Similarities of Standard Forms of Contract in Malaysia

Similarities of Standard Forms of Contract in Malaysia A Comparative Study on Three Standard Forms Used in Malaysia Seng Hansen Master Student of Construction Contract Management UTM Email: [email protected]

Introduction: Why We Need Standardization? There are at least 4 standard forms of contract which are commonly used in Malaysia nowadays, namely PWD (Public Works Department) Standard Form of Contract, PAM (Pertubuhan Arkitek Malaysia) Standard Form of Contract, CIDB (Construction Industry Development Board) Standard Form of Contract, and IEM (Institution of Engineers Malaysia) Standard Form of Contract. These standard forms evolve and develop in particular manners depending on the history and development of construction industry in the world, especially in Malaysia. Here, the author said that the development of these standard forms in Malaysia depending on the development of construction industry in the world because of 2 (two) reasons: Despite of the complexity and wideness of construction industry, the industry itself is actually inter-related and inter-connected. Thus we can say that we are working in a specific field of work which is dynamic but still in one closed system. For instance, new technologies or new material used in a project will become widely known and accepted in short time. This transfer of technology will have effect to the standardization of construction industry – in here we are particularly discussing the standardization of contract forms. Basically, Malaysia standard forms of contract adopt the international standard forms of contract. For instance, we can see that PAM Standard Form of Contract is originally based on JCT (Joint Contract Tribunal) Standard Form of Contract; the same with PWD Standard Form of Contract which is originally modeled from the English 1931 RIBA (Royal Institute of British Architects) Standard Form of Contract. Since the dynamic movement of construction industry will give so many interpretations in terms of methods, costs, scope etc, we need to limit these interpretations since the initial point of a project. This is materialized in contract document. Therefore, we can say that with the influence from global construction industry, Malaysian professionals try to make a standardization of contract in order to limit the interpretation of dynamic movement in construction industry. Table 1. Standard Forms of Contract in Malaysia Particulars Origin Produced by Application

PWD RIBA 1931 The Government (JKR) For government projects, usually for civil engineering works

PAM JCT 1963 PAM For private building works

CIDB CIDB For building works for both government and private employer

The advantages of using standard forms of contract instead of composing a new fresh contract document for each project are: 1. They are made by professionals in construction industry, therefore hopefully it can make a more clear understanding of contract terms (ambiguities and inconsistencies are reduced to a minimum) 2. They give options to both parties (the employer and contractor) to choose which standard form of contract will be used according to strategic business plan they may have 3. The rights and obligations of both parties are set out clearly and to the required degree of detail (fairer to both parties)

4. Because it is standardized, frequent users are familiar with the provisions in a particular form 5. We can save time and expense which usually incurred in preparing a new contract document What will be discussed in this paper is about the similarities of 3 (three) standard forms of contract used in Malaysia. These 3 standard forms are the most commonly used in Malaysia and have their own characteristics. The first is PWD form 203A (Rev. 2007) where Bills of Quantities is part of the contract. Because Bills of Quantities is very often used in Malaysia, the author takes PWD form 203A (Rev. 2007) as the representative standard form published by JKR/PWD. Secondly is PAM Contract 2006 with Quantities. Again, the same reason is taken. Thirdly is CIDB 2000 edition. CIDB standard form of contract consist only one type of contract. But there is appendix in CIDB which consist 6 option modules. Each module can be chosen whether they will be used or not. Generally, there will be so many similarities between these 3 standard forms of contract since they are already standardized. The only major differences between these 3 standard forms are their characteristics, descriptions and detailing procedures. Analysis of the Study: Similarities of Three Standard Forms of Contract 1. Obligation of the Employer Among these 3 standard forms, all of them have the description about obligations of the employer, although only CIDB which expressly describe this obligation (clause 6). Both PWD and PAM do not provide a certain clause to state the employer’s obligations. However, it does not mean that there is no employer’s obligation in the contracts. The employer’s obligations in both contracts are spread throughout some clauses which implied these obligations. The main obligation of the employer is to pay to the contractor what has been built. Here, payment is a consideration which creates a legal binding between the employer and the contractor. If the employer does not pay to the contractor, then we can assume that the employer has entered breach of contract. In order to evaluate any project progress on site, the employer will then employ architect/superintending officer (for next we will use S.O.). All of these three standard forms have a similar procedure that is the employer will pay to the contractor any amount which has been evaluate by S.O. In PWD, contractor can include any unfixed materials and goods intended for the Works in his payment (except unfixed material and goods supplied by Nominated Suppliers). For this matter, both PAM and CIDB also permit contractor to include any unfixed materials and goods but only in percentage (not all value). Then in PWD, contractor can submit his payment monthly and within 14 days S.O. shall issue an Interim Certificate, while in PAM and CIDB it is within 21 days. The, government then shall make a payment within specified period of time after the issuance of Interim Payment with the remaining xx% of the amount is being retained (for PWD 10%, for PAM and CIDB it is as stated in the appendix). Both in PWD and CIDB, within 3 months after the issuance of Certificate of Practical Completion, the contractor must submit full particulars including claims to enable the Final Account to be prepared by S.O. If contractor fails to submit within the stipulated period, then the S.O will make the assessment based on the available documents submitted by the contractor for the purpose of Final Account. The Government shall be discharged from all liabilities in connection with the claims. For this matter, PAM stated that period will be within 6 months. These three standard forms also provide a clause especially define about suspension for non payment. Here if the employer fails or neglects to pay within specified period of time after the release of Interim Certificate, then the contractor may give notice of his intention to suspend the Works. In PAM and CIDB this matter is discuss in clause 30.7 and 42.10 respectively. However we cannot find clause discussing suspension for non payment in PWD. In my opinion, this may be because PWD is used for government projects. Therefore, contractor need not be worry for the payment, since it is fund by government. It will be paid although takes a long time. In PWD clause 29 and 30, it is stated that contractor may ask for adjustment of contract sum due to some circumstances and fluctuation of price. In PAM, it is clearly stated that there is no such adjustment or alteration for contract sum. While in CIDB, there is no corresponding provision. Employer also has the obligation to pay contractor for any variation occurred during construction, only if the variation issued by the S.O. This matter is discussed in PWD in clause 24 and 25, in PAM in clause 11, and in CIDB in clause 28 and 29. All variation amounts shall be certified by the S.O and added to or deducted from the contract sum and the amount shall be adjusted accordingly.

In the particular events of delay and need to extent the Works schedule, employer has to give contractor an extension of time. All of these three standard forms stated that contractor must submit his claim for EOT within a specified period of time. In PAM and CIDB, if the contractor fails to submit his claim within the specified period of time, then contractor shall not be entitled with EOT. In PWD, there is no such requirement. Furthermore, in CIDB there is an explanation of specific event with continuing effect which will make a delay in overall project schedule. Contractor also entitled with claims and employer has the obligation to pay any claim made by contractor and has been approved by S.O. Moreover, in PAM there is mentioned that contractor can only make claim in such occasion as explained in clause 24.3. Also both in PAM and PWD, it is stated that if the contractor does not submit his claim together with the required documents within a specified period of time, then the contractor shall not be entitled the claim. In the case of Works insurance, both in PAM and CIDB give an option whether contractor will insure the Works or employer (but in case for existing building or extension, the employer is the one who has the obligation to insure). If both parties agree that the Works insurance will be done by the employer, then the employer must insure the Works within specified period of time. Failure of this action may lead the contractor to insure the Works and he shall be entitled to have the amount of insurance added to the Contract Sum. See clause 20 of PAM and 38 of CIDB. Employer also has the obligation to give site possession to the contractor usually before the Date of Commencement or unless the contract otherwise provides. We can see this in PWD clause 38 and CIDB clause 17.2. However, there is no corresponding provision in PAM. Based on the author’s experience, the characteristic of employer also effects to the employer’s obligations. It is true that the main obligation of the employer is to pay, but not only that. Employers should make payment to the contractor punctually. Contractors usually will face some difficulties to ask payment from private employers rather than projects fund by government. Private employers may have their own cashflow difficulties and strategic business plan. These reasons will eventually take effect to payment to the contractor. In some projects, the employers will release the payment 2 or 3 months after the payment certificate has been released. To overcome this problem, contractors will usually do some personal approach to the employers and take some strategies to make good their project’s cashflow so that their projects still can run and finish on time. This impact is something that the employers usually do not concern about. 2. Obligation of the Contractor The main obligation of the contractor is to construct the said project which has been agreed based on its scope and within the specified period of time and quality. This is also the general similarities of these three standard forms. The difference is the emphasis of the contractor’s obligations. For the contractor’s general obligations, we can see in PWD clause 10, PAM clause 1, and CIDB clause 7. It is important to notice why PAM put contractor’s obligations in the first clause of the contract. In my opinion, it means that in PAM contractor is considered as the party who need the work. All of these three standard forms have similar clause regarding Works Completion. In PWD this matter is described in clause 39 and 41; in PAM it is described in clause 15; and in CIDB it is described in clause 20, 21, and 22. Sometimes the employer wants to take some part of the Works which are already completed. This is explained in clause 41 of PWD and clause 22 of CIDB as Sectional Completion. Before executing the Works, contractor must provide performance bond to the employer as security deposit. This is a common matter required by employer to the contractor. However, we can only find a clause specifically discuss about performance bond in PWD and PAM. While in CIDB, performance bond becomes part of the appendix. Therefore, it will be depend on the agreement between both parties whether the contractor should submit performance bond or not. See Option Module F of CIDB. Contractor also has the obligation to ensure the quality of his works. If there is any defect during construction period and after completion, contractor has the liability to make good of any such defect until S.O satisfy with the works. This obligation is described in PAM clause 15, in PWD clause 48, and in CIDB clause 15.7 and 27. In doing his job, S.O sometimes needs to take a test of the works done by contractor. Usually the cost of inspection and testing are borne by contractor. This matter is described in PWD clause 36, in PAM clause 6 and 14, and in CIDB clause 15.

Contractor also has the obligation to be responsible with any indemnity and insurance of personal injury or death and damage to property arising from carrying out of the Works. These matters are described in PWD clause 14 and 15, in PAM clause 18 and 19, and in CIDB clause 35 and 36. The contractor must also provide insurance for his labour as described in clause 17 of PWD and clause 37 of CIDB. In my opinion, CIDB is the most complete standard form in terms of indemnity and insurance. In the case of Works insurance, both in PAM and CIDB give an option whether contractor will insure the Works or employer. Usually both parties will agree that contractor will provide the insurance in CAR form of insurance. See clause 18 of PWD, 20A of PAM and 38A of CIDB. There is also a specific clause regarding to antiquities such as fossils, coins etc which may be found on the site. In this circumstance, contractor has the obligation to take all steps which may be necessary to preserve and protect the object in the exact position and condition. The contractor should inform S.O immediately about the discovery. This obligation can be seen in clause 64 of PWD, 33 of PAM, and 39 of CIDB. The contractor also has the obligation to execute the whole Works. If he would like to assign some duties to his subcontractors, first he must receive the approval of S.O. If S.O approves his assignment, the contractor shall still be fully responsible for the works of his subcontractors. S.O also can appoint Nominated Subcontractor (NSC) or Nominated Supplier (NS) with the approval from the contractor. And again, the contractor shall be fully responsible for the works of NSC/NS. These matters are described in PWD clause 47 and 59, in PAM clause 17, 27 and 28, and in CIDB clause 18 and 40. At the end of the project, contractor should submit the as built drawing to the employer. Usually he must submit this drawing not later than the Date of Practical Completion of the Works or otherwise stated in the contract. We can see the description in CIDB clause 4.10 and PAM clause 3.10. 3. Obligation of both parties Both parties also share some obligations such as confidentiality (PWD clause 68, PAM clause 3.9, CIDB clause 4.9), obedience of dispute resolution decision (PWD clause 65, PAM clause 34 and 35, CIDB clause 47), compliance with the Law (PWD clause 21 and 72, PAM clause 4 and 38, clause 10 and 49), and give notification (PWD clause 66, PAM clause 36, CIDB clause 8). Conclusion After doing some comparison on these three standard forms of contract, we can see the characteristic of each standard form. The PAM standard form of contract tends to protect the employer’s interest, while PWD standard form of contract tends to protect the contractor’s interest. The most balanced is CIDB standard form of contract. But this is not the only aspects to choose which standard form of contract will be used by both parties. There must be many other aspects both from the employer and the contractor to enter into an agreement.

Table 2. Similarities of 3 Standard Forms of Contract in terms of Obligations No

Particulars

PWD 203A

PAM 2006

CIDB 2000

1 2

General Obligations of the Employer Claims made by contractor

Spread Clause 44

Spread Clause 24

3 4

Delay & Extension of Time (EOT) Insurance by employer

Clause 43 -

5

Payment

6

Price Adjustment

Clause 13.1

-

7 8 9

Site Possession by contractor Suspension for non payment Variations

Clause 30.7 Clause 11

10 11 12 13

General Obligations of the contractor Antiquities Guarantees & Bonds Indemnity & Insurance by contractor

14

Testing & Inspections

Clause 28 Clause 31 Clause 54 Clause 60 Clause 29 Clause 30 Clause 38 Clause 24 Clause 25 Clause 10 Clause 64 Clause 13 Clause 14 Clause 15 Clause 16 Clause 17 Clause 18 Clause 36

Clause 23 Clause 20B Clause 20C Clause 30

Clause 6 Clause 31 Clause 32 Clause 24 Clause 38B Clause 38C Clause 42

15

Subcontractor, NSC & NS

Clause 47 Clause 59

Clause 17.2 Clause 42.10 Clause 28 Clause 29 Clause 7 Clause 39 Module E & F Clause 35 Clause 36 Clause 37 Clause 38 Clause 38A Clause 15.1 Clause 15.3 Clause 15.4 Clause 40 Module C

16

Work Completion

17

Work Defects

Clause 39 Clause 41 Clause 42 Clause 48

18 19 20

As built drawings Confidentiality Dispute Resolution

Clause 68 Clause 65

21

Law

22

Notification

Clause 21 Clause 72 Clause 66

Clause 1 Clause 33 Clause 37 Clause 18 Clause 19 Clause 20A

Clause 6.3

Clause 17 Clause 27 Clause 28 Clause 15 Clause 16 Clause 15.4 Clause 15.5 Clause 15.6 Clause 3.10 Clause 3.9 Clause 34 Clause 35 Clause 4 Clause 38 Clause 36

Clause 20 Clause 22 Clause 23 Clause 15.7 Clause 27 Clause 4.10 Clause 4.9 Clause 47 Clause 10 Clause 49 Clause 8