problems plaguing sub-contracting in malaysia – a panacea ... · 2 problems plaguing...

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The Institution of Engineers, MalaysiaWednesday, 05 October 2005

Problems Plaguing Sub-Contractingin Malaysia

– A Panacea In Sight?

HO KIN WINGChartered Engineer(UK)/Professional Engineer(Malaysia)/

Panel Arbitrator/Accredited Mediator/VM ConsultantBSc(Hon) Civil Eng MSc Const. Law & Arb

CEng PEng MIStructE MIEM MCIArb MMIArb MCS

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Problems Plaguing Sub-Contracting in Malaysia – A Panacea In Sight?www.bkasiapacific.comwww.bkasiapacific.com

1.0 Introduction A non partisan view on the ills and challenges pertaining to the sub-contracting practice in the construction industry in Malaysia.

This talk will discuss the ills and challenges in the Malaysian construction industry and some of the solutions and/or recommendations to tackle these ills and challenges with the aim of improving the Construction Industry in general and in particular the sub-contracting practice.

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2.0 An Overview of Today’s Construction Industry Practice in Malaysia Malaysian Construction Industry today is only contributing less than 5% to the country’s GDP! [ It is only around 3.5-4.0%. Sad but true!]During the early days of the development of our country, sub-contracting is not as widely practiced when the Main Contractors are usually competent in most trades and will carry out the construction work themselves. However since the introduction of privatisation method of procuring public sector infrastructure in the 80s the practice of sub-contracting has become more and more dominantly used.

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2.0 An Overview of Today’s Construction Industry Practice in Malaysia The majority of the bigger Main Contractors in Malaysia these days have been transformed into Management Contractors whereby their main skill is actually only to manage the construction process and on their own might not have the competencies to carry out the construction work. These Main Contractors will in turn sublet the construction work to sub-contractors which will actually carry out the works [called work contractors in management contracting system of procurement].Main Contractors these days appear to have lost their ability to construct the works themselves, relying on separate work contractors to carry out the construction work.

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3.0 Sub-Contracting PracticeSub-contracting has been in practice in the construction industry for decades if not centuries.The practice of sub-contracting of having to take on a ‘back to back’ provision within their sub-contract has also been practiced over the same period.These seem to be fewer problems with sub-contacting then as compared to what it is now today.There is nothing legally or contractually that prevents the practice of sub-contracting with “back to back” arrangement.sub-contracting practice with ‘back to back’ provision or arrangement should not be of any concern if everyone within the payment chain “plays within the rules of the game”However not everyone within the payment chain “plays within the rules of the game” and the real issue is these “malpractices” of the construction industry that is actually the challenge.

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4.0 So what are some of these issues that lead to “malpractices”?

“The challenges facing the Construction Industry are not only countless, but also wide and deeply embedded in past practices so much so that we have begun to accept it as a norm in some cases.”CIDB Presidents and CEOs Round Table Discussion June 04

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The practice of awarding projects due to patronage and not on meritorious grounds will mean that the Main Contractor for the project might not have the skill and competence to carry out the construction of the project which will lead to the project being sub-let to another contractor.This style of business practice does not add value to the project but only brings about poorer quality product or work as the multi-layer sub-contracting does not add any value but rather it dilutes the profit margins of the sub-contractor.The multi layer sub-contracting has also led to many sub-contractors abandoning projects due to financial constraints arising from little or no profit and poor cash flow situation.

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Clients / Contractors squeeze the sub-contract price and still expect world class quality [Wishful thinking!].This will only result in poorer construction quality / defects and extended time of construction, disputes and abandonment of projects.The construction industry say some 20-30 year back, the contractors and sub-contractors were getting reasonable contract prices which translate to better quality, less disputes and less abandonment of projects unlike the situation that the construction industry is in now.

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The practice of either innocently or intentionally incorporating or importing contract terms and conditions without due regard to its effects and consequences arising from the lack of appreciation and understanding of the commercial, risk and contractual ramification of these imported contract terms and conditions has actually contributed to the challenges of sub-contracting.The Main Contractor lack the experience or knowledge to manage and administrate the sub-contracts has also led to the challenges of sub-contracting.The Main Contractor do not administer the sub-contracts in a professional manner such as under-certifying or non-certifying for works completed.

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On most sub-contracts that are on “back to back”arrangement would have a statement which basically states that the sub-contractor have reviewed and accepted the main contract conditions.Most of the time, the sub-contractor has not seen the terms and conditions of the main contract and will enter into the sub-contract blindly.The speaker has also dealt with a case where the main contractor entered into such a sub-contract at the time when he himself has not sighted the terms and conditions of the main contract! It is such disregarding attitude that actually causes the challenges and disputes of sub-contracting [One can only blame himself!].

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5.0 Root Cause of These ProblemsIf anyone is to single out one root cause to the challenges faced by the Sub-contractors in particular will definitely be the LACK OF MONEY.This lack of money then leads to many other problems such as:

low quality,low productivity,delays,disruptions,cashflow issues etc.

which then cumulates into disputes.

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6.0 Payment IssuesThe Working Group [under CIDB led by ISM] looking into the issue of payment within the construction process has produced a paper, Payment and Related Issued in the Construction Industry that identified the following current challenges relating to payment issues, which is applicable to sub-contractors:

Non certification;Under certification;Setting-Off (or Contra Payment as it is locally known as) without justification;Delay payment;Non payment to contractors (even when there is a valid certificate);Pay and when paid clauses

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6.0 Payment IssuesThe speaker has also identified the following as challenges relating to payment issues:

No tabulation of apportionment of certified amount for Sub-contractors’ certified work whereby the Main Contractor can withhold payment to sub-contractors even though payment has been made to him by the Client;Main Contractor does not issue payment certificates to sub-contractors;Client and Main Contractor are related where payment is withheld and therefore no need to pay the sub-contractors when there is a pay-when-paid clause;Calling of On-Demand Performance Bond unjustifiably.

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6.0 Payment Issues

Currently there are very limited relieves for non-payment unless provided for in the contract or sub-contract. Under common law the unpaid sub-contractor cannot

Suspend the execution of the works;Slow down the execution of the works (which is commonly practiced by contractors in Malaysia);Treat the sub-contract as repudiated and discharge accordingly.

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6.0 Payment Issues

Under all private construction sub-contract forms, there is a provision for the sub-contractor to determine their own employment but this step of determination of one’s employment must not be made unreasonably or vexatiously especially when there is a cross-claim scenario where the court has held that it was unreasonable and therefore a wrongful repudiation of the contract.Therefore there ought to be some interim solutions to overcome these payment issues.

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7.0 Relief Measures for Non PaymentWorking Group & Speaker Suggestions

Sub-contractor should have the right to suspend work due to no payment [already in the CIDB Contract and PAM Sub-contract, PAM Main Contract expected to have the same provision];Sub-contractor entitled to late interest, chargeable on delayed or non payment amounts;banning of pay-when-paid clauses.retention sums be kept in independent stakeholder accounts;Clients to issue payment bonds;right to suspend work due to non certification;

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8.0 Way Forward

The real solution to the ills and challenges is to tackle them at the fundamental level with more proactive measures rather than reactive measures like putting in more legislation or have more restrictive or stringent contractual provisions.A total shift of mind set or paradigm will be required and this needs structure changes at the fundamental level.it is pertinent that the ingredients of effective construction process management are well understood and practised. [implement good and tested practices, not cut corners practices!]Construction industry players and practitioners must be professional and ethical in carrying out their duties. [Buzz word – INTEGRITY~ Must Not Compromise Business and Professional Ethics]

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8.0 Way Forward

Contractors and sub-contractors must be commercially astute. [calculate their risks properly]There is a need to strike a balance between contractual and commercial approaches to esure the successful outcome of a construction project, which essentially means to be able to achieve a ‘win-win’ outcome for all the parties. [dogmatic approaches will only create impasses!]

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9.0 ConclusionThere is no real quick fix for the many ills and challenges to the Construction Industry but these have to be addressed at the fundamental level / framework of the Construction Industry where some structural changes has to be implementedNeed to remove our unhealthy practices and be subjected to scrutiny and be transparent, means being responsible and accountable for one’s actions and inactions. [Stop passing the buck and finger pointing!]The application of more common sense and integrity into the construction industry will definitely goes a long way in addressing the ills and challenges of sub-contracting.

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9.0 Conclusion“We need to change our mindset; but this can only be achieved with a strong commitment and collective will power; and the realization that in order to remain sustainable we may need to subject ourselves to some form of check and balance however much we prefer to be in charge of our destiny.” Presidents & CEOsRound Table Discussion 6/04

There is nothing fundamentally flawed with the practice of sub-contracting but what is flawed is the administration of the sub-contracting practice with construction industry players and practitioners tainted with less than ethical, unprofessional and incompetent practices.

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10.0 Closing Remark

Panacea In Sight?

You and I will have to do some soul searching and honestly ask ourselves if we are up holding business and professional ethics and practices.

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Thank you.

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problems plaguing sub-contracting in malaysia – a panacea ... · 2 problems plaguing...

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