The struggle of local contractors: Are we really in a good economy?

It is not a doubt that in order to become a developed country more developments are required.

The recent Budget 2018 underline the lots of construction projects opportunities which worth more than RM350 Billions for the nation or contractors to grab.

This was supported by the statement from Master Builders Association Malaysia (MBAM) President Foo Chek Lee which he said outstanding projects in the construction industry are estimated to be worth at least RM138bil currently while Budget 2018 did not specifically mention allocations for the construction industry, the government had allocated RM2.2bil for public housing projects such as 1Malaysia People’s Housing Programme (PR1MA).

Projects such as Affordable Housing PR1MA, rail transportation projects such as Mass Rapid Transit Line 3 or Circle Line, among others, will definitely spur the construction industry in Malaysia and stimulate economic growth.

Innovation inspiration such as to use industrialized building system (IBS) for projects valued at RM50mil or more in three years time will create good environment in the construction market.

By declaring this new mandate in advance, this will encourage our industry players to prepare themselves to be more competitive by developing or acquiring the necessary skills and resources to embrace the technology.

Based on a Research done by Univeristy Teknologi Petronas, the results exhibit that there is a strong correlation between construction sector and economic growth of Malaysia.

The construction sector has vital role in term of its contribution to revenue generation, capital formation and employment creation which ultimately support the gross domestic product (GDP) and the socio-economic development of Malaysia. Considering the substantial role of this sector, it is obligatory for Malaysia government to give due attention and focus on construction sector for qualifying the title of developed nation.

Hence, Malaysia cannot pretend not to have a payment problem despite sufficient mechanism
provided in many standards forms of construction contract.

Based on surveys, observations and research done by various institution, up until today, it can be concluded that many local contractors have experienced late and non-payment problems in the Malaysian construction industry and the situation is far worse when it comes to government clients since 2000.

This problem actually involves enormous amounts of money and leads to other problems that could affect the performance and image of the construction industry.

Study suggested that the late and non-payment problems are contributed by inter alia: local culture/attitude which includes bribery, disagreement on the valuation of work done and paymaster’s poor financial management.

This later creates cash flow problems, stress and undue financial hardship on the contractors.

It is interesting to witness that this involved all classes of contractors. A Director of a G5 company express his frustration of the industry late payment process which sometimes with no solid excuses.

He is still currently facing a lappet payment of one of his project which is due since 2000.It is heartbreaking to know that bribery was one of the factor of late payment and no repetition of work despite good reputation. Cronyism is highly practice despite the preach on transparency. On top of that, a Director of a G7 company, have no choice but to change his lifestyle just because his payment amounted RM10Billion is currently due.

In a research done by Univeristy Teknologi Malaya, the respondent pointed out that the total amount of money which remains overdue in government-funded projects until 2006
has exceeded RM11 million since January 2000. Despite the emphasis on the Government, private paymasters do practice the same situation.

This scenario will later be translated into an economic cycle as which started with Cash Flow Problems, Financial Hardship, Stress on Contractors, unemployment, inability to perform credit and the impact continues.

Due to the local culture or attitude is one of the frequent causes of late and non-payment, it is recommended that contractors consider this problem as a major risk that has a high probability of occurrence and consider it when completing estimates for tender.

It is anticipated that late or non-payment most likely will cause undue cash flow problems on the contractors and this would have a devastating knock-on effect down the contractual payment chain.

Nevertheless, it is the role of the Government to ensure that it is mandatory for employer’s financial capacity and credit rating to be made known to facilitate contractors in choosing the right employers and to increase chances of the latter getting paid.

Nevertheless, Construction Industry Payment and Adjudication Act 2012 [Act 746] must be regarded a means to an end.

Relevant bodies together with the government must study and amend the existing standard forms of contract to provide protection and, promote balance allocation of risk and fair contract to all related parties.

Punctuality of submitting, processing, issuing interim payment certificates and honoring the
certificates are extremely important issues in relation to progress payment claims. Perhaps, an increased sense of professionalism in construction industry could overcome some of the problems related to late and non-payment issues. Bribery is another issue of concern.

Sharifah Azzahra a Certified Enterprise Risk Advisory, Institute of Enterprise Risk Practitioner (IERP)