Is Late or Non-Payment a Significant Problem to Malaysian Contractors?

Is Late Or Non-Payment A Significant Problem To

Malaysian Contractors?

M.E. Che Mu n aaim1,M.S. Mo hd Dauu rl", H. Abdul-Rahm an' I.VCent er for Project and Facilities Manag eme nt

Faculty of the Built Env ironment University of Malaya 50603 Kuala Lumpur, Malaysia.

Abstract

Some devel op ed cou n tries have dra wn lip construc tion -sp ecific s ta tu tory sec uri ty of paymen t ac ts/ leg is la tio ns typically known as Con s tru cti on Cont rac ts Act to elim inate poor pa ym en t pract ices and to ass ist con tinu ous uninterrupted cons truct ion wo rks. Ma laysia too canno t p retend not to hav e these p robl em s. This paper p resent s find ings of a s tudy cond ucted a mongst Malays ian cont ractors with the a ims to det erm ine the seriousness of late and non- payment prob lem s; to identi fy the main causes and effects of late and non-payment; and to identify ways to sus tain the payment flows in the Malaysian cons truction indust ry. The stud y focused on contrac tual payments from the paymaster (government or priva te) to the cont ractors. The main factors for late and non-payment in the co ns truction ind us try iden tified from the study include: de lay in certificatio n, paym aster's poor fina ncia l man agement, local cultu re /n ttu ude , pay mas ter's failure to impl em ent goo d governance in bu siness, underpayment of certified am ou nts by the pa yma ster and the use of ' pay when paid ' cla uses in contrac ts. Th e resear ch findin gs sho w that late and no n-payment can crea te cash flow p roblems, stress and financi al hardship on the contractors . Amo ngs t the most approp ria te so luti ons to ove rcome the problem of late and non-payment faced by local con trac tors include : a right to reg ular pe riod ic pay ment, a righ t to a defined time fram e (or paym ent and a right to a speedy dispute resoluti on mechanism. Pro mp tness of submi tting, p rocessing, issuing in terim payment certifica tes and honouri ng the certificate s are ex tremely impo rtan t issu es in relation to progress payment claims. Perhaps, an increased sense of professiona lism in construction ind ustry could ove rcome some of the problem s related to late and non- paym ent issues.

Keywords:Construction contracts. Cash flowl Dispute, Late and " oll-payment

Introduction

Malaysia se ts to be a fully d evelop ed nati on by 2020 and its co ns truction indust ry has se t its own vision to be 'a mong the best in the world ' by 2015 (President's & CEO's, 2004). Ma ny cha lle nges a nd problems w ith in the cons tr uc tion in dustry have to be ove rcome to ena b le the vision be achieved in time . One of the problems id entified as a priority is that which re la tes to paymen t p roblems in the con struc tio n industry. Th e p ractice o f efficien t and tim ely paym ent in cons tru ct ion p rojects is a major factor th at

JO llrl/ol ofDesigntuu!tlu:Bui lt EflViroll1llt'lI f

The problem of late and non-paytnent is

exp erienced not on ly in fast de vel op ing

economics, as in the case of Malaysia , but also in de vel op ed countries, such as the United Kingdom . For ins tance, a survey of the Pa yment Perfo rman ce in Britain has shown that the co nstruction indu stry, in particular, is pron e tolat e-pa ym entculture,

w ith paym ent o f de bts due to subco n tractors

and suppliers bein g made, on average, 53 days aft er in v oices or applicati on s fo r

pay me n t h av e been rende red (Johnston, 1999).

In the localscene,Class F contractors

(the s ma lles t catego ry of con tra cto r class ifica tio n) w ho are eligi ble for projects cos ting RM200,000.00 a nd below; s uc h as

v illage or 'kamp ung ' roads , repair and restoration of schools, police stations, drains, and s to res, often face pay m en t-rela te d problems besid es lack of jobs (Suh aini, 2005). In 2005, abo ut 16,000 Class F con tractors we re on th e brink o f b an k ruptcy w hen

sev eral umbrella contractors failed to pay

them for rural roa ds they h ad built, d espite

the governme nt hav ing paid the umbrella

con trac tors in full (Su ha ini, 2005).

Several rel ated s tudi es ha ve bee n con ducted in othe r de ve loped co untries

w hich addressed th e probl em s rela ted to

payment issues in theconstructionind ustry.

For exa mple in the Unit ed Kin gd om the so -called La tha m Repo r t (Lat ha m, 1994) has

introducedso meradicalm ea su resto resolve

p ro blems rel ated to p aymen t issues in th e cons truc tion industr y by in tro d ucing the

Cons tructi on Contracts Act, es tablis hing mandatory trust fun ds forp aym ents and

sugges ting tha t adjud icati on sho u ld be the normal me thod of d isp u te reso lu tion. Some

of th e recom m end alions hav e _{bee n}

inc orp ora ted in the Part II of the H ou sing

Grants, Cons truction and Regen eration Act

1996.

Pa ym ent p ro bl e ms h ave p ro m p ted

so me cou n tries lik e U n ite d Kin gd o m, Singap ore, New Zealand andSO B1 Cstates in

Aus tra lia, e.g. New Sou th Wales, to legislate

theircons tructionspeci fic statutorypaytnent security reg ime .These leg islalions wer e

pur posel y ena cted to add ress issu es on

p rompt p a y m e nt in the constr uc tion . industry to elim inate p oor p ay ment p ractices

and smoo the n the con tractor's cash flow

(Lip, 2005; Ameer A li, 2005). Ac ts and the

res pec tive countr ies an d s tates , w hi ch

en acted them to ad d ress the p robl em of late

and non-p aym ent, are listed as foll ow s:

i. Ho using Gran ts, Co ns truct io n and

Re generati o n Ac t 199 6 - Uni ted Kingdom

ii. Build in g and Co ns truc tion Ind u s tr y Security of Payment Act 1999 (NSW) -New Sou th Wa les, Aus tra lia

iii. Bu ild ing a nd Co ns truc tion In du st ry Security of Pay me n t Act 2002 (VIC)

-Victoria, A us tralia

iv, Buil d in g and Co ns truct ion In dustry Payments Act 2004 (QLD) - Q ueensland,

Au stralia

v. Cons truction Contrac ts Act 2002 - Ne w

Zealand

vi. Build ing and Co ns truc tion Secur ity of Pay me nts Ac t 2004 - Singap or e.

O wi ng to lack of researc h on the iss ues of

late and n on-p a ym ent in the Malaysian cons tructio n ind us try , a s tudy w as

cond uc ted to id entify th e prob lems a nd

effects of late and no n-paym en ts in the co ns truction ind ustry . The rese arc h

co incide d w ith the lo cal Co ns truc tio n

Ind us try and Development Board 's in tention

to seek pointers on pay ment issu es . This

p ap er p resents results of a study on la te and n on-pa y m e nt issues facing the Malaysian

con tracto rs . Ano the r por tion of the st udy,

th at d e s cr ibe s the sa me is sue facing

consulta n ts, is presen ted elsew he re (crDB, 2006).

Proble m

Statem en ts

There are m echanisms provide d in tna ny standard form s of cons truction contrac ts

de alin g with pay me n t from the client to the

co n tracto r, yet ther e rema ins a chronic

teLate 01' NO ll-Paymen t A Sigmficnllt Problem To Malaysian Contractors?

the Malays ia constructi on industry(Amcer Ali, 2005b). Lim (2005) indica ted th at ther e

are variousavenuesavailable to improve the paylnent problems in theind ustryand some

of these op tions have been incorp orated in

the cons truct ion con tracts or s tatu tes in

o ther developed coun tries such as payment

of stipulated in terest, suspension of work , erad ica tio n o f "pay w he n paid " cla use, adjudication, liens , trus t and pay ment bonds. The main iss ues th at req u ire particular atten tion are as follow :

a) despite adequa te mechanisms in place w hy d o Ma lays ian con tractors s till ex perience late or /and no n-paymen t

situation, and

b) w ha t ca n be do ne to a llevia te th is p rob lem w hich will u ltimate ly imp rove the de livery tim e of end products.

Th is paper attemp ts to address the above

issues that cou ldbecomeama jorse tback in achieving the Ma laysian construct io n indus try's vis ion ofbecoming amongs tthe

best in the g lobe by 2015.

Aim and Objectives of Re search

of provid ing ev idence about the se riousness of late and non-paymen t issues in the Malays ian const ruc tion indu stry. Thisaim is supported by the follow ing objectives:

a) To de termine the seriousness of late and

no n -payment prob lems amo ng

Ma laysia n co n tractors and sub

-con tractors;

b) To s tudy the causes of late and non -paymentin the loca l scene;

c) To investiga te the effects of de layed and non-paymen t to the payees down the

contrac tual pay lnen t chain; and

d) To ide ntify a nd es tablis h co n trac tua l

and/ or sta tutory remedies to resolve or

m itig atecont ractors' paymen t woes .

Res earch Methodology

The principal me thod used for the study was

a questionnaire survey . The questionnai re

was des igned to meet th e objectives of

research by reviewi ng li teratures dea ling with lat e and non -paym en ts iss ues in

cons truc tion . Subseq uen tly, several research meetings were he ld wi th representa tives

from the Institu tion of Surveyors Malaysia

(IS M) and Co nst ruction In du s tr y Development Board (CIDB). The meetin gs w e re hel d to fur the r im p r o v e the

questionn aire by taking into considera tion the views from the cons truction ind us try

p layers.

Target Respondents

This sect ion describes the qu esti onnaire survey cond ucted on asampleofcontractors registered with the CIDB. Six thousand (6,000) ac tive con trac tors from Grade G1 th rou gh G7 we re randomly se lected using th e CIOB da tabase. Of th e 6,000 fielded

questionnai res, 333 replies were received, whic h represen ts a response rate of around

5.6%. The low response ra te may have bee n con trib uted to the shor t resp onse period given to responden ts or simply because the

prospective respondents were not interested

in providi ng feed backs.

QlIest; olllla;l'e

The que s tions in the ques tion naire were

designed to h ave three types of answering

me thods, namely : rating-based,

selective-based and open-selective-based formats . For the

rating-based questions, the statements we re dev ised to me as ure the respondents '

op inions by reg istering them on a fou r-point

scale ranging from "never to veryfre qu ent "

an d "not se riou s to very serious ." The

se lective-based questi ons only requi red respondents to tick the ap prop ria te box or boxes in the questionna ire . The op en-ended

ques tions allowed respon d e n ts to record down their answers to the q ues tio ns , Findings o f the survey were ana lyzed to

provide abe tterunderstand ing of the iss ues

[ou rna!ofDesignawi tile BuiltEnvironment

construction industry. The Statistical

Package for the Social Sciences (SPSS) was

used to handle the statistical calculations.

Scope and Limitation

The questionnaire survey undertaken in the

study is based on the opinions and experience of contractors in Malaysia about the seriousness of the issue of late and non-payment and the contributing factors for its

existence. The contractors' favourable

remedies in securing payment debt from their

respective clients were also recorded in this

survey. This survey does not consider late and non-payment problems faced by the

local consultants or views fr0111 the clients.

Literature Review . on Late and

Non-Payment Issues

Inorder to give a better understanding about the issues of late and non-payment, it is appropriate to discuss the causes, effects and possible solutions related to the issues oflate and non-payment in the global construction industry.

Causes ami Effects of Late and

NOIl-Pasjment

Based on the literature reviews the following factors have been identified as some of the

potential causes of late or non-payment in

the construction industry:

a) Paymaster 's Poor Financial

Management

Qualified contractors often are unwilling to bid on projects for

employers whose financial capacity and

credit rating are not widely known (The Associated General Contractors of America, 2003). Thus, it is extremely important for the employer to manage

his financial aspect in a good manner asit is amajorfactor in determining the

project's success.Itis anticipated that

paymasters' poor financial management could cause contractors insufficient

operating funds when the latter are obliged to pay the payees . The late paymentor evennon-paymenttherefore

could arise.

b) Paymaster's withholding of payment As provided in many standard forms of contract, the employer/paymaster may withhold payment to the main

contractoror sub-contractor fora variety of reasons. Such reasons are defective construction work, disputed work,

failure to comply with any material provision of the contract, third party claimsfiled or reasonable evidence that

aclaim will be filed, and failure to make

timely payments for project resources (Rourke& Gentry, 2002). These reasons may cause the employer /paymaster to refuse in making payments which will

result in late payment.

c) Local culture / attitude

An attitude if commonly accepted by the

industry or society in general can

become a culture. In this regard, we do not want negative attitude to be accepted as a culture in the industry . As explained previously, the Britain construction industry is prone to late payment culture with payment of debts due to subcontractors and suppliers

beingmade, on average, 53 days after

invoices or applications for payment have been rendered. (johnston, 1999)

Possible effects of late or non-payment have been identified as follow:

a) Creates negative chain effect on other

parties

As stated by Davis Langdon & Seah Consultancy (2003), the construction payment blues have domino effects. A delayed payment by one party may affect the whole supply chain of payment of a

IsLn te OrNon-PtrfmcntA SigllifiCnlIt Problem To Malaysiall COll trnclors?

employe r de lays in making paymen t to

the contractor this in turn w ill result in contractor's delay inm ak ingpayment

to the s ub-contractors and suppliers.

b) Resu lts in dela y in completion of p rojects

Late paymen tcauses cas hflow problems

w hich in tu rn can affec t th e ove ra ll prog ress of works (Ameer Ali, 2005a). Acco rdi ng to A bdu l- Rahman a n d Berawi (2002) financia l p ro bl e m is

confirmed by the topm anagementas the ma in cause of d el ay in additio n to manpower shortag e.

c) Lead s to ba nkruptcy or liqu id a tion Lat e p aymen t ma y affec t the fin ancial status o f th e con tractor. A lo cal newspaper reported tha t 16,000 F-class

co ntractors were on the bri n k of bankruptcy whe n several umbre lla

co n tractors fa iled to pay them for rura l roads they h a d b u il t, despite th e government having paid th e u mb rella con tractors in full (Suha ini, 2005).

A tternatiu e R em edie s f or Secur ing

Pilym ent Debt

Based on the literature reviews the following

have been identified as the possible remed ies for secur ing pay ment d ebt fro m the defau lting clien t:

a) Payment of Stip u la ted Interest

The issue of w he ther the con tractor is

enti tled to clai m for loss of in terest d ue to d elay and defa u lt of the em ployer in making payment is still unclea r. In FC Minier Ltd v Welsh Health Techni cal

Services Organization(1980) 13 BLR 1, a

claim for interest d ue to late paymen t

was uphe ld by the Court of Appeal. The

reason fo r th is is beca use claim on interest for late paymen t is considered as d irect lo s s a nd /or expense equiva len t to a claim for da mages as

decided in Hadley v Baxendale (1854) 9 Ex 341 and which h as bee n codified

under sect ion 74 of the Con tracts Act 1950. However, the test in Hadley v

Baxendaleas to w hether da mages in the

forms of in terest can be pa id for, is

dependen t on the ques tion of w hether the likeli h o o d o f th e occ urrence of dama ges was an ticipate d by bo th

parties at the time whenthe contractwas

made, havi ng regard to the know ledge of the par ties at the time . Therefore, if th e e mp loyer was aware th a t th e

con tractor was forced to borrow the

capital, the contrac tor may be ab le to

claim inte res t or financing charges for

la te or unpa id p aymen t. The refore, a

clear wo rding in the con tractis required to prov ide contrac tu al mecha nis m for the contractor to claim for in terest or financing charges.

In M al a y si a , only Sub-cla uses 42.9(b) and 42 .12 o f CID 132000 form

comprehensively provides entitlement to claim for interest du e to employer's late and unpa id pay ment as we ll as for any

failure or delay by the Superintenden t Officer in certifying any p ay ment d ue .

Such an express provision is essentia lly

.required in order to avo id d ispu tes on

thi s iss ue es pec ia lly if it goes to

unnecessary expensive arbitration or

litigation proceedings.

b) Sus pension o f Work

Itis uni versally known tha t there is no

C01nn10n law right of suspensio n of work du e to non-p ayment. The con tractor is

obliged to proceed w ith the work in a

regula r and . d ilig e n t ma n ne r

not w ith stan di n g the fa ct th at he is not being paid for the works he has execu ted p reviou sly. The Court of Appea l of New

Zealand in the case ofBritish Pipe Lilies v Christchurch Drainage(1986) 33 BLR 76 has hel d th a t a contractor has no imp lied righ t of temp orar y suspe nsion following non-payment on the part of

the emp lo yer. Th e deci s ion was

IO IlYlln l of_Designnlld tlte Built Ellvirollmellf

(1986) 33 BLR 39 wh ich affirmed the p os iti on of co n t ra c to r ' s r ight of susp ension. This fact has been expressly acknowledged by the local court inKnlr

Selig Const ruction Sdn Bird. v Seisin

Deuelopmeni Sdll. Bird.[1997J 1 CLJ Supp

448.

According to Murdoch and Hu ghes (1996), it is not u ncommon to find that a

contractor or sub-contractor who has not

been pa id what is due th reat ens to sus pe nd work und er the con tract until payment is made.It must be noted that witho ut a clear contrac tual righ t to

suspend the work s, the con tractor is no t

en titled to do so ev en th oug h the em ployer has failed to pay him w ithin the time stipu lated in the contrac t. In this respect, if the con trac tor sus pe nds the work the courts may find him guilty of repu di ating the con trac t. This w ill in tu rn open for the o ther party to accep t

the repud iation and rescindthe con trac t

and s ue for damages.

Hyp othetically, a con tractor is only en titled to sus pe nd the works following non -payment if such a s tip ula tion is

exp ress ly spelled ou t in the con trac t. However, the righ t to sus pend the works can o nly be found in ClD B2000. For exa mple, Clause 42.10 s tates that if the em ployer fails or neglects to pay the

co ntractor the amount on any certificate

wi th in the Period o f H onou ri ng Certifica te, and contin ues such defa ult for fourteen (14)days the con tractor can giv e a not ice specifying his inten tion to suspe nd the execution o f the works.If

the employer still continues such default for ano ther fourteen (14) days after the receipt of the notice, the contrac tor can sus pe nd wh olly or partly the execution

of works o r reduce the rate of execution

o f the works . It should be noted that

ther e ar c no simi la r p rovisions

regardi ng this ma tter in PAM1998 and JKR 203 /203A Forms. Stra nge ly, the PAM No minated Sub-con tract Standa rd Form prov ides the righ t to suspend the

work to the sub-contractor in the event

of non -payment under Sub-clause 11(7). Havi ng discussed the importance of such righ t it is ap prop riate to includ e this provisio n in all the s tanda rd forms ava ilable in Ma laysia . Per h a p s by incl uding th is provision in the Malaysian Cons truction Contract s Act it wo uld force the incorpo ratio n of the rig ht to sus pend the work in all the

standard forms ofcontract,because once

the Act is in force it will provide certain

mand atory requirements that must be

followed by an y construction con trac t that falls wi thin the ambit of the Act failin g which a default scheme will kick

in and bo th parties in the con tract must

comply with it. Inthe UK, Section 112o f the HGC RA provides tha t when the su m is not paid on the fina l day o f pay men t and no wi thhold ing notice has been issue d b y the emp loyer, in th is

circums tances the con tractor is entitled

to sus pend his performance until the full pay me n t is paid bu t strictly subjec t to the issua nce of7 days ' noti ce stating his int enti on in sus pend ing the wo rk and gro u nd s of suspension.

c) Righ t to refer d ispu te to Ad jud icatio n Adjudica tio n is d efined as a process where upon requ est by one of the parties, a n independe n t ad judica to r steps in

(even when work is ongo ing or services

arc being provided) and makes binding

decision on disputes withi n da ys o r

weeks. For example in the UK, the adjud ica to r is required to make a binding decision wi thin 28 d ay s.

The in teresti ng feature o f ad judication is that the dispute in qu estion can be referred to an indep endent third par ty at any tim e pro vided th a t both parties ar e in con trac t. In practice a dispu te is being referred to the arbi tra tion when the project is completed. Ironically, in claims invo lving a larg e su m o f money a

Is Late0,.NOli -Payment A Siguifican! Problem To Malaysiall Contractors?

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Figure1: Contractors' Experience with Late Payment in Government and Private

Funded Projects

Figure 2 indicates 14% (48) of the total respondents affirmed that they have not been paid for the works executed on site in government funded projects. As for non-payment in private funded projects, 33% (111) of the respondents revealed that they have not been paid at all for the materials supplied and labour provided for the execution of the work. The reasons for such a situation could be due to paymaster's poor financial management and paymaster's failure to implement good governance in business. It can be deduced from the findings that late payment has become a culture in public and private funded projects and the situation is much worse with the latter. As for non-payment, the number of non-payment cases in private funded projects is double from the government funded projects.Itis appropriate to say that Malaysian construction industry is prone to late and non-payment culture.

To determine the seriousness of the late and non-payment problem in terms of

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sometimes it is already too late to take this matter to court as the contractor may have suffered severe cash flow problem which could result in liquidation.

The policy of adjudication has been characterized as " pay now argue later" due to the nature of the decision which is binding and immediate enforceability until the dispute is finally determined by legal proceedings (or by arbitrationif

the contract so provides or the parties otherwise agree) or by agreement.I It

means that the decisions are enforceable and the parties need to comply with the decisions whether they like it or not until the dispute is finally decided by court or arbitration. Due to this matter, some regarded adjudication as providing a "rough justice".

Nonetheless, adjudication provides a speedy and cost effective mechanism in resolving dispute.Itis must be noted that the parties in dispute are likely to have commercial considerations in mind rather than a concern for extensive legal analysis.

Finding1:Tile Seriousness of Late and

NOIl-Ptupnent Problems

The respondents were asked to state whether they have experienced late payment in government funded projects since January 2000. About 44% (147) of the respondents reported they have been paid in an untimely manner in government funded projects. When asked whether their companies have experienced any late-payment event in private funded projects since January 2000, 178 (54%) out of 333 respondents responded, "yes" to the question.

Findings and Discussion

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Fig ure 2: Contractors' Experience w ith Non-Paym ent in Gover nment and Private Funded

Project

mone tary aspec t, the ques tion na ire was

dra fted to enable resp ondents to state the amo u nt o f la te o r non-p a ym en t w hic h

rem ains owed by their paymasters since

Ja nua ry 2000. The amou n t of mo ney still owed by the paymas ters to contractors is nearl y RM370 m illion for gove rnme n t-funded projec ts and about RM510million for pr iva te funded pr ojects as show n in Tab le 1.

These figures rep resent feedbac ks from 113 and 160 res pondents w ho a re invo lved in pub lic a n d p r iva te sec tors p roj ects , respectively. These sta tistics show tha t la te

and non-p a y m en t is su e has be co me a sy nd rome in the Malays ian constr uction indu stry and immed iatem easu resmus t be in trodu ced to m iniruis e the cas h flo w

problems in the cons tructio n indus try .

Table 1: Total Amount Wh ich Remai ns Overdue for Con trac tors si nce Janu ary 2000 to Date of Response

Sta tistic Item

Valid Missing

Mean Stun

Amo unt remains overd ue in

government funded projects

113 220 3,240,797.24 366,210,087.60

Amoun t remains overdue in

private fund ed projects

160 173 3,197,641.92 511,622,706.80

Finding2: Ca use s of Late (l/Id Non -Paipn ent

Figure 3 presents some ge neral obse rvations that may be made on causes of late and non-payment. For the purpose s of these observations fivemostfrequent causes of late paymen t

are" Delayillcertification," "PaYlIlaster's poor [innncint nmnagement," "Localcul t urefut titude,"

"Paymaster'sfailIIre to implement good governanceillbusiness"a nd "Un derptunnent of certified

amounts by the paymaster"w ith the ir overall mea ns of 1.826, 1.734, 1.63, 1.63 and 1.565,

respectively. Score of th ree (3) repr esents the mos t frequen t cause and zero (0) repr esen ts

never. The reason w hy mean was us ed as the data analysis method inmostof the questions

as op posed to ranking the factors using nu mber of responses beca use the fonn er provides consistency w ith the h yp othesis thatif the same ques tion was asked to a separate set of

Is Late Or Non-Paument A Significant Problem To Mnlnysinl/ Contractors?

D al ay In cer tifi ca ti o n Pny rn ns lor's p oo r finon e l ol

n lanag Q'110n l

L o c ol c u lt u raIattit u do Pa YOUts te r "s fa ilu r e t oｉ ｮ ｬ ｰｬ･ｦｮｾ ｮ ｴgo od governonce In b usi ness Und arp ayn1e nt of ce rt ifi e d orno u n t s

byt h o pay nl os lo r

Th e u se o f -pa y '.... h enｰ ｡ ｬ ､ ｾ • c l a uses In con trac ts D i s il gr oom ont on tho v al u a tion o f w o r k d one Pa y n lAs ter's w r o n gful wl1 hholdln o of payn"lon t S hor t o f c u r re n t yeA r proj e ct bu d g e t

Po orco rurrr u ritce t to rra010n 9 partlos I nvolved D el ay In s ubrllltlln u contractor 's

p n y m en t clai m Con nle t anlong p a rti e s In vol ve d

Poor u nd e r stan d in g of t he con tr ac t

1 .826

1.734

'1":63 ;=:::::

ｾ

ｾ

ｾ

1 .527

ｾ

1.451

1.44

ｾ

1 .114

ｾ

1 .087

ｾ

o 0 . 5 1.5 2

M e a n

Figure 3: Causes of Late Payment

Figure 4, shows the responses on the question abo ut the causes of non-paymen t. Based on Figure 4, th ree most frequent causes of non-payme nt are "Paymaster's poor [inancia l

management," "Paymaster's failure to implement good gooernance in business,"and "Delayill

certification,"wi th their overall means of 1.896, 1.848, and 1.768 respectively.

ｾ

t

1 .848

1 .768

1 .672

1 . 6 3 2

1 .624

1 .592

1 .52

1.432

1.288

1 .184

1 .136

1 .048 Do loy in s u b m itt ing co n tr octo r"s

payOla nl c ln lm

Pour under61fHl(J lnU o f t h ec o n i r e el

Poo rc.orn rn o rr tco t to oo m o n gpnrtt e e

i nvolvod Shor l o f curren t year project uud ge t P a ym a stor's w ron g f ul withholding o f

p oymont U n d orp nyn lont o fcortl fio dornoc mteb y

th e pAynu=l s le r Dl sa gr ooment on tho v al u a ti o n o f w o r k do no Local cultureIa tl itu de ｐｬＺｬ ｹｭ ｄｳ Ｇｯ ｾｳ p o or finll n cl ol

n lanagEHl lo n

P ayma stor's f D l l u r o to Im pl o m o n t goo d g o v o "n a n c e In bu sin e s s

Dal a y I n ce rt if ica tion Th o u sa of " p o y whon p ai d " •cro u s c s

Inco ru r acte

Con fl ict Et, n o no p ad le s I n volved

o 0 . 5 1. 5 2

M e an

Figure 4: Ca uses of Non Payment

Delnlt in Certification

Itis a norm in the construction industry where a cons ultant de lays in certification although an appropriate claim has bee n made by the contractor. The con tractor however can easily recover the payment debt if the adjudication provision is p rovided in the sta ndard form of -con tract.If there is an adjudica tion provision in place, the aggrieved party can take the matter to a neu tral third party who can decide based on materia ls submitted to him and this problem can be reso lved in ma tters of days. Thus, the contractor's cash flow will not be

[ourna! of Design and till.' Built Enninnnnen t

Payma ste r's Poor Fillallciat Ma llagemellt

Finan cial man ageme nt is a major factor in de termin ing the p roject's success .Itis an ticipated tha t pay mas ter's poo r financia l man agem en t could cause hi m insu fficient opera ting funds whe n they are obliged to pay the payees. Th us, late payme n t or eve n no n-paymen t therefore cou ld ar ise.

Loenl Culture/Attitude

"Loca l cultu re/ a ttitude" has been ranked as one of the main causes of late and non-paymen t pred icamen t in Malaysian cons truc tion in d ustr y.Itis genera lly accep ted tha t ou r ind us try is prone to late and non-payment culture. The situati on in Malaysia now is somewha t similar to the UK cons truction industry be fore the intr od uction of the Housin g Gran ts, Construction and Rege nera tion Act 1996 (HGCRA). The cons truc tion industr y in the UK was prone to late pa ym en t cu lture w here d elay of53d ays of making pay men t after the receipt of inv oice was not un common (Joh nston , 1999).

Finding3: Effe cts of Late and Non-Ptnpnent

Responden ts were also asked to rate the effec ts of la te payme n t based on the ex tensive list given . A further ana lysis of the effects of la te pay ment revealed that, three most grave effects of la te paymen t based on Figure 5 are "Create cast: flow problems," "Create stressallcon tractors"

and"Crea tes[nuincia!hardship"wit h their overa ll means of2.377, 2.185and2.135,respectively.

e n " " .. ..I"",,, 0"contraclor"

Creole s fi n "' n c l'" h",rd"hlp

C,e",le .. n e g a l i ve c h ai n ..ft.. C l On olhor p ", rUos

R .. su lls In da '''Y h' c-.ornplollo n o f p r o ) e cl "

Lea d .. 10 " b .. " d " " , ,, .. ,, t o r pro)octs

Results i n rorma l <lisp ." .. " . so l ullon 01] 1IIt {l o lio nfa rbi lrali on

Lo:ad" t o b :an kruplcy or IIq ul d" ,I.,,,

2 .377

2.185

2 . 135

2 .05

1.993

1 .7 1 9

1 . 5 44

1 . 5 2 7

1.42

o 0.5

M oan

1.5 2 2 .5

Figur e 5: Effects of Late Paymen t

As for the effects of non-paymen t, the three most p reva len t effects of non-pay ment based on Figu re 6 are "Crea tecnstiflow problems," "Crea tes[inanciai hardship" and "Create stress Oil

Is Lnte Or NOll -PaymentASignifica llt ProblemToMalaysiall Con tractors?

C r onl o en,, "IrOINp,o b lo n , ,,

CrO At o " f l'H.n dnl h n ' d " h lp

C ... lo .. I'n .. .. O n conl 'nclo n .

C r n A 10 "" e U OII " o c h " ln a ffe ct o n o l h e r po,lIn "

Rn .. " U.. I n d e to y I n co .... p let lon o f p roJe c l "

R .. .. u lt" III fo... 1 a i .pu l o re "'01u!lo n e g

il lig lOt i o nI..r b it ,o l l on

L .. .. d .. 10 ..b ..n do n ...o n l o r p r o Jo cl .

L O A d .. 10 ba n k r up tcy n r IIquld .. U on

2 . 54 6

2.4 54

2.4

2.368

2 . 3 19

2 .0B 1

2. 0 3 B

1 .995

1 .843

o 0 .'

...

M e an

2 2.' 3

Figur e 6: Effects of No n-Pay ment

Cash Flow Problems Created

In the ind ustry where cas h flow has been regarded as a lifebloo d of an enterprise, lat e and/

0 1'non-pa ym ent by the paymaster would have a de vasta ting knock-on effec t d own the

con trac tua l pa ymen t chain as th e cascade system of paymen t starts from th e financia l

instituti on to main co ntractor, main contractor tosub -cont rac torand so on down the chain.

The im por tance of cas h flow is fu rth er amplified by the fact that the cons truc tion ind ustr y rela tively in volves long durati ons to comp le te, large amou n ts of mon ey to spe nd and th e widely use of credit payme nt term ra ther than paymen t on delivery in purchasing of ma terials (Ameer Ali, 2005b). Thus, it is a nticipa ted the direc t effect o f late and Zor non -paymen t wo uld be cash flow problems .

Crea te FinancialHardslz ip

•

It is an ticipa ted tha t la te payment can create un due fina ncial ha rd sh ips o n the contractor. For ins tance, the ma in con trac tor is still ob liged to pay the sub-contractor / su p plier for their wo rk d one even tho ugh he is n o t being paid u nd er the main con trac t. This ca use s financia l h ar d sh ip to the con trac tor as he is not su pposed to se lf-fina nce th e job for h is client.

Stress

COil tractors alld Suvblier Cllaill

Late a nd non-paymen t w ill su rely crea te st ress on con tractors as they no rmall y tend er the proj ect in competition with ot hers and with a sma ll p rofit margin with a hope to gen era te cas h flow in the compan y.Ifthe client pay s the amount due in an untimely manner this will ca use stress to the contractor as he needs to find the recourse to pay the su bcon trac tors and

suppliers. The s ituation is much worse whenitinvolves non-payment.

Findi ng

A lternative Remedi es

for Securing Ptujment

Debt

This question asked the respo nde n ts abou t the alternativereme dies to overcome or mitigate

[ourna! of Design and th« Built Ennircnment

coun tries. The three mos t p referabl e remed ies to cou nterac t the payment p roblem s based on Fig ure 7 are "Arig'"10regllior periodic poymelll,""Aright toadejined lime[m niefor poymellf"

and "Arig'" 10aspeedy displlie resolution mechanism, for example, Adjlldicatioll,"with their over all mean s of 3.72, 3.695 and 3.509, respe ctively. For this qu estion, four is the largest sca le and one is the least. In terest ingly, the overall nine po ssible so lu tions in the qu estionnai re were all g iven a high score of im portance as the least score was eve n as high as 3.147 as show n in Figure 7.

A rl O h l I n ' .. o u h .. I)Or ,O<1' c pay n ... n l

A , 10 111t nn d o fln ..d t lr ,, « f ' Am o fn , pey , ,,., n l

1\.ioht 10 n Ap o o d y di s put. . . a a o l l1 l k,n , n n c h n n l ,. rn" u'A dl • •rl l cn l ion

T h .. ri O !>1 It>l nl .. . osl O n 1,,1.. p ay ", .. n l

T hom and a l ory ." ..a U o n o f 0 lOu ,. 1 a c c o.,n l · 10 ' . ..1.. " 110 ,, .um,.

" r lg" l 10 1I.", pond work

Th.. ' .. .. I ol ell on 0 1 I h .. . I u h l 10 "" o l -o ff o r wilhho l d lI u m s du o

T h .. c r .... ll o n 01 0 r io h i 1<> .. lion

Tho f', oh l l> llI o l1 ofｾ ｰｮ ｹ w l",, "p .. l d-·

c1 ..u s .... I II r: n " lr o c t ,.

3 . 7 2

3 .6 95

3 . 5 0 9

3 .4 9 1

3 . 3 4 8

3 .26 5

3 .2 2 6

3 . 1 7 6

3 . 1 4 7

o 2

M e an

3 4

Figure 7: Alternative Remedies for Secur ing Paymen t Debt

Righi 10 Regular Periodic PO!/lIIeul

Is Late OrNou-Painnen!ASig1Jifica ut ProblemToMalaysian COlltractors?

RighI 10 0 ｄｾ ｦｩ ｬｬ･ ､ Tillie Frallle f or POYllleII l

Again such a righ t ha s al ready bee n includ ed in all the s tanda rd forms of con trac ts in

Malays ia, un fortunately, ho w ever such a rig ht is s till inadequate to g uarantee tha t the

con tractor w ill be paid p romptl y for the work execu ted on site. This may be du e to the culture in our local scenario whereby the time fram e for paymen t provided u nd er the con tra ct is not seriously ad hered to by the cons ultan ts. Perhaps, severe pen alt y ca n be imposed in the contract to those consu ltan ts w ho tend to d elay matters.

RighI 10 0 Speedy D ispll i e Resol lll ioll M ecllOllislII i.e. Adjlldicalioll

"A rigM to a speedydispute resolution mechanism e.g. adjudicntion"has been perceived as the

third favoura ble alternative remedy for secu ring payment deb t from the d efaulting paymaste r ' w ith the ove rall mean o f 3.509 out o f 4.00. This shows tha t majori ty of the respond ents strongly in favour of speed ier method o f resolving disput es i.e. ad jud icatio n. The key feat ure

of the adjud ication process is that an adjud icator w ill reach a de cision w ithin days o r w eeks

o f the d at e up on which the d isp u te is referred to him . The p rocess is qu ick and relati vely

cheap, pa rticularly in compa rison to litigation and to those arbitrations that have so mew hat

unfortu na tely, for wha tever reason, been allowed to become more time consu ming and costly than they sho uld have been (joh n L. Riches, Ch ristop he r Dan cas ter, 2005). An ac tio n in

co urt or arbitration involving recovery of paym ent iss ues is normally time -con su ming and

expe ns ive and in the mean time, the contrac tor wou ld be strugg ling w ith his cash flow . The Ad jud ication Repo rting Cen tre (Ken nedy, 2005) revea ls tha t failure to co mply with paymen t provisions is the mai n subject of d isputes, amou n ting to 26% of the to tal subjects followed by valua tion of var iati ons and valuati on of fina l accou n t.Itis, however, important to not e that the s ubjects of the disputes ar e conc erne d with the con tractors' cash flow . Construction adjud icati on as int roduced by the Act provides a qu ick and int erim but enforceable awa rd w hich allow s op portu nity for improvements in cash flow . Based on the case ofBOl/ygl/es v . Dahl-lenson[20001 BLR 522, Chad wic k LJ sta ted tha t the adj udica tor 's d ecision may g ive rise to an immedi ate paym en t obligation.Itwas d esigned to ena ble the contra ctor to ob tain payment of interim payments.This was the in tention of the UK Parliamen t w hen passin g the Act in 1998.

Conclusions an d Recom men d ation s

The questi onnaire su rvey findin gs ind icate that lunny local contractors hav e ex perie nced

late and non -payment problems in the Malaysian construc tion ind ust ry. Whil st late and non-payment problemis muchmore seriousin theprivate sector,asthe surveyresults indicate

tha t the number o f cases d o ub les that o f the pu blic, bo th the p ublic and p rivate cons truction sectors could affect the pe rfor mance and image of the ind us try .

A ma jorit y of the res po nde n ts felt that local cu lture and attitude is one of the frequent causes of la te and non- pay men t, th us it is recommen d ed that con tracto rs consider this p robl em as a majo r and high probab le risk, and it sho uld be reflected in p repa ring tende r estimates.It is ant icipa ted that lat e or non -payment incidences have ca use d und ue cas h flow problems on the con tractors and this wo uld have a d evastating knock-on effect d ow n the con tractua l payme nt cha in.

The current s ituation concerning late and non-pay ment in the Malays ian cons truction indu stry indica tes that present remedi es or so lutions available under the contract and in the C0l11 111on law arc not adeq uate . Alternative solu tions mus t be iden tified to pro tect the

JO l/mal of Design and the Built EIIViro1J IIIl'll t

It is sugges te d th at the em p loyer's fina ncial capaci ty an d cred it rating be made transparent to facilit ate con tracto rs to assess the em ploye rs' ab ility to pay and to increase chances of th e lat te r g etting p a id. It is pe rhaps timel y for Ma laysia to consider in trod ucing it s own le gi sl ati on on the Payme n t a n d A dju d ica tion Ac t. Neve r the less , introducti on of suc h a n act cannot be regarded as a p anacea for a ll ills, ra theritmu st be regard eda means to an en d . P rof essio na l b o di e s a n d gove n u ne n t age ncies sho u ld s tu dy an d a me nd th e existing sta nda rd fo n ns of contrac t to p rovide pro tec tion a n d promot e a b a lanced alloca tio n of ris k a n d fa ir con trac t to all relat ed pa rti es. Prom pt n ess o f sub m it ting , proc ess ing , is suing int e ri m paym ent cer tificates and hon ou rin g the cer tificates are ex tre me ly impo rtan t issues in rel a tion to prog ress payme n t cl a ims . Pe rh a p s, a n increased se nse of profess ionalis m in the con struc tion ind ustry cou ld overcome some of th e prob le ms r el a ted to late a nd non-paym ent iss ues . Another cruci al issue tha t needs to b e ad dressed is why and h ow to change the some times lack adaisical atti tu de on p a ym en t iss u es in the co ns tr uc tio n ind us try .

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J

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See sectio n 108 (3 ) of the H G C RA and pa rag raph 23(3) of par t 101the Scheme ofCons truction Co n tracts (Eng land and Wa les)

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ro u rke.h tm

Su haini, A. (2005), No joy [orIlle5 11101/builders,