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PM World Today September 2010 (Vol XII, Issue IX)

PM World Today is a free monthly eJournal - Subscriptions available at http://www.pmworldtoday.net Page 1

PM WORLD TODAY FEATURED PAPER SEPTEMBER 2010

Pro j ec t Managemen t , Ea rned Va lue and P rompt Paymen t

Prac t i c e s Obse rved f rom the View o f I s lam ic Sya r iah Law

By Farid Maloni, BEng. MEng

ABSTRACT

The flow of funds from Muslim countries is estimated to be growing at a rate of some15% annually in a form of Sukuk which is an investment instrument that relies on Islamic Syariah law. This phenomenon gives a sign that an investor/project owner,especially Middle Eastern investors, which has a specific demand to invest their moneythrough a way that is aligned with their beliefs.

The fundamental or core elements of Syariah Law which apply to this paper areprohibition on Riba (charging interest) and payment of the workers salary.

This paper will observe another potential area in the Project Execution Processregarding to application of Syariah law. Some areas in the Project Execution Processwhich is attractive from Syariah point of view is project progress measurement andpayment timeline. A sacred text of Islam (an Al-Quran ) and Prophet Muhammadtraditions, a Hadits , reveals on how Muslims believe on proceeding payment to workersand prohibition of Riba or charging interest in their living aspect.

A simulation model will show how the money supply chains flows in a project; and itscorrelation to the selection of payment method, Long versus Prompt payment duration,and how its measured will drive the amount of interest charging to the cost of project.

The Syariah belief in prohibition riba or interest charging, and its synergy with promptpayment is proved, and then it will bring a beneficial impact to the CAPEX costefficiency. By utilizing Earned Value (EV) to measure project progress real-time, agreeon the prompt payment (shortened duration), and possibly cut the supply chains, it willhave reduced the interest charging about 1.5 to 4% embedded in a projects cost.

Keywords : Syariah, Riba, Project management, Earned value management, prompt payment term, trade credit, pay when paid term, owner company, Main Contractor, Sub Contractor

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1. INTRODUCTION This paper was prepared as one of the prerequisites required to earn AACEs highlyrespected Certified Cost Engineer (CCE) credential, in a 6 month long, graduate level

course developed by PT. Mitratata Citragraha, www.build-project-management-competency.com, mentored and facilitated by Dr. Paul D. Giammalvo, CDT, CCE,MScPM, MRICS.

The reason this topic was selected by me is because, being a Muslim, and practitionerin project management, and having knowledge in how EVM measure and control theproject, I have a strong feeling that earned value management is an appropriate tool foruse in Islamic cultures.

The flow of funds from Muslim countries is estimated to be somewhere around $300 $400 billion annually, growing at a rate of some 15% annually. With the oil price

currently at about $70 a barrel, this global flow of funds seems set to continue1

.Due to the above conditions, the incoming trend of investment in Syariah financinginstruments is growing even from countries without a dominant Muslim population. TheABN Amro, Citibank, Deutsche Bank, Hong Kong & Shanghai Banking Corp, UnionBank of Switzerland are each undertaking Islamic Banking for profit and marketadvantage, and not necessarily for religious reasons. Profit during the 1980s was onaverage of 15%-20% p.a. and in the 1990s onwards was on average of 10%-15% p.a.return 2

Based on the above facts, we can see a huge potential future in project financing using

Syariah instruments, reflecting the enthusiasm of investors, especially from the MiddleEast, to Syariah compliance. Research on Syariah compliance financing practices andthe growth of financial and banking has indicated an important opportunity for thosecompanies and organizations who are Syariah compliant.

The specific focus is the money supply chain flowing down from the owner company (aswork initiator) to the contractor and/or supplier as a work executor. Projects are usuallyinitiated by Owner Company to the main contractor, and most likely, depending on theproject size and complexity, some of the scope of work will tendered (by maincontractor) to sub-contractor, or material supply to supplier. When the tender process iscompleted, and the winner announced, the final details are then negotiated between theowner and contractor prior to signing the contract.

Specifically to the Contract Term of Payment, owner company commonly applies 30/60Net payment terms which is a trade credit, the credit from supplier or seller, whichextended to the owner company as a buyer when contract is awarded. By having a

1 Current trends in Syariah property investment,page.1-2,RICS research ,October 2006 2 Presentation slide from Amer Khalil ur Rehman, Introduction to Islamic finance, Security and Sukuk, page.2.

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trade credit from the seller, the buyer has the obligation to buy now and pay later. Bydefinition the Net 30 Day Pricing means that payment must be received within day 1through day 30, and The Net 60 Day Pricing means that payment must be received withinday 31 through day 60 3.

Then, the main contractor will continue to cascade some of their scope of work to thesub contractor and main supplier. Also the subcontractor will make their binding withtheir supplier/vendor to support the work with paid when paid term. Pay when paidterm such as all progress payments of the subcontract sum shall be made within 10days after payment is received by general contractor from owner 4. The same pay whenpaid term could continuously follow down the supply chains, from subcontractor of thesubcontractor, or supplier of the subcontractor etc. The longer the supply chains themore delays in the payment term.

In the following sections through the conclusion, the Author will discuss his perspectiveabout:

1. How the above payment term will negatively impact the project cost in the ownerside.

2. How the payment term is building an interest accumulation then passes it back to theowner company as risk compensation.

3. How this situation observed from a Syariah law perspective which prohibits interest(riba or usury ) and urges to pay the work done immediately after it is accomplished

4. How the application of Earned Value Management method will cure this problem andbring positive implication

2. SYARIAH LAW AND ITS FINANCIAL ASPECTS

Syariah is part Islamic which teach about Muslim practices and activities. Syariah or Sharia is set of principles and guidelines derived from the primary and secondarysources of Islam. Sharia not only governs faith and worship, but also economics, socialpolitical and cultural aspects 5. The primary sources of Islam are the sacred text of Al Qur-an and the secondary sources are the traditions gathered from the life of ProphetMuhammad, a Hadits .

Figure 1 shows the relation between Islam and Syariah . Islam has 3 foundations, whichare aqidah, syariah and akhlaq . One of Syariah branches is the teaching related to thepractices and activity of human in relation to God hablum minnallah and human

3 http://www.riekerinc.com/Terms%20&%20Conditions.htm , last accesses April 18, 2010 4 Business Credit Bulletin, National Association of Credit Management, When must A Subcontractor Be paid under A Pay-When-Paid clauses ?, Patrick Devine, Esq, July/Aug 2006 5 Presentation slide from Mufti Barkatulla, UK Based Sharia Advisor, Title: Sharia Standards, page 2 .

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related to other human hablum minnannas . Muammalat is part of Syariah whichteaches about Muslim practices and activities related to Human- human relations whichinclude political, economic, and social activity.

Figure-1 Islam and Syariah 6

A practice in Syariah muammalat is the most explored area during the last decade,especially the syariah financial practices. A growing amount of studies related toSyariah finance and the rapid growth of Syariah banking shows a good sign of Syariah compliance practice.

If we try to capture the belief system of Syariah finance paradigm, it is based to thefollowing sets of prohibitions, as per following: 7

Transactions in unethical goods and services;Earning returns from a loan contract ( Riba /Interest);Compensation-based restructuring of debts;Excessive uncertainty in contracts ( Gharar );Gambling and chance-based games ( Qimar );Trading in debt contracts at discount, and;Forward foreign exchange transactions.

6 Presentation slide from Amer Khalil ur Rehman Introduction to Islamic finance, Security and Sukuk,page.2. 7 Managing Financial Risks of Sukuk Structure,page.9, - A dissertation, MSc, International Banking, Ali ArsalanTariq,Loughborough University UK, 2004

Akhlaq (Morality & Ethics)

Ibadah(Man to God Worship)

Muammalat (Man to Man

PoliticalActivities

Economic Activities

SocialActivities

Banking andFinancial Activities

Syariah (Practices & Activities)

Aqidah (Faith and Belief)

Islam

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Prohibition to Interest ( Riba ) is the most popular on Islamic financial where signed on.Most of Islamic banking/ Finance law finds Interest/ Riba is prohibited; and some isextended to the remaining areas.

The question is then why does Islam prohibit interest ( riba )? What are the Islamicbeliefs on riba or charging an interest? Riba is any return/reward or compensationcharged on a loan/contract as well as charged on debt rescheduling. Riba is stronglyprohibited in Islam. The economic implication is that money is considered as a mediumof exchange effectively created to be sought for other commodities. Thus, charginginterest on loans is considered unjust since money is considered to be simply anintermediary between goods 8. Those are described above explain why Islam prohibitriba or charging an interest.

Regarding how the investments are made, Sukuk is the latest and most well knowninvestment instrument in the Syariah financial section. Sukuk are securitized assets andtherefore belong to the category of Asset Backed Securities (ABS). Unlike conventionalABS structures, Sukuk needs to have an underlying tangible asset transaction either inownership or in a master lease. The securitization of pure cash flow streams from creditportfolios as undertaken in the mortgage market; for instance, it cant be structured inthe same way. A properly made Sukuk limits the debt to the value of the underlyingassets 9.

There are a number of different types of sukuk which differ based on how they arediversified. Sukuk can be of many types depending on the type of Islamic modes offinancing and trades used in its structuring. The common types of sukuk are:

1. Sukuk Ijarah :2. Sukuk Mudharabah :3. Sukuk Musharakah :4. Sukuk Istisna :

In this paper, the author will not further discuss financial instruments and how they areused to fund projects. The author will address whether there is another side of projectsthat could synergy with Syariah practices which apply during the implementation orexecution phase of the project.

The above phenomenon gives a sign that an investor/owner currently, especially MiddleEastern investors, has a specific need to invest their money through a way aligned withtheir beliefs. The belief system becomes one part of the many decisions aspects fromthe investor before deciding their investment.

8 Managing Financial Risks of Sukuk Structure,page.10, - A dissertation, MSc, International Banking, Ali ArsalanTariq,Loughborough University UK, 2004 9 Reasons to issue Sukuk and the structures behind them , Banker Middle East 2005. Banker Middle East 2005

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If a project is invested, and when the money put on the table, the owner needs to give amandate on the project execution to a person who has competency, both technical andmanagerial, to transfer the capital investment to become an asset as per agreed scope,schedule, and cost.

The appointed project manager which has agreed to accept the project charter thenneeds to initiate, plan, execute, control, and hand over the project to the owner. Duringthe work, the project initiating, planning, and execution will involve tremendous effort,money, and resources. The specific knowledge and practice in project management isrequired by the project manager to achieve his objectives.

The specific practice and knowledge in project management has brought interest toobserve and explore the correlation to Islamic Syariah practice; specifically in theProject Execution Stage. The sukuk type investment described above, has shown howthe Muslim investors deal with the financing and funding of their projects, but the authorstill cannot find any Syariah practice applied in the lower chains on how the investedmoney through the project execution area, especially on how the work is to bemeasured and how a payment is made to a projects worker, contractor, subcontractor,supplier etc

3. SYARIAH PRACTICES RELATED TO SALARY PAYMENT AND RIBA

There are 2 main sources of Syariah law in Islam, the sacred text of Al-Quran andtraditions gathered from the life of Prophet Muhammad, a Hadits .

The Syariah law touches even the very basic of living aspect of humankind. There areHadits and Quran texts, which the author thinks related to riba and payment in Islam.

Riba in Quran is revealed several times. One of a revelation is That which you give as interest to increase the peoples wealth increases not with God; but that which you give in charity, seeking the goodwill of God, multiples manifold (Surah Al-Rumm 30:39) 10 .

Also a hadist from prophet Muhammad saw utterance, the receiver and the payer of interest, the one who records it and the two witnesses to the transaction and said: they are all alike (in guilt) (Hadits from Jabir ibn Abdullah, Muslim, Tirmidhi, MusnadAhmed) 11 .

There is one hadits which teaches us on prompt payment of the worker. Utterance fromthe prophet of Muhammad, Promptly pay your labor/employee worker salary before his

10 Presentation from Amer Khalil ur Rehman,Introduction to Islamic finance, Security and Sukuk,page.12. 11 Presentation from Amer Khalil ur Rehman,Introduction to Islamic finance, Security and Sukuk,page.21.

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5. DISCUSSION: THE PROJECT MANAGEMENT EARNED VALUE BENEFICIALTO PROMPT PAYMENT AND POTENTIAL TO ELIMINATE INTEREST/RIBA.

PM EV has superiority in progress control and monitoring the health of the project usingspecific indicators (e.g. CPI, SPI).

In the context of construction project execution, by using the EV tools the owner couldread Earned of the contractor work justified in real-time, as soon as the workprogresses. These advantages will provide the owner the ability to respond to theidentified earned work on the ongoing project as soon as they know. With EV tools thetime span required to know the progress status and the health of our project now is justa matter of the reporting time duration.

On the other side, the earned work will be subject to the amount paid to the contractoras a seller. As soon as the owner is confident he knows how much value he got, there isno reason for the owner company, as a buyer, to delay the payment to the contractor;which means money continues flowing down through the supply chain to the sub-contractor and supplier.

By making prompt payment to the contractor for work completed in substantialconformance to the specified quality standards and fulfilling the contractual terms andcondition, also known as shall clauses, which will prevent or avoid contractor raising theinterest rate (riba) in their tender proposal because they havent taken some risk oflosing their money due to time value of money. Also by having prompt payment of thework, the contractor has opportunity to re-invest their capital for their business activity.As mentioned earlier, we often find Net 30/60 payments term applied by ownercompany to the main contractor. Owner company as a buyer will be using the obligationof trade credit from the seller, which is the main contractor, and will pay the contractorsin full on or before the 30 calendar days (including weekends and holidays) when thegoods or services were delivered by the seller is fully complete as per agreed in thecontract scope of work.

The trade credit is the credit extended to you by suppliers who let you to buy now andpay later. Any time you take delivery of materials, equipment, or other valuables withoutpaying cash on the spot, you're using trade credit. Most of Suppliers likely aren't goingto offer you trade credit. They're going to want to make every order c.o.d., cash or checkon delivery or paid by credit card in advance until you've established that you can pay

your bills on time15. The trade credit is the credit extended to delay the long termpayments of the earned value of the work.

Following the supply chains, the main contractor will apply a pay when paid term to itssubcontractor; then respectively follow down to the subcontractor will apply the sameterm to its supplier/vendor. As mentioned earlier, Pay-When-Paid term such as All

15 http://www.entrepreneur.com/encyclopedia/term/82538.html, last access April 18, 2010

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progress payments of the subcontract sum shall be made within 10 days after paymentis received by general contractor from owner16 .

The Figure 2 will show typical supply chains in the project execution stage. An ownercompany has a major project with several contract packages to construct, install, andprocure. The buyer, owner company precedes tender and awards the packages toseveral main contractors. The main contractors divide their work packages tosubcontractors through separate contracts. Then the work package continues tocascade to several suppliers in the lower level of the supply chains. This supply chainwill reflect how money flows down from the owner company through to thesupplier/vendor, and in the opposite way the interest applied passes back to the buyerin the higher level.

16 Business Credit Bulletin, National Association of Credit Management, When must A Subcontractor Be paid underA Pay-When-Paid clauses?, Patrick Devine, Esq, July/Aug 2006

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Figure 2 Supply Chains Model - construction, installation and procurement

Here,MARR & = i % = interest rates

$x Sn = Sum value of contract Suppliers at n $x SC m = Sum value of contract Subcontractors at m $x MCk = Sum value of Main contractor at k$x OWNER= Total contract value owner

n = number or suppliers/vendorsm = number of subcontractorsk = number of main contractors

Assumption, Look in to Construction, Installation and Procurement (CIP) Procedure Description of 4 level CIP Supply chains The same trade credit applied (Nett 30/60) The same payment term applied overall supply chains The payment term part of GTC of contract ITB Owner and mostly

Total value of Owner contract,$x OWR= $x MC 1+$x MC2+ +$x MC k

Number of main contractors,1, 2, 3MC k Sum of main contractors contract,

$x MCk= $x SC m1+$x SC m2+ + $x SC mk

Number of subcontractors,1, 2, 3SC mSum of Subcontractors contract,

$x SC m= $x S m1+$x Sm2+ + $x S mn Number of supplier/Vendor,$x S1, $x S 2, $x S 3, $x S n

Level-1 Level-2 Level-3 Level-4

MARR % INCREASERISK INCREASE

Owner company

Main contractor

Subcontractor

Subcontractor

Vendor/Supplier

Vendor/Supplier

Vendor/Supplier

Vendor/Supplier

Main contractor

Subcontractor

Subcontractor

Buyer level-1 Seller level 1 / buyer-2

Seller level 2 / buyer-3

Seller

30/60 NetPayment Term

Pay when PaidPayment Term

Pay when PaidPayment Term

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If we follow on how the transaction is made and regulated, at the level 1, the owner(buyer) applies 30/60 net payment term to his contract term and condition to the maincontractors at level 2. The main contractor then continues cascade some of the scopesof work to the subcontractors with the pay when paid term binding, at level 3, and then itwill consistently follow down to supplier, at level 4 by the subcontractor.

The supplier is usually a small to medium size company compared to the owner. Thesmaller the company is the higher the MARR (minimum attractive rate of return), andconsequently the higher the risk of business. Suppliers with a high MARR will includehigh interest to their contract in order to offset the risk; thats because higher the interestrates, the MARR itself, then further into the future a cash flow occurs, the lower the PW.

The effective interest rate build up at individual supplier (S) contract value, in the level 4,will sum up to the individual subcontractor cost as reflected as follow:

$x SC m = $x S m1+$x S m2+ + $x S mn ..(See Figure - 2)

Analyzed by, PW (i %) SC m= $xS m1 (A/P, i%, N) + $xS m2 (A/P, i%, N);

Where N is 10 days calculated in nominal daily interest rate. The pay when paidtermcontributes 10 days delay which reflects the interest, N.

The subcontractors (SC), because of the pay when paid term applied by maincontractor (MC); then put amount of interests to the sum of main contractor (MC)contract value:

$x MC mk = $x SC m1+$x SC m2+ + $x SC mk..(See Figure - 2)

Analyzed by, PW (i %) MC mk= $xSC m1 (A/P, i%, N) + $xSC m2 (A/P, i%, N);

Where N = 20 days calculated in nominal daily interest rate due to total 20 days fromsupplier and subcontractor (which i% should be higher or equal to MARR %).

At the higher hierarchy is the owner company which will be the ultimate accumulation ofinterest from the supply chain due to applied Net 30/60 payment term. The sum willfollow the below equation:

$x OWR = $x MC1+$x MC2+ +$x MC k ..(See Figure - 2)

Analyzed by, PW (i %) MC mk= $xSC m1 (A/P, i%, N) + $xSC m2 (A/P, i%, N);

The MARR% value from every company will vary depending on the size of thecompany. A multinational owner company has MARR about 9%. The well establishedmain contractors MARR is around 15 to 18%; the subcontractor or small

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supplier/vendor will be about 30% a year. Based on its MARR, regardless of the size ofthe company, interest will be applied at about the same or above the MARR in order to

justify the economical feasibility of their business decisions that keeps them in thebusiness.

Figure 3 is a scheme of typical project execution that simulates several parties whichare: the owner company, 4 main contractors, 2 direct services/good suppliers, 5subcontractors, and 5 subcontractors suppliers. Below is replaced with a simplesimulation to figure out how much money in percentage will accumulate to the ownercontract value because of long payment term involved in contract supply chains. Theowner company as a higher level in the supply chain has a contribution in interestaccumulation reflects to apply 30/60 days of delay payment. The interest which isimplicitly charged back to the owner company is included in the commercial proposal ofthe contract of the main contractor. At the second level, the main contractor applies thepay when paid term, normally 10 days to its subcontractor, and the subcontractorconsistently applies the term to its supplier. The accumulated payment delays with thepay-when-paid clause will be passed back to the owner indirectly as the work initiator.

Based on the simulation in figure 3, shows the interest accumulation in level 1 is around0.8% to 2% from the total contract value of owner to main contractors in level 2, causedby 30/60 days net delay payment.

About 2.1% to 4.1% from the value of the scope of work cascades from maincontractors to subcontractors whish is passed in the form of interest accumulated bythe subcontractors pricing to the main contractors which is caused by 10 days delay ofpay when paid term. In level 3, it is about 4% to 7% from the value of the scope of workcascading from sub contractor to subcontractors supplier with interest passed in theform of supplier pricing to the subcontractors as implication of 10 days delay of paywhen paid term.

The important point here is all those accumulated interest values will finally end up tothe owners budget. The simulation shows the chains of this supply will increase ownercompany capital budget about 2.2% to 4.9% from their owner estimate.

The owner usually does not realize this because it is not in their control horizon. Ownerscan probably calculate the risk of interest by their own 30/60 net payment term to maincontractors because owner and main contractor has direct binding. But it is difficult forthe owner company to control the risk of interest that potentially comes from thesubcontractors and subcontractors suppliers because the owner company does nothave information on how many subcontractors and suppliers are in the supply chains atlevel-3 and level-4 and how they are legally binding. It is beyond the owners control.

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Figure 3 Supply Chain - Case: Long term payment

Direct Material &Services

$7,500,000

EPCI Installation1- Package$45,500,000

Owner company

Matrls supplier-1Contract value

$3,150,000

Main contractor -1

Contract value$44,590,000

Main contractor -2


Main contractor -3


Subcontractor -1.1


Vendor/Supplier -1.1.1


Vendor/Supplier- 1.1.2


FEED Execution1- Package$16,500,000

FEED Contractor Contract value

$16,170,000


Services supplier-2Contract value

$4,050,000

Subcontractor -3.1


Subcontractor -2.1



Contract value$648,025

Vendor/Supplier -3.1.1


Subcontractor -3.2




Vendor/Supplier- 3.3


EPCI Fabrication2-Packages$80,500,000

Net 30/60Payment term

+10 daysPay when paid term

50/80 days lon payment

40/70 days long payment

Total Owner Estimate

$150,000,000


0.8% - 2.3 %Interest applied by maincontractor to the owner

com an

2.1% - 4.1 %Interest applied by

subcontractors to maincontractor

3.8% - 6.8%Interest applied by

subcontracts suppliersto the subcontractors

Risk in form of Interest passback to owner 2.2% - 4.9 % of

total contract value

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Also, the owner company, who should have good in-house estimation capability, willnormally check the bid estimate from main contractor by using a class-1 cost estimatemethod with expected accuracy range L: - 3% to - 10% and H: +3% to +15% [17]. We canclearly see here the accumulated interest of 2.2% to 4.9% in the supply chains in figure- 3 is within the class-1 cost estimate range. This can be an indication that the ownercompany will consider it is a normal business. The interest accumulations will not bedetected since they fall within the range.

This is the area of potential cost efficiency where the owner company could strive toachieve.

Figure 4 will demonstrate the same project execution scheme with reduced days ofdelay in payment, which we will call (prompt payment). The reduction scheme isconditioned if the owner company could reduce the delay payment to net 5/20 dayspayment, and the contractors (and their subcontractors apply pay when paid term byreduction to 2 days delays.

The simulation shows that the interest accumulation in level 1 is around 0.27% to1.08%, main contractor to owner caused by net 5/20 days, 0.49% to 1.55% at level 2accumulated by the subcontractors pricing to the main contractors caused by 2 daysdelay of pay when paid term; then about 0.86% to 2.3%, from supplier pricing to thesubcontractors. The overall accumulation through supply chains of shortened durationat the owner side is 0.5% to 1.86%.

Figure 4 Supply Chain - Case: Short term payment


Net 5/20 daysPayment


9/24 days - shortened duration

7/22 days long payment


0.27% - 1.08 %Interest applied by maincontractor to the owner

company

0.5% - 1.6 %Interest applied by

subcontractors to maincontractor

0.86% - 2.3%Interest applied by

subcontractors suppliersto the subcontractors

Risk in form of Interest passback to Owner 0.5% - 1.86 %

of total contract value

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The simulations above reflect the impact of delayed payment conditioned on paymentterm on accumulated interest. The interest could balloon the value more than theoriginal value of the asset itself. The actual cost to build an asset contains a significantpercentage of interest accumulation. As per Syariah perspective, money is only aneffective medium of exchange or an intermediary between goods, but not for takingadvantage charging an interest.

Also the simulation tells us that the pay when paid and net 30/60 term is not consistentwith Syariah since having both clauses in the contract will facilitate owner or contractorsto delay payment on earned work. Syariah urges to make any payment soon after thework that is earned is completed. Regarding to prohibition of riba /interest, we also seethat both clauses create a business practices which potentially build or accumulate aninterest. As described in figure 3, it reflects on how both clauses could directlyaccumulate interest. Figure 4 also simulates how the interest is reduced if we can makethe payment earlier.

In order to facilitate prompt payment process, the long process in payment of earnedwork needs to be cut down. The reduced interest will be significantly reduced in thenumber of days. The next question is what factors are involved in owner company andmain contractor.

Based on the authors observation in some multinational companies, the internalverification and validation process is one of the processes in payment which requiresextended time before payment besides the progress measurement. To expedite a betterprocess, information technology (IT) will have significant impact in the improvement ofvalidation and verification in the internal business process. The company validation andverification can be expedited quicker through e-procurement applications available outthere. By having an e-procurement the contractors payment, verification, and validationimproves from 30-45 days into 20 days. The contractor can directly submit theirprogress report to the screen of approver. Once its approved then it goes for financialcheck prior to payment.

The important part prior to verification is how to measure the physical progress itself.Progress measurement deals with how the physical completion, or earned work can beweighed relative to the value of the work. Earned Value (EV) measurement method isone of available methods which could make a measurement of project real-timeweighed against to the planned progress.

Having EV in the project while performing progress measurement will facilitate betterand faster progress identification through the project execution. The fundamentalprocess of EV will consistently align with Syariah law because EV will support fastermeasurement of earned work which is eligible for prompt payment.

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6. CONCLUSION

The above simulations show a cost implication to the owner company and to thecontractor when theyre applying prompt payment or long term payment. The longer theduration of payment of earned work; the higher interest value applied to the bidproposal. The above simulation shows a long payment term the pay when paid 10 daysand the net 30/60 payment term will accumulate interest in range of 2.2% to 4.9% fromtotal Owner Estimate (OE) end to end. A shortened duration of payment of some levelwill reduce interest value embedded in the contract to 0.5% -2% from the ownerestimate (OE).

Syariah urges every Muslim to promptly pay any earned work as per agreed completionmilestone. Any delivered work by the employee or contractors need to be rewarded assoon as it is accomplished with the reason of fairness and prosperity.

That is in accordance with the prohibition of riba (interest) another Syariah practice. Bypromptly paying the contractor for any earned work they will avoid or minimize portionsof an interest charging in their bid proposal value, once it is awarded it will become acontract value. This is accepted by the contractors since they do not have tocompensate any risks of lack of capital due to long duration payment for their works ortasks; then they could continue their business as usual.

This is a clear indication that the pay when paid and the net 30/60 payment term is notconsistent with Syariah Law.

On the other side, EVM as a progress measurement tools is applicable to support theSyariah practices. The EVM is a proven method of measurement of earned work which

complies to substantial standards and per contract agreements. Implementing EVmeasurements in the project will help owners to understand the earned work statusearlier; which indirectly will expedite a prompt payment term.

For any Islamic company or any company working in predominant Islamic culture fromthe owner company perspective, applying both sets of:

1. Urge for effective progress earned measurement with EVMs applicable set oftools; and

2. Urge for prompt payment for any agreed accomplished work, reduced duration oreven eliminate the pay when paid and the net 30/60 term.

It will bring significant cost benefit and cost effectiveness with reduced capitalexpenditure cost. For the contractor companies, the initiative of prompt paymentstarted by owner company will deliver better cash flow and business continuity;especially for small contractors.

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7. REFERENCES 1. Humphrey & Associates, Inc. Project Management Using-Earned Value . 2006, CA2. AACE International. Skills & Knowledge of Cost Engineering. 5th Edition Revised,

2007. Morgantown, WV.3. Sullivan William. Wicks M, Elin. Koelling C, Patrick. Engineering Economic ,

Fourteenth edition. Pearson International Edition, 2009.4. RICS Research, Current trends in Shariah property investment . October 2006.

Corporate Professional Local.5. Rehman Ur, Amer Khalil; Introduction to Islamic Finance, Securitization and Sukuk ,

AIMS-Academy for International Modern Studies.6. Devine, Patrick, Esq. When Must A Subcontractor Be Paid Under A Pay-When-

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Appendices

Table- 1 Model Simulation Case: Long Term Payment Table- 2 Model Simulation Case: Prompt Term Payment

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Table-1 Simulation Model Long Payment Term Detail Calculation

Table-2 Simulation Model Shortened Payment Term Detail Calculation

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Table 2 Simulation Model Case: Prompt Term Payment

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About t he Author :

A Far id Ma loni, BEng, M Eng

Author

Farid Maloni is a project management practitioner with10 years working experiences in multinational Mining-Mineral and Oil-Gasindustries. Farid started his career as a Mechanical Engineer, ProjectEngineer, and Project Manager in a Mining and nickel processing company,Vale Inco Indonesia Corp. Currently he is working for Chevron Corp in theIndonesia Deepwater Development Project, Major Capital Project, Assurance,Interfaces and Risks as a Coordinator. Farid is based in Jakarta, Indonesiaand can be reached at [email protected]

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