The construction industry may soon see a major change in the way non-payment issues are resolved. Issues of cash flow shortage or non-payment of progress billings that often plague the industry may be reduced in the future when a Bill to regulate the payment is passed by Parliament.
In the past, non-payments or arbitrarily reduced payments of progress billings — by developers to contractors, or contractors to sub-contractors and suppliers — have caused major problems for the industry. They lead to cash flow problems for firms down the construction value chain, affecting their ability to deliver, and sometimes even to survive financially.
For the end-buyers, these disputes have led to late delivery of homes, and in some cases, abandoned projects.
The Kuala Lumpur Regional Centre For Arbitration (KLRCA) director, Sundra Rajoo, said the centre has proposed the Construction Industry Payment and Adjudication Bill 2011 (CIPA) to regulate payment in the industry.
The Bill, which is currently being tweaked in the Attorney-General’s Chamber, would facilitate regular and timely progress payment through a speedy resolution via adjudication. However, adjudication does not eliminate the right of the parties to litigation if they are unhappy with the resolution.
The CIPA is expected to cover all construction works, which include buildings, roads, harbours, bridges, dams, drainage, electrical, mechanical, water, telecommunication work and earthworks.
Sundra said payments in the construction industry are often disrupted by project failure or parties willfully refusing to pay.
“The way the construction industry is going to work is to make sure people honour their contracts,” he said, adding that KLRCA is all for making the industry more efficient.
He said the adjudication mechanism proposed in the Bill would facilitate cash flow in the industry during a project.
“Adjudication is a quick method of deciding a dispute. Parties will formulate the dispute and go to a third party and look at the dispute summarily. He (the third party) is not supposed to go into details but look at it overall,” said Sundra.
However, he said the adjudication mechanism should not be used in assessing the final account, as it is more complex and some would even take up to six months or a year to prepare.
The Malaysian Bar Council’s vice president Lim Chee Wee said the Bill will address the problems faced by contractors and the chain of sub-contractors in the construction industry who are at the mercy of the employer or in terms of payment disputes where the contractor or sub-contractor is not paid although the work has been performed.
He said that non-payment problems in the past had a major negative knock-on effect in the industry, as non-payment to a contractor will have repercussion on those throughout the value chain, including sub-contractors, suppliers and financial institutions.
Lim added that CIPA will provide for speedy and simple dispute resolution mechanism where an adjudicator (like an arbitrator) will make a decision which is binding on the parties.
Among other powers, the adjudicator can decide on the right of the unpaid party (who has an adjudication decision in his favour for non-payment) to suspend his performance. He can also decide on the the right of the principal (the entity two levels up, or one level above the non-paying party) to pay the adjudicated amount direct to the sub-contractor and deduct from the main contractor.
“With a speedy and simple adjudication process, no contractor or sub-contractor will be in a disadvantageous position of having to perform the works without prompt payment. Projects should proceed smoothly and without interruptions,” said Lim.
However, he said there are several issues that the government needs to decide before the final version of the bill is put to Parliament.
These policy issues include whether adjudication should include the final account, whether the bill should apply to all constructions works without any opting out and whether the party which awards the contract or sub-contract should provide a payment bond (which increases transaction and which costs).
In the case of the final amount, the Bar Council is of the view that it should not be included as the nature of the adjudication process cannot cater for the complicated and laborious process of determining the final account.
One of the concerns raised was whether government agencies and government-linked companies, which are the biggest work providers in the country, would also be bound by the final version of the bill.
Master Builders Association Malaysia president Kwan Foh Kwai said the idea for the bill came about as early in 2003.
“Both the public and private sectors would like an Act which would help uplift the industry to a more honourable industry. In the past, the contractors and the supply chain faced payment problems which are mostly cash flow-related,” Kwan said.
He added in countries where a similar act has been implemented, payment risk was eliminated. Hence the cost of doing business was lower and the savings were naturally passed down to the end-users or purchasers, which in most cases were home owners.
Kwan said adjudication would give the industry a faster and cheaper way of resolving disputes as the contracting parties would be able to take the matter to the adjudicator for ‘rough justice’.
As to whether the contracting parties could suspend work during the dispute, Kwan said temporary suspension has been proposed to be included, but qualified that the suspension of work must be justifiable.
It is also learnt that the parties that were involved in the formulation of the bill are split as to whether adjudication should be confined only to progress payments.
Kwan was of the opinion that adjudication should not be limited to progress payments, but to all payment matters.
“Even the final payments can be adjudicated. Sometimes it is just the retention money. It can be easily adjudicated. We don’t have to wait for arbitration. We are suggesting that final payment can be adjudicated. If they not happy, then they can file for arbitration. They have a choice. They can opt for adjudication or arbitration,” he said, stressing that the adjudication would be handled by professionals ranging from surveyors to engineers, and lawyers to architects.
Kwan said each professional body would have their list of qualified members to be adjudicators.
“We hope that there will be one body where all the professional bodies will be represented and would set the standard,” he added.
Meanwhile, Real Estate & Housing Developers’ Association of Malaysia (REHDA) president Datuk Seri Michael Yam said CIPA would provide clarity, especially in the area of dispute resolution.
“Sometimes, the employers do not pay on time because they feel short-changed or under-delivered by contractors and these reasons may have been used in the withholding of payments and unfair adjustments of payments that causes the industrial issues”, Yam said.
“Cashflow is an important life blood of not only the employers, but also the contractors. In doing this (employers withholding payments), perhaps arbitrary or one-sided decisions will affect the contracting parties, which will be detrimental to the industry as a whole. The contractors would not have the cashflow to perform. In the case of residential developments, there would be a delay in handover and we will have all sorts of issues kicking in,” said Yam, adding that if CIPA was to be used properly and in good faith, it would help the industry.
However, he also cautioned that those involved should not resort to adjudication at the slightest excuse, but should first seek resolution by talking through issues.