Is Late Or Non-Payment A Significant Problem To

Malaysian Contractors?

M.E. Che Mu n aaim1,M.S. Mo hd Dauu rl", H. Abdul-Rahman'

I.VCenter for Project and Facilities Manag eme nt

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

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

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

Introduction ca n co n tri b u te to a p ro jec t's s uccess. A

Malaysia se ts to be a fully d evelop ed nati on
by 2020 and its cons truction indust ry has
se t its own vision to be 'a mong the best in
the world ' by 2015 (President's & CEO's,
2004). Ma ny cha llenges a nd problems
w ith in the constr uc tion in dustry have to be
ove rcome to enable the vision be achieved in
time . One of the problems id entified as a
priority is that which re la tes to payment
p roblems in the construc tio n industry. The
p ractice o f efficien t and tim ely paym ent in
constru ction p rojects is a major factor th at
s m oo th cash fl o w brings an e ffe c tive
d elivery, on time and withi n budget so that
proj ect s can b e co m pleted w ithi n the
planned time and with quality (CIO B,2004).
La te a nd non-payment issues o r rather
con trac tors' pa ym ent woes ar e cons idered
to a ff ec t man y p laye rs in th e lo ca l
con s truction ind us try and is referred to as
financial p rob lem s by those affected by it,
whether in public or private funded projec ls
(Abdul -Rahman et al. 2006).

35
JO llrl/ol of Design tuu! tlu: Bui lt EflViroll1llt'lI f
The problem of late and non-paytnent is
exp erienced not on ly in fast de vel op ing
economics, as in the case of Malaysia, but
also in de vel op ed countries, such as the
United Kingdom . For ins tance, a survey of
the Pa yment Perfo rman ce in Britain has
shown that the construction indu stry, in
particular, is prone to lat e-pa ym ent culture,
w ith paym ent o f de bts due to subco n tractors
and suppliers bein g made, on average, 53
days aft er inv oices or applicati on s fo r
payme n t hav e been rende red (Johnston,
1999).
In the local scene, Class F contractors
(the s ma lles t catego ry of con tracto r
class ifica tion) w ho are eligible for projects
cos ting RM200,000.00 a nd below; such as
v illage or 'kamp ung' roads , repair and
restoration of schools, police stations, drains,
and s to res, often face paym en t-rela ted
problems besid es lack of jobs (Suh aini, 2005).
In 2005, abo ut 16,000 Class F con tractors
we re on th e brink o f ban k ruptcy w hen
sev eral umbrella contractors failed to pay
them for rural roa ds they had built, d espite
the governme nt hav ing paid the umbrella
con trac tors in full (Su ha ini, 2005).
Several rel ated s tudi es have bee n
con ducted in othe r de veloped countries
w hich addressed th e probl em s rela ted to
payment issues in the construction industry.
For exa mple in the Unit ed Kin gd om the so -
called Latha m Repo rt (Lat ha m, 1994) has
introduced so me radical mea su res to resolve
p ro blems rel ated to paymen t issues in th e
cons truc tion industry by in tro d ucing the
Constructi on Contracts Act, es tablishing
mandatory trust funds for paym ents and
sugges ting tha t adjudicati on sho uld be the
normal me thod of d isp u te reso lu tion. Some
of th e recom m end a lions h a v e bee n
inc orpora ted in the Part II of the Hou sing
Grants, Cons truction and Regen eration Act
1996.
Pa ym ent p ro bl e ms have p rom p ted
so me cou n tries like Un ited Kin gd o m,
Singap ore, New Zealand and SO B1 C states in
Aus tra lia, e.g. New Sou th Wales, to legislate
their cons truction speci ficstatutorypaytnent
security regime . These leg isla lions wer e
36
purposel y ena cted to add ress issu es on
p rompt p a y m e nt in the constr uc tion
. industry to elim inate poor pay ment p ractices
and smoo the n the con tractor's cash flow
(Lip, 2005; Ameer Ali, 2005). Ac ts and the
res pec tive countries an d s tates, w hi ch
enacted them to add ress the p robl em of late
and non-p aym ent, are listed as follow s:
i. Ho using Gran ts, Co ns truct io n and
Regenerati o n Ac t 199 6 - Uni ted
Kingdom
ii. Build in g and Co ns truc tion Ind us tr y
Security of Payment Act 1999 (NSW) -
New Sou th Wa les, Aus tra lia
iii. Bu ild ing a nd Co ns truc tion In dust ry
Security of Payme n t Act 2002 (VIC) -
Victoria, Australia
iv, Buil d in g and Co ns truction Industry
Payments Act 2004 (QLD) - Q ueensland,
Au stralia
v. Cons truction Contrac ts Act 2002 - Ne w
Zealand
vi. Build ing and Co ns truc tion Secur ity of
Pay me nts Ac t 2004 - Singapore.
O wi ng to lack of researc h on the iss ues of
late and non-p a yment in the Malaysian
cons tructio n ind us try , a s tudy w as
cond uc ted to id entify the problems a nd
effects of late and no n-paym en ts in the
co ns truction ind ustry . The rese arc h
co incided w ith the lo cal Co ns truc tio n
Ind us try and Development Board 's in tention
to seek pointers on pay ment issues . This
pap er p resents results of a study on la te and
non-pay m ent issues facing the Malaysian
con tracto rs . Ano the r portion of the study,
th at d es cr ibe s the sa me is sue facing
consulta n ts, is presen ted elsewhe re (crDB,
2006).
Proble m Statem en ts
There are m echanisms provide d in tnany
standard forms of construction contrac ts
de alin g with payme n t from the client to the
co ntracto r, yet ther e rema ins a chronic
problem of late and non-payment issues in
 te Late 01' NOll-Paymen t A Sigmficnllt Problem To Malaysian Contractors?
the Malays ia constructi on industry (Amcer
Ali, 2005b). Lim (2005) indica ted th at ther e
are various avenues available to improve the
paylnent problems in the ind ustry and some
of these op tions have been incorporated in
the cons truct ion con tracts or s tatutes in
o ther developed countries such as payment
of stipulated interest, suspension of work ,
erad ica tio n o f "pay whe n paid " cla use,
adjudication, liens, trus t and pay ment
bonds. The main iss ues th at req u ire
particular attention are as follow :
a) despite adequate mechanisms in place
w hy do Malays ian con tractors s till
ex perience late or /and no n-paymen t
situation, and
b) w ha t ca n be do ne to a llevia te th is
p rob lem which will ultimately imp rove
the de livery tim e of end products.
This paper attempts to address the above
issues that cou ld become a ma jor se tback in
achieving the Ma laysian construct io n
indus try's vis ion of becoming amongs t the
best in the g lobe by 2015.
Aim and Objectives of Re search
The aim of thi s stu dy is to address th e
problems of late and non-payme nt b y way
of providing ev idence about the seriousness
of late and non-paymen t issues in the
Malays ian const ruc tion indu stry. This aim
is supported by the follow ing objectives:
a) To de termine the seriousness of late and
no n-payment prob lems amo ng
Ma laysia n co n tractors and sub -
con tractors;
b) To s tudy the causes of late and non-
payment in the loca l scene;
c) To investigate the effects of de layed and
non-paymen t to the payees down the
contractual pay lnent chain; and
d) To identify and es tablish con trac tua l
and/ or sta tutory remedies to resolve or
m itig ate cont ractors' paymen twoes.
Res earch Methodology
The principal me thod used for the study was
a questionnaire survey . The questionnai re
was designed to meet the objectives of
research by reviewi ng literatures dea ling
with late and non -paym en ts issues in
cons truc tion . Subseq uen tly, several research
meetings were he ld wi th representa tives
from the Institution of Surveyors Malaysia
(IS M) and Co nst ruction In du s try
Development Board (CIDB). The meetin gs
w e re hel d to fur the r im p r o ve the
questionn aire by taking into considera tion
the views from the construction ind ustry
players.
Target Respondents
This sect ion describes the qu esti onnaire
survey conducted on a sample of contractors
registered with the CIDB. Six thousand
(6,000) ac tive con trac tors from Grade G1
th rou gh G7 we re randomly selected using
th e CIOB da tabase. Of the 6,000 fielded
questionnai res, 333 replies were received,
whic h represen ts a response rate of around
5.6%. The low response ra te may have bee n
contrib uted to the shor t response period
given to responden ts or simply because the
prospective respondents were not interested
in providi ng feed backs.
QlIest;olllla;l'e St ruct ure
The que s tions in the question naire were
designed to have three types of answering
me thods, namely: rating-based, selective-
based and open-based formats . For the
rating-based questions, the statements we re
dev ised to me as ure the respondents '
op inions by registering them on a fou r-point
scale ranging from "never to very frequ ent "
and "not seriou s to very serious ." The
selective-based questi ons only requi red
respondents to tick the ap propria te box or
boxes in the questionnaire . The op en-ended
ques tions allowed respon d en ts to record
down their answers to the q ues tio ns ,
Findings o f the survey were analyzed to
provide a be tter understanding of the issues
of late and non-paym ent in the Ma laysian
37
[ou rna! of Design awi tile Built Environment
construction industry. The Statistical
Package for the Social Sciences (SPSS) was
used to handle the statistical calculations.
Scope and Limitation
The questionnaire survey undertaken in the
study is based on the opinions and
experience of contractors in Malaysia about
the seriousness of the issue of late and non-
payment and the contributing factors for its
existence. The contractors' favourable
remedies in securing payment debt from their
respective clients were also recorded in this
survey. This survey does not consider late
and non-payment problems faced by the
local consultants or views fr0111 the clients.
Literature Review . on Late and
Non-Payment Issues
In order to give a better understanding about
the issues of late and non-payment, it is
appropriate to discuss the causes, effects and
possible solutions related to the issues oflate
and non-payment in the global construction
industry.
Causes ami Effects of Late and NOIl-
Pasjment
Based on the literature reviews the following
factors have been identified as some of the
potential causes of late or non-payment in
the construction industry:
a) Paymaster 's Poor Financial
Management
Qualified contractors often are
unwilling to bid on projects for
employers whose financial capacity and
credit rating are not widely known (The
Associated General Contractors of
America, 2003). Thus, it is extremely
important for the employer to manage
his financial aspect in a good manner
as it is a major factor in determining the
project's success. It is anticipated that
38
paymasters' poor financial management
could cause contractors insufficient
operating funds when the latter are
obliged to pay the payees . The late
payment or even non-payment therefore
could arise.
b) Paymaster's withholding of payment
As provided in many standard forms of
contract, the employer/paymaster may
withhold payment to the main
contractoror sub-contractor fora variety
of reasons. Such reasons are defective
construction work, disputed work,
failure to comply with any material
provision of the contract, third party
claims filed or reasonable evidence that
a claim will be filed, and failure to make
timely payments for project resources
(Rourke & Gentry, 2002). These reasons
may cause the employer/paymaster to
refuse in making payments which will
result in late payment.
c) Local culture / attitude
An attitude if commonly accepted by the
industry or society in general can
become a culture. In this regard, we do
not want negative attitude to be accepted
as a culture in the industry . As
explained previously, the Britain
construction industry is prone to late
payment culture with payment of debts
due to subcontractors and suppliers
being made, on average, 53 days after
invoices or applications for payment
have been rendered. (johnston, 1999)
Possible effects of late or non-payment have
been identified as follow:
a) Creates negative chain effect on other
parties
As stated by Davis Langdon & Seah
Consultancy (2003), the construction
payment blues have domino effects. A
delayed payment by one party may affect
the whole supply chain of payment of a
construction project. For instance, if an
 Is Lnte Or Non-Ptrfmcnt A SigllifiCnlIt Problem To Malaysiall COll trnclors?
employe r de lays in making paymen t to
the contractor this in turn w ill result in
contractor's delay in m ak ing payment
to the sub-contractors and suppliers.
b) Resu lts in delay in completion of p rojects
Late paymen tcauses cash flow problems
w hich in tu rn can affec t th e overa ll
progress of works (Ameer Ali, 2005a).
Acco rdi ng to A bdu l- Rahman a n d
Berawi (2002) financia l p ro bl e m is
confirmed by the top management as the
ma in cause of del ay in addition to
manpower shortag e.
c) Lead s to ba nkruptcy or liqu id a tion
Lat e payment ma y affec t the fin ancial
status o f th e con tractor. A lo cal
newspaper reported tha t 16,000 F-class
co ntractors were on the bri n k of
bankruptcy when several umbre lla
co n tractors failed to pay them for rura l
roads they h a d b u il t, despite th e
government having paid the u mb rella
con tractors in full (Suhaini, 2005).
A tterna t iu e R em edie s f or Secur ing
Pilym ent Debt
Based on the literature reviews the following
have been identified as the possible remedies
for secur ing pay ment d ebt fro m the
defaulting clien t:
a) Payment of Stip ula ted Interest
The issue of whe ther the con tractor is
entitled to clai m for loss of in terest d ue
to d elay and defa ult of the em ployer in
making payment is still unclea r. In FC
Minier Ltd v Welsh Health Techni cal
Services Organization (1980) 13 BLR 1, a
claim for interest due to late paymen t
was upheld by the Court of Appeal. The
reason for this is beca use claim on
interest for late paymen t is considered
as direct lo s s a nd /or expense
equiva lent to a claim for damages as
decided in Hadley v Baxendale (1854) 9
Ex 341 and which has been codified
under sect ion 74 of the Contracts Act
1950. However, the test in Hadley v
Baxendale as to w hether da mages in the
forms of interest can be pa id for, is
dependen t on the ques tion of w hether
the likeli h o o d o f th e occurrence of
dama ges was an ticipate d by bo th
parties at the time when the contract was
made, havi ng regard to the know ledge
of the parties at the time . Therefore, if
th e e mp loyer was aware th a t th e
con tractor was forced to borrow the
capital, the contrac tor may be able to
claim interest or financing charges for
la te or unpa id paymen t. The refore, a
clear wo rding in the con tractis required
to prov ide contrac tu al mechanis m for
the contractor to claim for interest or
financing charges.
In M al a ysi a , only Sub-cla uses
42.9(b) and 42.12 o f CID 132000 form
comprehensively provides entitlementto
claim for interest du e to employer's late
and unpa id payment as we ll as for any
failure or delay by the Superintendent
Officer in certifying any pay ment d ue .
Such an express provision is essentia lly
. required in order to avo id disputes on
this iss ue es pec ia lly if it goes to
unnecessary expensive arbitration or
litigation proceedings.
b) Sus pension o f Work
It is uni versally known tha t there is no
C01nn10n law right of suspension of work
du e to non-p ayment. The con tractor is
obliged to proceed w ith the work in a
regula r and . d iligen t ma nne r
not with stan di n g the fact th at he is not
being paid for the works he has execu ted
p reviou sly. The Court of Appeal of New
Zealand in the case of British Pipe Lilies
v Christchurch Drainage (1986) 33 BLR
76 has hel d th a t a contractor has no
implied right of temp orar y suspe nsion
following non-payment on the part of
the emp lo ye r. Th e deci s ion was
subseq ue n tly follow ed in the English
case of Lubenluun v South Pembrokesuire
39
IOIlYllnl of Design nlld tlte Built Ellvirollmellf
(1986) 33 BLR 39 wh ich affirmed the
p os iti on of co n t ra c to r ' s r ight of
suspension. This fact has been expressly
acknowledged by the local court in Knlr
Selig Construction Sdn Bird. v Seisin
Deuelopmeni Sdll. Bird. [1997J 1 CLJ Supp
448.
According to Murdoch and Hu ghes
(1996), it is not uncommon to find that a
contractor or sub-contractor who has not
been pa id what is due th reat ens to
sus pe nd work under the contract until
payment is made. It must be noted that
without a clear contrac tual right to
suspend the works, the con tractoris no t
en titled to do so ev en th oug h the
em ployer has failed to pay him w ithin
the time stipu lated in the contrac t. In this
respect, if the contrac tor suspe nds the
work the courts may find him guilty of
repu di ating the contract. This w ill in
tu rn open for the o ther party to accep t
the repud iation and rescind the con trac t
and s ue for damages.
Hyp othetically, a contractor is only
entitled to suspe nd the works following
non -payment if such a s tipulation is
exp ress ly spelled ou t in the contrac t.
However, the right to suspend the works
can o nly be found in ClD B2000. For
exa mple, Clause 42.10 s tates that if the
employer fails or neglects to pay the
co ntractor the amount on any certificate
wi th in the Period o f H onou ri ng
Certifica te, and contin ues such defa ult
for fourteen (14)days the contractor can
giv e a not ice specifying his intention to
suspe nd the execution of the works. If
the employer still continues such default
for ano ther fourteen (14) days after the
receipt of the notice, the contractor can
suspe nd wh olly or partly the execution
of works o r reduce the rate of execution
of the works. It should be noted that
ther e ar c no simi la r p rovisions
regarding this ma tter in PAM1998 and
JKR 203 /203A Forms. Stra ngely, the
PAM No minated Sub-con tract Standa rd
Form prov ides the righ t to suspend the
work to the sub-contractor in the event
40
of non -payment under Sub-clause 11(7).
Havi ng discussed the importance of
such right it is ap prop riate to include
this provisio n in all the s tanda rd forms
ava ilable in Ma laysia . Per h ap s by
incl uding th is provision in the
Malaysian Cons truction Contract s Act
it wo uld force the incorpo ratio n of the
rig ht to sus pend the work in all the
standard forms of contract, because once
the Act is in force it will provide certain
mand atory requirements that must be
followed by an y construction contrac t
that falls wi thin the ambit of the Act
failin g which a default scheme will kick
in and bo th parties in the con tract must
comply with it. In the UK, Section 112of
the HGC RA provides tha t when the
su m is not paid on the fina l day of
pay ment and no wi thhold ing notice has
been issued by the emp loyer, in th is
circums tances the con tractor is entitled
to suspend his performance until the full
payme nt is paid bu t strictly subjec t to
the issua nce of7 days' noti ce stating his
int enti on in suspend ing the wo rk and
gro und s of suspension.
c) Right to refer d ispute to Adjud ication
Adjudicatio n is defined as a process
where upon request by one of the parties,
a n independe n t adjudica to r steps in
(even when work is ongo ing or services
arc being provided) and makes binding
decision on disputes within da ys o r
weeks. For example in the UK, the
adjud ica to r is required to make a
binding decision wi thin 28 day s.
The in teresti ng feature o f
adjudication is that the dispute in
question can be referred to an
independent third par ty at any tim e
pro vided th a t both parties ar e in
contract. In practice a dispu te is being
referred to the arbitra tion when the
project is completed. Ironically, in claims
involving a large su m o f money a
co ntractor would strugg le to su stain his
cash flow before he can co mmence the
arbitra tion proceeding . Eve n worse,
 Is Late 0,. NOli -Payment A Siguifican! Problem To Malaysiall Contractors?
sometimes it is already too late to take
this matter to court as the contractor may
have suffered severe cash flow problem
which could result in liquidation.
The policy of adjudication has been
characterized as "pay now argue later"
due to the nature of the decision which
is binding and immediate enforceability
until the dispute is finally determined
by legal proceedings (or by arbitration if
the contract so provides or the parties
otherwise agree) or by agreement. I It
means that the decisions are enforceable
and the parties need to comply with the
decisions whether they like it or not until
the dispute is finally decided by court
or arbitration. Due to this matter, some
regarded adjudication as providing a
"rough justice".
Nonetheless, adjudication provides
a speedy and cost effective mechanism
in resolving dispute. It is must be noted
that the parties in dispute are likely to
have commercial considerations in mind
rather than a concern for extensive legal
analysis.
Findings and Discussion
The findings of the study are discussed
according to the objectives formulated.
Finding 1: Tile Seriousness of Late and NOIl-
Ptupnent Problems
The respondents were asked to state
whether they have experienced late payment
in government funded projects since January
2000. About 44% (147) of the respondents
reported they have been paid in an untimely
manner in government funded projects.
When asked whether their companies have
experienced any late-payment event in
private funded projects since January 2000,
178 (54%) out of 333 respondents
responded, "yes" to the question.
("ontrachn f
E\f'C rlcnu ' \\lIh La te 1".I)mt nl l n (fi"rrn rTll: n( .. u n....d
r roju h
'I " ' ''~' 'I? W~ Y('s .U7. ..a.l :;' o "(' ~
D ~o
o Mh i i:1g
rr\u. lC 7.2 6~;'
("onlr.ilcl(ln ' r.\ rc r l ~ n('(' \\lIh La te .".lI)m( nl ln Pr lva te .·unc.kd
rn 1('Ch
Figure1: Contractors' Experience with Late
Payment in Government and Private
Funded Projects
Figure 2 indicates 14% (48) of the total
respondents affirmed that they have not been
paid for the works executed on site in
government funded projects. As for non-
payment in private funded projects, 33%
(111) of the respondents revealed that they
have not been paid at all for the materials
supplied and labour provided for the
execution of the work. The reasons for such
a situation could be due to paymaster's poor
financial management and paymaster's
failure to implement good governance in
business. It can be deduced from the
findings that late payment has become a
culture in public and private funded projects
and the situation is much worse with the
latter. As for non-payment, the number of
non-payment cases in private funded
projects is double from the government
funded projects. It is appropriate to say that
Malaysian construction industry is prone
to late and non-payment culture.
To determine the seriousness of the
late and non-payment problem in terms of
41
Journal of Design and tlu: Built Environmen t

( ·~ nrr~,l o,,' fllp<rh ncr \lhh i'\" o n.l '~·n",nr I ~ O., 'u~ m< ~' l \l~ "' d ('onlr .. lo.. ' t:"I" r1 , n, ~ \ll rh '''' ~ n. I'~ .' m, n l l n l' rh~l t t'unJ.;J
1', ,,)«1> I'roj«1>

O Nu
, ,,,,., ,ss. '@ i;3'' ' II " '''', o w,
c Nu
O " li" i:l ~
N". lJ 1. 4 1 ~ ;

Fig ure 2: Contractors' Experience w ith Non-Payment in Government and Private Funded
Project

monetary aspec t, the ques tion naire was These figures rep resent feedbacks from 113
drafted to enable resp ondents to state the and 160 res pondents w ho are invo lved in
amo unt of la te o r non-p aymen t w hic h pub lic a n d p r iva te sec tors p roj ects ,
rem ains owed by their paymasters since respectively. These sta tistics show that late
January 2000. The amoun t of mo ney still and non-p aym en t is su e has be co me a
owed by the paymasters to contractors is sy ndrome in the Malays ian constr uction
nearl y RM370 m illion for governme n t- indu stry and immediate m easures must be
funded projec ts and about RM510million for in troduced to m iniruis e the cash flo w
pr iva te funded pr ojects as show n in Table 1. problems in the constructio n indus try .

Table 1: Total Amount Wh ich Remains Overdue for Contrac tors si nce
January 2000 to Date of Response

Sta tistic Item Amo unt remains overd ue in Amount remains overdue in
government funded projects private fund ed projects

Valid Missing 113 160

220 173
Mean 3,240,797.24 3,197,641.92
Stun 366,210,087.60 511,622,706.80

Finding 2: Causes of Late (l/Id Non -Paipn ent

Figure 3 presents some ge neral obse rvations that may be made on causes of late and non-
payment. For the purposes of these observations five most frequent causes of late payment
are " Delay ill certification," "PaYlIlaster's poor [innncint nmnagement," "Local cul t urefuttitude,"
"Paymaster'sfa il IIre to implement good governance ill business" and "Un derptunnent of certified
amounts by the paymaster" w ith the ir overall mea ns of 1.826, 1.734, 1.63, 1.63 and 1.565,
respectively. Score of three (3) repr esents the mos t frequen t cause and zero (0) repr esen ts
never.The reason why mean was used as the data analysis method in most of the questions
as op posed to ranking the factors using nu mber of responses beca use the fonn er provides
consistency w ith the hyp othesis that if the same ques tion was asked to a separate set of
respo nden ts the answers would be very much sim ilar or of slight va riance.

42
 Is Late Or Non-Paument A Significant Problem To Mnlnysinl/ Contractors?

D al ay In cer tifi ca ti o n 1 .826

Pny rn ns lor's p oo r finon e l ol
n lanag Q'110n l 1.734
L o c ol c u lt u ra I attit u do '1":63
Pa YOUts te r "s fa ilu r e t o I n l plefn~ n t go od
;=:::::
governonce In b usi ness ~
Und arp ayn1e nt of ce rt ifi e d orno u n t s
by t h o pay nl os lo r ~
Th e u se o f -pa y '.... h en p a l d ~ • c l a uses ~
In con trac ts 1 .527
D i s il gr oom ont on tho v al u a tion o f
w o r k d one ~
Pa y n lAs ter's w r o n gful wl1 hholdln o of
payn"lon t 1.451
S hor t o f c u r re n t yeA r proj e ct bu d g e t 1.44
~
Po or co rurrru ritce t to rr a010n 9 partlos
I nvolved
D el ay In s ubrllltlln u contractor 's
p n y m en t clai m 1 .114
Con nle t anlong p a rti e s In vol ve d ~
Poor u nd e r stan d in g of t he con tr ac t
~
1 .087

o 0 .5 1.5 2
M e a n

Figure 3: Causes of Late Payment

Figure 4, shows the responses on the question abo ut the causes of non-paymen t. Based on
Figure 4, th ree most frequent causes of non-payme nt are "Paymaster's poor [inancial
management," "Paymaster's failure to implement good gooernance in business," and "Delay ill
certification, " wi th their overall means of 1.896, 1.848, and 1.768 respectively.

Pl:l ym Ds 'o ~s p o or finll n cl ol

n lanagEHllo n t ~
P ayma stor's f D l l u r o to Im pl o m o n t goo d
g o v o "n a n c e In bu sin e s s 1 .848
Dal a y I n ce rt if ica tion 1 .768
Th o u sa of " p o y whon p ai d " • cro u s c s
In co ru r acte 1 .672
Local culture I a tl itu de 1 .6 3 2
P a ym a stor's w ron g f ul withholding o f
p oymont 1 .624
U n d orp nyn lont o f cortl fio d ornoc mte b y
th e pAynu=l s le r 1 .592
Dl sa gr ooment on tho v al u a ti o n o f
w o r k do no 1 .52
Shor l o f curren t year project uud ge t 1.432
Con fl ict Et, n o no p ad le s I n volved 1.288
Poo r c.orn rn o rr tco t too o m o n g p nrtt e e
i nvolvod 1 .184
Pour under61fHl(J lnU o f t h e c o n i r e el 1 .136
Do loy in s u b m itt ing co n tr octo r"s
payOla nl c ln lm 1 .048

o 0 .5 1. 5 2

M e an

Figure 4: Causes of Non Payment

Delnltcr in Certification J

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

43
[ourna! of Design and till.' Built Enninnnnen t

Payma ste r's Poor Fillallciat Ma llagemellt

Finan cial man ageme nt is a major factor in de termin ing the project's success. It is an ticipated
that paymas ter's poor financia l man agem en t could cause hi m insufficient opera ting funds
whe n they are obliged to pay the payees. Thus, late payme nt or eve n no n-payment therefore
cou ld ar ise.

Loenl Culture/Attitude
"Loca l culture/a ttitude" has been ranked as one of the main causes of late and non-payment
pred icamen t in Malaysian cons truc tion ind ustr y. It is generally accep ted tha t our ind us try
is prone to late and non-payment culture. The situati on in Malaysia now is somewha t similar
to the UK cons truction industry before the intr od uction of the Housin g Gran ts, Construction
and Regenera tion Act 1996 (HGCRA). The cons truc tion industr y in the UK was prone to late
payment cu lture w here delay of 53 days of making pay men t after the receipt of inv oice was
not un common (Johnston , 1999).

Finding 3: Effe cts of Late and Non-Ptnpnent

Responden ts were also asked to rate the effec ts of late payme n t based on the ex tensive list
given . A further ana lysis of the effects of late pay ment revealed that, three most grave effects
of late payment based on Figure 5 are "Create cast: flow problems," "Create stress all con tractors"
and "Creates[nuincia!hardship" wit h their overa ll means of 2.377, 2.185 and 2.135, respectively.

2 .377

e n " " .. .. I"",,, 0" contraclor" 2.185

Creole s fi n "' n c l'" h",rd"hlp 2 . 135

C,e",le .. n e g a l i ve c h ai n .. ft.. C l On
olhor p ", rUos 2 .05

R .. su lls In da '''Y h' c-.ornplollo n o f

p r o ) e cl " 1.993

1 .7 1 9

Lea d .. 10 "b .. " d " " , ,, .. ,, t o r pro)octs 1 . 5 44

Results i n rorma l <lisp ." .. " . so l ullon 01]
1IIt {l o lio n f a rbi lrali on 1 .5 2 7

Lo:ad" t o b :an kruplcy or IIq ul d" ,I.,,, 1.42

o 0.5 1.5 2 2 .5

M oan

Figur e 5: Effects of Late Payment

As for the effects of non-payment, the three most preva lent effects of non-pay ment based on
Figure 6 are "Create cnsti flow problems," "Crea tes[inanciai hardship" and "Create stress Oil
contractors" with thei r overall mea ns as 2.546, 2,454 and 2.40, respectively.

44
 Is Lnte Or NOll -Payment A Significa llt Problem To Malaysiall Con tractors?

C r onl o en,, " IrOIN p,o b lo n , ,, 2 . 54 6

CrO At o " f l'H.n dnl h n ' d " h lp 2.4 54

C .....lo .. I'n .. .. O n conl 'nclo n . 2.4

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

o l h e r po,lIn " 2.368

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

p roJe c l " 2 . 3 19

2 .0B 1

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

il lig lOt i o n I ..r b it ,o l l on 2. 0 3 B

L .. .. d .. 10 ..b ..n do n .....o n l o r p r o Jo cl . 1 .995

L O A d .. 10 ba n k r up tcy n r IIquld .. U on 1 .843

o 0 .' ...
M e an
2 2.' 3

Figur e 6: Effects of No n-Pay ment

Cash Flow Problems Created

In the ind ustry where cas h flow has been regarded as a lifeblood of an enterprise, late and/
non-pa ym ent by the paymaster would have a de vasta ting knock-on effec t down the
0 1'
con trac tua l pa ymen t chain as the cascade system of payment starts from the financia l
instituti on to main co ntractor, main contractor to sub -cont rac tor and so on down the chain.
The im por tance of cas h flow is fu rther amplified by the fact that the cons truc tion ind ustry
relatively involves long durati ons to comp lete, large amounts of mon ey to spe nd and the
widely use of credit payme nt term ra ther than payment on delivery in purchasing of materials
(Ameer Ali, 2005b). Thus, it is anticipa ted the direc t effect of late and Zor non -payment wo uld
be cash flow problems .

Crea te FinancialHardslzip
•
It is an ticipa ted tha t late payment can create un due fina ncial hardships o n the contractor.
For ins tance, the ma in contrac tor is still obliged to pay the sub-contractor / su pplier for their
wo rk d one even tho ugh he is no t being paid under the main con trac t. This ca use s financia l
har dsh ip to the contrac tor as he is not su pposed to self-fina nce the job for his client.

Stress 0 11 COil tractors alld Suvblier Cllaill

Late and non-payment w ill su rely crea te st ress on contractors as they no rmall y tender the
proj ect in competition with ot hers and with a sma ll profit margin with a hope to gen era te
cash flow in the compan y. If the client pay s the amount due in an untimely manner this will
cause stress to the contractor as he needs to find the recourse to pay the su bcontrac tors and
suppliers. The situation is much worse when it involves non-payment.

Findi ng 4: A lternative Remedi es for Securing Ptujment Debt

This question asked the respo nden ts abou t the alternative reme dies to overcome or mitigate
the problem of late and no n-payment faced by local con tractors . Some of the remedies posed
to the respondents are already incorporated in Construction Contracts Act in ma ny advanced

45
[ourna! of Design and th« Built Ennircnment

countries. The three mos t preferabl e remedies to counteract the payment problem s based on
Fig ure 7 are "A rig'" 10 regllior periodic poymelll," "A right to a dejined lime[m niefor poymellf"
and "A rig'" 10 a speedy displlie resolution mechanism, for example, Adjlldicatioll," with their
over all mean s of 3.72, 3.695 and 3.509, respe ctively. For this qu estion, four is the largest scale
and one is the least. Interest ingly, the overall nine po ssible so lu tions in the qu estionnai re
were all given a high score of im portance as the least score was eve n as high as 3.147 as
show n in Figure 7.

A rl O h l I n ' .. o u h .. I)Or ,O<1' c pay n ... n l 3 .7 2

A , 10 111 t n n d o fln .. d t lr ,, « f ' Am o fn ,
pey , ,,., n l 3 .6 95
1\ .ioht 10 n Ap o o d y di s put...a a o l l1 l k,n
, n n c h n n l ,. rn " u'
A dl • • rl l cn l ion 3 .5 0 9

T h .. ri O !>1 It> l nl.. . osl O n 1,,1.. p ay ",.. n l 3 .4 9 1

T ho m and a l ory ." ..a U o n o f 0 lOu ,. 1
a c c o.,n l · 10 ' . ..1.. " 110 ,, .um,. 3 .3 4 8

" r lg" l 10 1I.", pond work 3 .26 5

Th.. ' .. .. I ol ell on 0 1 I h .. . I u h l 10 "" o l -o ff
o r wilhho l d lI u m s du o 3 .2 2 6

T h .. c r ....ll o n 01 0 r io h i 1<> .. lion 3 .17 6

Tho f', oh l l>llI o l1 of ~ pn y w l",, " p .. l d-·
c1 .. u s .... I II r: n " lr o c t ,. 3 .14 7

o 2 3 4

M e an

Figure 7: Alternative Remedies for Secur ing Payment Debt

Righi 10 Regular Periodic PO!/lIIeul

"A right to regular period ic paym ent" has been rated as the most favor able alterna tive
rem ed y amo ng the responden ts. Such a righ t can be found in various s tanda rd form s of
contracts in Malaysia. The right however does no t resolve or mitigate the contra ctors' payment
woes as the occurrence of late and /or non pa yment in construction contracts is quite common
in Malaysia. This may be partly d ue to the laborious process in claim ing for work done
provid ed under s tanda rd forms of contracts and partly owing to the unprofession al attitude
of the certifier who tends to delay matt ers. Starting with the cont ractor's claim until paym ent
mad e by the employer during the period of honouring certifica te the whole process could
take up to 2 months. The del ay in maki ng pa ymen t to the contractor is furt her escala ted if
there is a d isp ut e or d isagreement abou t the va lue of wo rk done o r va riation order.
Con seq uently, there is an urgency to amend the standa rd for ms of contracts to expedite the
wh ole pa yme nt process so that the con tracto r wou ld not be struggling with his cash flow
whi le wa iting for certification. Paymas ters and its representatives mu st be sensitive towards
prom ptness of sub mitting , process ing, issuing interim paym ent certificates and hono ur ing
the cer tifica tes as these p rocesses can generate negat ive impacts if not serious ly a ttended to.

46
 Is Late Or Nou-Painnen! A Sig1Jifica ut Problem To Malaysian COlltractors?

RighI 10 0 D~filled Tillie Frallle f or POYllleII l

Again such a righ t has already been included in all the s tanda rd forms of contrac ts in
Malays ia, un fortunately, how ever such a right is s till inadequate to g uarantee that the
contractor w ill be paid promptly for the work execu ted on site. This may be du e to the culture
in our local scenario whereby the time fram e for payment provided under the con tract is not
seriously ad hered to by the consultan ts. Perhaps, severe pen alty ca n be imposed in the
contract to those consu ltants w ho tend to d elay matters.

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

"A rigM to a speedydispute resolution mechanism e.g. adjudicntion" has been perceived as the
third favoura ble alternative remedy for securing payment deb t from the defaulting paymaster '
w ith the ove rall mean of 3.509 out of 4.00. This shows tha t majori ty of the respond ents
strongly in favour of speed ier method of resolving disput es i.e. ad jud icatio n. The key feat ure
of the adjud ication process is that an adjudicator w ill reach a decision w ithin days o r w eeks
of the dat e up on which the d ispute is referred to him . The process is qu ick and relati vely
cheap, pa rticularly in compa rison to litigation and to those arbitrations that have so mew hat
unfortuna tely, for wha tever reason, been allowed to become more time consu ming and costly
than they sho uld have been (joh n L. Riches, Christop he r Dan cas ter, 2005). An action in
co urt or arbitration involving recovery of paym ent iss ues is normally time -consu ming and
expe ns ive and in the mean time, the contractor would be struggling w ith his cash flow .
The Adjud ication Repo rting Cen tre (Kennedy, 2005) reveals tha t failure to co mply
with paymen t provisions is the mai n subject of d isputes, amounting to 26% of the to tal
subjects followed by valua tion of var iati ons and valuati on of fina l account. It is, however,
important to note that the s ubjects of the disputes are concerne d with the con tractors' cash
flow . Construction adjud icati on as int roduced by the Act provides a qu ick and interim but
enforceable awa rd w hich allow s opportunity for improvements in cash flow . Based on the
case of BOl/ygl/es v . Dahl-lenson [20001 BLR 522, Chadwic k LJ sta ted tha t the adj udica tor 's
decision may give rise to an immediate paym en t obligation. It was designed to ena ble the
contra ctor to obtain payment of interim payments.This was the in tention of the UK Parliament
w hen passing the Act in 1998.

Conclusions an d Recommen d ation s

The questionnaire su rvey findin gs ind icate that lunny local contractors have ex perie nced
late and non -payment problems in the Malaysian construc tion indust ry. Whil st late and
non-payment problem is much more serious in the private sector, as the survey results indicate
tha t the number of cases do ub les that of the pu blic, bo th the p ublic and private cons truction
sectors could affect the pe rfor mance and image of the ind us try.
A majorit y of the respo nde nts felt that local cu lture and attitude is one of the frequent
causes of la te and non- paymen t, thus it is recommen ded that con tracto rs consider this
problem as a majo r and high probab le risk, and it sho uld be reflected in p repa ring tende r
estimates. It is ant icipa ted that lat e or non -payment incidences have cause d und ue cas h
flow problems on the con tractors and this wo uld have a d evastating knock-on effect dow n
the con tractua l payme nt cha in.
The current situation concerning late and non-pay ment in the Malaysian cons truction
indu stry indica tes that present remedi es or so lutions available under the contract and in the
C0l11111on law arc not adeq uate. Alternative solu tions must be iden tified to pro tect the
contractor 's interest aga ins t the possib ility of la te and / or non-paym ent situation.

47
JO l/mal of Design and the Built EIIViro1J IIIl'll t
It is sugges te d th at the em p loyer's
fina ncial capaci ty an d cred it rating be made
transparent to facilitate con tracto rs to assess
the em ploye rs' ability to pay and to increase
chances of th e lat te r g etting p a id. It is
perhaps timel y for Malaysia to consider
in trod ucing it s own legi sl ation on the
Paymen t a n d Adju d ica tion Ac t.
Nevertheless , introducti on of such a n act
cannot be regarded as a panacea for all ills,
ra ther it mu st be regarded a means to an end.
Professio na l b o die s a n d goven u ne n t
age ncies sho u ld s tu dy and a me nd th e
existing sta nda rd fo n ns of contrac t to
p rovide protec tion a nd promot e a ba lanced
alloca tio n of ris k a n d fair con trac t to all
relat ed parti es. Prompt ness o f subm itting ,
proc ess ing , is suing inte ri m paym ent
certificates and hon ou rin g the cer tificates are
ex tre me ly impo rtan t issues in rel a tion to
prog ress paymen t cl a ims . Pe rh a p s, a n
increased se nse of profess ionalism in the
construc tion ind ustry cou ld overcome some
of th e prob le ms r el a ted to late a nd non-
paym ent iss ues . Another cruci al issue tha t
needs to b e ad dressed is why and how to
change the some times lack adaisical atti tude
on pa ymen t iss ues in the co ns truc tio n
ind us try .
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49