FACTORS AND IMPACTS OF LATE PAYMENT ISSUES: A CASE STUDY IN MALAYSIA CONSTRUCTION INDUSTRY (MCI) CHAPTER 1 INTRODUCTION 1.1 Introduction Malaysia began develop its construction industry since independence. According to Lewis (1995), more than half of capital formation consists of work in construction. Hence, the expansion of capital is a function the rate at which the construction industry can be expanded. This can be seen in the initial economic plan (1956-1960) where it was basically a development expenditure plan. The primary concern was developing the infrastructure during independence because of its inadequacy. In order for the nation’s economy to prosper, the construction industry has to be developing first for the economy to take a one step further. The Malaysian Construction Industry (MCI) is generally separates into two areas. One area is general construction, which comprises residential construction, non-residential construction and civil engineering construction. 1.2 Problem Statement Payment has been said to be the life-blood of the construction industry. Yet there remains a chronic problem of late payment in the Malaysian construction industry affecting the 1 Specific Objective: To identify the factors that caused late payment issues in the Malaysia construction industry. What steps can be taken to improve late payment issues in Malaysia construction industry? 1.entire delivery chain.4 Objectives of Study This study embarks on the following objectives.4. How the seriousness / status of the late payment issues in the Malaysia construction industry? 2.1 i.3 Research Questions Based on the problem statement above. In addition of that. the research question can be point out as follows: 1. The main issues that faced in this study are why do Malaysian contractors still experiencing late payment situation despite adequate mechanisms provided by many standard forms of contracts and how to overcome this problem and how to improve the issues from time to time. How the late payment issues have affected the Malaysia construction industry? 4. The industry works and will only continue to work provided that those works and services are properly paid. 1. 2 . 1. the quantum of payment for works and services rendered in the construction industry are often huge in the millions of Ringgit. What are the factors that can derive to the late payment issues in the Malaysia construction industry? 3. To addresses the current problems in relation to late payment issues encountered by contractors in the local construction industry. It will also provide the contractors with a better understanding of their rights to payment and their legal position if payment is in default. 3 . The research is also expected to grab the attention of the employers in making their payments promptly and timeliness. 3. 1. To analyse the impacts of late payment on projects / construction industry in Malaysia.4.2 General Objective 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.5 Significance of the study The reasons why we do this study are: 1. To identify the alternative that can be use to improve the late payment problems in Malaysia construction industry. iii. 1.ii. so as to create a friendly and enjoyable working environment for all parties and to improve the payment flows in the Malaysian construction industry. 2. To increase the awareness of both contractors and employers in relation to the payment issues. To implement the necessary plan of action in order to minimize disputes on payment in any construction project. This will lead to improved working relationship between the contractors and employers. 7 Terms of Reference 4 . impacts and alternative to improve of the late payment issues in general construction. it does not warrant us to discuss the more detail about this study. Other limitation is it’s hard to find the specific cases or project that involving the late payment issues.1.6 Scope and Limitation Scope: The scopes of this study were to examine the late payment issues in the general construction industry in Malaysia. Limitation: Due to the time constraint and length of the report. Aspects that can be as a guide in the scope of this study are factors. 1. CHAPTER 2 LITERATURE REVIEW 2. al (2011) and Harris and McCaffer (2003). withhold of payment by client. Researchers also found causes of late payment are client’s poor financial and business management. inaccuracy of 5 . Hamzah et. Sometimes because of late payments problems. delay in valuation and certification of interim payment by consultant. According to Chen. defined the late payment as failure of a paymaster to pay within the period of honoring of certificates as provided in the contract. contractor’s invalid claim.1 Payment and Late Payment Payment is important not only in construction industries but also in other sectors because it will cause and give big impacts to parties involved. O’Brien and Herbsman (2005). a critical point for a contractor to keep them alive is a regular payment of interim payment. Payment will be big problems to the contractors because their cash flow will be affected when they faced late payment or not being paid in the amounts certified occurred. small construction companies can’t survive and may closed their business. without adequate supporting documents. 2. involvement of too many parties in the process of honoring certificates.2 Factors of Late Payment According to Reeves (2003). method statement did not follow the specification. When this situation happens.valuation for work done. When this happen. error in submitting claims is the one of the main reasons for the issues of late payment. insufficient documentation and information for valuation. 6 . claims calculated is wrong and those submitted without using the right procedures. heavy work load of consultant to do evaluation for work done and contractor’s misinterpretation of client’s requirement of variation order. what contractors need to do is to resubmit again the claims after making necessary corrections. Researchers make this study to identify the causes of delays in construction projects with traditional type contracts from the viewpoint of construction contractors and consultants using survey method. request information are not given. This includes claims which are not following the chronology. The contractors need to submit the progress billing attached with the approve percentage of completion by the authorized person in charge Study by Odeh and Battaineh (2002). it will cause a conflict between clients and contractors and so. found that another factors that may contributed to the late payment issues is when valuation of work at side is fail to agreed by contractors. The payment of the tender awarded would commonly be based on the progress of the project. the claims would not be qualified or certificate hence late payment occurred. Researches use the balanced stratified random sampling with a sample of 393 out of 733 questionnaires dispersed. 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. Izuddin Ismail and Ilias Said (2012). 7 . small. The late payment or even non-payment therefore could arise.Clients also can be the factors of late payment issues. The Associated General Contractors of America (2003) said paymaster's Poor Financial Management is one of factors that lead to late payment problems. M. It is anticipated that paymasters' poor financial management could cause contractors insufficientoperating funds when the latter are obliged to pay the payees. Qualified contractors often are unwilling to bid on projects for employers whose financial capacity and credit rating are not widely known. The results showed that the main potential cause of late and non-payment among contractors is paymaster's poor financial management and the effect is struggle of creating nonfinancial. done a research to identify the major cause and effect of late and non-payment among contractors in Malaysia. He stressed that any government employee with an attitude like this will be prosecuted and punished for any wrong doings that (Utusan Malaysia. large and public-listed contractors in the eleven states of peninsular Malaysia. Thus. Fikri Hasmori. 23 November 2006). This bad attitude will affect the projects and give a bad reputation in Malaysia construction industry and it also get attention from Prime Minister. There are situation where clients employees have an unethical value which they will hold the payment because obtain some kind of “gift” from contractors once they pay out the payment. The data were gathered from all micro. As explained previously.According to Johnston (1999). creates financial hardship for the company. client and others. contractors. A delayed payment by one party may affect the whole supply chain of payment of a construction project. In this regard. the construction payment blues have domino effects. extension of time for project. 53 days after invoices or applications for payment have been rendered. create financial hardship and also create stress on contractor. valuation of project progress. For instance. an attitude if commonly accepted by the industry or society in general can become a culture. subcontractor refuse to continue works on the project. sub contractors. the Britain construction industry is prone to late payment culture with payment of debts due to subcontractors and suppliers being made. financial matters. abandonment of the project and also low quality works due to contractor’s uncertain financial condition are the impact of late payment issues.3 Impacts of Late Payment Hasmori (2012) said that late payment will bring a serious impact such as create cash flow problem. on average. As stated by Davis Langdon & Seah Consultancy (2003). we do not want negative attitude to be accepted as a culture in the industry. 8 . if an employer delays in making payment to the contractor this in turn will result in contractor's delay in making payment to the sub-contractors and suppliers. 2. Create negative relationship between developers and contractors. delay in project’s progress. All this impact will affect the construction projects in term of time. Late payment may affect the financial status of the contractor. despite the government having paid the umbrella contractors in full.According to Suhaini (2005).000 F-class contractors were on the brink of bankruptcy when several umbrella contractors failed to pay them for rural roads they had built. 2005a). late payment is possible to leads to bankruptcy or liquidation. According to Abdul. Delay in completion of projects progress also contribute to late payment impacts in constructions. 9 . A local newspaper reported that 16.Rahman and Berawi (2002) financial problem is confirmed by the top management as the main cause of delay in addition to manpower shortage. Late payment causes cash flow problems which in turn can affect the overall progress of works (Ameer Ali. (2003) Pay Up. Kuala Lumpur: CIDB and ISM. Causes of Construction Delay: Traditional Contracts. Utusan Malaysia (2006) Kerajaan Lantik Terus Subkontraktor Atasi Masalah Pembayaran Lewat. Chen Wang.13 March 2012. Construction Industry Payment and Adjudication Act. Herbsman (2005) Assessing the Accuracy of Cash Flow Models: The Significance of Payment Conditions ACSE Vol 6: 669-676. Issue 1/2003: 4-6. 6(1). (2005). 10 . Issues Of Late and Non-Payment Among Contractors In Malaysia. 20: 67-73. Izuddin Ismail & Ilias Said (2012). Hong-Long Chen. 205212. Vol. Odeh and Hussein T.References Abdalla M. International Forum Construction Industry Payment Act and Adjudication. Noushad Ali Naseem. Hamzah Abdul-Rahman. K. Reeves. M. 3rd International Conference On Business And Economic Research \( 3rd ICBER 2012 \) Proceeding 12 . Vol. Roshana Takim and SzeMin Wong (2011). Fikri Hasmori. Battaineh (2002). and Zohar J. JUBM Construction News and Views. O’Brien. Project schedule influenced by financial issues: Evidence in construction industry. International Journal of Project Management. pp. William J. Malaysia.
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