Late Payment and Nonpayment Encountered by

Contracting Firms in a Fast-Developing Economy

Hamzah Abdul-Rahman 1; Meiye Kho 2; and Chen Wang 3

Abstract: Late payment and nonpayment is explicitly recognized as a widespread problem in the construction sector and recurs in project
after project. Although the Construction Industry Payment and Adjudication Act was enacted in 2012 by the Parliament of Malaysia to ease
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timely and regular payment, it does not apply to a construction contract entered into by a natural person for any construction work involving a
building which is less than four stories high and which is wholly intended for his or her occupation. Further, the majority of resident buildings
in Malaysia are mostly low-rise buildings that are less than four stories high. Also, CIPA Act 2012 does not address the underlying causes of
late payment. This study aims to identify the underlying causes of late payment in the construction sector in a fast-developing economy—
Malaysia—and to develop effective solutions to mitigate this kind of risk. A structured questionnaire survey was conducted for contractors
registered as Grade 3 to Grade 7 under Malaysian Construction Industry Development Board (CIDB). A sample of 1,000 contractors was
selected, approximately 5.3% of the population. Findings reveal that the “cash flow problems due to deficiencies in client’s management
capacity” is the most significant underlying cause for late payment. In mitigation of late payment risks, “investigating the owner’s ability to
pay” was analyzed as the most effective solution. Indicators for late payment and nonpayment identified in this study enable contractors to
forecast payment risks in both the current project and future projects. DOI: 10.1061/(ASCE)EI.1943-5541.0000189. © 2013 American
Society of Civil Engineers.
Author keywords: Nonpayment risk; Late payment; Fast-developing economy; Contracting firms; Payment capacity; Cash flow risks.

Introduction
When the flow of money into a project is delayed, the net cash flow
becomes negative (Paul et al. 2012; Ranyard and McHugh 2012;
Kaka and Price 1991). In a construction project, payments are
needed to pay for materials, labor, subcontractors’ account ren-
dered, and preliminary and general overheads expended during
the progress of the work. Some practitioners may regard late pay-
ment as acceptable, and perceptions of this kind merely exacerbate
a problem that is already difficult to handle (Massoud et al. 2011).
Because late payment can affect a company’s cash flow to the ex-
tent of leading to insolvency, timeliness of payment is important
(Yang and Chang 2013). Once a payment problem starts to develop,
it typically gets worse over time and shifts financial burdens from
one participant to another while creating cash flow problems
(Scholnick et al. 2013). Clients have become more demanding,
more discerning, and less willing to accept risk (Lee et al.
2012). It is a normal practice for some clients to shift some risks
to other parties further down the chain by delaying payments and
thus reducing their financing costs. In this way, the financial burden
is transferred to contractors who may not have sufficient capital
assets or available credit to cover delays (Chung 2013).
1 often, people concentrate on making a profit and overlook the ef-
Vice-Chancellor’s Office, International Univ. of Malaya-Wales,
Kuala Lumpur 50480, Malaysia.
2
Faculty of Built Environment, Univ. of Malaya, Kuala Lumpur 50603,
Malaysia.
3
Associate Professor, Faculty of Built Environment, Univ. of Malaya,
Kuala Lumpur 50603, Malaysia (corresponding author). E-mail:
derekisleon@gmail.com
Note. This manuscript was submitted on June 24, 2013; approved on
October 17, 2013; published online on December 2, 2013. Discussion per-
iod open until May 2, 2014; separate discussions must be submitted for
individual papers. This paper is part of the Journal of Professional Issues
in Engineering Education & Practice, © ASCE, ISSN 1052-3928/
04013013(9)/$25.00.
According to Davis (1999), the motto for strategic cash flow is
to “collect early and pay late.” This has created a dilemma in which
delay in payment is a two-edged sword. It is common for clients to
withhold the money as long as possible, whereas contractors want
their money as soon as possible. Consequently, late payment is a
predicament which is difficult to deal with in view of the different
interests and perceptions of the parties involved (Lou and Wang
2013). Owners who presumably wish to protect their own reputa-
tions seem to give biased responses when asked whether clients
pay the prime contractors on time. Subcontractors and general con-
tractors agree that payment is not made on time nearly as often as
is claimed (Arditi and Chotibhongs 2005). This research aims to
identify the underlying causes of late payment from the contactors’
perspective in the expectation to develop appropriate corrective
actions.
Cash Flow in Construction Projects
Late payment is closely connected to cash flow and is a matter of
great concern in the construction industry, perhaps more so than in
other less labor-intensive industries (Yang and Chang 2013). Work-
ers have to be paid whether the contractor has been paid or not. Too
fects on their cash flow of delayed payment. If the profit is tied up
in debts or work in progress and there is not enough left over to pay
the bills, then that profit is of little use (Low and Goi 2003). Cash
flow in the construction industry is critical because projects tend to
be larger and take longer to complete than in other industries, and
progress payments also tend to be large. Any delays in the project
or cash flow can have a major impact, and cash flow problems are
largely responsible for the high level of insolvency in the construc-
tion industry. Because construction projects are extremely complex
and usually governed by highly detailed contracts, the payment
process is one of the most sensitive areas for all parties. It is

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 important to understand each party’s concerns, as all parties bear a
significant risk.
Times for receiving payments affect cash flow in a project (Paul
et al. 2012). Unless payments are made in advance before the
project starts, many construction projects have negative net cash
flows until the very end when the final payment is received (Hyung
et al. 2005). Delays in payment affect the contractor’s cash flow,
and prompt payment is of the greatest importance to minimize fi-
nancial hardship for the contractor. Contractors will then delay pay-
ment to sub-subcontractors and suppliers further downstream in the
supply chain (Pettigrew 2003), starving them of cash in turn and
forcing them to rely on borrowing. Advancing or borrowing
additional capital to fund cost overruns means increased interest
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production chain. The organization least able to carry the risk, such
as the small specialist contractor, has to accept the risk or not be
awarded the work (Zhou et al. 2013). Parties further down the line
will consequently be more vulnerable to this risk.
Research Methods and Procedures
A combination of an exploratory and a descriptive method was em-
ployed for this project. A questionnaire survey is a good approach
to elicit people’s perceptions regarding late payment issues. There-
fore, a structured questionnaire survey was employed to make an
anonymous study of a wide geographical area in Malaysia.

costs in collecting on another defaulted promise (Wilder 2007).

Disruptions to cash flow caused by late payment can signifi-
cantly affect the daily operations of small businesses, depending Sample Population
on the extent and duration of the delay (McCoy 2006). Promptness
of payment is critical to ensure normal operation in construction There are 63,150 contractors registered with the Construction
companies and avoid affecting their daily activities. Again, there Industry and Development Board Malaysia (CIDB). The target
seems to be a general agreement among contractors and public groups of respondents in this study were contractors in grades
agencies that monthly payments are not made on time by G3, G5, G6, and G7, specializing in building and civil engineering
public agencies, even though the timing of payments is explicitly (G7 is the top). These four grades were selected to represent small,
laid down in standard agreement forms and general provisions medium, and large contractors to ensure the consistency of re-
(Turkoglu and Egemen 1980). The timing of payments is a key spondents and to avoid possible bias. Contractors of grades G1
factor in firms’ profitability performance (Jackson and Gilliam and G2 were not selected because of their low turnover and volatile
1999; Strischek 1995; Heron and Lie 2002) as cash is the most nature. The characteristics of contractors registered with the CIDB
important of a construction company’s resources. are listed in Table 1.
There seems to be agreement that if owners pay general contrac-
tors on time, the timing of payments to subcontractors can be
improved significantly. Prompt payment to prime contractors Sampling Size, Design, and Methods
enables payments to be made further down the chain (Arditi and
Chotibhongs 2005). Payments are made by the client to the prime Stratified sampling was used in combination with simple random
contractor. The prime contractor then passes a share to the subcon- sampling to ensure each category in the population was represented
tractors, who are responsible for the heating, lighting, water serv- in the sample in a similar proportion. In this research, the popula-
ices, and so forth. The subcontractors pass a share to their own tion were stratified according to the CIDB grades G3, G5, G6,
subcontractors. If a payment is held up, particularly if it occurs and G7. Stratified sampling ensures a degree of representativeness
at the top of the chain, it affects everyone down the line (Taleizadeh but could lead to the overrepresentation of a segment of the pop-
et al. 2013). They all are affected by the lack of payment, whether it ulation. This problem is avoided by using proportionate sampling
was their fault or not. For the large contactor this could mean in which the proportions of contractors in the population are re-
serious inconvenience, but for the subcontractor it could mean flected in this sample. According to Blaikie (2004), samples of be-
insolvency (Pettigrew 2003). tween 1,000 and 2,000 provide adequate information about most
populations in most circumstances. The general rule for samples
is the bigger the better, but increasing sample size is subject to
the law of diminishing returns. A sample of 1,000 private contrac-
Risk of Late Payment tors was selected, approximately 5.3% of the population. Table 2
The owner’s failure to pay is among the risk factors that affect the shows the breakdown by grade and location. The size of the sample
construction’s project time and/or cost (Wong and Hui 2006). Late was determined in Eq. (1), inspired by the probability formula:
or delayed payment from clients can be categorized as a type of
financial risk involving a high level of uncertainty (Taleizadeh et al. Table 1. Characteristics of Contractors Classifications
2013; Maeda and Sakai 2007). Managing financial and economic
Contractor
risks is important because these risks may have a negative impact Paid up capitala/net categories
on cash flow, endanger a project’s viability, and limit profitability Grade Tendering capacity capital worthb (RM) (size)
(Xenidis and Angelides 2005). These risks cause the project’s cost
G7 No limit 750, 000.00 Large
to increase abnormally and subsequently delay the progress of the
G6 Not exceeding 10 million 500, 000.00 Medium
project. Zou et al. (2007) categorize project funding problems as G5 Not exceeding 5 million 250, 000.00 Medium
cost-related risks, time-related risks, and quality-related risks that G4 Not exceeding 3 million 150, 000.00 Medium
can significantly influence the delivery of a construction project. G3 Not exceeding 1 million 50, 000.00 Small
Financial stress may result from a combination of delayed pay- G2 Not exceeding 500,000.00 25, 000.00 Small
ments with inaccurate cash forecasts and/or deficiencies in cash G1 Not exceeding 100,000.00 5, 000.00 Small
flow management (Paul et al. 2012). Proper cash flow management a
Paid up capital (for private limited company/public company).
plays a strategic role even when a firm is not facing financial stress b
Net capital worth (for sole proprietorship/partnership) in the form of
(Yang and Chang 2013; Barbosa and Pimentel 2001). Contract current account bank statement (average balance considered)/balance from
conditions and penalty clauses are often used to pass risks “down saying account/overdraft facilities/uncharged fixed deposit statement/
the line” by allocating them to organizations in the supply and ASB/ASN shares (source: Construction Industry Development Board).

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 Table 2. Distribution of Questionnaire by Contractors’ Grade and Location
Grade 3 Grade 5 Grade 6 Grade 7
States Population Sample Population Sample Population Sample Population Sample
Johor 1,239 66 223 12 72 4 239 13
Kedah 400 21 108 6 45 3 166 10
Kelantan 333 18 124 7 35 2 134 7
Labuan 38 2 7 0 3 0 10 1
Melaka 357 19 88 5 31 2 77 5
Negeri Sembilan 438 23 82 4 26 1 74 4
Pahang 475 25 121 7 31 2 108 6
Perak 622 33 161 9 56 3 106 6
Perlis 69 4 23 1 4 0 22 1
Pulau Pinang 635 34 148 8 59 3 207 11
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Sabah 734 39 160 9 82 5 295 16

Sarawak 457 24 157 8 59 3 264 14
Selangor 2,083 110 594 31 218 12 891 47
Terengganu 427 23 153 8 34 2 157 8
Wilayah Persekutuan 2,226 118 860 46 297 16 1,373 73
Total 10,533 559 3,009 161 1,052 58 4,123 222

n=N ¼ 1000=ð10533 þ 3009 þ 1052 þ 4123Þ respondents are involved in both public and private projects
(Table 4). Respondents cover both public and private sectors, which
¼ 1000=18717 ¼ 0.053 ð1Þ
helps to reduce bias on the relative prevalence of late payment in
government or private projects.
where n = size of the sample; and N = size of the population. The seriousness of late payment in public and private projects
From a total of 1,000 questionnaires, the response rate was 10.2%, were ranked using a Likert scale rating from 1 to 4 (least significant
which was close to the 10.8% reported by Adams (2008) in a study to most significant). Table 5 shows that late payment was a more
on payment risk. significant problem in the private sector (Mean ¼ 2.89) than in the
government sector (Mean ¼ 2.50). The difference in the serious-
ness of late payment between public and private projects affects
Results of Analysis and Discussion the size of the mark up and contractors’ bidding behavior.
Subsequently, the acceptability of late payment, shown in
Nonparametric testing was conducted because it does not require Table 6, indicates that 80% of respondents were able to accept
any assumptions about the shape of the underlying population payment delay by only a few days, i.e., less than five work-
distribution. Table 3 contains demographic information on the
ing days.
respondents according to current job position, years of experience,
There are significant differences in the frequency of perspectives
and the company’s information. The study features a high degree
towards the acceptable duration of late payment. The homogeneity
of reliability because the majority of respondents were CEOs,
of variance assumptions has been violated (p < 0.05), which re-
managers, and directors. The range of main business activity indi-
flects Coakes and Steed’s (2003) results. The acceptable lateness
cated that the findings cover a wide variety of contractors in the
ranged from 3 to 45 days, and the most serious delay was one year.
Malaysian construction industry. A majority (54.9%) of the
As shown in Table 7, most of the respondents (58.8%) did not
explicitly allow for the risk of late payment when bidding for a
Table 3. Frequency Distribution of Respondents’ Profile project. However, a clear majority (75.5%) quote different prices
Demographic for clients who pay late and those who pay promptly. Contractors
categories Category breakdown Frequency Percent have, in practice, traditionally used high markups to cover risk,
but this approach is no longer effective when their margins are
Job position CEOs, managers, directors, 61 59.8
and other managerial posts
squeezed, which is in line with the findings from Baloi and Price
Senior executive 14 13.7 (2003). A bid price must consider the financial position of the cus-
Executive 24 23.5 tomer or client, including cash flow needs. There is a significant
Administration officer 2 2.0 difference between the frequency of perspectives towards the incor-
Others 1 1.0 poration of late payment risk and the pricing of a project with the
Years of 1–5 45 44.1 client who tends to pay late (p < 0.05), which suggests that re-
experience 6–10 17 16.7 spondents were not aware that they had actually allowed for late
11–15 21 20.6
16–20 5 4.9
>20 14 13.7 Table 4. Government and Private Projects under Survey
Company’s main Prime contractor 72 70.6
Valid Cumulative
business
Project funding Frequency Percent percent percent
Activity Subcontractor
Building works 39 38.2 Government funded project 16 15.7 15.7 15.7
Civil and structural works 33 32.4 Private funded project 30 29.4 29.4 45.1
Mechanical and electrical works 13 12.7 Both government and 56 54.9 54.9 100.0
Infrastructure works 22 21.6 private project
Architectural works 13 12.7 Total 102 100.0 100.0

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 Table 5. Seriousness of Late Payment in Public and Private Projects
Standard
Types of project 1 2 3 4 Minimum Maximum Mean deviation Rank
Government 16 (15.7%) 25 (24.5%) 23 (22.5%) 14 (13.7%) 1 4 2.50 1.004 2
Private 5 (4.9%) 30 (29.4%) 27 (26.5%) 27 (26.5%) 1 4 2.89 0.894 1
Note: Friedman test: chi-square = 4.083; p < 0.043.

payment when bidding for a project but had unconsciously priced
according to the client’s promptness in payment. The respondents
generally have a poor understanding on the incorporation of late
payment risk when bidding for a project. This confirms the findings
of Thevendran and Mawdesley (2004), in which only 17% of re-
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mitigation of late payment problems is “understanding and re-
searching the owner’s ability to pay” (mean ¼ 3.89), followed
by “to solve late payment by implementing the Construction Indus-
try Payment and Adjudication Act” (mean ¼ 3.69). The third to
fifth were “negotiating payment terms with the client to facilitate

spondents had experience in risk management. Wong and Hui
(2006) support the finding that the contractors may inflate the ten-
der price if the clients have a record of late payment. Smith and
Bohn (1999) also found that markups are affected by the adequacy
of the clients’ project financing and their ability to pay on time.
a healthy cash flow” (mean ¼ 3.68), “to obtain the payment due
before handing over the project to the client” (mean ¼ 3.67),
and “the importance of understanding and studying the payment
requirement of each individual project” (mean ¼ 3.66).

Measures and Indicators of Late Payment

Underlying Causes of Late Payment
Eight main causes, including 41 subcauses, of late payment
were identified from the literature and the pilot survey. The descrip-
tive statistics in Table 8 show the underlying causes of late
payment from the contractors’ perspective. Most of those signifi-
cant subcauses were related to the main cause of poor financial
management of clients. The top three causes were “cash flow
problems” (mean ¼ 3.96), “ineffective utilization of funds”
(mean ¼ 3.88), and “scarcity of capital to finance the project”
(mean value ¼ 3.81), followed by “failure to generate income
from the bank when sales do not raise the required amount”
(mean ¼ 3.72), categorized under insufficient financial resources.
Next in rank were “poor cash flow resulting from a lack of proper
process implementation,” “delay in releasing the retention monies
to the contractor,” and “delay in the evaluation and certification of
interim and final payments” (mean ¼ 3.66).
Answers to the open-ended questions included in the questionnaire
survey show that the possibility of late payment arises when work
does not progress as scheduled. Payments to a project are also
likely to be delayed when the economy slows down and sales are
reduced. Late payment follows delays in issuing certificates and
delays in the certification of progresses. It is also common to have
late payment when the project is almost completed. In addition,
cash flow problems, materials problems on site, slow supply of
materials, and underpayment of subcontractors and consultants
all contribute to late payment. It is important for contractors to
be aware of these indicators of late payment so that appropriate
measures could be taken in time. Table 10 lists the measures rec-
ommended to incorporate risk of late payment. These measures
highlight those points to be considered by contractors before
beginning a project.

Critical Discussion Compared with CIPA Act 2012

Possible Solutions in Mitigating Late Payment
In 2012, the Construction Industry Payment and Adjudication Act
Table 9 identifies the five most effective solutions to mitigate late was enacted by the Parliament of Malaysia to ease timely and regu-
payment out of 22 variables. The most effective solution in lar payment. The CIPA Act 2012 of Malaysia received royal assent
on June 18, 2012, and came into force on June 22, 2012. Malaysia
now has a statutory payment and adjudication regime for construc-
Table 6. Acceptability of Late Payment tion contracts (Parliament of Malaysia 2012). This act provides a
Yes No Chi-square test mechanism for speedy dispute resolution through adjudication to
Late payment for assist in easing cash flow. Aggrieved contractors who do not re-
a few days is Significant
ceive timely payments from the clients can initiate adjudication,
acceptable? No Percent No Percent χ2 (p)
and the issue can be resolved within 45 days.
Less than five (5) 80 78.4 20 19.6 36.00 <0.001a From Sections 2 and 3 of the act, this act applies to every con-
working days struction contract made in writing relating to construction work car-
Significance p < 0.001.
a ried out wholly or partly within the Territory of Malaysia, including
a construction contract entered into by the government (Parliament
of Malaysia 2012, p. 7). However, this act does not apply to a con-
Table 7. Incorporation of Risk of Late Payment when Pricing for a Project struction contract entered into by a natural person for any construc-
Yes No Chi-square test tion work in respect to any building which is less than four stories
high and which is wholly intended for occupation (Parliament of
Risk of late Significant
Malaysia 2012, p. 8).
payment No Percent No Percent χ2 (p)
Indah Water Konsortium (IWK) (2013) categorizes building
Incorporation of risk 41 40.2 60 58.8 53.353 <0.001a with two to five floors as a low-rise building. This act does
of late payment not take into account the payment default for low-rise building.
Pricing of project 77 75.5 25 24.5 26.510 <0.001a Nevertheless, the mainstream of construction works in Malaysia
Significance p < 0.001.
a
is mostly low-rise buildings, especially resident buildings that

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Table 8. Underlying Causes of Late Payment

Significance of late payment (1 = least significant to 5 = most significant)

© ASCE
Standard
Main causes Subcauses 1 2 3 4 5 Mean deviation Rank
Client’s poor financial Deficiencies in client’s management capacity 3 (2.9%) 10 (9.8%) 17 (16.7%) 36 (35.3%) 35 (34.3%) 3.96 1.091 1
management Client’s ineffective utilization of funds (http:// 4 (3.9%) 10 (9.8%) 28 (27.5%) 29 (28.4%) 30 (29.4%) 3.88 1.122 2
www.financialmanagement.org)
Lack of proper process implementation 1 (1.0%) 15 (14.7%) 27 (26.5%) 34 (33.3%) 24 (23.5%) 3.66 1.089 5
Overlook the ripple effect of economic downturn 7 (6.9%) 9 (8.8%) 44 (43.1%) 23 (22.5%) 13 (12.7%) 3.31 1.084 22
Scarcity of capital to finance the project (Meng 8 (7.8%) 6 (5.9%) 19 (18.6%) 39 (38.2%) 28 (27.5%) 3.81 1.190 3
2002)
Financial failure due to bankruptcy (Xenidis and 15 (14.7%) 16 (15.7%) 15 (14.7%) 20 (19.6%) 34 (33.3%) 3.55 1.444 10
Angelides 2005; Low and Goi 2003)
Insufficient financial Clients failure to generate income from bank 2 (2.0%) 9 (8.8%) 25 (24.5%) 39 (38.2%) 24 (23.5%) 3.72 0.986 4
resources when sales do not hit the targeted amounta
Clients underestimate the time period and the cash 4 (3.9%) 11 (10.8%) 29 (28.4%) 42 (41.2%) 12 (11.8%) 3.50 0.925 13
flow from the investment (Lip 2006)
Clients inaccurate forecasting of market demand 3 (2.9%) 15 (14.7%) 35 (34.3%) 29 (28.4%) 16 (15.7%) 3.42 1.034 17
when preselling property (Zou et al. 2007)
Shortage allocation of fund from sources of 2 (2.0%) 7 (6.9%) 40 (39.2%) 29 (28.4%) 20 (19.6%) 3.57 0.966 9
funding when contract sum increased due to
variation orders
Clients loan from bank not in place to pay the 3 (2.9%) 15 (14.7%) 26 (25.5%) 34 (33.3%) 19 (18.6%) 3.57 1.136 9
contractorsa
Banks refuse to provide credit facilities to small 5 (4.9%) 16 (15.7%) 25 (24.5%) 33 (32.4%) 19 (18.6%) 3.43 1.171 16
construction company
Paymaster’s withholding Clients deliberate delay for their own financial 1 (1.0%) 13 (12.7%) 33 (32.4%) 32 (31.4%) 19 (18.6%) 3.61 1.018 7

04013013-5
of payment advantage
Delay in releasing of the retention monies to 0 (0%) 10 (9.8%) 35 (34.3%) 32 (31.4%) 20 (19.6%) 3.66 0.940 5
contractor (Park et al. 2005; Low and Goi 2003)
Wilful withholding of payment for personal 7 (6.9%) 29 (28.4%) 24 (23.5%) 19 (18.6%) 18 (17.6%) 3.11 1.245 25
reasonsa
Conflict and poor Client’s lack of trust with the consultants in 9 (8.8%) 29 (28.4%) 25 (24.5%) 24 (23.5%) 10 (9.8%) 3.05 1.133 27
communication among certification of contractors progress claim and
parties involved variation ordersa

J. Prof. Issues Eng. Educ. Pract., 2014, 140(2): 04013013

Lack of understanding on clients’ requirement for 9 (8.8%) 23 (22.5%) 31 (30.4%) 30 (29.4%) 5 (4.9%) 3.04 1.053 28
variation of works (Arain and Low 2005)
Difficulties in reaching settlement (Lip 2006) 3 (2.9%) 19 (18.6%) 32 (31.4%) 37 (36.3%) 7 (6.9%) 3.32 0.938 21
Disagreement of the valuation of work donea 3 (2.9%) 16 (15.7%) 37 (36.3%) 17 (16.7%) 15 (14.7%) 3.26 1.048 24
Local culture/attitude General perception of construction players who 4 (3.9%) 10 (9.8%) 46 (45.1%) 28 (27.5%) 12 (11.8%) 3.38 1.003 19
think that delay for few days is acceptable
Contractors will accept late payment from clients 6 (5.9%) 10 (9.8%) 40 (39.2%) 23 (22.5%) 21 (20.6%) 3.61 1.004 7
as they are always at the mercy of the clients
(Mochtar and Arditi 2001)
Clients assume contactors will finance the project 8(7.8%) 11(10.8%) 35(34.3%) 25(24.5%) 21(20.6%) 3.61 1.004 7
in advance in the event of late payment (Wang
et al. 2006; Lim 1999; Shanmuganayagam 1988)

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Table 8. (Continued.)
Significance of late payment (1 = least significant to 5 = most significant)

© ASCE
Standard
Main causes Subcauses 1 2 3 4 5 Mean deviation Rank
Financial market instability Increment of interest rate in repayment of loan 11 (10.8%) 21 (20.6%) 37 (36.3%) 25 (24.5%) 3 (2.9%) 2.95 1.045 30
(Baloi and Price 2003)
Increment of foreign exchange rate (Kapila and 15 (14.7%) 27 (26.5%) 31 (30.4%) 18 (17.6%) 5 (4.9%) 2.72 1.188 32
Hendrickson 2001)
Inflation (Xenidis and Angelides 2005; Hwee and 6 (5.9%) 18 (17.6%) 19 (18.6%) 33 (32.4%) 22 (21.6%) 3.59 1.249 8
Tiong 2002; Kaming et al. 1997)
Delay in certification/poor Delay in evaluation and certification of interim 1 (1.0%) 13 (12.7%) 26 (25.5%) 37 (36.3%) 21 (20.6%) 3.66 1.011 5
documentation and final payment (Abdul Kadir et al. 2005)
Late in consultant’s site staff attending to 4 (3.9%) 13 (12.7%) 41 (40.2%) 28 (27.5%) 14 (13.7%) 3.32 1.061 20
inspection work (Abdul Kadir et al. 2005)
Involvement of too many parties in the process of 4 (3.9%) 12 (11.8%) 32 (31.4%) 35 (34.3%) 17 (16.7%) 3.53 0.940 11
honoring interim certificatea
Bureaucracy or inefficient procedures of payment 4 (3.9%) 13 (12.7%) 29 (28.4%) 27 (26.5%) 25 (24.5%) 3.51 1.088 12
process
Consultant’s quantity Underpaid claims (Hwee and Tiong 2002) 4 (3.9%) 13 (12.7%) 36 (35.3%) 30 (29.4%) 15 (14.7%) 3.39 1.057 19
surveyor Consultant’s quantity surveyor not a quality 9 (8.8%) 20 (19.6%) 30 (29.4%) 29 (28.4%) 10 (9.8%) 3.01 1.092 29
management system company (Odeh and
Battaineh 2002)
Contractor’s default Slow processing and delay in finalizing of 3 (2.9%) 10 (9.8%) 36 (35.3%) 29 (28.4%) 22 (21.6%) 3.64 1.041 6
variations and final accounts (Lip 2006)
Contractor’s capital lock-up (Palmer et al. 1999) 3 (2.9%) 19 (18.6%) 34 (33.3%) 31 (30.4%) 13 (12.7%) 3.45 1.075 15
Contractor’s do not research paymaster ability to 3 (2.9%) 17 (16.7%) 34 (33.3%) 34 (33.3%) 12 (11.8%) 3.41 1.019 18
pay when tender for a projecta

04013013-6
Contractors submit incomplete payment claims 11 (10.8%) 18 (17.6%) 31 (30.4%) 28 (27.5%) 12 (11.8%) 3.11 1.277 25
(Lip 2006)
Contractors delay in submitting claimsa 20 (19.6%) 19 (18.6%) 28 (27.5%) 26 (25.5%) 7 (6.9%) 2.81 1.341 31
Contractors do not incorporate financial charges 9 (8.8%) 22 (21.6%) 36 (35.3%) 21 (20.6%) 11 (10.8%) 3.08 1.202 26
when bidding for project with poor payment
recorda
Financial blunder the contractor underpriced the 2 (2.0%) 23 (22.5%) 35 (34.3%) 28 (27.5%) 12 (11.8%) 3.30 1.082 23
project costs during tender (Yiu and Tam 2006;

J. Prof. Issues Eng. Educ. Pract., 2014, 140(2): 04013013

Hwee and Tiong 2002)
Willing to accept onerous payment term from 6 (5.9%) 21 (20.6%) 27 (26.5%) 27 (26.5%) 17 (16.7%) 3.35 1.221 20
clients (Mochtar and Arditi 2001)
Contractor’s work Contractor’s poor quality of work lead to client’s 2 (2.0%) 16 (15.7%) 35 (34.3%) 30 (29.4%) 14 (13.7%) 3.46 1.036 14
performance dissatisfactiona
Contactors work do not adhere to required 4 (3.9%) 16 (15.7%) 30 (29.4%) 26 (25.5%) 13 (12.7%) 3.39 1.120 19
standard of specificationa
a
Indicated underlying causes of late payment obtained from pilot questionnaire survey.

J. Prof. Issues Eng. Educ. Pract.

 Table 9. Possible Solutions in Mitigation of Late Payment Problems
Effectiveness
Standard
Solutions 1 2 3 4 5 Mean deviation Rank
Understand and research the owner’s 1 (1.0%) 5 (4.9%) 20 (19.6%) 47 (46.1%) 25 (24.5%) 3.89 0.863 1
ability to pay (Battisti 2004)
Implementation of Construction Industry 3 (2.9%) 11 (10.8%) 26 (25.5%) 22 (21.6%) 30 (29.4%) 3.69 1.148 2
Payment and Adjudication Acta
Negotiate payment terms with clients to 3 (2.9%) 4 (3.9%) 34 (33.3%) 37 (36.3%) 21 (20.6%) 3.68 0.904 3
facilitate a healthy cash flow
Obtain payment due before handover of 5 (4.9%) 8 (7.8%) 31 (30.4%) 23 (22.5%) 30 (29.4%) 3.67 1.181 4
project to client (Ling and Hwee 2007)
Understand and study the payment 3 (2.9%) 11 (10.8%) 23 (22.5%) 38 (37.3%) 23 (22.5%) 3.66 1.027 5
requirement of each individual project
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Implementation of financial management 4 (3.9%) 9 (7.8%) 23 (22.5%) 41 (40.2%) 21 (20.6%) 3.65 1.083 6
to ease cash flow problems (Hyung et al.
2005)
Requires the owner to provide the owner’s 8 (7.8%) 9 (8.8%) 33 (32.4%) 14 (13.7%) 34 (33.3%) 3.63 1.262 7
payment guarantee or bonda
The authority should list down the late 5 (4.9%) 18 (17.6%) 22 (21.6%) 23 (22.5%) 30 (29.4%) 3.59 1.247 8
payers in the industrya
Provide the contractor rights to either 4 (3.9%) 18 (17.6%) 25 (24.5%) 26 (25.5%) 25 (24.5%) 3.57 1.163 9
suspend work or reduce the rate of work
(Scheffler 2003)
Clients to bond with the capital market to 2 (2.0%) 7 (6.9%) 41 (40.2%) 32 (31.4%) 17 (16.7%) 3.55 0.946 10
get credit to fund the projecta
Train and educate all parties on the effects 7 (6.9%) 6 (5.9%) 29 (28.4%) 39 (38.2%) 17 (16.7%) 3.53 1.072 11
of payments on the project progress
Contractors are encouraged to complain to 6 (5.9%) 16 (15.7%) 29 (28.4%) 19 (18.6%) 28 (27.5%) 3.52 1.203 12
Biro Aduan Negara (BAN) and assured
them that this will not affect them in
securing future worksa
Contractors should submit timely accurate 4 (3.9%) 14 (13.7%) 28 (27.5%) 30 (29.4%) 23 (22.5%) 3.49 1.093 12
invoices with complete documents (Tarek
2006)
The finance and accounting team reviews 3 (2.9%) 11 (10.8%) 30 (29.4%) 40 (39.2%) 14 (13.7%) 3.49 0.922 12
what is required for timely project billing
and prompt payment
Impose interest penalties on late payers 9 (8.8%) 20 (19.6%) 18 (17.6%) 26 (25.5%) 25 (24.5%) 3.45 1.277 13
(Meng 2002; Scheffler 2003)
Mutual discussions of problems with 3 (2.9%) 15 (14.7%) 32 (31.4%) 35 (34.3%) 14 (13.7%) 3.45 0.982 13
employer to address the problems in a
timely manner (Tarek 2006)
Contractor’s entitlement to establish legal 9 (8.8%) 12 (11.8%) 38 (37.3%) 17 (16.7%) 22 (21.6%) 3.39 1.208 14
lien in Malaysia (Meng 2002)
Apply term loan from bank to cover the 9 (8.8%) 15 (14.7%) 32 (31.4%) 22 (21.6%) 19 (18.6%) 3.32 1.209 15
consequences of late paymenta
Contractors should chase payments due 8 (7.8%) 15 (14.7%) 36 (35.3%) 28 (27.5%) 12 (11.8%) 3.26 1.088 16
relentlesslya
Sign another supplementary agreement 11 (10.8%) 21 (20.6%) 37 (36.3%) 21 (20.6%) 9 (8.8%) 3.05 1.134 17
with the employer to reduce the rate of
work due to insufficient budget from
sources of fundinga
Reschedule work to help client ease their 11 (10.8%) 18 (17.6%) 34 (33.3%) 27 (26.5%) 9 (8.8%) 3.03 1.139 18
cash flowa
Contractors should mark up the tender 19 (18.6%) 9 (8.3%) 38 (37.3%) 23 (22.5%) 10 (9.8%) 2.98 1.203 19
price for a project with bad payment record
(Arditi Chotibhongs 2005)
Note: Friedman test: chi-square = 100.570; p < 0.001.
a
Indicated possible solutions obtained from pilot questionnaire survey.

are less than four stories high. According to Omar et al. (2012), the
Malaysian contemporary terraced house has been around for more
than 40 years. It is widely built by private developers and is cur-
rently the most preferred form of property in the country
because of its affordability. In the second quarter of 2008 alone,
Malaysia had seen terraced housing dominate the overall supply
of new houses available in the market. In a study conducted
by Chong et al. (2011), most respondents prefer to buy property
(77.1%) instead of an apartment or condominium although the
price of apartment is much cheaper than property.
Therefore, this research is vital to fill this gap, as the targeted
contracting firms for this research were registered contractors that

© ASCE 04013013-7 J. Prof. Issues Eng. Educ. Pract.

J. Prof. Issues Eng. Educ. Pract., 2014, 140(2): 04013013

 Table 10. Measures to Incorporate Risks of Late Payment
Number Main heading Subheading
1 Financial Institution • Dealing with financial institutions to
guarantee payment
• Apply for long term bank loans
• Bank facilities
2 Terms of payment • Negotiate payment terms with the
client
• State terms and conditions clearly and
review of these terms thoroughly
before signing a contract
3 Monitoring payments • Progress report on payments
• Make claims according to work
progress Keep track of payments
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4 Slowing down of works • Reduce volume of works
5 Mark up profit margin • Include a higher margin to
incorporate the cost of funding and
delays
• Bid at higher price to allow for late
payments
• Mark up the profit margin
6 Preliminaries item • Increase the preliminaries item by a
small percentage
7 Research the client’s • Check clients’ backgrounds
background • Research the company’s financial
background
fall under the categories of G3, G5, G6, and G7 from the Construc-
tion Industry Development Board. These four grades of contractors
were selected to be representative of different categories of contrac-
tors consisting of small, medium, and large size. This study that
comprises different sizes of contractors does consider both low-rise
and high-rise construction works.
Drew and Skitmore (1993) postulated that different bidders
would have different degrees of preference towards the individual
contract characteristics, such as size. High-rise residential is a
unique property and it differs from property such as bungalows
and terrace houses. A common definition for a high-rise building
is any building having an occupied floor located more than 22.86 m
(75 ft) above the lowest level of Fire Department vehicles access
(Prashant 2007). According to Indah Water Konsortium (2013),
high-rise buildings have five or more stories. Therefore, this act
might have overlooked the payment woes for low-rise property
in the Malaysian construction industry. This act, which is appli-
cable for high-rise buildings only, covers certain types of bidders,
whereas this study covers different bidders that range from G3, G5,
G6, and G7 from the Construction Industry Development Board.
The act is also not without its weaknesses once the parties agree
to the terms of the adjudicator and the fees for the adjudicator.
However, if the parties fail to agree, the current standard terms
of appointment and fees of the Kuala Lumpur Regional Centre
for Arbitration (KLRCA) apply. Parties are jointly and severally
liable for these, in much the same way as other legislation around
the world. The general rubric was, and remains, “pay up now and
argue later.” If someone did not agree with the adjudicator’s deci-
sion, he or she had no choice but to pay while then going on to
arbitration or litigation to have the dispute reheard (Gould 2012).
Conclusions and Recommendation for Future Study
This research focuses on the underlying causes and remedies of
late payment issues encountered by contractors. Clients’ cash flow
problems emerge as the most significant underlying cause because
© ASCE 04013013-8
J. Prof. Issues Eng. Educ. Pract., 2014, 140(2): 04013013
of the deficiencies in a client’s management capacity. Ineffective
utilization of funds and scarcity of capital to finance a project also
significantly contribute to late payment. Investigating a client’s
ability to pay, empowering the Construction Payment and Adjudi-
cation Act, and negotiating payment terms to facilitate a healthy
cash flow were suggested by the study as possible solutions. Some
indicators of late payment were also provided to enable contractors
to anticipate late payment in projects to forecast risks related to late
payment. The CIPA Act enacted in 2012, which is applicable for
construction works more than four stories high, overlooked the
payment woes for low-rise property in the Malaysian construction
industry. This act only covers certain types of bidders, whereas this
study covers different bidders that range from G3, G5, G6, and G7
from the Construction Industry Development Board. For better im-
plementation, further case studies are recommended to test those
indicators and measures developed in this study accompanied by
an applicable flowchart.
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