BEM Sep07-Nov2007 (Eng Construction Contracts).pdf

8/17/2019 BEM Sep07-Nov2007 (Eng Construction Contracts).pdf

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LEMBAGA JURUTERA MALAYSIA

KDN PP11720/1/2008 ISSN 0128-4347 VOL.35 SEPT - NOV 2007 RM10.00

BOARD OF ENGINEERS MALAYSIA


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33

4 President’s Message Editor’s Note

5 Update

Professional Indemnity Insurance

Announcement

Publication Calendar

Event Calendar

Fraudulent Offers On Engineering Council

United Kingdom Registration

Cover Feature

6 Effective Contract Management For

Construction Projects

16 Drafting Construction Contracts

24 Understanding Engineering/Construction Contracts

Guidelines

36 The Chartered Institute Of Arbitrators:

Code Of Professional And Ethical Conduct

Feature

37 Membendung Kerugian Berkaitan Dengan Tuntutan

Kerugian Dan Perbelanjaan Tambahan Di DalamKontrak Binaan

44 Construction Disputes

48 Integrated Engineering Services - The ETI Centric

Professional Services

Engineering Nostalgia

56 Some Engineering Works In The 60s

c o n t e n t sVolume 35 Sept - Nov 2007

2 THE INGENIEUR

41

56

6

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As more local builders and professionals areengaging in construction works, both local and

overseas, the subject of contracts has always beenpopular. In this publication, readers will be takenon a revisit to the understanding of EngineeringConstruction Contracts as well as the drafting of

construction contracts by prominent writers who have salientpoints to reach out to us.

On the international scene, the paper on ‘IntegratedEngineering Services-the ETI centric professional services’ willexamine the supply chain of Engineering Services in FTA.

During the recent BEM road shows on Certicate ofCompletion & Compliance (CCC), many questions wereraised on Professional Indemnity Insurance (PII). We hope

the section on PII addresses the concerns in this area andwe welcome further deliberation on this.

Ir. Fong Tian YongEditor

MEMBERS OF THE BOARD OF ENGINEERS MALAYSIA

(BEM) 2006/2007

PresidentYBhg. Dato’ Prof. Ir. Dr. Judin Abdul Karim

RegistrarIr. Dr. Mohd Johari Md. Arif

MembersYBhg. Tan Sri Dato’ Ir. Md Radzi Mansor

YBhg. Datuk Ir. Hj. Keizrul AbdullahYBhg. Mej. Jen. Dato’ Ir. Ismail Samion

YBhg. Dato’ Ir. Shanthakumar SivasubramaniamYBhg. Datu Ir. Hubert Thian Chong Hui

YBhg. Dato’ Ir. Prof. Chuah Hean Teik Ar. Dr. Amer Hamzah Mohd Yunus

Ir. Henry E ChelvanayagamIr. Dr. Shamsuddin Ab Latif

Ir. Prof. Dr. Ruslan HassanIr. Mohd. Rousdin Hassan

Ir. Prof. Dr. Hassan BasriTn Hj. Basar bin JuraimiIr. Ishak Abdul Rahman

Ir. Anjin Hj. Ajik Ir. P E Chong

EDITORIAL BOARD

AdvisorYBhg. Dato’ Prof. Ir. Dr. Judin Abdul Karim

ChairmanYBhg Datuk Ir. Shanthakumar Sivasubramaniam

EditorIr. Fong Tian Yong

Members

Ir. Prem KumarIr. Mustaza Salim

Ir. Chan Boon Teik Ir. Ishak Abdul RahmanIr. Prof. Dr. K. S. Kannan

Ir. Prof. Dr. Ruslan HassanIr. Prof. Madya Dr. Eric K H Goh

Ir. Nitchiananthan Balasubramaniam

Executive DirectorIr. Ashari Mohd Yakub

Publication OfficerPn. Nik Kamaliah Nik Abdul Rahman

Assistant Publication OfficerPn. Che Asiah Mohamad Ali

Design and Production

Inforeach Communications Sdn Bhd

PrinterArt Printing Works Sdn Bhd

29 Jalan Riong, 59100 Kuala Lumpur

The Ingenieur is published by the Board of EngineersMalaysia (Lembaga Jurutera Malaysia) and is distributed

free of charge to registered Professional Engineers.

The statements and opinions expressed in thispublication are those of the writers.

BEM invites all registered engineers to contribute articlesor send their views and comments to

the following address:

Publication CommitteeLembaga Jurutera Malaysia,Tingkat 17, Ibu Pejabat JKR,

Jalan Sultan Salahuddin,50580 Kuala Lumpur.

Tel: 03-2698 0590 Fax: 03-2692 5017E-mail: [email protected]; [email protected]

Website: http://www.bem.org.my

Advertising/SubscriptionsSubscription Form is on page 54

Advertisement Form is on page 55

KDN PP11720/1/2008ISSN 0128-4347

As Malaysia celebrates its 50th anniversary,the local construction industry has alsodeveloped tremendously and matured. Malaysia

has earned a reputation of completing majorprojects in record time such as the PetronasTwin Tower and KLIA, just to name a few.Many of our consultants and contractors haveventured beyond our shores to compete with

big players on the international scene.While we may be familiar with construction techniques

and engineering codes, contract management may differ fromone country to another. The concept of Integrated EngineeringServices as detailed in one of the papers is one such creationthat engineers need to familiarize themselves to face thechallenging world. For engineers to stay competitive, wenot only have to keep up with the new technologies and

innovations, we also need to keep track of the changingtrend of contracts.

Contact per say cannot be left to the contract divisionor the quantity surveyor alone. Engineers as the leadingconsultants in major projects are often saddled withcontractual matters that require a good understanding ofthe nexus of legal terms and conditions of the contract.Knowledge and experience on this matter make an engineerbetter equipped to manage a major construction project.

I hope this edition with the theme on EngineeringConstruction Contracts will enrich engineers with newthoughts on contract matters and ingredients needed to

formulate and facilitate effective contract management toenhance project excellence.

Dato’ Prof. Ir. Dr. Judin Abdul KarimPresident

BOARD OF ENGINEERS MALAYSIA

President’s Message

4 THE INGENIEUR

Editor’s Note

Vol. 35 Sept - Nov 2007


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5THE INGENIEUR

ANNOUNCEMENT

The issue of whether Professional Indemnity

Insurance (PII) should be made mandatory for all Engineering Consultancy Practices (ECP) was

deliberated at length by the Board of Engineers Malaysia

(BEM) when the proposed amendment to the Registration

of Engineers Act was redrafted last year. This was in

view of the proposed amendment to the Street, Drainage

and Building Act 1974, Act 133 whereby Professional

Architects and Engineers are given the responsibility to

issue the Certicate of Completion and Compliance (CCC)

for development projects for which they are the principal

submitting persons. Although the bill was nally approved

by Parliament without any mention on PII, the Board

encourages all ECPs to take up PII voluntarily.

In fact, a number of ECPs have PII coverage since

their formation and some have taken up PII on their

own initiative to safeguard their interest. Meanwhile, the

Board is exploring other forms of PII which are practiced

in other countries which may be more benecial and

affordable to local ECP.

The public, particularly house buyers may not have the

right perception of PII. Professional indemnity policies

Professional Indemnity Insurance

provide an indemnity for legal liability arising out of a

breach of professional duty by way of neglect, error oromission. In addition, many professional indemnity policies

incorporate additional clauses or extensions, such as libel

and slander, loss of documents in insured custody or

control. Certain PII policies do cover legal costs up to a

stated amount) in connection with legal proceedings taken

by the Professional Engineer (PE) claiming for damages

arising out of the infringement of any copyright vested

in the PE. The policy, however does not cover civil or

criminal and/or other penalties nancial or otherwise as

liability on the part of the PE. PII does not cover third

party claim against the engineer if such claims are not

connected with the tortuous act on design or work related

to it. Similarly PII does not cover fraud.

As the public is getting more litigious, the Board urges

ECPs to take up PII to safeguard their own interest.

Dato’ Prof. Ir. Dr. Judin bin Abdul Karim

President

Board of Engineers Malaysia

UPDATE

The following list is the Publication

Calendar for the year 2007 - 2008. While we

normally seek contributions from experts foreach special theme, we are also pleased to

accept articles relevant to themes listed.

Please contact the Editor or the Publication

Officer in advance if you would like to make

such contributions or to discuss details anddeadlines.

December 2007: PROJECT FINANCING

March 2008: POWER

June 2008: ASSET MANAGEMENT

Event CalendarConference on Sustainable Building South-East Asia– Strategies for Implementation & Exhibition onSustainable Building and ConstructionDate: November 5-7, 2007Venue: Kuala Lumpur Convention Centre,Kuala Lumpur Joint Organisers: KTAK, CTMC, UTM and ISI Workshop on Dynamics of Negotiating SkillsDate: November 26-27, 2007Venue: Hotel Bayview, Langkawi, KedahOrganiser: SPACE UTM Workshop on Dynamics of Strategy ManagementDate: November 28-29, 2007

Venue: Hotel Bayview, Langkawi, KedahOrganiser: SPACE UTMTel: 07-5218170; 5218159; 5218164Fax: 07-5211355Email: [email protected] Contact: Ms. Zarina / Nurrul Ain

The Engineering Council United Kingdom (ECUK) is aware

that there is a fraudulent operation in place which, amongst

other things, offers to arrange registration with ECUK.

The ECUK never processes applications through third

parties. All applicants must deal directly with ECUK

andits constituent engineering institutions.

For further details on registration procedures with

ECUK, please visit www.engc.org.uk . Anyone who receives

an offer from an agent to facilitate registration should

contact ECUK.

Fraudulent Offers on Engineering Council

United Kingdom (ECUK) Registration

SelamatHari Raya Aidil Fitri

HappyDeepavali&

The Board of Engineers Malaysia wishes all readers


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By Ong Hock Tek, Managing Director, Entrusty Group

Effective Contract ManagementFor Construction Projects

In the context of the constructionindustry, many of us wouldacknowledge that successful

construction projects are oftenattributed to those that achievethe client’s requirements andproject objectives set out atthe outset of the project. Suchobjectives may include deliverywithin the stipulated time period,construct within the budgeted cost and meet the quality standardset. Other objectives, equallyimportant, may include meetingfunctional requirements andsatisfaction of the clients and/orend users. Notwithstanding suchrequirements and objectives, the

construction industries around theworld still suffer from numerousse tbacks and problems , inparticular those associated withthe construction process.

The common issues andproblems associated with theconstruction process often lie inthe ill considered procurementselection, traditional separationof design from construction,lack of integration/organisation

of the project members andpoor communication channels,uncertainties in design andconstruction, changing internal

and external environment, projectcomplexity and characteristics, aswell as contractual and commercialmatters. In order to overcomethese issues and problems soas to achieve project success,it is pertinent that the elementsor ingredients in managing thecontract effectively are wellunderstood and practised.

Con t rac t Admin i s t r a t ion / Management i s abou t themanagement of the contract/sof a project. It involves theunderstanding and managementof the roles, responsibilities,obligations, powers and liabilitiesof the contracting parties, as

well as the administration of thecontract provisions, proceduresand practices as expressed andimplied under the contract.

Is there a difference betweencontract adminis t rat ion andcontract management? Whilst manywould view and construe contractadminis t rat ion and contractmanagement as synonymous, theauthor would draw a distinctionbetween the two, in practice or

practical terms.Con t rac t Admin i s t r a t ion

involves understanding the roles,responsibilities, obligations, powers

and liabilities of the contractingparties and administering thecontract provisions, proceduresand practices as expressed andimplied in the contract. Theterm ‘administration’ means ‘toadminister’, ‘to execute’ or ‘toimplement’. In practice, theadministration of the contract isusually carried out in a passiveor at best, reactive manner.The person who carries out thecontract administration role,usually called the ContractAdministrator, executes orders,gives directions and ensurecompliance with the contractprovis ions , procedures and

instructions by the SuperintendingOfcer.On the other hand, Contract

Management is different. It’s aboutthe management of the contractof a project, which includescontract administration. The term‘management’ means ‘to manage’.Management of the contractinvolves planning, organising,communicating, co-ordinating,monitoring and controlling the

whole contract of the project. It’s aproactive rather than just reactiveapproach in the administrationof the contract. The person

6 THE INGENIEURCOVER FEATURE


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who carries out the contractmanagement role, usually calledthe Contract Manager, managesand co-ordinates the contractrequi rements toge ther wi thother project team members toensure not only the contract ismanaged effectively, but alsothe project as a whole achievesits set objectives and meets theclient’s requirements, effectivelyand successfully.

The ten essential elementso r i n g r e d i e n t s n e e d e d i nformulat ing and faci l i ta t ingeffective contract managementto achieve project excellence

and success are:

1 A good understanding of the

Client, its Objectives and

Priorities

2 A detailed appraisal and

under s tand ing o f the

P r o j e c t N a t u r e a n d

Characteristics

3 A proper and structured

appraisal and management

of the Project Risks

4 Selection of a suitable

Project Team (Design/

Construction)

5 Use of a suitable Building

Procurement System

6 Use of a suitable Contractual

Arrangement

7 Hav ing an e f f e c t i ve

Organisat ion Structure

t ha t a l l ows e f f i c i en t

communication channels

and is capable of adapting

to changes

8 Main ta in ing e f f ec t ive

Monitoring and Control

S y s t e m s c a p a b l e o f

identifying and responding

to changes

9 M a i n t a i n i n g p r o p e r

Information Recording and

Retrieval Systems

10 Emphasis on the importance

o f good Commerc ia l /

Bus iness and Human

Relations

Note: 6 & 8 (adapted)

The elements are brief lydescribed and discussed, asfollows;

The Client and its Objectivesand Priorities

Whether from the private orpublic sector, each client hasits own organisation and projectobjectives. The former objectivescan include prot margin, growth/ expansion, strategic alliance, etc.The latter objectives may includedelivery within the stipulatedT ime pe r iod , Cos t w i th inbudget, meeting the required

Quality standards or Functionalrequirements, as well as ensuringcustomer Satisfaction.

Whatever the objectives, it isimportant to know and understandclearly the client’s requirementsand priorities. Whilst some clientsmay place priority on aestheticor prestige, early or t imelycompletion or price certainty,others may place emphasison buildability or exibility to

accommodate changes duringconstruction and/or operation of

the eventual completed buildingor facility.

The objectives are essentiallythe Input and the Constraints canbe the priorities and requirementson the project. In order toensure that the Output, whichare the deliverables, productsand/or services can be achievedsatisfactorily and successfully,the Mechanisms, which comprisepeople, resources, etc. mustbe adequate and timely put inplace and properly managed.That is to say, the effectivecont rac t management o f aproject encompasses effective

the interaction and integrationof the four basic fundamentalsor elements in the projectmanagement process, effectively.

Diagram 1 i l lustrates theproject management process1

Project Nature andCharacteristics

A detailed appraisal andunderstanding of the nature and

characteristics of the projectis crucial as every project

7THE INGENIEUR COVER FEATURE

CONSTRAINTS

Time, cost, quality,technical and other

performance parameters,legal, environment, etc

INPUTBusiness needs

and requirements

MANAGEMENTOF THE

PROJECT

OUTPUTProject

deliverables,products and/or

services

MECHANISMSPeople, techniques

and tools, equipment,organisation

Diagram 1


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exhibits different nature andcharacteristics.

For example , la rge andcomplex p ro jec t s such a sairports, involve various uniqueassemblies and complicationsdue to the high level of servicesand specialist input, making co-ordination and knowledge of suchworks of paramount importance.Consequently, the emphasis ison selection of a contractor orbuilder who has the knowledgeand experience to provide theinput and expertise by partakingin the pre-construction stagerather than to ensure buildability

and proper co-ordination ofthe works amongst the manyparties involved only during theconstruction stage.

Mass housing or industrialbuildings, often involve repetitiveconstruction works due to theextensive use of standardised orprefabricated components and/orproprietary systems. Such systemsusually have sufcient constructioninformation and details for the

construction works to be carriedout and completed. Hence, workscan often start early and phasedcompletion is often possible. Asfor refurbishment works, its natureand characteristics are againdifferent due to the uncertainty ofthe extent of works as it is usuallymessy and complicated, possiblyinvolving existing buildings withunsecured site conditions. Worksare often required to be started as

soon as possible, with difcultiesin the measurement of quantitiesand pricing of rates.

Project Risks

BS 4478 defines risk as acombination of the probability,or frequency, of occurrenceof a defined hazard and themagnitude of the consequencesof the occurrence. In construction

project terms, risk is The likelihoodof negative occurrences adverselyaffecting the project, so that itsobjectives become more difcult

or impossible to achieve. Dueto the inherent characteristics ofconstruction projects and theirprocesses, they invariably giverise to risks and must thereforebe understood and managed,

effectively. Such characteristicsinclude changing environmentcond i t ions ( ex te rna l l y andinternally), traditional separation ofdesign from construction, lengthydesign and construction periods,diverse and substantial resourcerequirements, sub-contractingof works, multi-disciplinaryproject team members, multi-level communication channelsand multi-facetted co-ordination

of works.Risks could stem from badground and weather conditions,inadequate design and constructiondocumentation, lack of resourcesand/or skil ls /expertise, poorplanning, monitoring and/orcontrol and lack of teamworkand communication. The effectsarising from these risks, if notproperly managed, may includedisruption and delays to the

construction works, budget andcosts overrun, poor quality andstandard of works, damage toplant/equipment and/or injuryto construction personnel andcontractual or technical disputes.Hence, having proper r isksappraisal and management is anessential element. It involves thesystematic application of strategies,policies, methods and proceduresby taking positive, often proactive,

steps in identifying, assessing,mitigating and managing the risksto eliminate or reduce its exposureto the party/ies concern.

Proper and structured risksappraisal and management canlead to a more effective projector construction managementthrough better awareness andunderstanding of risks, systematictreatment of the risk issues toreduce uncertainties and hazards,as well as to ensure better useof the available resources.

Managing risks effectivelyfacilitates the achievement ofproject objectives, improvesproject performance, increaseproduct iv i ty and increaseseventual profitability. Hence,specific considerations need to

be given in the appraisal ofrisks, namely:

● Identification of risks ( thecause) e.g. hazards - what,where, when, how, why, etc.

● Analysis of risks identified(the analysis) e.g. likelihoodand nature of occurrences,etc.

● Assessment of risks analysed(the effects) e.g. consequencesand extent of injuries, damages,disruptions, delays, etc

Management of the risksappraised, involves:

● Planning and allocation of therisks appraised (the planning& control ) i .e. to avoid,transfer, share, reduction and

acceptance

● Monitoring and feedback ofthe actual risk occurrences (themonitoring and feedback ) i.e.recording, checking, verifying,comparing, reporting

Project Team

In selecting the project teamfor design and construction,

several factors such as selectioncriteria and its process, scopeof services/works, commitments,responsibi l i t ies , experience,


Site inspection


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teamwork, communication, actionplan, etc need to be assessed andconsidered properly. The selectionprocess wil l be very muchgoverned by the type of buildingprocurement system to be usedfor the project. The factors toconsider in establishing a suitableproject team includes:

● Commitment to dened andmeasurable project objectives

● Ability to foster and maintainteamwork

● Realistic action programme,budget/price and resourcesallocation

●

Communication structure andchannels● R e g u l a r p e r f o r m a n c e

appraisals● Suitably located for regular

formal/informal interactions● Roles and responsibilities

In order to select and appointa suitable design team, thefollowing should be considered:

● Single team of consultantsor separate appointment ofindependent consultants (withor without lead consultant)

● Criteria for selection andinterview

● Scope and extent of services● Fees chargeable and mode of

payments● Role and duties● Terms and conditions of the

professional agreement

● Compatibility of the consultantsand their teamwork spirit

In the selecting and appointinga suitable construction team,t h e f o l l o w i n g s h o u l d b econsidered: ● Suitable selection or tendering

arrangement● Criteria for selection and

tender interview● Experience and expertise of

the contractor● Financial s tabili ty of the

contractor

● Scope and extent of works● Te n d e r r e q u i r e m e n t s /

conditions● Tender documentation● Te n d e r a p p r a i s a l a n d

reporting● Compatibility of the contractor

and design teams

In addition, the choice of theright people with the right attitude

for the project is importantto its eventual success. Thefollowing pertinent points shouldbe observed;

● Selection criteria of people andorganisations

● Recognition and employingskilled people is essential

● Able and interested to meetproject objectives

● Mutual trust creates the right

environment● Encourage a collaborative

working environment● S e l e c t i o n b a s e d o n

accomplishments and attitude

Note: The CIOB Code of Practice4

provides a number of checklists

and forms for the selection of the

design and construction teams.

Building Procurement

System

Building procurement systemsinclude traditional/conventional,

management contracting, designand build/construct, projectmanagement , package dea lor turnkey, etc. Each systemexhibits its own characteristicsand advantages/disadvantages.

Any selection should consideredtogether with the project natureand characteristics, in addition tothe elements described above.

Note: Further details on theaforesaid systems can be found

in “Cons t ruc t i on Con t r ac t

Admini st ra tion/Management in

Practice”10.

Contractual Arrangement

The contractual arrangementleading to contract documentationestablishes the contractual rights,obligations, responsibilities and

liabilities of the contracting parties.Such arrangement or documentationincludes contract based on billsof quantit ies, drawings andspecication, schedule of rates,cost reimbursement, design andbuild, etc.

In s e l ec t ing a su i t ab lecontractual arrangement, variousfactors such as the elementsdescr ibed prev ious ly , p luschange in requirements, design

completeness, cost uctuations,etc., need to be considered,instead of merely using anystandard form of contract.


Employing skilled people


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Organisation Structure

Organisation structure is aboutframework, hierarchy, authority,control, rules, procedures, formalrelationships, for the peoplein the organisation and/or theproject. This essential element,allows effective and efficientcommunication channels to takeplace and adapts to projectenvironment and changes.

Any structure adopted, be itfunctional, project or matrix canaffect project teamwork, workefficiencies and the eventualproject outcome. Each type of

organisation structure has its ownadvantages/disadvantages. Criteriasuch as clear objectives andpriorities, policies and procedures,roles and responsibilities, exiblework structure, people relations,motivational issues, leadership,teamwork, capacity to change,performance, etc need to beprope r l y cons ide red whenchoosing a suitable organisationstructure for the construction

project.Diagrams 2, 3, 4 illustrate the

common organisation structuresu s e d i n t h e c o n s t r u c t i o nindustry.

Monitoring andControl Systems

Ef fect ive monitoring andcontrol systems are capable ofidentifying and responding to

changes ensure project objectivescan be met. Proper monitoringand control systems enable timelyprovision of information/details,smooth progress of works, costswithin the budget, identicationof changes/variations, timelysupervision, testing and inspectionof works, etc.

Increasingly, the project teamshould adopt quality assurancep r o g r a mme s s u c h a s I S O

9001:2001 to ensure a consistencyand systematic approach to theorganisation’s work processesand procedures. Quality is not


Director

Operations Tendering Sales Marketing Administration Management Level

Department Level Functional responsibility

Director

Marketing Finance Administration Tender

Project

Manager

BProject

Manager A Project

Manager

C

Contract Construction Procurement/ Purchasing

Construction

Construction Contract

Contract

Procurement/ Purchasing

Procurement/ Purchasing

Project

Manager

X

Project Manager B

Others

F u n c t i o

n a l r e s p o n s i b i l i t y

Director

MarketingTender & Contracts

Finance Purchasing

Project Manager A

Project responsibility

FUNCTIONAL

PROJECT

MATRIX

Diagram 2

Diagram 3

Diagram 4


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just about achieving technicalrequirements, but also the variouselements in Project Management.There must be greater emphasison meeting client’s requirementsand customer satisfaction, whichdemands continuous improvementsin delivery and products. Suchquality practices and improvementsenhance competitiveness throughbetter organisational effectivenessand performance efficiency inconstruction projects. There is alsoa broader and more encompassingphilosophy, often known as TotalQuality Management1, which isaimed at identifying the client’s

wants, organisation’s mission,measuring performance to meetrequired standards throughoutthe whole construction process,thereby involving the wholeorganisation in a system ofcontinuous improvements.

The Masters Builders AssociationMalaysia (MBAM) has adopteda group quality scheme using‘Value-Managed Quality System(VMQS)’ to facilitate contractors

and sub-contractors in Malaysiato achieve their ISO 9001:2000certification. This is in linewith the association’s aspirationto promote and encouragecontractors, sub-contractors andothers to deliver quality works ontheir building and constructionprojects, both in Malaysia andoverseas.

In essence, VMQS, whichincorporates Value Management isabout ‘Doing the right things right ’in order to enhance the efciencyand effectiveness of the qualitydelivery process to ensure thatthe end product or service can

satisfy the customer’s or client’srequirements. A typical outcomeof using the fast approach on thework environment is shown in thefollowing Diagram 5.

VMQS i s an innovat ivequality management approachaimed at changing the traditionalorganisat ional mindset andconstruct ion approach intodynamic, quality and performanceexce l lence a t in te rna t iona l

quality standards. Such valueachievements and improvementslead to sustainable competitiveadvantages.

Information Recording andRetrieval Systems

Good records are like snapshotsof the events or actions taken atthe particular moment, oftenreferred to as contemporaneousrecords. And, good retrievalsystems are like going into alibrary to nd the informationrequired.

Going back to basics, records

such as tender/contract documents,drawings register, correspondenceles, programmes, progress reports,site diaries, instructions, dayworks,claims, etc. should always beup to-date and maintained,properly. The use of ICT to assistin systematically organising,recording and retrieval of the saiddocuments have reduced the timetaken to undertake such tasks,effectively and efciently.

Improve ICT &Networking

Invest in ICT

Better Working Space & Layout

Storage & Library

Provide Confortable

Working

Area

Provide Area & Personnel for Storage

Improve Productivity

Conducive Environment

Project Good Image

Promote Staff Interaction

Good Communication& Interaction

Improve InterpersonelRelatives

Boost EmployeeSpirit

Proper Space / Relocation

Reduce Noise Interference

Prevent Eating on Working Area

Confortable & Relax

Atmosphere

Efficient Working Tools

Larger WorkingArea

Facilitate PeopleMovements

Minimise PhysicalHindrance

Land Scaping

Safe Work Area

Security

WANTS

NEEDSOBJECTIVES

HOW WHY

Diagram 5


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Note: Practical examples, various

forms and checklists on information

recording and retrieval systems

can be found in the Appendices of

the CIOB Code of Practice 4 and in

the Practical Construction Contract

Administration/Management 8

Commercial/Business and

Human Relations

Emphasis on the importanceof good commercial/businessand human relations is thefinal essential element, if notmost important element, ineffective contract management toachieve excellence and success inmanaging construction projects.

Commerc ia l or bus inessrelation is about fostering business

links/relations and communicationwith other organisations. Humanrelations is about understandingand fos te r ing in te rpersonalrelationship with another individualor group. For human relations tobe effective and harmonious,criteria such as people selection,team commitments, meetingorganisation and project objectives,sharing common objectives andvalues, motivational issues, and

skills development need to beseriously taken into account.Failure to manage the construction

project effectively and amicablycan lead to problems suchas disputes or conflicts. Thecontracting parties may end up inarbitration or court proceedingsto resolve their disputes.

Not all contractually or legallycorrect action is commerciallyr i g h t . S o m e t i m e s , e v e ncommercially sound decisions,

may be contractually wrong.Whilst it is important to knowand understand the contractualrights, responsibilities, powersand l iabi l i t ies , i t does notnecessarily mean that everycontract provisions must befollowed and enforced in thestrictest sense. To go down thecontractual route usually meanshaving to rely on the provisionsexpressed/implied under the

contract i.e. needing to work orresolve matters within the ambitof the contract. This is known tobe as the ‘hard’ approach.

To go down the commercialroute vir tual ly opens up awider and borderless scope fornegotiation and settlement of thedisputes/conflicts without/partlyrelying on contractual/legal route.This is called the ‘soft’ approach.Neither approach should be

followed to the extreme.Therefore, there is a need

to strike a balance between

contractual and commercial routesto ensure the successful outcomeof a construction project, whichessentially means to be able toachieve a ‘win-win’ outcomefor all the parties involved inthe construction project. In thisregard, ‘Partnering’ approach17,which promotes win-win solutions,has been adopted at the outsetof many construction projects,overseas.

Conclusion

Construction industries aroundthe world suffer from numerous

se tbacks and problems , inparticular those associated withthe construction process. There istherefore an urgent need to ensurethat the setbacks and problemsare eliminated or mitigated byeffective management of theconstruction process in order forthe projects to be successful.

In order to achieve excellenceand success in the managementof construct ion projects , i t

is paramount to appreciate,understand and practice the tenessential elements or ingredientsnecessary in formulating andfacilitating effective contractmanagement.

Effective Contract Managementis essentially about managing thecontract of a project by ensuringthat the planning, organising, co-ordination, monitoring and controlof the project from inception to

completion will meet the projectobjectives in order to achievesuccess.

Editor’s Note: This art ic le isbased on and adapted from theconference paper on ‘EffectiveProject Management — EssentialElements in Successful Projects’ presented by the Author at theInaugural Construction Conference2007 jointly organised by CIOB

Singapore and National Universityof Singapore on January 25,2007. BEM

Recording and retrieval systems using ICT


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REFERENCES

1. Associat ion of Project Management (APM),

Project Management Body of Knowledge, 4th

Edition, 2000.

2. BS ISO 10006:1997 British Standard, QualityManagement – Guidelines to Quality in Project

Management , BSI 06 - 2000.

3. BS 6079-1:2002 British Standard, Project

Management – Part 1 – Guide to Project

Management .

4. Chartered Institute of Building, Code of Practice

for Project Management for Construction and

Development , 3rd Edition, Blackwell Publishing,

2002.

5. Ong, H.T., Building Procurement, Tendering

and Contractual Arrangement , Construction

Management Seminars/Workshops, CIOBMalaysia, November 16, 1996.

6. Ong, H.T., Effective Contracts Management

– Construction Management Seminars by

The Chartered Institute of Building, Malaysia.

December 16, 2000.

7. Ong, H.T., Construction Contracts in Malaysia

a paper presented at Construction Conference

2002 ~ A One-Day Conference jointly organised

by The Chartered Institute of Building, Malaysia

(CIOBM) and Master Builders Association,

Malaysia on in-conjunction with MALBEX

and International Construction Week 2002,

September 12, 2002.

8. Ong, H.T., Practical Construction Contract

Administrat ion/Management , 12-Modules

Training Programme Lectures and Workshops,

March- September 2003.

9. Ong, H.T., Achieving Excellence through Value-

Managed Quality System - A paper delivered

at the International Conference on Managing

Excellence in Construction, Chongqing, China”-

Organised by CIOB China, May 26, 04

10. Ong, H.T., Construction Contract Administration/

Management in Practice - Two Day Intensive

Seminar /Workshop organ i sed En t rus ty

Management Sdn Bhd, December 9 & 10,

2003.

11. Ong, H.T., Value-Managed Quality System

(VMQS) – Towards A Value-Added Quality

Management System – 6th International Value

Management Conference” organised by Hong

Kong Institute of Value Management, Nov 26

& 27, 2003

12. Ong, H.T., Value & Risk Management , FIABCI-

CIDB Brown Paper Bag Seminar, University

Malaya, 2004

13. Ong, H.T., Risks and I ts Management ,

International Conference on Construction Law

& Arbitration, April 26 – 28 th, 2005, organised

by Kuala Lumpur Regional Centre for Arbitration

(KLRCA) & Malaysian Institute of Arbitrators

(MIArb), April 27, 05

14. Ong, H.T., Risks and Uncertainties inConstruction Projects – One Day Executive

Workshop on Construction Business Financing

and Risk Analysis for Non-Construction

Financia l & Risk Managers /Execut ives

organised by Business & Advanced Technology

Centre (BATC), Universiti Teknologi Malaysia,

August 3, 2005

15. Pro-Value Management Sdn. Bhd/Applied

Facilitation & Training, An Introduction to

Risk Management for KLCC Berhad , Training

Manual/Materials, September 11, 2002.

16. Project Management Institute, PMI Guide tothe Body of Knowledge, PMI 1996.

17. Stevens, David., Strategic Thinking : Success

secrets of big business projects, Advantage

Quest Publications 2004.

18. Ong, H.T., Effective Project Management

~ Essential Elements in Successful Projects ,

Inaugural Construction Conference 2007 jointly

organised by CIOB Singapore and National

University of Singapore on January 25, 2007.



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Drafting ConstructionContracts


Editor’s Note: This article was extracted from Volume 3/2004 of LegalInsights the Newsletter of Messrs. Skrine, Advocates & Solicitors

By N. Pathmavathy and Kamraj Nayagam, Skrine & Co.

appropriate contractual frameworkfor the physical execution of itsdesires.

STANDARD FORM

CONTRACTS

Standard Form constructioncontracts provide a basic frameworkidentifying the rights, obligationsand duties of the parties, establishthe ambit of the powers and dutiesof the contract administrator as wellas put in place the administrativeprocedures necessary for operationof the contract.

The standard form contractscommonly used in Malaysia includethe PAM98 Form issued under thesanction of the Pertubuhan ArkitekMalaysia, JKR or PWD Forms issuedby the Public Works Departmentof Malaysia, CIDB StandardForm of Contract for BuildingWorks issued by the ConstructionIndustry Development Board, IEMforms issued by the Institutionof Engineers Malaysia, FIDICForms issued by the FederationInternationale des Ingenieur-Conseils and the ICE Formsissued by the Federation of CivilEngineering Contractors.

One of the advantages ofmost standard forms is that mostconstruction professionals arefamiliar with their operation,limitations and drawbacks. Suchfamiliarity leads to administrativeand cost efciency. As there is abody of judicial pronouncementsaccumulated over the years on

standard forms, there is somecertainty in meaning. Accordingly,there are appreciable savings intime and costs when standard

Aconstruction or buildingcontract can be looselydened as an agreement for

the construction, repair, renovationor restoration of building orengineering works. It ought tospecify what work has to bedone by the contractor, wherethe work is to be done, whenthis work must be completed, towhat standard the work shouldbe done, how the contract is tobe administered and how is tobe paid to the contractor by theemployer.

The many types of constructioncontracts include traditionalbuilding contracts, engineeringcontracts, design and buildcontracts, fee based contractsand build operate and transfercontracts. Although each contractwill obviously be unique, broadconceptual types of contractmay be identied, and even acontract created specifically tomeet the individual requirementof a given situation will inevitablyhave points of similarity to othercontracts.

Nevertheless, such is thecomplex i t y o f t he t yp ica lconstruction contract in the modernage, that any awareness of theworkings of construction contractsmust of necessity be founded upona thematic understanding of thevarious procurement strategiesand the underlying forces whichdrive them.

In general, familiarity withthe available standard form of

construction contract, and of thetypes of construction contract, willenable the prudent Employer to atleast ensure that it will achieve the

forms are used compared tothe costs of drawing up freshcontracts.

The disadvantages include thefollowing. The forms are arrivedat by a process of compromisebetween different parties tothose entering the contract, oftenreflecting other concerns thanthose of the parties. The judicialpronouncements which haveaccumulated are often contraryto the previous understandingof those in the industry, whichis why it is sometimes best tohave a new form of words. Ina Malaysian context, the formsused are often from overseas andmay not reect peculiarities oflocal law. The dense wording ofthe standard forms makes themvery difcult to amend effectively.Hasty amendments often haveunintended and unforeseenconsequences, whilst properlyconsidered amendments ofteninvolve large amounts of effort.

T h e c r e a t i o n o f a n yconstruction contract requires abalancing act between conictingimperatives. This process starts atthe conceptualisation stage, andrequires the prospective Employerto be aware of its wishes andintentions before even consideringthe identity of the Contractor.

The prospective Employer,desirous of maintaining controland certainty, is torn betweenthe shackles of precedent andthe pro-active crafting of solutionsappropriate to his precise situation.

The latter course may amount tono more than the re-invention ofthe wheel, with all the attendantinefciency and expense. Hence


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Role Of Employer● Procure the design to be

prepared by profess ionalarchitects

● Secure planning permissionand building permits

● Make payments regularlyaccording to contract

● Give adequate site possessionto contractor

● Ensure non-interference withconstruction

Role Of Contractor● To car ry out the works

according to the design issuedby architects

● To complete the works on orbefore the contractual date ofcompletion

● Responsible for the materialsand the workmanship aspectsof the contract

the attraction of the standardform contract, as outlined above.However, such a contract is unlikelyto reect in full the intentions andconcerns of the parties, leadingto the temptation to amend the

same. Such modication, whetherby way of addition, deletion, orrevision is not to be undertakenlightly. Arbitrary revisions cancreate serious problems, asdiscussed above. As a rule ofthumb, revisions to standard formcontracts should be kept to aminimum and only implementedafter a thorough review.

In conclusion, there is nosimple solution to the creation of

the perfect construction contract,and this is not to be wonderedat, for, as has been observed,major construction projects are themost complex sphere of humanendeavour short of warfare. Insuch a scenario, it is only prudentthat those about to embarkon such an endeavour shouldgive a commensurate amount ofconsideration to the preparation ofthe document which will govern

the course of the endeavour.The stages in a construction

contract are shown in Diagram 1.The parties involved in a contractincludes:

● Employer or Owner● Contractor● Architect● Engineer● Quantity Surveyor● Consultants

● Project Manager● Sub-Contractor● Supplier

ROLE OF RESPECTIVE

PARTIES IN A TRADITIONAL

BUILDING CONTRACT

CONTEXT

The Employer commissions anarchitect to prepare the designfor the building. The Contractor

is then employed to construct theproject for a xed price. (SeeDiagram 2)

Employer

Main

Contractor Architect

Consulting

Agreement

Consultants

Sub-

contractors

Suppliers

Decision to Build Project

Brief

Design

Design

Drawings

Tender Documentation

Conditions

of Contract,

Drawings ,

BQs,Specifications

Tender Invitation

Contractor

Tenders &

Proposals

Evaluation & Award

Construction Works

LOI /

Award

ContractDocuments

● Responsible for the performanceof his sub-contractors

Role Of Architect● Complete the design● Oversee development of the

Project● Co-ordinate design work of

other consultants● Supervise the building works● Issue certicates and approvals

Role Of Quantity Surveyor● Es t imate quant i t ies f rom

architect’s plans and put intobills of quantities

● Prepare of tender documents● Oversee contract

documentation● Assist evaluation of progress

claims and variation work● Recommend amounts to be

certied

Diagram 1: Stages in Typical Construction Project

Diagram 2: Traditional Building Contract


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• Contract Terms must beclearly drafted

• A good Contract must :

(a) spell out risks, rights andobligations

(b) set out consequences ofbreach & termination

(c) be consistent

• Don’t ignore terms duringproject execution

• Reach shared understandingon obligations

•

Improve project teamcommunication channels

• If Parties feel the Contract isfair, they will be less likely toseek relief

• Appreciate what the otherParty wants out of the Contract

• Allocate risks to the party bestable to control, manage andinsure the risk

• NB: onerous provisions riskbeing declared unenforceable

– e.g. forfeiture clauses of allsums paid (see Johor CoastalDevelopment v ConstrajayaSdn Bhd)

FAIRNESSCLARITY

Diagram 3 – Effective Contract Drafting

Role Of Consultants● C & S Engineer● M & E Engineer● Acoustics Consultant● Landscape Architect

CONTRACT DOCUMENTS

The contract documents includeArticles of Agreement, Conditions ofContract, Plans & Drawings, Bill ofQuantities, Specications and OtherDocuments specically included.

Articles Of Agreement● Brief description of Project● Location of Site● Commencement Date● Name of the parties● Obligation of parties● Price to be paid● Name of consultants● Time for Completion● List of contract documents

Conditions Of Contract● Elaborate set of legal terms

which regulate the contractualrelationship between parties tothe contract

● Define duties and rights ofparties

● Address some of the likelyevents which may arise duringthe course of works

Plans & Drawings● Numbered according to series

and separate series used foreach consulting discipline :architecture, structural and civilengineering, mechanical and

electrical engineering● Each drawing signed and scales

clearly stated● Enable the price for works to

be computed

Bill Of Quantities● Consis ts of prel iminaries

(site overheads), trades bills,schedule of provisional sums

● Trade bill divided into sixcolumns

(i) alphabetical reference forthe item

(ii) brief description of item (iii) unit

(iv) quantity (v) unit price rate for each

item of work (vi) grossing up column [unit price rate x quantity]

Specifications● Standards for execution of

works● Source for applicable technical

standards and codes

Other Documents SpecificallyIncluded● Tender● Method statement● Works programme

TYPES OF PROCUREMENTMETHODS

● C la s s i f i ca t ion accord ingt o h o w c o n t r a c t o r i sremunerated(a) Lump Sum Contract

(b) Measure &Value Contract

(c) Cost Plus Contract (d) Term Contract

● Classification by referenceto nature of Contractor’sobligations

(a) Design-Bid-BuildContract

(b) Design &Build Contract

(c) Turnkey Contract (d) Management Contract

ENGINEERING

CONTRACTS

● EP● EPC● EPCC● EPCM

WH Y USE ST ANDAR D

FORM CONTRACTS?

The Standard Form Contractsprovide a basic legal framework,establish the ambit of the powersand dut ies o f the cont rac tadministrator and put in placethe necessary administrativeprocedures.

Advantages● Compromise solution● Risks are allocated relatively

fairly● Time-tested● Certainty in meaning● Saves time and costs

STAGES OF PROJECT

MANAGEMENT

● Contract Drafting (See Diagrams3 & 4)

● Contract Administration● Dispute Resolution

RISK ALLOCATION

● Optimal risk allocation ≠maximum risk transfer



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Components of a Good

ContractBenefits

Clearly Stated Scope of

Works

Ensures that employer gets what they have

paid for and that contractor is clear as to what

their responsibilities include

Choice of LawImportant where contracting parties are from

different jurisdictions

Performance StandardsDefined

Ensures accountability and provides measurablestandards and goals to be achieved

Limitation of liability Allocation of risk

Price StructureDetailed cost estimate from contractor provides

up-front awareness of total costs

Completion Date Ensures that project will be accomplished in a

given period of time

Penalty for Failure to

Complete on Time

Makes contractor accountable for achieving the

negotiated goals within agreed time period

EXAMPLES OF RISKS

ENCOUNTERED DURING

PROGRESS OF PROJECT

(i) Price escalation (See Diagram 5)

(ii) Failure to complete on time (See Diagram 6)

(iii) Unforeseen GroundConditions

● Not all standard form contractshave provisions in relation tounforeseen ground conditions

● Absence of such provisionsmay lead to dispute as to whowill be responsible and bearthe costs for additional works

arising from the unforeseenground conditions

● Employe r may cons ide remploying a more interactiveselection or bidding processto identify and reduce anyuncertainties that may beencountered during the progressof the project

(iv) Default in payment● I t i s not uncommon for

contractor to allocate any riskof any payment default by theemployer to his sub-contractor

● Such risk allocation can bedone by way of ‘pay whenpaid’ clauses

KEY TERMS AND

CONDITIONS OF

CONSTRUCTION CONTRACT

(i) Obligations of Parties

(See Diagram 7 )(ii) Key Contractual Dates

(See Diagram 8)

(iii) Standard of Performance● Implied term: the contractor

must perform the works ingood and workmanlike manner.If higher standards are required,these must be express lystipulated in the contract.

● Examples of higher standards

for consideration include: - Fitness for purpose – i.e.

the works performed andmaterials ordered must be

Diagram 4 – Components of a Good Contract

Who will absor b -

Contr actor / Employer ?Pr ice Incr ease

Risk Allocation

If risk is allocated to contractor, contractor may

limit liability for any price increase

Diagram 5 – Price Escalation


● Risks should be allocated toparties best able to managethem

● General rule, risks within thecontrol of the employer to beallocated to the employers and

risks within the control of thecontractor to be allocated tothe contractors

● Identifying Parties’ interest andeffective risk management isthe key to prevent disputes

Failure to Complete

on Time

Contractor’s DefaultNot due to

Contractor’s Default

Risk to be allocated

to Contractor

Risk to be allocated

to Employer by way

of EOT clause

Diagram 6 - Failure to complete on time


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Unconditional

& “on-demand”banker’s

guarantee

ContractPrice

Pro

Employer

Conditional

banker’s

guarantee

Parent company

guarantee

Valid from

commencement of

works to expiry of DLP

Valid from

commencement of works

to completion of works

Valid from commencement

of works to expiry of DLP

but value reduced to half

upon completion of works

Chart 1

Completion Date

Expiry of Defects

Liability Period (DLP)

Commencement Date

Date of Site Possession

Date the contractor must

complete the works (subject

to extensions of time)

Date the contractor must gain

possession of the Site

Date the contractor can

commence construction

works

Date by which the contractor

must make good defects

which had appeared during

DLP

• Contractor to complete the

works

• SO to issue certificate of

practical completion

• Employer to give possession

of the Site to the Contractor

• Contractor to be responsible

over safety of the Site and

mobilise to the Site

• Contractor to commence

construction

• Contractor to make good

defects

• ER to issue certificate of

making good defects

Effect Action Required

Execution DateDate when the contract

comes into force

• Contractor to furnish

performance security & do

preparatory works

Contractor

• To perform and complete the works

• To design the works in accordance

with the employer’s requirements

(where applicable)

• To provide all plants, tools and

materials necessary for the

completion of the works

• To be responsible for the adequacy

and safety of all site operations

and methods of construction

• To comply with statutory

requirements

• To remedy defects in the works

• To give possession of the site tothe contractor

•

To make timely payments to thecontractor

• To appoint an architect, engineeror surveyor as the superintendingofficer (S.O.) for contractadministration

• Not to interfere with or improperlyinfluence the S.O. in hiscertification duties

• Not to interfere with the progressof the works by the contractor

• To issue instructions and giveinformation in good time

Employer v

t for the purpose for whichthey are required.

- Speci f ied perform anceguarantees

- Established internationalbenchmarks

(iv) Performance Security● Contractor is commonly required

in construction contracts tofurnish performance securityfor due performance of theworks

● Performance security usuallytakes the form of an ‘on-demand’ and i rrevocablebanker’s guarantee

● Parent company guarantee or

insurance guarantee may be anacceptable alternative in someinstances

● The value of performancesecurity typically required byemployers in Malaysia is 5%to 10% of the contract price

● Employer may require designbond as additional securityagainst any defect in thedesign. (See Chart 1)

To ensure the contractorfurnishes the performance securityto the employer:● the contract may stipulate

the provision of performancesecur i ty as a condi t ionprecedent to commencementof works and payments by theemployer

● the contract may entitle theemployer to terminate thecontractor’s engagement in

the event the contractor failsto furnish the performancesecurity within the requisiteperiod

● the contractor may entitle theemployer to withhold monieswhich may become due to thecontractor under the contractin the event the contractorfails to furnish the requisiteperformance security

(v) Interim Payments● Stage Payments v Periodic

Payments● Periodic payments are sums

Diagram 7

Diagram 8 - Key dates in a Construction Contract



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payable to the contractor basedon a periodical valuation ofthe work done to date. Suchvaluation are usually conductedon a monthly basis.

● Stage payments are fixed

installment sums payableto the contractor upon thea c h i e v e me n t o f c e r t a i nprescribed milestones.

● General view is that stagepayments offer the benet ofcertainty in the sums payableto the contractor and savingsin professional fees and time.NB: Stage payments may notbe appropriate for contractorswith poor cash ow.

(vi) Time for Completion● It is important to expressly

s t ipulate in the contractthe time for completion ofthe works as otherwise thecontractor only has an impliedobligation to complete theworks within a reasonableperiod.

● Extension of time provisionsmust be included to prevent

time being at large should theemployer causes any delayto the works. Otherwise, theemployer’s right to claimliquidated damages may beaffected.

● S e e P e a k C o n s t r u c t i o n(Liverpool) Ltd v McKinneyFoundations Ltd (1970) 1 BLR111 where CA held:

The s t ipu la ted t ime for

completion having ceased tobe applicable by reason of theemployer’s own default andthe extension of time clausehaving no application to that, itseems to follow there is in sucha case no date from whichliquidated damages could runand the right to recover themhas gone.

● Examples of events of delay

which would ent i t le thecontractor to extension oftime:(a) act of prev enti on by

employer (b) delay in giving possession of

the site to the contractor (c) in te r f e re nce by the

employer’s contractors (d) delay by the employer

in i s su ing necessaryinstructions

(e) suspension of works bythe employer withoutreasonable cause

● It is important to specify ina construction contract what

remedies are available to theemployer in the event thecontractor fails to completethe works within the stipulatedtime of completion.

● Such remedies may include the

right to:(a) issue instructions to the

contractor to expedite theworks

(b) impose LAD (c) terminate the contract (d) call on per for manc e

security

(vii) Completion & Taking Over● The employer may take over

the works when the works have

been completed in accordancewith the contract and therelevant certicate has beenissued certifying the completionof the works.

● What constitutes completion ofthe works may differ from oneproject to another. Typically,substantial completion willsufce where the employer hasthe full and proper benecialuse of the works with only

minor defects. Other conditionsmay also be imposed suchas the issuance of CF andcompletion of testing andcommissioning of the works tothe satisfaction of the employer.(See Chart 2)

(viii) Defects Liability Period● It is common in construction

cont rac t s to requi re thecontractor to warrant that the

works upon completion arefree from defects and to makegood defects which appearduring the defects liabilityperiod.

● It is during the defects liabilityperiod that the employer has theright to call for the contractor’sphysical return to the siteafter the employer has takenover the works. The employermust serve a notification of

defect on the contractor andthe contractor is required tomake good the defect withina reasonable period.


If Employer

not satisfied

If Employer

satisfied

Employer to

issue Certificate of

Practical Completion

Contractor to issue

notice when works

ready to be

Taken over

Employer to

inspect worksEmployer to give

reasons & specify

works to be done

Contractor to

complete works

Practical

Completion is

achieved

Chart 2 - Workow for Taking Over


19/50

● If defects appeared after theexpiry of the defects liabilityperiod, the employer’s remedyin most cases is limited topursuing a legal claim indamages.

● Remedies available to theemployer in the event thecontractor fails to make gooddefects during DLP may includethe right to:

(a) carry out the remedialworks himself or employother contractors anddeduct all reasonablecosts incurred from theretention monies;

(b) determine a reasonable

reduction in contract priceto reect the diminutionin value of the works byreason of the defects;

(c) call on the performancesecurity;

(d) terminate the contract● In pract ice, such defect

liability period clauses alsowork to the advantage of thecontractor given that remedialworks can usually be carried

out more cheaply by thecontractor than other 3rdparty contractors.

(ix) Consequences of Default inPayment

● Mere breach of a paymentobligation by the employer doesnot constitute a repudiationunder common law, entitlingthe contractor to terminate thecontract. Default in payment

must be sufciently serious to justify termination.

● Courts in Commonwealth jurisdictions have consistentlyrefused to imply a right tosuspend works by the contractorin the event of the employer’sdefault in payment.

● To protect the contractor’sinterest in this regard, clearprovisions affording the right tothe contractor to terminate the

contract and suspend the workson the basis of the employer’sdefault in payment should beincorporated.

(x) Termination● Termination clauses should

set out clearly :(a) the mechanism within

which either party mayterminate the contract by

giving notice of default,followed by notice oftermination should thedefaul t ing par ty fa i lto remedy the defaultwithin requisite period;

(b) e v e n t s o f d e f a u l tentit l ing the party toterminate (distinguishd e f a u l t s c a p a b l e o fbeing remedied and non-remediable defaults)

(c) r e m e d i e s a v a i l a b l eto the non-defaultingparty in the event oftermination

● Examples of remedies availableto the employer in the eventof termination on the basis ofcontractor’s default:

(a) The contr actor mustvaca te the s i te andremove all equipment

and personnel (includinghis sub-contractors)

(b) The employer is entitledby himself or employothers to complete theoutstanding works

(c) The cont ract or is notentitled to any moniesuntil after completion ofthe outstanding worksby the employer (exceptcertied sums)

(d) The contractor must assignto the employer contractswith his suppliers andsub-contractors uponnotice by the employer

(e) The contractor must issueor procure the issuance ofletters of release

● Examples of remedies availableto the contractor in the eventof termination on the basis of

employer’s default: (a) The contractor to cease

works and vacate the siteand remove all equipment


and personnel (includinghis sub-contractors)

(b) The employer is entitledby himself or employothers to complete theoutstanding works

(c) The contractor is entitledto be paid the amountrepresenting the value ofthe works done to-date andloss and expense sufferedby the contractor resultingfrom the termination

(d) T h e c o n t r a c t o r i sentitled to be returneda n y p e r f o r m a n c esecurity furnished to theemployer

(xi) Liquidated and AscertainedDamages (LAD)

LAD serve as a reasonablecompensation to the employerfor:(a) the contractor’s failure to

complete the works withinthe s t ipula ted t ime forcompletion;

(b) the contractor’s failure to satisfythe performance guarantees

prescribed in the contract(c) LAD clauses are usually

incorporated to protect theemployer’s interest, avoidexpense and effort to provedamages and provide certaintyto the consequences ofbreach

(d) NB: LAD clause may alsowork to the advantage of thecontractor as it may act as aceiling to which the employer

can claim for damages

● Section 75 of the Contracts Act1975:

When a contract has beenbroken, if a sum is named inthe contract as the amount tobe paid in case of breach, or ifthe contract contains any otherstipulation by way of penalty, the party complaining of the breachis entitled, whether or not actual

damage or loss is proved to havebeen caused thereby, to receivefrom the party who has broken thecontract reasonable compensation


20/50


not exceeding the amount sonamed or, as the case may be,the penalty stipulated for.

See Selva Kumar a/l Murugiahv Thiagarajah a/l Retnasamy [1995] 1 MLJ 817

The Federal Court in SelvaKumar held:

A plaintiff (employer) who isclaiming for actual damages or thereasonable compensation in anaction for breach of contract muststill prove the actual damagesor the reasonable compensationin accordance with the settled principles in Hadley v Baxendale[1854] 9 Exch 341. Any failure to

prove such damages will result inthe refusal of the court to awardsuch damages.

Applied in Lion EngineeringSdn Bhd v Pauchuan DevelopmentSdn Bhd [1997] 4 AMR 3315

● Example Of LAD Clause:

If the Contractor fails tocomplete the Works by theDate for Completion or within

any extended time ... and the Architect certies in writing thatin his opinion the same oughtreasonably so to have beencompleted, then the Contractorshall pay to the Employer a sumcalculated at the rate stated in

the Appendix as Liquidated and Ascertained Damages (LAD) forthe period from the Date forCompletion or any extendeddate where applicable to thedate of Practical Completion.

The Employer may deduct suchsum as a debt from any moniesdue or to become due to theContractor under this Contract.(Clause 22.1 of PAM 1998)

● An employer is ent i t ledto deduc t LAD upon thecertication of non-completionof the works.

See Lion Engineering Sdn Bhdv Pauchuan Development Sdn

Bhd [1997] 4 AMR 3315 whereit was stated:

From the plain reading ofClause 22 of the PAM Contract,the architect has to certify inwriting the non-completion ofthe works before the defendantis said to be entitled to deductLAD. It is appropriate to say thatthe certicate of non-completionis a condition precedent to thededuction of LAD…

See also Bell and Son v CBFResidential Care and HouseAssociation [1986] 46 BLR102 where it was held thatas the architect did not issuea valid Certi f icate of Non-Completion after xing the new

Completion date, no LAD couldbe deducted.

● Contracting out of Section 75of Contracts Act

E.g. Clause 22.2 of PAM 1998:

The Liquidated and AscertainedDamages stated in the Appendixis to be deemed to be as theactual loss which the Employerwill suffer in the event that theContractor is in breach of theClause hereof. The Contractorby entering into this Contractagrees to pay to the Employerthe said amount(s) if the same

become due without the need ofthe Employer to prove his actualdamage or loss.

E.g. Clause 47(1)(a) of ICEFORM OF CONTRACT:

Where the whole of the Worksis not divided into Sectionsthe Appendix to the Form ofTender shall include a sumwhich represents the Employer’s

genuine pre-estimate (expressed pe r we ek or pe r day as thecase may be) of the damageslikely to be suffered by him ifthe whole of the Works is notsubstantially completed withinthe time prescribed…

(See Table 1)

TOOLS FOR

EFFECTIVE CONTRACT

ADMINISTRATION

● Good unders tanding andapplication of the contractualregime

● Having a good contractadministrator

● Effective supervision and closemonitoring of the works

● Adherence to Work Programmeand milestones

● Proper issuance of Instructions

and Notices● R e c o r d - K e e p i n g a n d

Documentation

PAM IEM FIDIC

Performance Bond

EOT – strict notice

provisions (CP)

Extension of DLP

LAD – Anti-Selva

Kumar Clause

Right to suspend

works upon

payment default

Risk Assumption by

Contractor of

Unforeseen Ground

Conditions

Termination for

Convenience

Direct Payment to

NSC

Objection to NSC’s

Nomination

X

X X X

X X

X X

X X

X X

X X

X

✓ ✓

✓

✓

✓

✓

✓

✓ ✓ ✓

✓ ✓

BEM

Table 1


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By Ir. Harbans Singh K.S, Director, HSH Consult Sdn Bhd

Understanding Engineering/Construction Contracts

Nature ofconstruction contracts

An engineering/constructioncon t rac t ( i n sho r t aconstruction contract, for

the purposes of this article, is acontract under which one party 1

(commonly called the contractor)agrees for valuable considerationto undertake to carry out works foranother party (commonly calledthe employer 2) involving design(where applicable), fabrication,erection, alteration, repair ordemolition of structures and/orinstallations on a site 3 madeavailable by the latter. It coversa whole range of contracts i.e.from a simple oral agreement to

repair a house roof to a megahighway contract. Such contractsare usually termed ‘buildingcontracts’ where they relateto buildings and ‘engineeringcontracts’ when they relate toinfrastructure 4, systems 5 andequipment installations 6. Thedistinction between these termsis of no legal significance, andindeed construction contracts asa class are regarded by Malaysian

law, not as a separate categoryof contracts, but a part of thegeneral law of contract.

In most cases, the only partiesto a construction contract are theemployer and the contractor 7.However, in actual practice, in alllikelihood, a construction projectfrequently involves a large numberof contributors or participantswho are contractually inter-linked by a matrix of contractual

arrangements. The roles of suchcontributors are discussed in thisarticle.

Forms ofconstruction contracts

The main matters for whicha construction contract normallymakes provision are, the extentof obligations undertaken by theparties and the means by which

those obligations may be variedfrom time to time; the time forcompletion and interim controlof the progress of the works; themachinery for payment of thecontractor; supervision of theworks on behalf of the employer;insurance against a range of risks;and the remedies available to theparties in respect of default.

The Malaysian constructionindustry relies essentially on a

number of types of forms ofcontract; these being notablythe standard forms of contract,modif ied s tandard forms ofcontract and ‘ad hoc’ or ‘bespoke’forms of contract. The principals tandard forms in commonuse include those publishedby the various institutions e.g.the Insti tution of Engineers,Malaysia and the Pertubuhan Akitek Malay sia . For public

sector contracts, the Public

Works Department 8 has draftedand published an employerspecific ‘standard’ set of forms ofcontract. Lately, the ConstructionIndustry Development Board(CIDB) has issued a standardform of contract for building

works9

. Many of the standardforms as alluded to hereaboveare adumbrated below. Theseforms of contract may be used aspublished, but they are frequentlyamended. A true standard formi.e. one which is produced by abody which is representative ofthe industry e.g. the ConstructionIndustry Development Board(CIDB), is in principle unlikelyto attract the operation of the

‘contra proferantum’ principle10

.

1. This includes a corporation.2. Also called ‘the client’ or ‘the purchaser’ or ‘the authority’.3. Land or place which may be allotted or used for the purposes of

carrying out the work.4. Such as highways, airports, harbours, etc.5. Inclusive of utilities.6. Such as Mechanical, Electrical, Telecommunication, Heavy Engineering,

etc.7. In a sub-contract, the main contractor is in effect the employer and

the sub-contractor is in effect the contractor.8. or, Jabatan Kerja Raya (JKR).

9. Which includes a Main Contract Form and one for the NominatedSub-Contract.

10. Union Workshop (Construction) Co. v Ng Chow Ho Construction Co.Sdn. Bhd . [1978] 2 MLJ 229.

Construction contracts



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However, the position may wellbe different where an employeror contractor repeatedly contractson the basis of standard formcontract containing his ownamendments 11 or one that is self-

styled as a standard form 12.Other standard forms of

contract in use in the constructionindustry include those publishedby particular employers e.g.Tenaga Nasional Berhad , PutrajayaHoldings , Telekom MalaysiaBerhad and the like for theirspecic projects and a sprinklingof foreign forms. The latterinclude those standard formsgenerated by bodies such as the Joint Contracts Tribunal (JCT),the Institution of Civil Engineers(ICE), the International Federationof Consulting Engineers (FIDIC)and various international bodiesfor use in relation to specialistworks 13.

Roles of the parties

In addition to the employer and

the contractor, the operation of aconstruction contract commonlyinvolves a number of other personsnot party to the contract itself 14.Except where the contractorundertakes to design as well as toconstruct the works, the employerwill usually either undertakethe design departmentally 15 orcommission the design from aprofessionally qualified persone.g. architect or engineer whose

rights and obligations will begoverned by the contract underwhich he is engaged 16.

Most sizeable constructioncontracts make provision forthe employer to be representedduring the progress of theworks by one or more contractadministrators 17. Such personor persons may be given authorityto act as the employer’s agentin supervising the works and

transmitting information andinstructions to the contractor;they may also be empowered bythe construction contract itself

to exercise certification andother decision-making powerswhich are binding upon both theemployer and the contractor.

T h e p r i n c i p a l c o n t r a c tadministrator has traditionally

been the engineer or architectresponsible for designing theworks, although this is by nomeans necessa ry. A recenttrend especially in ‘Design andBuild’ and ‘Management’ typesof contracts has been for non-professionals such as projectmanagers, construction managersand the like to undertake the saidrole. In addition, many contractsprovide for the appointment of aquantity surveyor to carry out someof the administrative functions.

A sub-contractor is one whocarries out part of the contractworks under a contract with themain contractor who is for allintents and purposes of the sub-contract, the former’s employer.

A sub-contractor who suppliesonly materials but undertakes nowork or other services under thesub-contract is commonly calleda ‘supplier’. Sub-contractorsand suppliers are referred toas ‘domestic’ where they areselected by and the responsibilityof the main contractor; they areoften referred to as ‘nominated’where they are selected by theemployer, who then instructs themain contractor to enter into therelevant sub-contract 18.

11. Chester Grosvenor Hotel Co Ltd v Alfred McAlpine ManagementLtd (1991) 56 BLR 115. See also Barnard Pipeline Technology Ltd. v

Marston Construction Co Ltd [1992] CILL 743.12. E.g. the JKR or PWD Standard Forms.13. Notably the Institution of Electrical Engineers, the Institution of

Mechanical Engineers and the Institution of Chemical Engineers toname a few.

14. See Ir. Harbans Singh K.S. ‘Engineering and Construction ContractsManagement: Law and Principles’ at P10-19.

15. Example, the Public Works Department by ‘in-house’ designers.16. e.g. BEM Standard Form of Agreement (BEM Form 2000 Edn)17. Called S.O., Engineer, Architect, Employer’s Representative, etc.

depending on the form of contract employed.18. Other common categories of sub-contractors include ‘designated (or

named) sub-contractors, ‘selected’ sub-contractors, ‘specied’ sub-contractors, etc.

19. i.e. construction or installation.20. either, in-house or external consultants.21. See JKR 203 & 203A Forms, PAM ‘98 With Quantities and Without

Quantities Edns. Forms, etc.

TYPES OF CONTRACTPROCUREMENT

Traditional general contracts

Appearing under various labelssuch as ‘General’ contracts,‘Employer-design’ contracts and‘Design-bid-build’ contracts,these contracts are basicallycharacterized by the separationof the design from the productionor manufacture 19 elements of thecontract. Under this contractprocurement route, the employercauses the design of the works to

be prepared by his professionaldesigners 20 and then invites thecontractor to tender on the basisof the completed design 21. Thecontractor builds or manufactureswhat the designers have specied.Since the design element is withinthe ambit of the employer’sobligations, it accordingly assumesall responsibility for all designwork undertaken. The contractoris only answerable for the buildingor construction aspects of theworks i.e. the quality of materialsused and workmanship involvedin the contract.



23/50

Another signicant characteristicof this form of procurement isthat a single main contractor 22 undertakes total responsibility tothe employer for all the workunder the contract. In so far

as parts of the work are in factcarried out by other organisations,these operate as sub-contractorsto the main contractor and donot enter into direct contractualrelations with the employer 23.However, where sub-contractorsare selected by the employer 24,the main contractor’s responsibilityis frequently less onerous and alimited form of contract is enteredbetween the employer and thechosen sub-contractor.

Design and build contracts

A design and build contract 25,also known as a ‘package deal’or ‘turnkey contract’ 26, is oneunder which the contractorundertakes both to design andto construct the contract works,which are to be completed

in such a way as to meet therequirements of the employer 27.The defining characteristic ofthis type of contract is thecombination of most (if notall) of the essential tasks of aproject e.g. design procurement,m a n u f a c t u r e , f a b r i c a t i o n ,production, construction andmanagement in to a s ing lepackage. Taken to the extreme,the arrangement also places

the task of nancing, procuringapprovals, complete tting out,technology-transfer and the likeon the contractor. Accordingly,the contractor shoulders fullresponsibility and sole liabilityfor the design and constructionelements of the works in so faras these are included withinthe ambit of his obligations. Ininstances of default or breach bythe contractor, the onus is not on

the employer to distinguish theparticular element involved bethis design, quality of materials orworkmanship or the party actually

culpable. Its redress is solely atthe contractor’s expense 28.

Selection of the contractor isnormally based on competitivetendering or negotiations andpayment effected on either an

interim, milestone or lump sumbasis. It is common under suchan arrangement to find thatthe supervisory powers of theemployer’s representative are morelimited than those of a contractadministrator under a traditionalgeneral contract 29. Hence, unliketraditional general contracting,the employer’s representativeplays a limited administrativerole which may be conned toconducting independent checksand auditing the contractor’sworks. The contractor, his sub-contractors 30 and professionaladvisors are responsible for allaspects of the works inclusive ofmanaging the contract up to itsnal realization.

Management contracts

A compara t i ve ly recen tdevelopment on large and complexprojects has been the emergenceof the ‘management contractor’,whose only role is to manage, co-ordinate and supervise the workof numerous specialists by whomthe whole of the constructionwork is carried out. Under amodern management contract,these specialists are employedas sub-contractors 31 to the mainor management contractor 32,but the latter is relieved of anyresponsibility to the employer forsub-contractor defaults 33. Theunderlying philosophy of thisspecies of contract procurementis that the management of theconstruction process constitutesa particular expertise whichcan be distinctly identied andaccordingly addressed through theemployment of the managementcontractor. The latter is forall intents and purposes not abuilder in the strict sense but an

independent professional providingessentially a management service.This common thread runs, inaddition through the constructionmanagement route of contractprocurement.

Compared to traditional generalcontracting or design and buildtypes of contracts, managementcontract ing is unfortunately

22. Sometimes called a ‘General Contractor’ or ‘Contractor’ (in short).

23. Hence avoiding any privity of contract between the parties.24. Where this is so (as frequently in respect of specialist work) the

employer may dictate the terms of the sub-contract as well as thesub-contractor’s identity.

25. or ‘Design and Construct’ Contract.26.

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