A “CONSTRUCTION INDUSTRY PAYMENT AND ADJUDICATION ACT”:

Reducing Payment-Default and Increasing Dispute Resolution Efficiency in Construction 

Note this write up is extracted from the article written by: 

Sr Noushad Ali Naseem Ameer Ali-President, The Institution of Surveyors MalaysiaChair – Construction Industry Working Group On Payment (WG 10)                                 

For further details of the article please refer to Master Builders Journal 3rd Quarter Publication 2006

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PART I  1.0            Introduction and background  

Payment default in the Malaysian construction industry

Master Builders Association Malaysia (MBAM) has also long been lamenting on the problems of delayed and non-payment in the construction industry.  And MBAM too has been carrying out surveys on payment issues.  The surveys only confirm the harsh reality – payment default is a major problem in the construction industry.  Only the extent varies with each survey. 

Construction Industry Working Group on Payment (WG 10) 

Payment was identified as one of ten priority areas in the Malaysian construction industry during a construction industry roundtable in June 2003.  An industry-working group (WG 10) led by the Institution of Surveyors Malaysia (ISM) was then formed.  Given the industry experience on payment problems and taking heed of experience of other countries, WG 10 then made various recommendations during a the construction industry roundtable in June 2004 chaired by the Honorable Minister of Works.  One of the recommendations was for the creation of a Malaysian ‘Construction Industry Payment and Adjudication Act’. 

Following agreement in principle during the meeting, WG 10 moved towards its evolving vision which could be summarized as: ‘payment in the construction industry is timely’ - where everyone in the construction industry pays the appropriate amounts due in a timely manner.  That ties in with the construction industry masterplan vision of making the Malaysian construction industry world class by 2015.  These in turn fit in with Malaysia’s 2020 vision of becoming a fully developed country. 

One cannot have a ‘world class construction industry’ if even ‘mundane’ things like payment is not being honoured – whether in a timely manner or at all!

 2.0            Payment and the construction industry  

The importance of payment in the construction industry  Payment in any industry has generally been an issue of concern.  In the construction industry payment is an issue of major concern.  This is because:

 (a)       Unlike many other industries, the durations of construction projects are relatively long;

 (b)       The size of each construction project is relatively large and each progress payment sum involved are often relatively large; and

 (c)            Payment terms are usually on credit rather than payment on delivery.   

Cash Flow

Cash flow in the construction industry is critical because of the relatively long duration of projects.  A planned expected revenue flow is usually represented by an S curve.  Any deviation due to either project delays or cash flow delays can have a major impact on the project.

 3.0       The Malaysian Visions 

Malaysia has set its vision to be a fully developed nation by 2020.  The construction industry has set it own vision to be ‘among the best in the world’ by 2015.  As part of the plan, working groups on ten priority areas were set up in June 2003.  WG 10 was but only one of ten. 

If the Malaysian construction industry is to be ‘among the best in the world’, the working group had to have an equally challenging vision.  The vision of the working group on payment is:

Everyone in the construction industry pays all appropriate amounts due in a timely manner.

 4.0       A Malaysian ‘Construction Industry Payment and Adjudication Act’ 

Support for a Malaysian ‘Construction Industry Payment and Adjudication Act’ by the construction industry players has been overwhelming.  Master Builders Association Malaysia has been a consistent major supporter and contributor to the refinement of the conceptual proposals. 

 5.0            Contents of a Construction Industry Payment and Adjudication Act 

Typically the relevant acts around the world cover various common aspects including the following.  These are considered in some detail below: 

• A scheme for regular payment where there is no provision for a payment mechanism in a construction contract.  I repeat – ‘where there is no provision for a payment mechanism in a construction contract.’

• Outlawing ‘pay-when-paid’ and ‘pay-if-paid’ clauses in construction contracts

• The rights for a party who has not been paid to suspend works

• The provision of a speedy dispute resolution process called adjudication for disputes relating to a construction contract

• The provision of remedies for the recovery and security of payment under a construction contract