THE CONSTRUCTION INDUSTRY PAYMENT AND ADJUDICATION ACT (CIPAA), AND HOW DOES IT AFFECT YOU..?

THE CONSTRUCTION INDUSTRY PAYMENT AND ADJUDICATION ACT (CIPAA), AND HOW DOES IT AFFECT YOU..? (Part 1)

CIPAA, the most talked about topic among Contractors, Professionals, Academician etc. is in its way towards realisation. While most are eager to have this CIPAA in place, I doubt that the majority in the construction industry really understand what is it, the mechanism of operation, it’s application etc. Another interesting matter to think about is how would the parties react? and what are the adjustment they will probably do to cope with this CIPAA.

Norazman Zaini of SuaZ Consultancy writes about CIPAA….How Does It Affect You..?

Part 1 will be discussing the background, basic applications etc. Part 2 will be on claims procedures, while Part 3 will be on Adjudicator’s appointments, processes decisions etc. Part 4 will be a conclusion of how this CIPAA will affect you as players of the construction industry.

CIPAA Background

It started as seen in CIDB portal to be the Government attempt in ensuring the smooth implementation of construction projects, problems of this nature must be addressed especially at the onset of the 10th Malaysia Plan. CIDB has been given mandate by the industry stakeholders to initiate and embark on the CIPAA development. Many consultative forums have been held to ensure all needs of the stakeholders have been addressed and eventually enable them to benefit from CIPAA. From the record, Cabinet has agreed that CIPAA be enacted to resolve payment problems in construction industry on the 15th July 2009.

Following that, CIPAA has first read in the parliament on 1st December last year and read the second time in parliament on 2nd April 2012. CIPAA was passes in the Senate on the 7th May 2012, it’s therefore on its way to be gazetted soon by the end of 2012.


Purpose & Aims of CIPAA

The following is taken from CIDB and KLRCA’s notes describing the purpose and aims of CIPAA;

1. To Facilitate Regular and Timely Payment

2. To Provide a Mechanism for Speedy Dispute Resolution Through Adjudication

3. To prohibit conditional payment terms that inhibit cash flow.

4. To further provide default payment terms in the absence of provision to that effect.

5. To Provide Remedies for the Recovery of Payment in the Construction Industry

Application and The Scope of the CIPAA Bill

It covers all construction contracts made in writing that relates to construction work carried out wholly or partly within territory of Malaysia including one that is entered into by the Government Malaysia is governed by the proposed Act. CIPAA also includes local and international construction contracts. This generally means that all contracts such as construction contracts, labour supply, materials/equipments/manpower supply, professional consulting appointments, etc. are included.

The following are the categories of contracts;

Construction Work Contract: Means the construction, extension, installation, repair, maintenance, renewal, removal, renovation, alteration, dismantling or demolition of buildings and or structures, civil engineering works, drainage, irrigation or river control work, electrical, mechanical, water, gas, oil, petrochemical or telecommunication work. It also include any work which forms an integral part of or are preparatory to or temporary of the works described and Procurement of construction materials, equipment or workers for works described.

Construction Consultancy Contracts: For consultancy contracts it specifically covers;

1. Planning and feasibility studies
2. Architectural work
3. Engineering
4. Surveying
5. Exterior and interior decoration
6. Landscaping
7. Project management services

Now, what about Construction Contracts Consultants contracts? Claims Consultants contracts? Training O&M contracts? Risk Consulting Contracts? Funding or Bridging contracts? Works Insurance Contracts?

Construction contracts and Claims consultancy….that’s what I do….If all the above contracts are not within the definition and scope of CIPAA….I may want to impose huge security deposit or insist for a Payment Bond!

What is not applicable and not within the scope of CIPAA

Obviously what’s not included in the above, and construction contracts executed orally or partly oral and partly in writting! It does not apply also to construction contracts where exempted by Minister or entered into by a natural person for any construction work in respect of any building which is less than four storeys high and which is wholly intended for his occupation (residential construction contract).

Now I have no comment for the exemption by Ministers, however for the later, does this exclusion includes consultancy contracts between the natural person and his Architects/Engineers/QS/Surveyors? To be frank, I can’t see the rational of such exclusion. A bridge contract by JKR may cost RM250K with less complexity gets CIPAA, whereas most private owned bungalows that will obviously costs RM1 million or above coupled with it’s complexity and numerous trades gets no CIPAA!

So you guys there building private bungalows out there…be warned. Make sure the bungalow you build is four storeys and above!

Remedies provided under CIPAA

In generality the remedies are;
1.After adjudication award if the adjudicated amount is not paid, this gives the right to suspend or reduce the rate of progress of the construction work provided notice is given. Party is entitled to fair and reasonable extension of time to complete his obligations under the contract after being paid.

2.After adjudication award if the adjudicated amount is not paid, this gives the right to request for direct payment from the principal of the party owing the monies, and the principal shall pay the amount.

KLRCA as the appointed Adjudication Authority

Now, KLRCA has been doing intensive awareness programmes by way of a road tour around Malaysia. You may be wondering why is KLRCA involved?

Well that’s because under Section 32 of Part V: Adjudication Authority states that KLRCA is responsible for:

1. the setting of the competency standard and the criteria required of an Adjudicator.

2. the determination of the standard terms of appointment of an Adjudicator and the fees for the services of an adjudicator.

3. to provide administrative support for the conduct of adjudication

4. to serve any functions as may be required for the efficient conduct of adjudication.

How Does All These Affects You?

Well, some brief pointers in relation to this Part of my writting;

1.Ensure payment terms is included in your contracts, if not the default provision of payment of 30 calendar days will apply.

2.You will need to compare and check the payment terms against your payment practices. Some organisation will have their own procedures for payment that may not be the same as what’s written in the contract. You will have to make adjustments and/or amend your payment terms in the contract to suit your organisation payment practice and procedures or vice versa.

3.As adjudication is suppose to be a fast process, you may want to agree the Adjudicator for specific types of disputes during formation of a contract i.e. disputes relating to design matters, a variation, disputes on extension of time matters, disputes on loss and expense claims etc. etc. I foresee that at one time, there may be disputes about measurement of quantities and the other about extension of time which are 2 different areas of expertise. You may want to adjudicate the 2 issues separately.

4.Before entering into a contract check for the existence of any ‘Pay when Paid’ or ‘Back to Back Payment’ clause to be removed.

5.If your conditions of contracts specifically contain expression that the contractor shall not suspend works throughout the contract period for any reason, you may want to re-look and review such clauses as it contravene with the provision of CIPAA.

6.You may want to include adjudication as the mean for dispute resolution before arbitration if there is no adjudication provision in your contract.

7.I foresee that Standard Form of Contracts by PWD/PAM/IEM/CIDB may be amended to a certain extend to be in line with CIPAA.

------------------------------------------End of PART 1-------------------------------------

Letter of Award or Letter of Acceptance?

Letter of Award or Letter of Acceptance? Both commonly referred to as LoA by the industry. A friend asked me, 'does it really matters?' Yes of course! although there may not be any crucial contractual implication, the words you choose reflects your understanding over the matter.

Lets look at the process before a contract is awarded. Quotations or proposals are commonly requested from the contractors. He then prepare his quotation/proposal or put price onto the tender. The Employer then received the quotation/proposal or priced tender and review/examine it. He then decides who gets the job. He then write to the succesful contractor to inform that he is selected to perform the job.

Now, the activity of quoting or preparing the proposal or pricing  the tender is in fact an act of making an 'offer'.  While the act of the Employer having decided which contractor will be doing the job and issuing the LoA to the said contractor is actually an act of accepting the offer and communicating it.

So, when the Employer is communicating 'acceptace' it suits commonsense and rightly such letter should be a 'Letter of Acceptance' rather than a 'Letter of Award'!

Other Issues Relating To Letters of Acceptance

• Be aware of counter offers in LoAs.
• The content of your LoA should be minimal to convey acceptance, stating consideration and duration if standard conditions of contracts being in used. Avoid drafting lengthy paragraphs and contents that duplicates the terms and conditions already made known in the standard conditions.
• Avoid no-sense statements such as 'This LoA shall bind the parties until formal agreement is executed...bla bla bla..." When you have accepted an offer and where all the essential  elements of a valid contract exists, a contract is formed already and binding upon the parties.
• Ensure your consideration, duration etc. as stated in the LoA is consistent with the ones stated elsewhere in the contract document.
• Get the LoA typed! avoid handwritten letters and get witness involved when signing.

SuaZ Consulting is a firm specialising in contract administration, contract claims and dispute resolution invite you to discuss your contractual problems and we strive to find solutions for it.

Loss of Profit : What Need To Be Proved for a Successful Claim?

The issue about loss of profit is always a popular subject of discussion. It’s common for contractors to ask me these few hot questions, “Can I claim for loss of?”,  “What’s the reasonable profit % to claim?”,  “How do I justify my claim for loss of profit and what need to be shown?”

Well first and foremost,  there are series of questions that need answering. Among others;

1.       What is the cause or event resulting the purported  ‘loss of profit’ need to be determined.?

2.       Who or which party caused it?

3.       The reasons of such changes instructed, omission, prolongation etc.?

4.       Is the event within the control of any party?

5.       The omitted works given to others?

6.       Does the contract allows for such omissions?

Once the above series of questions are answered, then you can probably know whether such a breach of contract (allowable or not) or otherwise? Done of badfaith/mala fide? Once known, and if the facts suggests that it’s a breach of contract, then only we can talk about how prepare the necessary justifications and the approach to calculate the loss of profit!

Always remember that you can put up any amount as loss of profit. The chances of getting what you claim will be dependent upon how convincing is your justification and calculation approach. So be tactful when making such a claim, you won’t want to be perceived  as putting up a frivolous claim.

Now as the basic rule, there is no such thing as the ‘accepted  % of profit’, the ‘industry norm’ , ‘common % of profit’ and the like. Any attempt to apply % would be a speculative act.

There are 2 categories of loss of profit, one being incurred loss, the other is future or potential loss. The former may also be compensated as additional cost incurred in lieu of loss of profit hence enabling the injured party to maintain his profit level. The later refers to potential loss such as in the case of loss of profit for omitted works.

As a guide a claim for lost profits claim requires three elements that need proving ;

1^st :   Foreseeability-the loss of profits must have been a foreseeable consequence of the conduct.
2^nd:   Proximate Cause- the loss of profits must have been caused by a breach of the contract at issue.
3^rd;    Loss of profit damages must be capable of proof with reasonable certainty.

The 1^st element actually refers to the laws relating to damages, while the 2^nd element is about proving ‘cause and effect’. Now the 3^rd element is about justifying the loss and calculation approach.

In order to meet the 3^rd element requirement, you must first show with reasonable certainty  that profit  can be earned and loss been incurred. Therefore detailed review of the contract rates and estimates is necessary. Upon having the detailed breakdown of your estimates and/or rates, comparison with actual price incurred or market prices for materials, labour, plant & machineries etc. such works at the time it was priced will have great influence in determining whether your price is within or out of the range for profit. It’s not an easy task and if you want to be successful that extra effort and determination is essential.

As SuaZ Consulting, our Principal has worked on and had given advise to many clients on this loss of profit issue and should you or your organisation require assistance on this subject, please do not hesitate to contact us now!

5 Common Questions on Critical Path [CP]

We commonly found the term CP being used in the specification or requirements for work programmes. Its a trend nowdays that CP is specifically mentioned as a requirement in most contract documents produced by JKR, Government Bodies & the Public Sector. In some contracts I've seen, its specifically mentioned also that Extension of Time shall be evaluated using CPM technique!

What is CPM?

You must defined it as 'Critical Path Method' don't you. While for me it may also mean 'Cheat the Programme & Manipulate it!' Jusssst Joking!

Wikipedia defined it best by stating the history behind it as;

The Critical Path Method (CPM) is a project modeling technique developed in the late 1950s by Morgan R. Walker of DuPont and James E. Kelley, Jr. of Remington Rand.^[2] Kelley and Walker related their memories of the development of CPM in 1989.^[3] Kelley attributed the term "critical path" to the developers of the Program Evaluation and Review Technique which was developed at about the same time by Booz Allen Hamilton and the US Navy.^[4] The precursors of what came to be known as Critical Path were developed and put into practice by DuPont between 1940 and 1943 and contributed to the success of the Manhattan Project.^[5]

CPM is commonly used with all forms of projects, including construction, aerospace and defense, software development, research projects, product development, engineering, and plant maintenance, among others.

Any project with interdependent activities can apply this method of mathematical analysis. Although the original CPM program and approach is no longer used, the term is generally applied to any approach used to analyze a project network logic diagram.

Now lets move on.....5 Common Questions asked and their answers are;

1. What is Critical Path?

Critical path is a series of activities having dependency between each other and that that connects activities from start date to the end date without any float/slack time. It is normally referred to as the longest path in a work programme. Typical example as below;

2. How do you identify Critical Path

Well first of all not all red bars in a programme are critical activities within a critical path. You have to go beyond the colours. Cosmetically, a 'blue' bar can be turned into 'red'. Check the logic and resource links, the duration of each activities and there shouldn't be any float/slack duration.

3. Can there be more than 1 Critical Path in a work programme?

Yes, multiple critical path can exists especially when works are divided into zones and segments of working areas. Typical example as below;

4. Can critical path change during the course of works?

Yes, critical path is alive! It changes because in reality sequence of work may change, duration of activities may change and addition or omission of activities may occur. So the original identified critical path can easily change. Common misunderstanding about critical path is that it's static and never change throughout the construction period! However, for some type of project such as roadworks, O&G pipeworks and the like you will find that the process and sequence may be fixed and therefore for such projects the critical part is unlikely to change.

5. Is it true that only delays on the critical path can affect the completion date?

Yes, delays on the contemporary critical path will affect the completion date. Delays can either be in the form of late start or prolonged duration.

SuaZ Consulting provides services to review work programmes and analyse the impact of delays via CPM delay analysis methods. We also prepare and advise on Extension of Time Claims and evaluation.

Concurrent Delay Event...Is there such thing?

It’s quite common  for Contractors to report to me that their claims for additional time and money failed because of concurrent delay issue.

Most of the time Employer will justify to me that their action for not granting EoT is because the Contractor was in fact in delay himself s at the time the Employer’s delay event occurred.

Now, how do we deal with this issue?  How do we analyse it?

Let’s not look at the technicality or legal aspects first, but at physiological aspect for a start. 

When one recognised and accepted that he also contributed to the delay, naturally he will not be too confident to assert his case. Most of the time Contractors will move a step backwards and give-away their claims and seek for sympathy from the Employer on the basis they do not know how to justify their claims!

On the other side, the Employer will view this as an opportunity to demoralise the Contractor and refuse to grant EoT and additional cost claims.

This is only my opinion - It’s this physiological aspect inferiority that hinder the learning process and development of knowledge over this subject.

Now let’s not waste time and go into the crux of this subject. First of all we need to know what concurrent delay mean.  Look at the following illustrated scenarios. Do you consider all of it as concurrent delay scenario?  or any one of it only?

                                          

Most people consider all 3 scenarios as concurrent delay and straight away apply the apportionment approach, 'dominant cause' approach, 'devlin' approach, 'malmaison' approach etc. in determining liability. This is a wrong approach in my opinion and it lead to no where in determining EoT!

To me only scenario 3 is a true scenario of concurrent delay whereby difficulty arises in determining liability. However, practically how often do we come accross this scenario of true concurrency? In my practicing years.....none!

Where the issue is about determining additional time entitlement, the impact of delay events as shown in scenario 1 & 2 can be determined by way of CPM analysis. Such analysis will be able to identify which event had an impact to the completion date and from there liability can be determined.

So my conclusion is that it's very rare for true concurrency to occur, therefore  Contractor's now need not worry whenever they are trown with statements such as 'You were yourself delayed at that time and no EoT granted...'. What needed is to carefully and critically analyse the delay events to identify whether its truly concurrent or not. A proper delay analysis need to be done though!

I must advise that the analysis is not as simple as what it looks like in the diagrams illustrating scenarios above. It will be a tedious exercise of analysing your work programme and actual progress recoded.

At SuaZ, we do advise our clients of complex issues such as this. Do not hesitate to contact us should our advise is required.

Why Contractor's Claim Failed in the First Submission..

Being in this Claims Consultancy business for more than 15 years, I can say that most Contractor's claim failed in their first submission. 'Failed' here means it failed to grab the attention of the S.O. and/or the other party. How can this be?

The following are 5 reasons which in my opinion commonly found in contractor's submission;

1. Letter issued to the wrong addressee-Please do read your contract document and identify the right party to whom the letter should be addressed and also the correct address for delivery. The fact that Mr.X always attend to you and chair the meeting during execution stage of the contract doesn't mean that he is the S.O/E.R of the contract.  So, please check your contract!
2. Unclear Subject Matter/Title of the letter- Do clearly write the 'Subject Matter/Letter Title'. I've seen a case where contractor put the title of the letter as 'Extra Earthworks' when he is actually claiming for a variation whereby he wanted to claim for additional earthworks i.e. imported filling material.  Some put the title as 'Additional Workmen Claim' whereby his claim is actually a loss and/or expense claim for prolongation of workmen at site. So, please think carefully of the subject matter/title of the letter before you write!
3. Unstructured Content-Most contractor write the content of their letter in a manner and style as if the other party knew exactly what they mean. So there is no proper structure to introduce the subject, its background, the basis, expected outcome, plead etc.  Example "Merujuk kepada perbincangan dengan ....... kami ingin mengemukakan tuntutan berjumlah RM5 Juta...." or "We refer to the above captioned matter which was discussed repeatedly over these few months in relation to our claim for excavation in rock and hereby submit our final claim duly adjusted based on the recent discussion with your QS". Do remember, if the matter goes into arbitration or adjudication, all there letters may become relevant and that if the content is not properly structured to express your intention, it may not be useful to you! Write your letter as if the addressee is a 3rd party who don't have knowledge of the matter.
4. Vague Basis for Claiming- This is so important. You must clearly know your basis of claims-whether its under the contract provisions or otherwise, whether its loss and/or expense or a variation, the provision under which you are relying your case, etc. etc. The moment the S.O/E.R see that you are not sure of your basis of claim, then to him its a waste of time to look into it further.
5. Approach in deriving at the Claim Amount-Most contractor wrongly believed that its the amount they claimed is important, and not the approach and calculation leading to that amount. Now, if you proceed with that belief, there is no point of having the S.O/E.R to administer the contract! Just let the price nego be purely on 'horse trading' basis. So, you must have a systematic and justifiable approach in deriving at the amount claimed and you must be prepared to table it out to the other party for review.

I hope the above will offer some guidance. For further detailed review of any potential claims submission, or if you are on the other side evaluating the claim, please do not hesitate to contact Suaz for consultation.

Stamp Duty Act Ruling....now will take effect from 1st January 2011!

Stamp Duty Act ruling- instead of a fixed sum for stamp duty, stamp duty now will be at % basis on the service contract value!

I thought this was one of those so called 'brilliant' ideas which will end up in the bin! Just like the idea of applying different petrol prices to different c.c. cars...but unfortunately NOT!

MBAM via its circular dated 24th December 2010 stated that they have received a letter from the MoF whereby the MoF has decided that the stamp duty policy on service agreements (including construction contracts)  will be applicable with effect on 1st January 2011 as follows;

1. The imposition will be at 0.1% ad-valorem on the service contract value, Don't be confused with the term ad-valorem! The phrase ad-valorem is Latin for "according to value";

2. If the service subjected to stamp duty involves multi-tier contracts i.e. Employer-Main Contractor-SubContractor,  the 0.1% will be imposed at the first tier (i.e. the contract between Employer-Main Contractor); or to the second tier (i.e. the Main Contractor-SubContractor) for service agreements whereby been exempted from paying stamp duty (i.e. where the Goverment  is the Employer);

3.Service Agreement at other levels (other than those where the 01.% applies) will bear a stamp duty fixed at a flat rate of RM50.00;

4.If a service agreemnt been cancelled by the Employer (or the party awarding the contract) and stamp duty of 0.1% has been paid, such 0.1% is returnable. However those stamp duty at other levels (i.e. the RM50.00 flat rate) will not be returned.

Do read the circular by MBAM here:  http://www.mbam.org.my/mbam/doc/news/[20101224]%20Circular%20on%20Update%20for%20Stamp%20Duty%20Act%20Ruling.pdf

Should you have any queries about the ruling, you can email directly to MBAM at mbam05@mbam.org.my

Now how does this affect us? In every aspect of services we engaged where contract exist!

For the construction industry the immediate effect will be the increased in project prices. Just to let know of the magnitude of payable amount;

• RM1,000,000,000.00  Contract Value,  stamp duty  payable  RM1,000,000.00
• RM   100,000,000.00  Contract Value,  stamp duty  payable  RM    100,000.00
• RM     10,000,000.00  Contract Value,  stamp duty  payable  RM       10,000.00
• RM       1,000,000.00  Contract Value,  stamp duty  payable  RM         1,000.00
• RM          100,000.00  Contract Value,  stamp duty  payable  RM             100.00

Although it appears manageable, my worry is that if this is not understood properly, subcontractors and sub-subcontractors and  all lower tier levels may wrongly assume the 0.1% apply at all levels and hike their  prices accordingly and the whole project price will be overblown!

Therefore the information about this Stamp Duty Ruling application need to be spreaded fast! Forums, talks, circulars etc. from governing, organisation, society etc. need to be issued out immedieately to avoid misconception.