University of Technology

MARA, Shah Alam

FACULTY & PROGRAMME :

FACULTY OF
ARCHITECTURE, PLANNING &
SURVEYING

BACHELOR 0F BUILDING SURVEYING (AP229)

SEMESTER :

5 (CLASS AP229 5F)

PROFESSIONAL PRACTICE 1 (BSR609) :

ASSIGNMENT 1: INDIVIDUAL ASSIGNMENT

LECTURER :

SIR ZULKFLI SAPECIAY

STUDENT :

SITI NAZIRAH BINTI LATUWO

2018635192
 ACKNOWLEDGEMENT

In preparation of my assignment during the Covid-19 pandemic, I had to take the help and guidance of
some respected persons, who deserve my deepest gratitude. As the completion of this assignment gave me
much pleasure, I would like to show my gratitude to Sir Zulkfli Sapeciay, Lecturer for subject Professional
Practice (BSR609), for giving me a good guideline for assignment throughout numerous consultations. I
would also like to expand my gratitude to all those who have directly and indirectly guided me in writing
this assignment.

In addition, a big thank you to my beloved parents for supported me and always by my side throughout the
years with all the hardship and difficulties that i has been through especially during I’m working on all the
assignments.

Many people, especially my classmates have made valuable comment suggestions on my paper which gave
me an inspiration to improve the quality of the assignment.

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 TABLE OF CONTENT

CONTENT PAGE

ACKNOWLEDGEMENT I

TABLE OF CONTENT II

1.0 INTRODUCTION 1

2.0 CONSTRUCTION INDUSTRY PAYMENT AND ADJUDICATION ACT (CIPAA) 1

2.1 The Purpose of CIPAA 2

3.0 DEFINITION OF PAYMENT 2

3.1 Payment in Construction Industry 2

4.0 PAYMENT DEFAULT IN CONSTRUCTON INDUSTRY 3

4.1 Type of Payment Default in Construction Industry 3

4.2 Causes of Payment Default 3

4.3 Effect of Payment Default 4

4.4 Remedies for Payment Default 4

4.5 Dispute Resolution 4-5

4.6 The Adjudication Procedure 6-7

5.0 CONCLUSION 8

REFERENCES 9

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1.0 INTRODUCTION

It is generally agreed that the construction industry is not only one of the most important
contributors to economic growth in many countries but has also been around for many years now.
According to Ameer Ali (2006), in the attempt to promote and uphold the image of construction industry,
payment constantly has been an issue and barrier that hinder such effort. Often, the risk of late or non-
payment in construction industry could be adversarial and disastrous and subsequently, affect the
economic growth of the country (Hasmori, Ismail and Said, 2012 and Rahman and Ye,2010). Judi and
Muhamed Sabli (2010) revealed that payment defaults remain substantial in the Malaysian construction
industry, Although there are specific provisions provided in all standard forms of construction contract
addressing the payment obligations.

As a result, cash flow problem that caused by payment default can severely affect the
implementation of construction projects. Consequently, on June 18, 2012 Construction Industry and
Payment Adjudication Act (CIPAA) have been passed and gazette on June 22, 2012 (Fong,2012).
Subsequent to that, the Act comes into operation effective on April 15, 2014 (Rajoo, 2014).
Acknowledging the fact that CIPAA is newly introduced to the industry, simultaneously the possibility of
industry’s key players to be lack of information and awareness about CIPAA is greater.

2.0 CONSTRUCTION INDUSTRY PAYMENT AND ADJUDICATION ACT (CIPAA)

The Malaysian government came out with an Act in 2012 known as Construction Industry Payment
and Adjudication act, 2012 (CIPAA) which was enforced in April 2014. This Act comes into operation on
a date to be appointed by Minister by notification in the Gazette. This Act is drafted to provide speedy,
timely and cost-effective dispute resolution mechanism for payment disputes in the construction industry.
This Act has the support from relevant construction industry players like the Master Builders Association
Malaysia (MBAM), PAM, BEM, Construction Industry Development Board (CIDB), EIM and so on.
CIPAA clearly sets out the applicability and non-applicability of payment disputes for adjudication act.

1) Application
The Act applies to all construction contracts wherein written agreements are made to carry
out projects wholly or partly in the territory of Malaysia whether the contract is entered with
the government or a private party.

2) Non-Application
The Act does not apply to any construction contract in respect of any building which is less
than four storey high entered into by a natural person which is wholly intended for his
occupation.

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2.1 The Purpose of CIPAA

Payment disputes in the construction industry have become a common problem in Malaysia
and in most countries, especially in developing countries. About 50% of Malaysia construction
project experience Under Payment, Late Payment and Non-Payment issues which causes
complication to the projects to the extent that some of the projects are abandoned wherein innocent
third party purchaser become victims of delayed and abandoned projects.

Therefore, the construction payment dispute requires to be dealt with at worst, a cheaper,
quicker, simpler, legal binding and enforceable resolution enabled by an adjudication proceeding,
which is what CIPAA has specially drafted to resolve the issues with provisions such as prohibition
of Conditional Payment to streamline payment procedures and provide remedies for the recovery of
payment.

3.0 DEFINITION OF PAYMENT

In general terms, ‘payment’ is the transfer between parties of some form of value such as funds,
services and assets in an agreed exchange. This can be for goods, services or to fulfill a legal obligation
such as a debt. The most common form of payment involves money although it can also take the form of
stock issues or other benefit, and is typically preceded by a bill or invoice specifying the amount due.

The payee generally has right to specify the method of payment they will accept from the payer.
The payee may decide that they will accept a part/discounted payment in exchange for certain conditions
such as a cash payment, prompt payment, and so on.

By accepting a payment, the payee extinguishes the debt or other obligation that was owed to them
by the payer, and usually acknowledges the payment by issuing a receipt. Generally a payee cannot
unreasonably refuse acceptance of a payment.

3.1 Payment in Construction Industry

In the construction industry, payment can be the source of a great deal of controversy. The
sum involved very large and long duration of projects and also the total amount payable tends to
change over time. In addition, contractors, subcontractors and suppliers face
considerable risk when pricing construction projects, and optimistic pricing or late payments can
quickly cause cash flow problems. Payment terms in construction industry are usually on credit
rather than payment on delivery.

As a result, payments are often be the source of disputes which can ultimately lead to a

breakdown in relationships and even project or business failure.

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4.0 PAYMENT DEFAULT IN CONSTRUCTON INDUSTRY

Payment has been said to be the life-blood of the construction industry. Yet the industry knows
payment default, specifically delayed and non-payment, remain a major problem. There is a chronic
problem of delayed and non-payment in construction industry affecting the entire delivery chain.

4.1 Type of Payment Default in Construction Industry

There are constant issues among key players of the industry, as payment defaults would
always be revolving around in construction industry. Issues of payment have plagued the
construction industry for a long time. Frequently, disputes arise from under payment, late payment
and non-payment to the contractors are commonly highlighted and discussed.

1. Under Payment
The certified and paid amount by the Client is lower than the value of Contractor’s work
done.
2. Late Payment
Client taking longer time than the allocated time (beyond the period of honoring certificate)
to issue/making payment to the Contractor.
3. Non-Payment
Non-Payment is release to Contractor albeit the Contractor has completed certain area of
works.

4.2 Causes of Payment Default

Cause of payment default must be identified because it is the main root that arise payment
default issue in construction industry. There are various factors have been identified as the causes
of payment default mainly in construction industry.

 Paymaster’s poor Financial Management

 Paymaster with holding of Payment
 Local Culture/Attitude
 Conflict among Parties Involved
 Delay in Certification
 Short of Current Year Project Budget
 Financial Crisis
4.3 Effect of Payment Default
Each party in construction industry knew that payment default will brought a negative effect
to the entire construction delivery chain. There are various negative effects which have been
identified when the payment default issue arises.

 Creates Financial Hardship  Results in Delay in Completion of

 Creates Negative Chain Effect on Projects
Other Parties  Leads to Bankruptcy or Liquidation
 Create Cash Flow Problems  Leads to Abandonment of Projects

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4.4 Remedies for Payment Default

According to Ramachandra (2013), contractors are entitled to be paid upon the fulfillment
of their contractual obligations as provided under the contract from construction contract’s
perspective. The primary objective of the enacted CIPAA is facilitating regular and timely
payment. Majid (2013) has further explained that CIPAA provides avenue for the Contractor to
challenge the valuation and certification of works done.

CIPAA is to address critical cash flow issues in the construction industry. It should be noted
that Clause 35, Part IV of CIPAA would removed the practice of conditional payment such as ‘pay
when paid’ or ‘pay if paid’ (Rajoo, 2012). Abraham (2012) outlined that any payment defaults can
be avoided and improves the Contractor’s cash flow.

4.5 Dispute Resolution

The need for cheaper and speedier mechanism to resolve dispute had led to the enactment of
CIPAA as mentioned in Clause 7, Part II of the CIPAA. Thus, CIPAA will provide platform for
dispute resolution by way of statutory adjudication. As a result, it allows the project to continue the
regular activities without obstruction, whilst adjudication proceeding take place. KLRCA (n.d.)
stated that Clause 12 (5), Part II of the Act allows a party (claimant) who is owed monies to
promptly obtain payment from the non-paying party (respondent), based on assessment by industry
expert known as adjudicator.

To add, adjudication proceeding is conducted privately (Clause 20, Part II) and
adjudicator’s decision is temporarily binding the parties (Clause 13, Part II) (KLRCA, n.d.).
Adjudication offers a faster procedure in resolving disputes among parties under the contract. Since
26 the adjudication decision is only binding but not final, it may lead the dissatisfy party to further
refer such dispute to arbitration or court litigation (Fong, 2012).

Table 1 visualizes in clearer image of the process and time taken for adjudication
proceeding.

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Table 1: Procedure and time taken of Adjudication (Shirley,2012)

No Item Section Requirements The Limit

.
1. Payment 5 To state: None
Claim a) Amount claimed and due date
b) Cause of action and provision
in contract relied on
c) Description of work or services
to which payment relates
d) Statement that it is made under
the Act
2. Payment 6 a) May admit or dispute partly or 10 working days
Response wholly
b) Attach payment of amount
admitted
c) If fail to respond then it is
deemed that the entire claim is
disputed
3. Notice of 7(2) and State nature and description of dispute May serve on respondent
Adjudication 8 and remedy sought together with after expiry of time limited
supporting documents for payment response
4. Adjudication 9 State nature and description of dispute 10 working days from
Claim and remedy sought together with receipt of acceptance of
supporting documents appointment by
adjudicator under Section
22(2) or 23(2)
5. Adjudication 10 Answer the adjudication claim and 10 working days from
Response include any supporting documents. . If receipt of adjudication
not filed, claimant may proceed with claim
the adjudication after time limited to
do so
6. Adjudication 11 Reply to response and include any 5 working days from
Reply supporting documents receipt of adjudication
response

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4.6 The Adjudication Procedure

The adjudication procedure and the respective timeline are clearly provided in the Act. For
the ease of reference, the relevant adjudication process is summarized in the following diagram:

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Diagram 1: The Adjudication Procedure and Process of CIPAA

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5.0 CONCLUSION

CIPAA 2012 changes the payment culture in the construction industry. CIPAA 2012
compels mandatory payment of an amount due to the contractor as the Act intends to provide a
fairer allocation of risk between the employers and the contractors. With the implementation of
CIPAA 2012, it is imperative to have a good system of concurrent record keeping as this will be
helpful in the event that a party needs to pursue adjudication or even to defend a claim. In addition,
parties are advised to have the payment terms in the construction contract stipulated in a clear and
workable manner as the lack of such payment terms will trigger the operation of the default
payment provisions under CIPAA 2012.

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References
Ameer Ali, N. A. N. (2006). A “Construction Industry Payment and Adjudication Act”: Reducing
PaymentDefault and Increasing Dispute Resolution Efficiency in Construction”
All Answers Ltd. (November 2018). Introduction Overview of Study. Retrieved from
https://www.lawteacher.net/free-law-essays/contract-law/the-impact-of-payment-default-in-
construction-industr-contract-law-essay.php?vref=1
CIPAA Act 2012: A Complete Guide for the Malaysian Construction Industry (2019), Retrieved from
https://www.cipaamalaysia.com/blog/cipaa

CIPAA_Construction Claim Consulting,

Retrieved from https://cipaaconstructionclaim.com/procedure/
Fong, L. C. (2012). The legal implication of CIPAA. Retrieved on October 21, 2013. Retrieved from
http://klrca.org.my/userfiles/File/The-Legal-Implication-CIPA-Conference-24_10_2012.pdf
Hasmori, M. F., Ismail, I., & Said, I. (2012). Issues of Late and Non-Payment Among Contractors in
Malaysia. 3rd International Conference on Business and Economic Research\ (3rd ICBER 2012)\)
Proceeding 12-13 march 2012, Bandung, Indonesia.
Judi, S. S.,& Muhamed Sabli, N. A. (2010). A Study on Contractor’s Right On Late Or Non Payment.
Retrieved on October 4, 2013. Retrieved from http://eprints.uitm.edu.my/6929/
Majid, A. M. (2013). The Impact of the Construction Industry payment and Adjudication Act 2012 on
Government Contract Aministration. Retrieved on November 15, 2013.
Nik Mohd Dhiyafullah Nik Din and Zulhabri Ismail. Construction Industry Payment and Adjudication Act
(CIPAA) Remedying Payment Issues: CIDB G7 Contractor’s Perspective. Retrieved from
https://core.ac.uk/download/pdf/268564273.pdf
Rahman, H. A., & Ye, K. M. (2010). Risk of Late Payment in Malaysian Construction Industry. World
Academy of science, engineering and technology 41.
Rajoo, S. (2014). The Construction Industry Payment and Adjudication Act 2012 Comes into Operation.
Press Release of Kuala Lumpur Regional Centre for Arbitration. 15 April 2014.
Rajoo, S. (2012). Dispute Resolution for Construction Industry in Malaysia. Newletter of Kuala Lumpur
Regional Centre for Arbitration. Apr-June 2012 Issue.
Ramachandra, T., (2013). Exploring Feasible Solutios to Payment Problems in the Construction Industry in
New Zealand. (Doctoral Dissertation, Auckland University of Technology, 2013). Retrieved from
http://aut.researchgateway.ac.nz/handle/10292/5554
Shirley, H. (2012). The Conference on the Practice and Procedure of Adjudication. MIArb Newsletter. The
Newsletter of the Malaysia Institute of Arbitrators. Retrieved on December 2, 2013. Retrieved from
http://miarb.org/userfiles/MIArb-newsletter-2012-web-res.pdf
Abraham, W. (2012). Construction Industry Payment and Adjudication Act 2012- A solution or
Revolution for The Construction Industry? Zul Rafique & Partners. Retrieved on October 5, 2013.

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