to delayed payment is when
contractors fail to agree with the valuation of work on site (Adballa and Hussein,
2002). This would then result in conflicts between clients and contractors which
could lead to dispute resolution and hence, delayed payment occurring.

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Delayed payment caused by clients
According to Reeves (2003), the main factor contributed by clients is when they take
longer than the stipulated time in terms of the contract to certify the claim. This
might be because they have become increasingly subject to claims arising out of
their design and construction administration services. There are cases where clients
are wrongfully withholding the payment. Most of them do this to obtain some kind
of ‘gift’ from contractors once they disburse the payment (Adballa and Hussein,
2002). Hence, contractors often have to tolerate this kind of action in order to secure
their payments which should not be happening.

Delayed payment caused by contractual matters

There are cases where contract agreements do not bring any justice to both main
contractors and subcontractors (Artidi and Chotibongs, 2005). One good example is
when for instance, the ‘paywhen-paid’ clause is often used in contract agreements
between main contractors and subcontractors or between housing developers and
main contractors (Adballa and Hussein, 2002). ‘Pay-when-paid’ or also known as
‘back to back’ method of payment never brings justice to the second parties (Artidi
and Chotibongs, 2005). Often second parties would get delayed payment or even
worse, no payment at all. But the real situation is, it still exist in the industry, often
in the nonstandard construction contracts. It may be worthwhile to note that in
England, this type of provision in construction contracts has been rendered
unenforceable (Housing Grants, construction and Regeneration Act 1996). The
policy of ‘pay-when-paid’ was also rejected during the drafting of Construction
Industry Development Board in 2002 in Malaysia. The general contractor uses these
strategies to insulate himself/herself from any liability in the event of being sued by
subcontractors at any time or in the event of non-payment by the owner.

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RELATED FORM

Certificates relating to payment

Most of the standard forms of construction contract in Malaysia require the
Employer to pay the Contractor within the stipulated period upon receipt of the
amount due as stated in the certificate issued by the Architect/Engineer/SO/PD.
There are generally three main types of certificate relating to payment that entitle
the Contractor to payment by the Employer, namely Interim Certificate, Penultimate
Certificate and Final Certificate. able 1 shows the relevant clauses in the standard
PAM form of construction contract relating to such certificates.

Table 1: Certificates relating to payment under PAM

Payment Certificate Relevant Contract Clauses

PAM 2006 PAM 1998
Interim Certificate 30.1 30.2
Penultimate Certificate 30.13 30.6
Final Certificate 30.15 30.7 (iii)

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Determination of Employment by Contractor
The majority of standard forms of construction contract, except JKR forms of
contract i.e. JKR 203A and JKR DB/T, allow the Contractor to determine his own
employment upon the Employer failing or neglecting to make payment on the
amount due in the certificate. Table 2 indicates the relevant PAM clauses for the
determination of employment by the Contractor for payment default.

Table 2: Determination of employment by the Contractor under the PAM

Employer’s default Relevant Contract Clauses

PAM 2006 PAM 1998
Failure to pay 26.1 (a) 26.1 (i)

Suspension of Works and Interest Charge

Most standard forms of construction contract provision on Employer’s default in
payment, stipulate that the Contractor can either continue with his work or determine
his own employment upon default in payment by the Employer. In addition, PAM
2006 and CIDB 2000 allow the Contractor to suspend the works and/or claim interest
for the unpaid amount. Table 3 indicates the relevant PAM clauses for the suspension
of works and interest charge for such default.

Table 3: Relevant provisions for suspension of works and interest charge under
PAM

Brief Description Relevant Contract Clauses

PAM 2006 PAM 1998
Suspension of works 30.7 -
Interest charge 30.7 -

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PAYMENT ISSUES RESOLUTION

it is widely recognized that payments have been a source of disputes in the

construction industry. Thus it was decided that exploring construction payment
disputes could indicate the degree of payment problems in the Malaysia construction
industry.

Malaysian construction disputes are traditionally resolved in arbitration, otherwise

in the normal courts of law. These construction payment disputes are often
technically complex involving mixed issues of fact and law. Both modes of dispute
resolution have in recent years been increasingly perceived as inadequate and
unsatisfactory by the users especially in respect of cost and time taken to dispose the
dispute.

It is observed from the United Kingdom experience that construction justice

is best served by the trinity of construction arbitration, statutory adjudication and the
specialist construction court. Thus by the initiative of the Construction Industry
Development Board (CIDB) to transform the Malaysian construction industry
dispute resolution landscape in line with the vision of the Construction Industry
Master Plan, the Construction Industry Payment and Adjudication Act 2012
(CIPAA) is finally enacted in June 2012 after several years of debate. The specialist
construction court is also established by the Malaysian Judiciary on 1st April 2013
in the High Courts in Kuala Lumpur and Shah Alam at the joint request of the CIDB
and the Bar Council Malaysia.

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In the meanwhile, the Kuala Lumpur Regional Centre for Arbitration (KLRCA) has
in the last couple of years also undergone rapid transformation and is actively
promoting arbitration as the preferred ADR way. The Arbitration Act has been
revised by the Government to strengthen arbitration.

The transformed landscape and availability of these alternative modes of

construction dispute resolution pose a challenge for both counsel and client to
determine and select the mode that is best suited for the dispute.

However, the suitable way to solve the payment dispute is Statutory Adjudication,
the right to statutory adjudication of the construction dispute is governed by the
CIPAA and is hence subject to the constraints laid down their in.

Statutory adjudication is confined to payment disputes which are disputes

over payment for work done or services rendered under the express terms of the
construction contract. The CIPAA applies to all construction contracts relating to
construction work but they must be examined from 4 interrelated perspectives. In
gist, it applies to all written construction, supplies and consultancy contracts for
works wholly or partly situated in Malaysia other than contracts for a residential
building below 4 storeys wholly intended for occupation by a natural person and
those contracts exempted by the Works Minister.

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 By comparison with arbitration or even litigation where summary judgment
is pursuable, the conduct of statutory adjudication under the CIPAA is the quickest.
The maximum time frame from commencement to conclusion is 95 working days
unless extended with the consent of the parties. Accordingly, statutory adjudication
will be the preferred mode of payment dispute resolution particularly where time is
of the essence to get the defaulting party to pay to sustain the cash flow to continue
and complete the project. In addition, the statutory adjudication can unconditionally
be commenced at any time whether during or after project completion.

The choice of the adjudicator can be agreed to by the parties but the
adjudication has to be conducted by a single adjudicator only. If the parties are
unable to agree on the adjudicator, the default appointing body is the KLRCA which
is the Adjudication Authority under the CIPAA. Since statutory adjudication is
confined to payment disputes, the choice of the parties will likely be a registered
quantity surveyor who will be most familiar with payment issues.

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CONCLUSIONS

It was realised that client-related factors were the highest ranking group to
contractors in the study. According to the contractors, the most frequent causes of
delayed payment by clients are: ‘Clients’ poor financial management’; ‘clients’ poor
financial sources/conditions’; and ‘clients’ failure to cultivate a good payment
attitude among its employees by wrongfully withholding the payment’. On the other
hand, the clients also related the most frequent causes of delayed payment by
contractors as: ‘Contractors’ failure in submitting a new (corrected) claim’;
‘contractors submit claims with mistakes’; and ‘contractors’ failure to understand
the contract agreement’. It was also identified that delayed payment is sometimes
caused by disagreement on the valuation of work done between client and contractor.
Delayed payment most likely will cause undue cash-flow problems for the
contractors and this would have a devastating knock-on effect down the contractual
payment chain. Failure to receive payment in a timely manner could expose
contractors to a greater risk of failing to complete construction projects on time. The
survey results indicate that the most serious effects of delayed payment are: ‘Delay
in project’s progress’; ‘creates financial hardship for the company’; ‘sub-contractors
refuse to continue works on the project’; and ‘creates negative relationship between
clients and contractors.

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The professional bodies and government agencies should study and amend the
existing standard forms of contract to provide protection and to promote well-
balanced allocation of risk and a fair contract to all related parties. It should also be
made mandatory for employers’ financial capacity and credit rating to be made
transparent to facilitate contractors in selecting employers who are credit-worthy and
to improve the chances of the contractor being paid. Perhaps, an increased sense of
professionalism in the construction industry could overcome some of the problems
related to delayed payment

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REFERENCES
Abdul-Rahman, A., Munaaim, M. E. C., Danuri, M. S. M., & Berawi, M. A. (2008). Issues
affecting payments in the building and construction industry of a rapidly developing
economy. Building Engineer(November).

Ameer-Ali, N. A. N. (2006). A construction industry payment and adjudication Act: Reducing

payment-default and increasing dispute resolution efficiency in construction Master
Builders 3, 4-14.

Abdul-Rahman, H. and Berawi, M.A. (2006). Delay mitigation in the Malaysian construction
industry. Journal of Construction, Engineering and Management, ACSE, 132 (2): 125-133.
Adballa, M.O. and Hussein, T.B. (2002). Causes of construction delay: Traditional
contracts. International Journal of Project Management, 20: 67-73. Ameer Ali, N.A.N.
(2005). Construction industry payment and adjudication act, reducing payment default and
increasing dispute resolution efficiency. International Forum on Construction Industry
Payment Act and Adjudication, 13 & 14 September 2005, Kuala Lumpur Convention
Centre, Kuala Lumpur, Malaysia.

Artidi, D. and Chotibongs, R. (2005). Issues in subcontracting practice. Journal of Construction

Engineering and Management ACSE, 8: 866-876. CIOB (Chartered Institute of Building)
(2004). Construction Act consultation: Improving payment practices, 14th October, 2004
(Accessed August 8, 2005).
Articles of Agreement and Condition of Contract for Building Works (5th edn.) (1988).
Accra, Ghana. Artidi, D. and Chotibongs, R. (2005). Issues in subcontracting practice.
Journal of Construction Engineering and Management ACSE, 8: 866-876. CIOB
(Chartered Institute of Building) (2004). Construction Act consultation: Improving
payment practices, 14th October, 2004 (Accessed August 8, 2005).

Reeves, K. (2003). Pay up. JUBM Construction News and Views, 1/2003: 4-6.

Abdul-Rahman, A., Munaaim, M. E. C., Danuri, M. S. M., & Berawi, M. A. (2008). Issues
affecting payments in the building and construction industry of a rapidly developing
economy. Building Engineer(November).

Lip, E. (2003). Construction payment blues – Why that domino effect? Davis Langdon and Seah
Consultancy: Executive Summaries for the Practitioner, 3: 1-4.

Sundra Rajoo, ‘The Malaysian Standard Form of Building Contract (The PAM 1998 Form)’,
Second Edition, Malayan Law Journal Sdn Bhd, 1999.

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