LATE PAYMENT PROBLEMS AMONG CONTRACTORS IN MALAYSIA

NOOR ZARINA BINTI MOHD NAZIR

A project report submitted in partial fulfilment of the requirements for the award of the degree of Master of Science (Construction Management)

Faculty of Civil Engineering Universiti Teknologi Malaysia

NOVEMBER 2006

“I/We* hereby declare that I/we* have read this project report and in my/our* opinion this thesis is sufficient in terms of scope and quality for the award of the degree of Master of Sciene (Construction Management).

* Delete as necessary

ii

I declare that this project report entitled “Late Payment Problems Among Contractors In Malaysia” is the result of my own research except as cited in the references. The project report has not been accepted for any degree and is not concurrently submitted in candidature of any other degree.

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ACKNOWLEDGEMENT

In preparing this thesis, I was in contact with many people, researchers, academicians, and practitioners. They have contributed towards my understanding and thoughts. In particular, I wish to express my sincere appreciation to my supervisor, Professor Dr. Muhd. Zaimi bin Abd Majid for his encouragement, guidance, critics and friendship.

I am also very thankful to my colleague of MIA 6 for their advices and motivation. Without their continued support and interest, this project report would not have been the same as presented here.

My sincere appreciation also extends to all my colleagues and others who have provided assistance at various occasions especially for Encik Mat Radzi, Encik Abdul Halim, Tuan Syed Azman, Encik Khairul Salleh and Puan Zurina. Their views, tips and friendships are wonderful blessing. Of course there are many more, unfortunately, it is not possible to list all of them in this limited space. May Allah bless you.

Noor Zarina Mohd Nazir Nov 2006

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ABSTRACT

Late payment to contractors is a common cause of disputes in the construction industry all over the world. Although there has been a remarkable progress in Malaysia’s construction industry in the recent years, problems arising from payment issues are getting more serious. The rapid increase of the late payment issues nowadays has gone to the point that it tends to decrease the good image of construction industry in Malaysia. The aims of this study is to investigate the consequence of the late payments problems confronted by contractors in Malaysia and to proposed strategic actions that could be taken by the contractors in securing their payments. The methodology adopted was through literature search and questionnaire surveys. This study was limited to contractors within Malaysia. Frequency and average index analysis was used to analyze the data collected. Results of the survey indicate that the main factors of late payments problems come from the clients-related category. Impact of late payment that has the highest index was the negative relationship it created between developers and contractors. The last section of analysis indicated that most contractors choose to do a follow up using formal procedure in the case of late payment. In conclusion, it is hoped that these findings will guide effort to improve the payments problems of the Malaysia construction industry, and will be useful to draft a better way in seeking right for the contractors in getting payment on the stipulated time.

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ABSTRAK

Isu pembayaran kepada kontraktor (ataupun kekurangan bayaran) adalah sebab utama yang mengakibatkan konflik dan perbalahan di kalangan pihak – pihak yang terlibat di dalam industri pembinaan seluruh dunia. Walaupun terdapat pencapaian yang tinggi di dalam perkembangan industri pembinaan di Malaysia, masalah yang timbul dari isu pembayaran kepada kontraktor menjadi semakin serius dari semasa ke semasa. Peningkatan mendadak di dalam masalah kelewatan pembayaran kepada kontraktor telah menjadi satu punca yang menyebabkan imej industri pembinaan Malaysia terjejas di mata dunia. Tujuan penyelidikan ini adalah untuk menyiasat kesan – kesan kelewatan pembayaran ke atas kontrator di Malaysia dan mencadangkan langkah – langkah yang boleh diambil oleh kontraktor untuk mendapatkan bayaran. Metodologi yang digunakan dalam menyempurnakan penyelidikan ini adalah secara kajian literatur, dan menjalankan proses soal selidik. Penyelidikan ini melibatkan kontraktor di dalam Malaysia. Frekuensi dan analsis purata indeks telah digunakan untuk menganalisis data. Keputusan menunjukkan kelewatan pembayaran adalah disebabkan faktor yang berkaitan dengan pemaju. Kesannya pula adalah hubungan negatif yang wujud antara kontraktor dan pemaju. Kesan ini merupakan kesan dengan indeks yang paling tinggi. Seksyen terakhir analisis menunjukkan bahawa kebanyakan kontraktor memilih untuk membuat susulan menggunakan prosedur rasmi dalam mendapatkan bayaran tertunggak. Adalah diharapkan bahawa kajian ini akan meningkatkan usaha sedia ada dalam menangani masalah bayaran lewat di dalam industri pembinaan Malaysia dan akan dijadikan panduan untuk merangka langkah – langkah lebih baik dalam mengetengahkan hak kontraktor untuk mendapatkan bayaran ke atas kerja – kerja yang telah dilaksanakan di dalam masa yang telah ditetapkan.

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TABLE OF CONTENTS

CHAPTER TITLE DECLARATION DEDICATION

TITLE

PAGE i ii iii iv v vi vii xi xii xiii xiv 1 1 2 3 4 4 5 5 6 6 7

ACKNOWLEDGEMENTS ABSTRACT ABSTRAK TABLE OF CONTENTS LIST OF TABLES LIST OF FIGURES LIST OF SYMBOLS LIST OF APPENDICES I INTRODUCTION 1.0 1.1 1.2 1.3 1.4 Introduction Background Of Study Problem Statement Aims and Objective Of Study Scope Of Study 1.4.1 1.4.2 1.5 1.6 1.8 Contractors Developers

Justification Research Methodology Summary Of Chapters

viii II LATE PAYMENT 2.0 2.1 Introduction Payment 2.1.1 The Scheme Or Schedule Of Payment In Relation To The Timing 2.1.2 2.1.3 2.1.4 2.1.5 2.2 2.2.1 2.2.2 2.2.3 2.2.4 2.3 2.4 The Quantum Of Payment The Relevant Procedure Involved Inclusive Of Any Conditions Precedent The Employer’s Right To Set –Off Or Abate The Enforcement Of Payment Periodic Schedule During Contract Period Stage Payment Advance Payment Payment After Completion In Malaysia’s Construction 10 10 10 11 11 13 13 13 14 14 15 15 15 16 16 17 17 18 18 20 21 21 21 23 26 28

Types of Payments

Late Payment Industries 2.4.1 2.4.2 2.4.3

Factors that Caused Late Payment Factors Contributed By Contractors Factors Contributed By Clients Factors Contributed Buy Contractual Matters 2.4.3.1 Pay When Paid Clauses

2.5 III

Summary Of Chapters

IMPACTS AND REMEDIES FOR LATE PAYMENT 3.0 3.1 3.2 3.3 3.4 Introduction Impacts Of Late Payment On Construction Industries Remedies For Late Payment Actions Taken by Malaysian Governments Summary Of Chapters

ix IV RESEARCH METHODOLOGY 4.0 4.1 Introduction Research Methodology 4.1.1 4.1.2 4.1.3 4.1.4 Identifying Objectives Sampling Data Collection 4.1.4.1 Research Design 4.1.4.2 Questionnaire Design 4.1.4.3 Checking and Questionnaires 4.1.5 4.2 V Analysis Method Summary Of Chapters Distributing Problem Statement And 29 29 29 30 30 31 31 32 33 41 41 42 43 43 43 44 49 49 51 52 53 54 55 55 56 56 57 57

Literature Review

ANALYSIS AND DISCUSSION 5.0 5.1 Introduction Result And Analysis 5.1.1 5.1.2 Respondent Particulars Factors Of Late Payment Problems 5.2.2.1 Contractors Related Factors 5.2.2.2 Clients Related Factors 5.2.2.3 Contractual Related Factors 5.1.3 5.1.4 5.2 Late Payment Impacts On Projects Action Taken By Contractors To Overcome Late Payment Problems Factors of Late Payment 5.2.1.1 Contractors Related Factors 5.2.1.2 Clients Related Factors 5.2.1.3 Contractual Related Factors 5.2.2 Impacts Of Late Payments

Discussion 5.2.1

x 5.2.3 5.3 VI Action Taken By Contractors To Overcome Late Payment Problems

58 58 60 60 60 61 61 61 62 62 63 63 63 64 64 64 65 67 69 70 71 72 73

Summary of Chapters

CONCLUSION AND RECOMMENDATION 6.0 6.1 Introduction Conclusion 6.1.1 Factors of Late Payment 6.1.1.1 Main Contractors 6.1.1.2 Sub-Contactors 6.1.1.3 Clients 6.1.2 Impacts Of Late Payment 6.1.2.1 Main Contractors 6.1.2.2 Sub-Contactors 6.1.2.3 Clients 6.1.3 Remedies Of Late Payment 6.1.3.1 Main Contractors 6.1.3.2 Sub-Contactors 6.5 Recommendations

REFERENCE APPENDIX A APPENDIX B APPENDIX C APPENDIX D APPENDIX E

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LIST OF TABLES

TABLE NO. 1

TITLE The Distribution Of Respondent Based On Company Nature Of Works, Age And Gender.

PAGE 45

2

Relative Importance Index and Ranking for Contractor Related Factors Based on Respondent Business

50

3

Relative Importance Index and Ranking for Clients Related Factors Based on Respondent Business

51

4

Relative

Importance

Index

and

Ranking

for 52

Contractual Related Factors Based on Respondent Business 5 Relative Importance Index and Ranking for Impacts of Late Payment Based on Respondent Business 6 Relative Importance Index and Ranking Action Taken By Contractors To Overcome Late Payment Problems. 7 Importance Index And Ranking Of Late Payment Factor Categories

53

54

55

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LIST OF FIGURES

FIGURE NO. 1 2

TITLE Flowchart Diagram Of Research Methodology Adopted Figure.2: Period Of Payment Delay After Completion Of Work (Artidi and Chotibhongs,2002)

PAGE 9 25 34 35 36 37

3 4 5 6

Sample Of An Official Letter To The Respondent Sample Of Introduction For Survey Questionnaire Sample Of Section A Of The Survey Questionnaire Sample Of Section B Of The Survey Questionnaire For Contractor-Related Factors Of Late Payments

7

Sample Of Section B Of The Survey Questionnaire For Client-Related Factors Of Late Payments

37

8

Sample Of Section B Of The Survey Questionnaire For Contractual-Related Factors Of Late Payments

38 39 40 40 46 47 48

9 10 11

Sample Of Section C Of The Survey Questionnaire Sample Of Section D Of The Survey Questionnaire Section of Contact Details For Respondent Who Wish To Contribute Further In the Study

12 13 14

Distribution Of Respondent Base On Company Profile Distribution Of Respondent Base On Gender Distribution Of Respondent Base On Age

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LIST OF SYMBOLS

I i Wi Xi rs d N ∑

-

Relative Index response category index the weight assigned to the ith response frequency of the ith response given as percentage of the total response for each cause Spearman’s rank correlation coefficient the difference in ranking between each factors, impacts and actions number of variables Total

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LIST OF APPENDICES

APPENDIX A Newspaper

TITLE Clippings: Kerajaan Lantik Terus

PAGE

Subkontraktor Atasi Masalah Pembayaran Lewat B C Newspaper Clippings: Pay Within Three Weeks Newspaper Clippings: Akta Baru Tangani Masalah Bayaran D Newspaper Clippings: Ada Kontraktor Bergolok Bergadai Tunggu Bayaran E Sample Of Survey Questionnaire

69

70

71

72

73

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CHAPTER I

INTRODUCTION

1.0

Introduction

Malaysia’s construction industry has expanded during these past years and had contributed to the country’s economy. But last year, a negative two percent (-2%) growth has caused some reactions among the players in the construction industry. When the government decided to promptly start the twenty-six (26) projects under the Malaysian Ninth Plan, it was welcomed by the industry’s players.

This would not only give new hopes to the contractors but to those in the construction’s manufacturing and supplying area as well. It is expected that the fast act in initiating these project would regenerate the construction domestic sector to a new level.

But nonetheless, there would be some problems that will hinder the progress in regenerating the industries. Contractors are often blamed when there are problems such as safety, nonconformance and delays issues at site and people failed to look beyond that. They failed to recognize the root problem that led to these issues that often caused constant headache to all the contractors around the world.

2 1.1 Background Of Study

Payment is a sum of money paid to someone. In the construction industry, payment is the sum of money paid to contractors, consultants and suppliers after their works, service or materials has been successfully realized or accepted. Payments are so important to these parties that it is a constant headache for them as problems in construction would always be revolving around the poor payment practices.

In cases like this, contractors would be directly affected as they are the one who receive and spend the most amounts of monetary sources in a project done. A regular disbursement of interim payment is a critical point for a contractor to help them survive in the construction field.

Whether it is late payment or not being paid in the amounts certified, it all literally means big problems to the contractors as cash flow will be effected. Some small construction companies such as Class F contractors would even close business due to late payments.

Many actions have been taken by government to curb the payment problems among contractors. Datuk Seri S. Samy Vellu in 2004 for instance has proposed to directly pay the subcontractors client in ensuring they get their payment on time. Datuk Seri Abdullah Ahmad Badawi (2005) also show his support in ordering

departments or government organization to distribute payment in a period less than one month of the date accepted invoice. Government officers that delayed the distribution of payments to contractors will be given surcharge.

But that does not stop there. Recently, Datuk Seri Abdullah Ahmad Badawi shows his concerns over complaints from contractors and suppliers about late payments. He had instructed that all payments must be made within three weeks of the date of receipts of the bills.

3 Government is very particular about this matter because it was giving a negative perception of the current implementation of the 9th Malaysia Plan that is moving at a slow pace. Other than, there are also another five measures to be carried out with immediate effect, following numerous complaints of late payment in Malaysia’s construction industry.

Nonetheless, there are still cases of delayed payment and non-payment in arbitration if not in the court. Contractors are still facing problems in receiving their payments. Arbitration and judicature process not only consumed much time and money but could kill the business as well. As a contractor, what is the most appropriate action should be taken in securing their payments without effecting their business and cash flow?

1.2

Problem Statement

Construction industry has been one of the main contributors for the Malaysia’s growth every year. From economic point of view, the works in construction industry are very important because it is linked and support the growth of other 50 industry in Malaysia.

Governments are at their best supporting for the development of construction industry especially for the Bumiputeras under the New Economic Plan (DEB). The outcome from this supports has shown that the number of Bumiputeras contractor has increased from 2,049 in 1972 to 46,789 as at 31st May 2005. With this figures increasing each day, non-government organization are also needed to put up demand for construction in ensuring the growth of the construction industry and the other industries linked to it.

But despite the growth and support, construction industry is also facing lots obstacles and problems. Delays, abandonment, payments and health and safety issues, and payments are among the list of problems constantly faced. Payments issues

4 nonetheless bring the hardest impact to contractors. Even though government are giving their full attention throughout the years, this problems does not seem to dissolve.

1.3

Aims And Objectives Of Study

The aim of this study is to investigate the consequences of late payments problems confronted by contractors and to propose remedial actions that could be taken by contractors in securing their payments. In achieving this aim, four objectives have been outlined which includes:

i. To identify the factors that caused late payment issues in construction industry; ii. To identify the impacts of late payment on projects / construction industry; and iii. To investigate the strategic action taken by contractors to improve the situation and project performance due to late payment problems.

1.4

Scope Of Study

This research will be focusing on two main parties in the Malaysia’s construction industry, contractors and developers. Contractors were chosen because they conveyed the large categories on the construction industry team player. Developers on the other hand, were chosen because they are the paymaster in most of the construction projects. Both parties are equally important in getting the right information in this research. They work hand in hand within any construction project and often payments problems occur between these two parties

5 1.4.1 Contractors

This research will be focusing on contractors, sub-contractors and clients for construction projects in Malaysia where a regular disbursement of interim payment is the main method of payment to contractor.

The main respondent chosen are contractors as they spend and receive the most amounts of monetary sources in a project. Contractor is a person or firm that undertakes a contract to provide materials or labour to perform a service or do a job. In this research, contractors include main contractors as well as subcontractors doing any construction in Malaysia. If anything involved payments, they will be directly affected.

The schemes for reimbursing the contractor for works done under a typical construction contract are varied as the types of such contract agreement encountered in practice. In this research however, the schemes has been reduced into the following principal categories which is periodic payments, stage payments, advance payments and payments after completions. Questionnaires are distributed to contractors within Malaysia.

1.4.2 Clients

Clients are also chosen because they are directly involved in payment. Opinions and experiences from clients are needed in this study to get a better view from their side. In construction industry, clients are usually the developers. This includes the non-governmental institution and the government as well. Questionnaires would be distributed to clients with projects associated with the contractors.

6 1.5 Justification

The rapid increase of the late payment issues nowadays has gone to the point that it tends to decrease the good image of construction industry in Malaysia. Malay Contractors Association president, Datuk Roslan Awang Che once revealed that some contractors are owed RM 100 million to RM 200 million for four to five years, mostly on final payments.

There are even contractors who have to do leasing or loans with bank because of late payment. Late payment gives bad impacts to contractors, especially contractors with small capital. Not only that, it also creates a negative chain effect within the players in the construction industries such as to suppliers, sub-contractors and end users as well.

Datuk Seri Abdullah Ahmad Badawi in a statement dated 6 October 2006 believed that complaints relating payment to contractors and suppliers tends to give negative perception that the implementation of the 9th Malaysia Plan is moving at a slow pace. This shows the seriousness of the problems because it is related to the image of Malaysia’s construction industry. This study is important in determining the steps contractors could take in ensuring their payment is received on time, without compromising their business.

1.6

Research Methodology

In conducting this research the methodology used is identified and fulfill objectives that has been outlined previously. This method is used at the early part of the research in getting adequate information to understand the subject. The method includes reading and extracting information from sources on the issue to get thorough knowledge of the research theory and concepts. The sources include books, previous thesis, journals, newspapers and the internet. This is critical in ensuring the subject of late payment. Figure 1 is the summary of research method use in this research.

7 Data collection includes distributing the questionnaires to the related personnel within the scope of the study. The questionnaires is designed to answers the objective that has been outlined. Both contractors and developers will be the

respondent to these questionnaires. The next step after data collections would be data analysis. This method includes compiling all the data collected.

1.7

Summary Of Chapters

This dissertation is divided into six (6) chapters which discussed issues related to payment in Malaysia’s construction industry. Chapter One (1) discuss on the introduction, problems, justification and objectives of the study. Chapter 1 also discuss briefly on the scope of study and the research methodology adopted to fulfill the objectives of the study

Chapter Two (2) discuss about payments in Malaysia’s construction industry. It explains thoroughly the subject of payments by providing types of payments usually applied in the industry. This chapter also discuss briefly about late payment issue in the Malaysia’s construction industry. It highlights the factors that contribute to such problems.

Chapter Three (3) identifies the impacts of late payments and the remedial actions taken by contractors to overcome the late payment problems. This chapter also explains the action taken by government in assuring that contractors who have successfully completed the works to receive their payments within the stipulated time.

Chapter Four (4) explains the methodology used in this study. The methodology used was considered based on the needs of the researcher to achieve the earlier mentioned objective. For better understanding, the methodology in this research has been simplified into a flow chart diagram as shown in Figure 1 of Chapter 1. The figure explains briefly the steps from the initial stage of identifying problem to the method of analyzing the data collected.

8 Chapter Five (5) describes and discuss the analysis of the data collected previously. The results of the analysis are then presented in Table 2, 3, 4, 5 and 6 of Chapter 5.

Chapter Six (6) concludes the results and finding from Chapter 5. What had been determined here is then used to make certain recommendations to improve the situation of late payment problems in Malaysia’s construction industries

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PROBLEM STATEMENT & OBJECTIVES Developing Problem Statement, Aims and Objectives of Research

LITERATURE REVIEW

IMPACTS OF LATE PAYMENT

PROPOSED STRATEGIC ACTIONS

FACTORS THAT CAUSED LATE PAYMENTS

DATA COLLECTION

RESEARCH DESIGN What method best use to collect particular data? What factors to be considered? Resources? Money? Time?

QUESTIONNAIRE DESIGN What kind of data? Objectives? What type of format to use?

CHECKING AND DISTRIBUTING QUESTIONNAIRES Questionnaires need to be check to avoid problems especially to respondent. How to distribute?

DATA ANALYSIS

CONCLUSIONS & RECOMMENDATIONS Aims achieved? Objectives answered? Recommendation for future works?

Figure 1: Flowchart Diagram of Research Methodology Adopted

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CHAPTER II

LATE PAYMENT

2.0

Introduction

Before going trough the issue of late payment, one have to understand what is payment in the construction industry. Payment is a sum of money paid to someone. In the construction industry, payment is the sum of money paid to contractors after their works or certain projects has been successfully realized. Payments are so

important to contractors that it is a constant headache for them as problems in construction would always be revolving around the poor payment practices.

In a typical engineering and construction contract, it is apparent that the contractor has promise to carry out all the works under the contracts. On the other hand, the employer must keep his side of promise by giving necessary consideration which in most cases comes in monetary form.

2.1

Payment

It is very obvious that a healthy and consistent disbursement of monetary is a critical point in determining the contractor performance. In order to ensuring the flow of the work activities under the contract and its eventual successful realization, construction contracts had been drafted. Most of these standard forms of contracts contain specially drafted clauses which govern all aspects of the subject of payment

11 under the contract. In PAM98, JKR203, CIDB2000 and FIDIC the following principal observations can be made. All of the construction contracts mentioned above are quite similar in wording, scope and intent.

Ir Harban Singh K.S, (2003) concluded that among the primary features of the said provisions are the spelling out of the main entitlements of the contractor and the principal aspects of the employer’s obligation vis-à-vis the subject of payment encompassing:

2.1.1 The Scheme Or Schedule Of Payment In Relation To The Timing

The scheme of payment or schedule of payment is usually agreed at initial phase of contracting. The most common method use is progress payments and stage payments. A regular disbursement of payment should be paid by the employer to the contractor based on the contract agreed.

2.1.2 The Quantum Of Payment

In terms of progress payments, the amount to be paid by contractors are usually based on the certified interim certificate but there are certain clauses provide for situations where the Employer is entitled to deduct amounts from that certified in interim payment certificates. PAM98 allows the Employer to make deductions in the following situations:

i.

Clause 2.2 Where the Employer employs and pays others to carry out work after

failure by the Contractor to comply with an instruction of the Architect.

12 ii. Clause 19.5 Where the Employer takes out third party insurance after default by the Contractor to take out such insurance.

iii.

Clause 20A Where the Employer takes out insurance of the Works after default by

the Contractor to take out such insurance.

iv.

Clause 22.1 Liquidated damages for late completion.

vi.

Clause 25.4 (ii) Where the Employer pays suppliers or sub-contractors directly after

the determination of the Contractor.

vii.

Clause 27.4 Where the Employer pays nominated sub-contractors directly after the

Contractor has failed to furnish reasonable proof that they have been paid

CIDB2000 also provides for deductions in a number of situations, many of which are similar to PAM98. For both PAM98 and CIDB2000, these deductions are not reflected by the Architect / S.O. in the interim certificates themselves, but are instead deducted by the Employer from the amount stated as due in the interim certificates when making payment. Under JKR203 there are also a number of clauses providing that the Government is entitled to deduct amounts from payments due.

13 2.1.3 The Relevant Procedure Involved Inclusive Of Any Conditions Precedent

Different standard forms might have different procedure involved in getting payments. Procedure as making claims, producing interim certificate and verification of works are the most common procedure applied.

2.1.4 The Employer’s Right To Set-Off Or Abate

The question often arises as to whether the Employer can make deductions for other reasons from amounts certified as due to the Contractor. The most common reason given for such deductions is defective work. But there are also cases where employer refuses to make payment on the interim certificate on the basis of a set-off for damages arising from defective work and overvaluation.

In simple terms, a set-off is a defence to a claim by way of a counterclaim. In this case the Contractor’s claim of unpaid money on the interim certificate was claimed by the Employer to have been set-off by virtue of a counterclaim for damages, suffered as a result of defective work and overvaluation. Bold as it can be, this clause could always be one way of contractors in not getting his payment on time. Employers could always misuse this clause for his advantage.

Under PAM69, the Employer has no right to set-off for defective work or for any reason other than those expressly provided for. It is submitted that, under PAM98, this same principle would apply as it has identical provisions for deduction to PAM69.

2.1.5 The Enforcement Of Payment

This clause states the enforcement of payment that has been certified to the contractors. The period of getting payment stated JKR203 is 30 days from the

14 certified claims. Employer shall make payments to contractors all the amount due and contractors has the right in getting his payments.

Usually, remedies steps taken in solving payment problems were referred to standard forms (contracts). We can’t argue the importance of the standard forms but nonetheless it seems that the standard forms do not provide adequate solutions for payment problems. The need for some other options has become an essential in this endemic situation. This is where the proposed solutions come in.

2.2

Types Of Payments

A regular disbursement of interim payment is a critical point for a contractor to keep them alive. (Chen, O’Brien and Herbsman, 2005). Whether its late payment or not being paid in the amounts certified, it all literally means big problems to the contractors as cash flow will be effected. Some small construction company would even close business due to late payments.

The schemes for reimbursing the contractor for works done under a typical construction contract as varied as the types of such contract encountered in practice. In Malaysia however, the schemes has been reduced into the following principal categories:

2.2.1 Periodic Schedule During Contract Period

During contract period, the most common method used is interim payments or the so called progress payments. In Standard Forms, the interim or progress payments are effected by the issuance of ‘interim certificates’.

15 Interim certificate is actually the periodic certification for the payment due to contractor. The failure of the certifier to issue the relevant ‘interim’ certificates in line with the stipulation of the contract can expose his employer to a possible claim of breach of contract by the contractor (Singh K.S, 2003). The frequency of periodic payment could be varied from fortnightly to monthly. The actual duration is normally the period as agreed in the contract conditions signed.

2.2.2 Stage Payment

The term stage payment is used when the payments are made at specific stages of work. This mode of payment is often used in small lump sump contract without quantities where a proportion of the total sum is agreed to be paid over in a number of stages. These proportions are fixed and do not depend upon any re-measurement of work. Nevertheless, the application this mode of payments are also applied in Turnkey, Design & Build as well as contracts involving repetitive works.

2.2.3 Advance Payment

This is the sum of money paid to the contractor by the employer well before the work involved is executed. This practice is usually done in public work contracts. The main purpose of implementing this scheme is to help the contractor to start up and finance the contract without resorting unnecessary external borrowings.

2.2.4 Payment After Completion

This is the method of payment to contractor triggered by the achievement of the contract milestone of practical of substantial completion and/or the so called handing over of the works to the employer. Hence, unless such stage is reached and

16 certified by the contract administrator, the contractor is not entitled to any payment whatsoever.

In using this method, the contractor is basically financing the works to a large degree, which costs would eventually built into the contract sum. The employer must also be prepared to shoulder this burden as well as be in a position to source and effect payment ultimately of a sizeable lump sump amount upon the taking over of the works.

2.3

Late Payment In Malaysia’s Construction Industries

The rapid increase of the late payment issues nowadays has gone to the point that it tends to decrease the good image of construction industry in Malaysia. Literature reviews indicates that late payment creates some kind of domino effects in the construction industry (Lip, 2003).

Late payments are often associated with other issues in Malaysia’s construction industry such as productivity, non conformance, safety, delay and abandonment issues (Oon, 2002). According to the construction industry master plan in The Construction Industry Roundtable 2004, the Malaysian construction industry will be the best in the world in 2015. In achieving this, Working Group on Payment vision is that everyone in the construction industry pays the appropriate amounts due in a timely manner by 2015. By learning from other countries, Malaysia is trying to improve to avoid the collapses of construction companies due to the bad payment practice.

2.4

Factors that Caused Late Payment

There are many factors that is said to be causing the late payment problems in construction industries. Few works on this issue worldwide has stated that the late

17 payment problems could be contributed by contractors, clients and sometimes the contractual matters in the contract provision used.

2.4.1 Factors Contributed By Contractors

Most of the time contractors would blame clients when they receive late payment. This is not arguable but contractors also contribute to these matters. In construction industry, the common procedure for a contractor to receive payment is by making claims after they completed their work. Client representative would then check and certify the claims, provided that the claims submitted by the contractors are live up to the requirements.

Reeves (2003) in his work stated that one of the main reasons for late 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 right procedures When this is the case, contractors need to resubmit the claims after making necessary corrections.

Another factor contributed to late payment is when contractors fail to agree with the valuation of work at site (Odeh and Battaineh, 2002). This would then results in conflicts between clients and contractor. No doubt, the claims would not be certified and hence, late payment occurred. The same thing happened when a contractor did his job as per specified in Bill of Quantities.

2.4.2 Factor Contributed By Clients

Main factor contributed but clients are when they took longer than stipulated time in 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.

18 The obligation of the design professional to issue payment certificates has long been a tedious and dreaded task and one that often creates numerous liability problems. Although the only real purpose of issuing payment certificates is to inform the owner or lender that the contractor is entitled to payment, these certificates are often used by potential claimants as a basis for many types of legal actions. This of course leads to late payments in the industry.

There are also cases where client’s employees are wrongfully withholding the payment. Most of them do this to obtain some kind of “gift” from contractors once they disburse the payment. Hence, contractors have to tolerate this action to get their payments which should not be happening. This bad attitude has gain attention from various personnel in the construction industry and one of them came from our Prime Minister. He insists that any government servant with this kind of attitude to be given penalty on any wrong doings (Utusan Malaysia, 2006).

2.4.3 Factors Contributed By Contractual Matters

The penultimate question facing the contractor is, after having received the official certificate of payment from the contract administrator, how can he enforce it, i.e. how and when he can finally receive his payments? For contractors, the answer lies in the particular contractual provisions governing the cardinal issues of the honouring period and the remedies available to the contractor in the event of the employer’s breach of the said obligation.

2.4.3.1 Pay When Paid Clauses

There are cases where contract agreements do not bring any justice to both main contractors and sub-contractors. For instance, the pay-when-paid clause often used in contracts agreement between main contractors and sub-contractors or between housing developers and main contractors.

19 “Pay when paid” or also known as “back to back” method of payment is relevant especially in the case of nominated sub-contractor when the main contractor has not been paid by the Employer. In most non-standard construction contracts encountered by researcher, this is also invariably the case. It may be worthwhile to note that in England, this type of provision in construction contracts have been rendered unenforceable (Housing Grants, Construction and Regeneration Act 1996).

The policy of pay when paid was also rejected in the case of payment from contractor to the nominated sub contractor during the drafting of CIDB (2002). This clause never brings justice to the second parties. Often they would get late payment or even worse, no payment at all. But the real deal is, it still exist in the industry, often in the non-standard construction contracts.

An additional risk is assumed when the subcontract does not define the timing of such payment by the general contractor other than that it will be after the owner has made payments. A study conducted by Artidi and Chotibhongs (2005) shows that this condition is commonly inserted in subcontracts drawn by general contractors in-house and that it gives no guarantee as to when payment is to be made.

The general contractor uses these strategies for insulating itself from any liability to subcontractors at any time in the event of nonpayment by the owner. Standard forms of subcontract stipulate specific periods of time for payments to subcontractors arrived at by negotiation, but they are rarely used.

As things currently stand, main contractors and sub-contractors would be victim, being squeezed in the middle when there are late payments. Usually, contractors seek ways out in courts or arbitration process. And these will not only take a long period to resolve but will effect the contractors reputation as well. He can claim for interest of sometimes if the breach be serious enough to ‘shatter the confidence’, he may rescind the contract and attempt to recover the necessary damages. But what other options can a contractor choose that would not effect his reputation and the construction progress?

20 2.5 Summary Of Chapter

This chapter explains the importance of a healthy and consistent disbursement of monetary in determining the contractor’s performance and also discusses the primary features of payments in the standard construction contracts used in Malaysia.

Apart from that, it also discussed the schemes for reimbursing the contractor for works done under a typical construction contract. However, for the purpose of this research, only four principal categories usually applied in Malaysia were studied.

Late payment issue in Malaysia’s construction industry is also discussed in this chapter. For better understanding of the study, factors that is said to be causing the late payment problems in construction industries are also explain in this chapter. Reference has been made to few works on this issue worldwide that highlighted the late payment problems could be due to contractors, clients and even the contractual matters in the contract provision used.

21

CHAPTER III

IMPACTS AND REMEDIES FOR LATE PAYMENT

3.0

Introduction

The successful execution of construction projects and keeping them within estimated cost and prescribed schedule depend on a methodology that requires sound engineering judgment. However, other factors such as late payments also contributed to the extensive delays of projects. Not only that, late payments can also lead to nonconformance and safety problems as well as bankruptcy. This chapter discussed the impacts of late payment and the remedial action to overcome the problems.

3.1

Impacts Of Late Payment On Construction Industries

Quite understandably, late payments, inefficient as it may be were never an issue during good times and when jobs were plenty. Main contractors and subcontractors down the line tolerated late payments or even part payments in those times because the volume of job is high. This is because another job’s payments could always cover another job’s cost.

Lip (2003) concluded that during the years, with the diminished volume of construction work, contractors are reeling under relentless pressure to tender with little or non-existent margins or as most aptly called ‘suicide’ bids just to sustain the flow of work orders. Payment to contactors or lack of it is a common cause of disputes in the construction industry. Timeliness of payments affects many

22 contractors, for whom receiving delayed payments from their clients is a cause of friction between the two parties.

Meng (2005) in his works stated that all problems in construction begin when payment is not received at the exact amount or date. Disagreements then leads to arguments as relationships sour, and the stage become a setting for conflict, blame, finger pointing, buck-passing and lawyers. Projects exceed initial time and cost estimates and experienced extensive delays. But contractor are the one who suffers the most when things like this occur. This is the case especially when Design and Built construction contract are practised more and more nowadays.

Late payments never bring justice to contractors. Sub-contractors are very much the same, if not worse condition, because of late payment (Artidi and Chotibongs, 2005). It effects sometimes are so harsh that some companies had to closed due to payments issues. One of the biggest consequences would be the interest. Interest is a fact of life in the world of business, and the construction industry of Malaysia is no exception. Contractors often borrow working capital from banks in order to finance their construction operations and invariably have to pay interest on these borrowings.

Contractors are therefore highly dependent upon regular interim payments from employers during the course of construction to help discharge the debt so accrued. Therefore, when a contractor does not receive interim payments on time or in accordance with the terms agreed or for the proper amount, the interest he or she needs to pay in the form of finance charges to the bank will invariably increase.

But then the legal presumption is that in the ordinary course of things, a person does not suffer any loss by reason of the late payment of money; a presumption which is clearly fallacious in modern times.

The basic common law is that interest is not considered to flow naturally from a breach, and therefore cannot be claimed as general damages where the only breach

23 is non or late payment was affirmed in London v Chatham and Dover Railway Company v South Eastern Railway Company, (W. Rae, 2002). If this is the case, it does not only burden the contractor physically but mentally as well as he can’t do anything about it.

Sub-contractors are also affected by late payments. Subcontractors are often paid late by main contractors because of pay-when-paid and pay-if-paid clauses included in most contract forms. The consequences of the subcontractors being paid late are grave.

In such situations, some subcontractors tend to increase their quotations, which in turn increases total project cost, an undesirable condition for owners. It should be possible to improve subcontractor payment practice if developers pay main contractors on time, and in turn main contractors pay their sub-contractors right after completion of sub-contract work.

Other than that, late payment will also affect the contractor’s performance. He can lose his workers. He wouldn’t have sufficient funds for the construction. The construction process will delay and the list goes on. But one thing for sure, it all brings negative influence to the overall construction process.

3.2

Remedies For Late Payment

Perhaps the question which troubles a contractor most now is the question of delayed payment by the Employer. All the standard forms discussed herein with the exception of PWD 203 contain a provision that if the Employer does not pay, the contractor is entitled to bring the contract, of his employment under contract, to an end. Proper procedure however must be followed.

However, terminating a contract is often viewed to be a serious step to adopt and from a commercial viewpoint this may not be a desirable and conducive for

24 possible settlement. Most contractors will also fear that if this step is resorted to, their rightful entitlement may be “stuck” for years and can only be recovered after a successful attempt into arbitration of litigation. Such a fear is of course not good for any contractors who appreciate the importance of cash flow to the going concern and health of a company.

One possible remedy to this obvious breach of contract by the employer in not paying in time is to allow for the contractor to claim for interest (CIDB 2000). This affords some relief to the contractor but this can be a double-edged sword for the contractor for it effectively allows the employer to suspend payment and not commit a breach of contract.

Another remedy which contractors can resort to is to suspend further performance of his obligations under the contract. According to the understanding of the FIDIC, the contractor may either suspend work or reduce the rate of work, and even has the authority to terminate his employment under the contract after giving notice to the owner, with a copy to the engineer.

This can be a safe position taken by the contractor and is in fact one routinely taken by the contractor when non-payment from the employer ensues. But for late payment, this action might be too harsh and impose another problem at site such as illegal suspension of work by the contractor. There are persuasive writings arguing for allowing of contractors to suspend their works because of late payments, the facts remains that this is currently not the established law.

It shall be establish that in the event of the owner’s or developer’s failure to make a progress payment to the contractor within the time stated in the contract, by notifying the owner, the contractor may urge the owner to effect a progress payment. If the owner still fails to pay after receipt of the contractor’s notice, the owner may negotiate with the contractor for payment on deferred terms. If the owner and the contractor come to an agreement, the owner shall pay overdue interest. But if both of them do not come to an agreement and the contractor is unable to continue his work,

25 the contractor may suspend work and the owner shall bear the liability for breach of contract (Meng, 2002).

The remedial actions mentioned previously are usually for late payment during the construction process. But what will happen if late payment occurs after construction period? It must be noted that late payment also occurs at the end on the construction process. In practice, owners often take over completed projects before making completion payment to contractors (Artidi and Chotibhongs, 2005). Figure 2 is taken as a reference from their work regarding of late payment after the completion of the work. This gives unfaithful owners or developers an opportunity to evade the duty of a final payment.

Figure.2: Period Of Payment Delay After Completion Of Work (Artidi and Chotibhongs, 2002)

In China, the contract conditions for construction to overcome this problem should establish the following principle; when a completed project passes inspection for acceptance, the owner shall first make a final payment to the contractor, and then the owner can take over the completed project. At the end of the maintenance period, the owner shall pay the balance of retention money to the contractor.

26 Although the right of legal mortgage is still valid after the completed project is taken over in accordance with the Chinese contract law, it is advisable to all contractors that it is better for them to get paid before the project is taken over. After the contractor delivers the completed project to the owner and the owner occupies the completed project, it is very difficult for the contractor to exercise his or her right and it is almost impossible to get back the total amount due to the contractor and this is still happening in Malaysia’s construction industry.

3.3

Actions Taken by Malaysian Governments

Cases where contractors need to apply loans from banks while getting long due payments was not a new situation in Malaysia. This scenarios gave bad impacts to contractors especially to the class F contractors where the need the money to pay the workers and as working capitals for new projects.

Therefore the action taken by government in assuring that contractors who have successfully completed the works un the RMK 9 to get their payments in two weeks time is welcomed by all. This at the same time ensured that RMK 9 operate according to the schedule. The promise by government gave the contractors new hope and increased their spirit in doing their responsibilities and works to the nation.

In the period of 6 years from 2000 to 2006, is it estimated that they are about 18,000 contractor and sub-contractors who has not yet received the payment amounting to RM 23.7 billion. The situation indurate those in the industry especially consultants, contractors, sub-contractors and suppliers.

As one of the way to handle this problem, Governments are establishing new acts to handle the payment problems by contractors in the construction industry. Our Works Minister, Datuk Seri Samy S. Vellu confirms that the act names Construction Industry Payment and Adjudication Acts would be an assurance and resolve to

27 problems such as late payments and non – payments problems. This act is hoped to ease the cash flow and at the same time boost the reputation of construction industry.

At the moment, CIDB are conducting forums on the act which will facilitate for an international exchange of ideas and concepts on ‘construction contracts acts’ and adjudication. It will also deliberate on the effect of statutory provisions on payment issues in the construction industry and will highlight experiences of advanced countries with valuable track records on effects of statutory provisions.

The Forum will also look into new possibilities such as e-adjudication and cross border adjudication and would consider on possible international collaboration on adjudication, which may include training, standards, research, and statistics on adjudication. At the same time, governments are doing their best to settle all outstanding bill submitted by contractors and suppliers within three (3) weeks. Datuk Seri Abdullah shows his concern over the issue of late payments by announcing the government views and commitment on the matters.

Apart from the three (3) weeks period, governments are also announcing for other measures such as the Finance Ministry to hold regular meetings with all related ministries and state authorities, in anticipation of issues or problems arising. The meeting is supposed to identify factors leading to the late payments problems.

Maybe we can also learn from what had been establish in United Kingdom regarding this matter. The Department of Trade and Industry U.K are also looking to improve payment practices in their construction industry. In March 2005, it published a consultation document on the review of the Construction Act, which was chaired by industry reformer Sir Michael Latham in 2004. It highlight that the recommendations for a client to pay subcontractors directly when a main contractor fails were ruled out because funds should be shared among all creditors. It proposes limits on crosscontract set-off, where money being withheld on one contract can be set off against another contract on an entirely different project between the same firms.

28 It also looks at abolishing trustee accounts in adjudications, where payments awarded are currently held until the end of the dispute process and recommends protection for adjudicators from prosecution by a third-party. Additional powers for adjudicators to rule on their own jurisdiction to prevent challenges through the courts were also included.

3.4

Summary Of Chapters

This chapter discusses the impacts of late payment on construction industries. What can be concludes from here is that late payments brings negative impacts to the whole team players on the construction industry. It creates a negative chain effect through and through.

The remedial actions taken by contractors to overcome late payment problems are also discusses in this chapter. Apart from the actions that are stated in standard forms, such as terminating the contract and applying interest to overdue payments, researcher also considers other small remedial actions that are applied in the industry.

This chapter also explains the action taken by government in assuring that contractors who have successfully completed the works to get their payments. As one of the way to handle this problem, Governments are establishing new acts to handle the payment problems by contractors in the construction industry. The promise by government gave the contractors new hope and increased their spirit in doing their responsibilities and works to the nation.

29

CHAPTER IV

RESEARCH METHODOLOGY

4.0

Introduction

The previous chapter discussed about the factors that contribute to late payments and the consequences of late payments for construction industry. This chapter on the other hand will explain all the method used in gather all the information in this study. The methodology used was developed at initial point of the research. The main factors in considering methodology used are based on the objectives of the research.

4.1

Research Methodology

The methodology used in this study is considered based on the needs of the researcher to achieve the mentioned objective. Apart from that, appropriate methodology used also helps to keep things in order and the development of the research to be smooth. For better understanding, the methodology in this research has been simplified into a flow chart diagram as per Figure 1 in Chapter 1. The figure explains briefly the steps from the initial stage of identifying problem to analyzing the data collected.

30 4.1.1 Identifying The Problem Statement And Objectives

Developing Problem Statement and Objectives is the first step in this research. This can be done in various ways but in this particular research, reading materials and personal experiences play very important roles.

Trough personal experiences, payment seems to be a big problem in construction industries. Being working with consultant, contractor and developer before, payment problems seems to be endless. Based on this, researched decided to initiate research in this particular issue.

Problem statement was then developed. A developed written statement from this research would then be determined and finalized trough discussion sessions with supervisor. Later stage was to developed objectives of the research. It was later discussed with the supervisor as is need to be carefully outlined.

This part is very important as it determines where the research is heading. The objectives that have been developed must never be too general or it will create problems in later stage of the research. The next step in this research in to do some literature review to get a deeper information and background study of the issue.

4.1.2 Literature Review

The main objective of doing background study is to get adequate information in understanding the subject of the research. The research could not proceed without first understanding thoroughly about the subject.

Background study or also known as literature review takes a lot of time and effort including searching for reading materials and understanding it. The information gathered then need to extract accordingly as per research subject and then divided into to the four (4) objectives that has been outlined.

31 Various ways could be used to get adequate information regarding the subject. The most effective way would be by reading and extracting information from the latest sources on the issue. Sources include books, journals, handouts, technical papers and newspapers. Previous research, theory and concepts on the subject should be look into for better understanding of the subject.

In this study, related E-Journals and other reading materials could be easily accessed at Sultanah Zanariah Library or from the ease of own home. Literature review should prepare us from all the information and knowledge that could be applied in the research.

4.1.3 Sampling

Sampling is a process of identifying the source of the data. In this study, source of the data comes from contractors and developers as they are the one who are directly affected with the late payment problems.

In sampling process, certain question need to be answered to identify the correct selection of sample. Since the target has been identified as contractors and developer, a proper way in selecting large sample of the target is necessary to minimize non-response error in the survey. Hence, the sample is selected randomly from CIDB list of registered contractors. The latest list from CIDB ensured that all of sample selected are active company currently.

4.1.4 Data Collection This section explains how the data collection being made and what method are used in this study. Every aspect of the research needs was considered in choosing the best research method.

32 4.1.4.1 Research Design

In this research, a set of questionnaires are used because it is an inexpensive way to gather data from a potentially large number of respondents. Often questionnaires are the only feasible way to reach a number of reviewers large enough to allow statistically analysis of the results. The choices of using this method are made based on a variety of factors including the type of information to be gathered and the available resources for the research. Researcher chooses this method because:

i.

Resources and money are limited. A Questionnaire can be quite inexpensive to administer. Although

preparation may be costly, any data collection scheme will have similar preparation expenses. The administration cost per person of a questionnaire can be as low as postage and a few photocopies.

ii.

There are limited times to gather data. Time is also an important resource that questionnaires can maximize.

If a questionnaire is self-administering, such as an e-mail questionnaire, potentially several thousand people could respond in a few days. It would be impossible to get a similar number of usability tests completed in the same short time.

iii.

The need to protect the privacy of the participants. Questionnaires are easy to administer confidentially. Often

confidentiality is the necessary to ensure participants will respond honestly if at all. Since the subject of the research is payment, confidentiality is very necessary.

iv.

The need to reach various parties. Late payment issues in the construction business must be considered

from the viewpoint of all the parties involved, including main contractors, sub-

33 contractors, general contractors, and owners. Questionnaires survey is the most appropriate way in gathering all the information from different parties.

4.1.4.2 Questionnaire Design

At this point, the researcher has already decided on the type of data to collect and start to design questions according to the objectives of the study. The questionnaire of this research consists of the following: i. ii. An official letter to the respondent as shown in Figure 3; A copy of letter from UTM confirming student status of researcher; and iii. The questions which are divided into (four) 4 Sections which were based on the objectives that has been outline in Section 5.1.1.

The questions were designed using closed format. These types of questions are usually in the form of a multiple-choice question. To assist the respondent, the choice of the answers is therefore needed. A closed format question must supply answers that cover the whole range of possible answers.

The questionnaires also seek general information about the respondents and include factual questions about current practice in the payment system. The questionnaire was divided into four sections and each section is properly design to provide answers to the objectives. Each section is explained further in the next paragraph.

34

Figure 3: Sample Of An Official Letter To The Respondent

i.

Introduction Figure 4 is the sample of introduction section of the questionnaire. This

section provides brief explanation regarding the subject of the research and it also highlights the aims of the research to the respondent.

35

Figure 4: Sample Of Introduction For Survey Questionnaire

ii.

Section A Figure 5 shows the sample of Section A which are intended to gather

information such as age, gender and years of working experience.

36

.

Figure 5: Sample Of Section A Of The Survey Questionnaire

iii.

Section B Figure 6, 7 and 8 shows the sample of Section B of the questionnaire

regarding contractor-related factors, client-related factors and contractualrelated factors of late payment respectively. Respondent were asked to tick an appropriate level of agreement they believe to be the best reflects their opinion The scale used in this section are 1, 2, 3, 4 and 5 for Disagree, Slightly Agree, Moderately Agree, Strongly Agree and Extremely Agree respectively.

37

Figure 6: Sample Of Section B Of The Survey Questionnaire For ContractorRelated Factors Of Late Payments

Figure 7: Sample Of Section B Of The Survey Questionnaire For ClientRelated Factors Of Late Payments

38

Figure 8: Sample Of Section B Of The Survey Questionnaire For ContractualRelated Factors Of Late Payments

iv.

Section C Sample of questionnaire for Section C is shown in Figure 9. This

section was designed to identify the impacts of late payment. A list of the impacts identified from literature review was presented in this section and respondent were asked to tick an appropriate level of agreement which they believe to be the best reflects their opinion. The scale used in this section is the same as used in section B.

39

Figure 9: Sample Of Section C Of The Survey Questionnaire

v.

Section D Figure 10 shows the question which is designed to investigate the

remedial action that will be taken by contractors to improve situation and project performance due to late payment problems. Since the remedial actions are taken by contractors, only contractors are required to respond to this section. Requiring response from other parties such as developers or owners will be irrelevant.

A list of remedial actions usually taken by contractors was identified and contractors need to tick an appropriate level of agreement that best reflect their opinion. For contractors who wish to participate further in an interview regarding late payment issue, they were asked to leave their contact details at the end of the questionnaire. The sample for this portion is as shown in Figure 11.

40

Figure 10: Sample Of Section D Of The Survey Questionnaire

Figure 11: Section of Contact Details For Respondent Who Wish To Contribute Further In the Study

41 4.1.4.3 Checking and Distributing Questionnaires

After the completion of questionnaire design, it needs to be check before begin distributed. Researcher reviewed the questionnaire with her colleagues and discusses all points that were in any way confusing and work together to solve the problems. The major hurdle in questionnaire design is making it clear and understandable to all.

Then it is ready to be distributed among the chosen respondents. Distribution method used is trough postal service. The questionnaire set are post together with a self addressed envelope and adequate stamps so that it will be easier for respondent to respond. This method of communication has led to the return of 156 completed questionnaires: 81 main contractors, 60 subcontractors and 15 clients.

4.1.5 Analysis Method

The analysis method chooses for this survey is appropriate to the types of survey that has been developed earlier. Analysis method includes ranking each factor, impacts and remedial actions according to relative importance index for all contractors, sub-contractors and developers response.

Relative importance index was calculated as:

5

∑WiXi I=
i=1 5

∑Xi
i=1

Where, i = response category index = 1,2,3,4 and 5 for Disagree, Slightly Agree, Moderately Agree, Strongly Agree and Extremely Agree respectively

42 Wi = the weight assigned to the ith response, as = 1,2,3,4 and 5, respectively Xi = frequency of the ith response given as percentage of the total response for each cause

The Spearman’s rank correlation was then used to test association between the main contractors, sub-contractors and developers ranking. Spearman’s rank correlation was calculated as:

rs =

1-

6∑d2 N(N2-1)

Where, rs d = = Spearman’s rank correlation coefficient the difference in ranking between each factors, impacts and actions N = the number of variables

4.2

Summary Of Chapter

The whole chapter explain the methodology used in this study step by step. The methodology used was considered based on the needs of the researcher to achieve the earlier mentioned objective. Apart from that, appropriate methodology used also helps to keep things in order within the research.

For better understanding, the methodology in this research has been simplified into a flow chart diagram as shown in Figure 1 of Chapter 1. The figure explains briefly the steps from the initial stage of identifying problem to discussing the method of analyzing data.

43

CHAPTER V

ANALYSIS AND DISCUSSION

5.0

Introduction

This chapter contains the results of the research questionnaire. It describes the way in which the data of the questionnaire has been analyzed and a discussion of the analysis. Information in this chapter will follow the following pattern: definitions, results and discussion. The idea behind such pattern is to give the reader the complete information regarding each issue.

5.1

Results And Analysis

The scope of research includes contractors, sub-contractors and clients for construction projects in Malaysia. Given this scope, questionnaire was distributed to a random sample of two hundred (200) contractors and fifty (50) developers in Malaysia. The respondents were asked to express their perception of the late payment problems factors, impacts and strategic action to be taken to solve the problems.

The questionnaires were posted over to the respondents. This method of communication has led to the return of one hundred fifty six (156) completed questionnaires: eighty one (81) main contractors, sixty (60) subcontractors and fifteen (15) clients.

44 The results of this study were generated from all the responses received. Data collected were then analyzed statistically. The structured data are summarized by calculating frequencies, percentage, relative index, standard deviation, and ranks. It will be discussed based on the division of the questionnaire as below.

Relative index was used to determine the ranking of factors, impacts and action taken by contractors to overcome the late payments problems. As to evaluate the level of agreement between each of the categories of respondent involved, Spearman’s correlation coefficients were used. High value of rank correlation coefficients indicates strong agreement.

5.1.1 Respondent Particulars The distribution of respondent varies from the types of business of the company, gender and age. Table 1 shows the distribution of respondents based on the mentioned groups. Figure 11, 12 and 13 on the other hand reflects the distribution of respondent on each of the group using pie chart and graph. This distribution was expressed in this manner to give better perspective of the respondent’s general background.

45

Table 1: The Distribution Of Respondent Based On Company Nature Of Works, Age And Gender.

COMPANY PROFILE Main Con Respondent 81 Sub Con 60 Clients 15

GENDER Male Respondent 111 Female 45

AGE (YEARS) Below 25 Respondent 53 26 – 30 90 31 - 35 9 36 And Above 4

MAIN CON, 81, 52% SUB CON, 60, 38%

CLIENTS, 15, 10%

Figure 12: Distribution Of Respondent Base On Company Profile

46

45, 29% FEMALE MALE

111, 71%

Figure 13: Distribution Of Respondent Base On Gender

47

48

100

90
90 80 70 60 AG E 50 40 30 20 10 0

53

9 4 RESPONDENT

BELOW 25 YEARS OLD 26-30 YEARS OLD 31 - 35 YEARS OLD 36 YEARS OLD AND ABOVE

53 90 9 4

Figure 14: Distribution Of Respondent Base On Age

49 5.1.2 Factors Of Late Payment Problems

This division discusses the factors that caused late payment problems among contractors in Malaysian construction industries. The factors are divided into three groups which are contractor-related factors, client-related factors and contractual matters-related factors.

Relative index was used to measure the most likely factors of late payment problems. These indexes were then ranked, and the results are shown in their Table respectively. Relative index with the same value in the same category was then calculated using standard deviation formula to determine the ranking.

5.1.2.1 Contractors Related Factors

Contractors related factors are factors contributed mainly by contractors. This includes both main contractors and sub-contractors. The factors are such as contractors delay in submitting claims and failure to follow the procedure as stipulated in the contract agreement. Relative index for contractor related factors as chosen by main contractors, sub-contractors and clients respectively are shown in Table 2.

50

Table 2: Relative Importance Index and Ranking for Contractor Related Factors Based on Respondent Business

No.

Contractor Related Factors

Main C In R 1 2 3

Sub-Con In 3.17 2.82 1.52 R 1 2 6

Clients In 3.73 4.33 4.07 R 5 2 4

i. Contractor delay in submitting claims. ii. Contractor submit claims with mistakes iii. Contractor submit uncompleted claims – without necessary attachments Contractor’s failure in submission a new (corrected) claim. Contractors’ failure to agree to the valuation of work. Contractors failure to do work base on B.Q. Contractors’ failure to follow the certain procedure / guidelines in claims. Contractor failure to understand the contract agreement.

3.15 2.38 1.86

iv.

1.52

8

1.32

8

4.33

1

v.

1.67

7

1.75

4

2.80

6

vi.

1.70

6

1.60

5

1.33

8

vii.

1.72

5

1.42

7

1.67

7

viii.

1.84

4

2.05

3

4.33

3

*

In R

: :

Relative Index Ranking

51 5.1.2.2 Clients Related Factors

Clients related factors are factors contributed mainly by clients. This includes clients’ poor financial management and clients’ poor financial sources. The act of clients employee wrongfully withholding the payment also fall into this category. Relative index for clients’ related factors as chosen by main contractors, subcontractors and clients respectively are shown in Table 3. Ranking for index with the same value was later done using standard deviation.

Table 3: Relative Importance Index and Ranking for Clients Related Factors Based on Respondent Business

No. i. ii.

Clients Related Factors Clients’ poor financial management. Clients’ poor financial sources / condition. Clients’ failure to implement good attitude

Main C In 4.81 4.69 R 1 2

Sub-Con In 4.63 4.63 R 2 1

Clients In 1.47 1.87 R 6 5

iii.

among its employee by wrongfully withholding the payment.

4.49

3

4.50

3

3.40

1

iv. v.

Clients’ delay in certification. Clients’ failure to agree to the valuation of work. Clients’ failure to understand the contract clauses. Clients’ failure to follow the certain procedure / guidelines in claims.

3.75 2.01

4 5

4.13 2.00

4 6

2.53 2.40

3 4

vi.

1.98

6

2.00

5

2.60

2

vii.

1.70

7

1.77

7

1.33

7

*

In R

: :

Relative Index Ranking

52 5.1.2.3 Contractual Related Factors

Contractual related factors are factors contributed mainly by contractual matters. This may happen if the contracts clause in the agreement used are too complicated to be understood by the technical personnel. There are also cases where late payment occurs because the contracts used are not comprehensive enough especially in terms of payments. Relative index for contractual matters related factors as chosen by main contractors, sub-contractors and clients respectively are shown in Table 4.

Table 4: Relative Importance Index and Ranking for Contractual Related Factors Based on Respondent Business

No.

Contractual Related Factors Contract used are too complicated to be understand by both parties. Contract used are not comprehensive of payment aspect. The use of “pay when paid” clauses. Contract bias to one party.

Main C In R 3

Sub-Con In 2.30 R 3

Clients In 1.60 R 4

i.

2.30

ii.

3.22

2

3.45

2

2.00

2

iii. iv.

3.41 2.26

1 4

3.65 2.10

1 4

2.40 1.73

1 3

*

In R

: :

Relative Index Ranking

53 5.1.3 Late Payment Impacts On Projects

This section discussed the late payment impact to the construction on progress and also the impact it had on the company itself. Some of the impacts include delay in project’s progress, extension of time for project, low quality of work and financial hardship for contractors. The list of impacts was obtained from previous works and by interviewing contractors which has experienced the late payment problems. The results was also analyze based on the three respondent groups using relative index ranked as indicated in Table 5.

Table 5: Relative Importance Index and Ranking for Impacts of Late Payment Based on Respondent Business

No. i. ii. iii. iv. v. vi. vii. vii. ix.

Impacts Of Late Payment Delay in project’s progress. Extension of time for project. Low quality works due to contractor’s uncertain financial condition. Abandonment of the project. Create negative relationship between developers & contractors. Creates financial hardship for the company. Sub-contractor refuse to continue works on the project. Suppliers would stop supplying. Construction cost will rise.

Main C In 4.15 3.41 2.21 2.99 3.59 3.47 3.67 2.72 3.21 R 1 5 9 7 3 4 2 8 6

Sub-Con In 3.93 2.70 3.92 4.05 4.00 4.60 4.63 2.07 2.12 In 5 7 6 3 4 2 1 9 8

Clients R 4.53 4.40 4.87 4.40 4.07 3.80 2.73 3.67 2.73 In 2 3 1 4 5 6 9 7 8

*

In R

: :

Relative Index Ranking

54 5.1.4 Actions Taken By Contractors to Overcome Late Payment.

This section discussed the actions taken by contractors to overcome the late payment problems. In the questionnaire, only contractors and sub-contractors are asked to choose the action taken by them to overcome the late payment problems. The actions were then ranked as shown in Table 6.

Table 6: Relative Importance Index and Ranking Action Taken By Contractors To Overcome Late Payment Problems.

No. i. ii. iii.

Action Taken By Contractors To Overcome Late Payment Problems Follow-up with clients using formal procedure. Follow-up with clients by direct communication only. Slow down the construction work at site until payment is received. Suspend the construction process/supplying process until payment is received. Apply interest charge to the overdue payments. Applying loan to utilize project Sending notice through company’s lawyer. Initiate arbitration or litigation.

Main C In 4.10 4.25 1.43 R 2 1 8

Sub-Con In 3.48 3.30 4.53 R 3 4 2

iv. v. vi. vii. viii. ix.

1.94 1.42 3.05 4.01 1.98

7 9 5 3 6 4

4.73 1.43 1.67 1.58 1.65 1.65

1 9 5 8 6 7

None. Just ignore and continue with next month’s claim. 3.90

*

In R

: :

Relative Index Ranking

55 5.2 Discussion

The following is a brief discussion of the ranking of the relative importance of the groups of late payment factors, impacts and actions taken as deducted from Table 2, 3, 4, 5 and 6.

5.2.1 Factors Of Late Payment

In the analysis, factors of late payments problems are groups into three (3) main categories. Each of these categories was then analyze and the results are shown in Table 2, 3 and 4. From there a new table was developed to reflect the factors that were rated highly by each of the group of the respondent. The results are as shown below in Table 7.

Table 7: Importance Index And Ranking Of Late Payment Factor Categories

No. i. ii. iii.

Late Payment Factors Category Contractor Related Factors Client Related Factors Contractual Matters Related Factors

Main C In 1.98 3.35 2.80 R 3 1 2

Sub-Con In 1.95 3.38 2.88 R 3 1 2

Clients In 3.33 2.23 1.93 R 1 2 3

*

In R

: :

Relative Index Ranking

This are then discussed based on the three (3) categories of factors of late payments.

56 5.2.1.1 Contractors Related Factors

As reflected in Table 7, contractors related factors were the highest ranking group to clients. This is mainly due to the failure to submit corrected claims, submission of incorrect claims, and failure to understand the contract agreement. These three factors were ranked among the top three in this group by the clients.

It was interesting to find out contractors delay in submitting claims and submitting incorrect claims are the two most important factors in this category chosen by both main contractors and sub-contractors.

5.2.1.2 Clients Related Factors

Both main contractors and sub-contractors have high level of agreement in choosing this category as the top factors of late payments. The Spearman’s correlation coefficients value on this factors between these two categories of respondent are 1. This is mainly due to clients’ poor financial management and poor financial condition, which rank the top two most chosen factors.

Clients on the other hand ranked the failure to implement good “payment” attitude among its employee contributed most to the late payment problems. It is also worth noticing that clients’ failure to understand the contract clause and failure to agree to the valuation of works are of more important factors to clients than contractors. The least chosen factor in this category is the clients’ failure to follow certain procedures in claims. All three categories of respondent clients, main contractors and sub-contractors ranked this at the last place.

57 5.2.1.3 Contractual Related Factors

Contractual matters related factor was considered important and ranked second by both main contractors and sub-contractors. Main contractors and subcontractor level of agreement on this category was high. They ranked each of the factors equally.

The use of ‘pay when paid’ clauses in most of the contract in Malaysia was chosen as the top factor that caused late payments problems in Malaysia. This is clearly revealed in the results of the research by both main contractors and subcontractors. The use of ‘pay when paid’ clauses often occurred in contract involving sub-contractors and housing developers.

5.2.2 Impacts Of Late Payment

Surprisingly this section revealed low level of agreements between main contractors and sub-contractors. Main contractors ranked the top three impacts of late payments as delay in project’s progress, sub-contractor refuse to continue works and its also creating negative relationships between developers and contractors. Meanwhile subcontractors ranked refusing to continue works, financial hardship and abandonment of the project as the top three most likely impacts of late payments.

In reality abandonment of project might not happen because of late payments but it may happen because of non-payment. Researcher concluded here that abandonment of project because of late payment might occur if the late payment problems were too severe like the delay of payments in more than five (5) months. Severe cases of late payments like this might have led to abandonment of projects by sub-contractors.

58 Clients on the other hand ranked impacts related to project which is due to low quality of works, delay and extension of time among the highest. While extension of time can be considered normal to project with late payments problems, low quality of works on the other hand can not be accepted. In this research, contractors placed their priority in quality even when the payment was late because they rank the consequences of low quality of works at the lowest rank. This means that contractor disagree with the fact that low quality of work decrease with late payments.

5.2.3 Action Taken By Contractors To Overcome Late Payment Problems

The level of agreement between main contractors and sub contractors were low for this section. The highest ranking action that has been taken by main contractors in case of late payments was to do follow up by direct communication. Not surprisingly, the second highest action chosen would be to follow up with clients using formal procedure.

The highest ranking action chosen by sub-contractor on the other hand was to suspend construction process. But there is a big index difference between main contractors and sub-contractors on this action. Main contractors personally ranked this action among the lowest.

5.3

Summary Of Chapter

In this chapter, the results of this study were generated from all the responses received. The structured data are summarized by calculating frequencies, percentage, relative index, standard deviation, and ranks. It is discussed based on the section of the questionnaire.

59 i. Section A – Respondent Particulars The distribution of respondent varies from the types of business of the company, gender and age. Table 1 shows the distribution of respondents based on the mentioned groups.

ii.

Section B – Factors of Late Payment Problems It discusses the factors that caused late payment problems among

contractors in Malaysian construction industries. The factors are divided into three groups which are contractor-related factors, client-related factors and contractual matters-related factors. Main contractors and sub-contractors

ranked the client-related factors among the highest while developers ranked contractor-related factors among the highest.

iii.

Section C – Impacts of Late Payments This section discussed the late payment impact to the construction on

progress and also the impact it had on the company itself. Some of the impacts include delay in project’s progress, extension of time for project, low quality of work and financial hardship for contractors. The results was also analyze based on the three respondent groups using relative index and then ranked as indicated in Table 5.

iv.

Section D – Remedial Action Taken By Contractors To Overcome The Late Payment Problems. The results derived from the data analysis indicated that the highest

ranking action that has been taken by main contractors to overcome late payments was to do follow up by direct communication. The highest ranking action chosen by sub-contractor on the other hand was to suspend construction process. The level of agreement between main contractors and sub contractors were low for this section.

60

CHAPTER VI

CONCLUSION AND RECOMMENDATION

6.0

Introduction

Factors, impacts and remedial actions taken by contractor regarding late payments problems ranked by each group of respondent have been identified in the previous chapter. This chapter on the other hand will discuss the findings of the survey and generate conclusion for all the findings. Apart from that, this section also discusses the recommendations made based on these findings.

6.1

Conclusions

The fact that the number of responding main contractors was larger than subcontractors reflects the current structure of the industry. One of the limitations of this study is that it surveyed main contractors, sub-contractors and owners.

A more diversified sample including supplier companies may help in getting view on this matter from a broader segment of the industry. There is also possibility of bias error in the survey as contractors and main contractors choose developersrelated factors as the highest ranking factors and developers on the other hand pick contractor-related factors among the highest ranking factors. The following are the major conclusions of the study:

61 6.1.1 Factors Of Late Payment

Factors that caused late payment issues in the construction industry have been successfully identified and could be group based on respondents.

6.1.1.1 Main Contractors

According to the analysis, among the top factors of late payments ranked by main contractors were: i. ii. iii. Clients’ poor financial management; Clients’ poor financial sources / condition; Clients’ failure to implement good attitude among its employee by wrongfully withholding the payment; iv. v. Clients’ delay in certification; and The use of “pay when paid” clauses.

6.1.1.2 Sub – Contractors

The level of agreement between main contractors and subcontractors are very high. It could be conclude that they agree on the same factors of late payments which are: i. ii. iii. Clients’ poor financial management; Clients’ poor financial sources / condition; Clients’ failure to implement good attitude among its employee by wrongfully withholding the payment; iv. v. Clients’ delay in certification; and The use of “pay when paid” clauses.

Eventhough sub-contractors received payment from main contractors, they did not blame the main contractors when late payment occurs. Sub-contractors are often

62 paid late by general contractors because of pay-when-paid and pay-if-paid clauses included in most contract forms. Sub-contractors know it should be possible to improve subcontractor payment practice if owners or developers pay main contractors on time, and in turn main contractors can pay their subcontractors right after completion of Sub-contract work.

6.1.1.3 Clients

Clients on the other hand ranked contractor-related factors among the highest. According to the analysis, the top five factors of late payments as chosen by clients are: i. ii. iii. iv. Contractor’s failure in submission a new (corrected) claim. Contractor submit claims with mistakes Contractor failure to understand the contract agreement. Contractor attachments v. Contractor delay in submitting claims. submit uncompleted claims – without necessary

There seems to be a biased response to this question on the part of clients, who presumably want to protect their reputation, whereas both sub-contractors and main contractors agree that clients related factors contributed most to the late payment problems.

6.1.2 Impacts Of Late Payment

Factors that caused late payment issues in the construction industry have been successfully identified and could also be group based on respondents. While some of these findings confirm already established perceptions, some others are quite unexpected such as abandonment of projects that was ranked among the highest impacts of late payment by sub-contractors and developers.

63 6.1.2.1 Main Contractors

For the impacts of late payments, it shows low level of agreement between main contractors and sub-contractors. To main contractors, the most likely impacts of late payment are:
i. ii. iii. iv. v.

Delay in project’s progress; Sub-contractor refuse to continue works on the project; Create negative relationship between developers & contractors; Creates financial hardship for the company; and Extension of time for project.

6.1.2.2 Sub – Contractors

Sub-contractors on the other hand ranked abandonment of the project among the highest impacts. This is quite unexpected as abandonment of projects could lead to bigger problems. But this impact is not possible in cases where late payment turns into non-payment. As for sub - contractors, the top five most likely impacts of late payment are:
i. ii. iii. iv. v.

Sub-contractor refuse to continue works on the project; Creates financial hardship for the company; Abandonment of the project; Create negative relationship between developers & contractors; and Delay in project’s progress.

6.1.2.3Clients

Clients in the other hand see the impacts of late payment to the project directly. Clients top five of impacts of late payments are:
i. ii.

Low quality works due to contractor’s uncertain financial condition; Delay in project’s progress;

64
iii. iv. v.

Extension of time for project; Abandonment of the project; and Create negative relationship between developers & contractors.

6.1.3 Remedies For Late Payment

Remedial actions taken by contractors in facing late payment issues in the construction industry have been successfully identified and could be group based on two (2) groups of respondent, contractors and sub-contractors. This is because the actions are listed based on their everyday experiences. It would be irrelevant for the clients to answer this section.

6.1.3.1 Main Contractors

Remedy actions taken by contractors also see low level of agreement between main contractors and sub-contractors. The top five action chosen by main contractors are:
i. ii. iii. iv. v.

Follow-up with clients by direct communication only; Follow-up with clients using formal procedure; Sending notice letter via company’s lawyer; None. Just ignore and continue with next month’s claim; and Applying loan to utilize project.

6.1.3.2 Sub – Contractors

Sub – contractors on the other hand prefer to take these below actions:
i.

Suspend the construction process/supplying process until payment is received;

ii.

Slow down the construction work at site until payment is received;

65
iii. iv. v.

Follow-up with clients using formal procedure; Follow-up with clients by calls only; and Applying loan to utilize project.

6.2

Recommendations

What could be determined here is the different results may be resulting from the different way of thinking, different capital and different responsibilities between main contractors and sub-contractors in handling projects. Among of all the action that has been taken by contractors into getting payments, the lowest ranking was to apply charges to overdue payments.

The method of applying overdue charges was very rare in the construction industry. In this problem, time is the essence. Arbitration or litigation was also least likely chosen because it took a very long time to settle.

To improve the situation, the findings of this research must be addressed by a joint effort of all participants in the construction industry. This calls for:

i.

Enforcing clauses of late payment in contracts. Applying charges to

overdue payments could be determined the same way late delivery charges has been applied.

ii.

Developing payment department for every contractors to report any

late payment problems. This department would be responsible in keeping records of every client with late payment history. Penalties would be given to them if they fail to pay on time as stipulated in contracts. It shall be reminded that time is the essence and this department shall be able to settle the problems a soon as possible.

66 iii. Adopting a new way of payment method among developers or clients

whom wrongfully withholding the payment. Penalties shall also be given personally to the employees if they are found to wrongfully withholding the payment. This is to discourage this habit.

67 References

Abdalla M. Odeh and Hussein T. Battaineh (2002). Causes of Construction Delay: Traditional Contracts. International Journal of Project Management. Vol. 20: 6773. Artidi, D. and Chotibongs, R. (2005) Issues in Subcontracting Practice. Journal of Construction Engineering and Management ACSE. Volume 8: 866-876. Construction Industry Development Board Malaysia (2006) Consultation Forum On Construction Industry Payment And Adjudication Bill. Malaysia. Unpublished. Hong-Long Chen, William J. O’Brien, and Zohar J. Herbsman (2005) Assessing the Accuracy of Cash Flow Models: The Significance of Payment Conditions ACSE Vol 6: 669-676. Hyung K. Park, Seung H. Han, and Jeffrey S. Russell (2005) Cash Flow Forecasting Model for General Contractors Using Moving Weights of Cost Categories ACSE Vol 4: 164-173. Lip, E. (2003).Construction Payment Blues – Why That Domino Effect? Davis Langdon and Seah Consultancy Executive Summaries for the Practitioner. Volume 3: 1-4. Mohamed Y. Hegab and Khaled M. Nassar (2005) Decision Support System for Commencement Delay Claims ACSE Vol 3:177-180. Oon Chee Kheng, Ir. (2002). Standard Construction Contracts In Malaysia. Seminar On Construction Contracts And Arbitration. 18 October 2003, IEM, Perak Branch, 1 – 16. Reeves, K. (2003) Pay Up. JUBM Construction News and Views. Issue 1/2003: 4-6. Singh K.S, Ir. H. (2003). Engineering and Construction Contracts Management – Post Commencement Practice. Singapore: Lexis Nexis Business Solutions. The Star, (2006) Pay Within Three Weeks. Malaysia. Utusan Malaysia (2006) Akta Baru Tangani Masalah Bayaran. Malaysia. Utusan Malaysia (2006) Kerajaan Lantik Terus Subkontraktor Atasi Masalah Pembayaran Lewat. Malaysia. Vincent Ng J (2005) Tradebond (M) Sdn Bhd V Halim-O Construction Sdn Bhd. The Malayan Law Journal. W. Rae, S. (2002). Is The Law Losing Interest In Construction? James R Knowles (Singapore) Pte Ltd. Unpublished.

68 Xianhai Meng (2005). Guarantees for Contractor’s Performance and Owner’s Payment in China. Journal of Construction Engineering and Management ACSE. Vol. 3: 232-237. Xueqing Zhang (2005) Concessionaire’s Financial Capability in Developing BuildOperate-Transfer Type Infrastructure Projects ACSE Vol 10: 1054-1064.

Note: Arranged alphabetically according to author’s name.

73 APPENDIX E

Sample Of Survey Questionnaire

QUESTIONNAIRE

1.0

Subject Of The Research In a typical engineering and construction contract, it is apparent that the contractor has promise to carry out all the works under the contracts. On the other hand, the employer must keep his side of promise by giving necessary consideration which in most cases comes in monetary form. It is very obvious that a healthy and consistent disbursement of monetary is a critical point in determining the contractor performance.

2.0

Aim of The Research The aim of this study is to investigate the consequences of late payments problems confronted by contractors and to proposed strategic actions that could be taken by contractors in securing their payments.

3.0

Guideline to fill the Questionnaire Please tick appropriate box and circle appropriate answer you believe best reflects your agreement with the given statement.

SECTION A – Respondent’s Particulars 1. 2. 3. 4. Age Gender : : _____ _____ ________ years

Working Experience :

Company Status (Please choose one that reflects your company/employer best): i. ii. iii. iv. v. Main Contractor (Please State Class : ____________) Sub-Contractor (Please State Class : ____________) Supplier Clients Other (Please State : _________________________________)

74

SECTION B To Identify the Factors That Caused Late Payment Issues in Construction Process
1 2 3 4 5 Disagree Slightly Agree Moderately Agree Strongly Agree Extremely Agree

1.

At you opinion what are the most likely factors contributed by contractors that caused late payment issues to rise in construction process? NO. i. ii. iii. iv. v. vi. vii. viii. FACTORS Contractor delay in submitting claims. Contractor submit claims with mistakes Contractor submit uncompleted claims – without necessary attachments Contractor’s failure in submission a new (corrected) claim. Contractors’ failure to agree to the valuation of work. Contractors failure to do work base on B.Q. Contractors’ failure to follow the certain procedure / guidelines in claims. Contractor failure to understand the contract agreement. SCALE 3 4

1

2

5

2.

At you opinion what are the factors contributed by client that caused late payment issues to rise in construction process? NO. i. ii. iii. iv. v. vi. vii. FACTORS Clients’ poor financial management. Clients’ poor financial sources / condition. Clients’ failure to implement good attitude among its employee by wrongfully withholding the payment. Clients’ delay in certification. Clients’ failure to agree to the valuation of work. Clients’ failure to understand the contract clauses. Clients’ failure to follow the certain procedure / guidelines in claims. SCALE 3 4

1

2

5

75

3.

At you opinion what are the factors contributed by contractual matters that caused late payment issues to rise in construction process? NO. i. ii. iii. iv. FACTORS Contract used are too complicated to be understand by both parties. Contract used are not comprehensive of payment aspect. The use of “pay when paid” clauses. Contract bias to one party. SCALE 3 4

1

2

5

SECTION C To Identify the Impacts Of Late Payment on Projects

1.

What is the most likely impact of late payment on the project respectively? NO. i. ii. iii. iv. v. vi. vii. viii. ix. FACTORS Delay in project’s progress. Extension of time for project. Low quality works due to contractor’s uncertain financial condition. Abandonment of the project. Create negative relationship between developers & contractors. Creates financial hardship for the company. Sub-contractor refuse to continue works on the project. Suppliers would stop supplying. Construction cost will rise. SCALE 3 4

1

2

5

76
SECTION D – THIS SECTION IS TO BE ANSWERED BY CONTRACTORS ONLY To Investigate The Strategic Action That Will Be Taken By Contractors To Improve Situation And Project Performance Due To Late Payment Problems.

1.

What is the most likely action taken by contractors into getting payments when facing with late payments problems? NO. i. ii. iii. FACTORS Follow-up with clients using formal procedure. Follow-up with clients by calls only. Slow down the construction work at site until payment is received. Suspend the construction process/supplying process until payment is received. Apply interest charge to the overdue payments. Applying loan to utilize project Sending notice letter trough company’s lawyer. Initiate arbitration or litigation. None. Just ignore and continue with next month’s claim. SCALE 3 4

1

2

5

iv. v. vi. vii. viii. ix.

2.

Do you think that by changing some clause in contract agreement can curb the late payment problems?
1 2 3 4 5 Disagree Slightly Agree Moderately Agree Strongly Agree Extremely Agree

3.

Can applying interest to overdue charges help to curb late payment problems?
1 2 3 4 5 Disagree Slightly Agree Moderately Agree Strongly Agree Extremely Agree

If you wish to participate and contribute more in this survey it will be most appreciated. Please leave your contacts details so that you could be contacted. Name : ………………………………. E-mail : ………………………………. or Phone : ……………………………….

Thank you for your time and co-operation. It is very much appreciated.

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