5.

EFFECT OF GST IN CONTRACT ADMINISTRATION

5.1 Project Estimate and Budgeting

At the stage of project estimating and budgeting, there will be a rate for the material in the bill of
quantities. With the implementation of GST, the rate of the material will increase as the contractor
will price according to the current price in market and as the contractor also imposed by GST by the
supplier of the materials. As for the client of the project, the total cost will be seen higher than it was
before the GST implemented and because the client has no right to claim the GST imposed on them.

5.2 Tendering

The issue in tendering process about GST is maybe when the company without GST registration send
their proposed tender, so their price might be lower than the company who have to include GST in
their tender. The price of the tender that include GST is definitely higher and also it will affect to the
client who have to bear all cost. Thus, those who submit their tender must be clear about GST
whether it is included or not.

5.3 Insurance

Insurance premier may increase due to the service tax applied on the services provided by the
insurance company. Before GST implemented, there is no charge of GST in the invoice issued by
insurance on the supply of medical insurance, fire insurance, motor vehicle insurance and life
insurance which are all important insurance in construction industry. After GST is imposed, the
supply of medical insurance, fire insurance, motor vehicle insurance has been imposed with GST.
However life insurance is exempt from GST.

5.4 Retention Sum

Retention sum is the sum of the progress payment which is not paid until the conditions specified in
the contract for the payment of such amount. Such contract allows the developer to withhold a
percentage from the payment of each progress payment pending satisfactory completion of the
entire contract. For the retention amount a supply shall be treated as taking place when a payment
in respect of such amount is received or invoice for such retention sum issued by the contarctor.
Value of Retention Sum will vary according to tendering practice. So, GST is charged accordingly
during deduction in Interim Payment.

5.5 Interim Payment

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Interim payment provides a mechanism for the client to make payments to the contractor before
the works are complete. Interim payment can be agreed in advance and paid at particular, but they
are more commonly regular payments the value of which is based on the value of work that has
been completed .The amount of these payments is entered onto an interim certificate (generally
valued by the consultant, perhaps having taken advice from the designer) and the client must
honour the certificate within the period stipulated by the contract. After the implementation of GST,
value of Interim Payment will vary according to tendering practice. Tender price is GST inclusive (GST
Inclusive (PNB/I&P) and allow GST as Provisional Sum example adjustment of Provisional Sum
(Cahaya Jauhar Sdn Bhd).

5.6 Liquidated Ascertained Damages

When the contractor fails to complete on time or within any extended time, the Superintending
Officer will issue Certificate Non-Completion (CNC) and the Government will imposed Liquidated
Ascertained Damages (LAD). LAD is calculated at the rate from the issuance of Certificate Non-
Completion (CNC) or the date of termination of contract. When the Government introduced GST, the
calculation for this compensation is still the same. Base Lending Rate is a percentage that
determined by the bank.

LAD = (Contract Sum X Base Lending Rate(BLR))

365 days

The formulae is for a day that the contractor must pay until the project is completed. The contract
sum stated above is include GST. Hence, there are no additional 6% GST as the contract sum is
inclusive GST.

Example

Contract Sum (before GST) = RM 200 000

Contract Sum inclusive GST = RM 212 000

LAD = RM 212 000 X 6%

365 days

=RM 34.85 /day

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5.7 Variation Order

Under PWD Clause 24, Variation means a change in the Contract Document because of the
alteration or modification of the design by the client, quality or quantity of the works. Therefore, to
include GST in the contract is by adding 6% to the value of the item (not yet include GST)

Example

To include GST in variation order is depends on the company, some of the company makes the GST
as the provisional sum

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5.8 CIDB Levy

CIDB Levy is tax imposed by the Construction Industry Development Berhad (CIDB). Levy Rate is
0.125% which is applied to total construction a work contract that exceeds five hundred thousand
ringgit. The total contract amount must include GST at 6%.

0.00125 x Contract Sum (Inclusive GST) = Levy

Example

0.00125 x RM 212 000 (include GST) = RM265

*no additional charges for levy

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