Issues and Challenges Faced in the Management of Claims for
Construction Projects
Lip Ping Lew, Dr. H.C Tan, Dr. S.C Mandy Wong
Abstract: The management of construction claims is become greatest challenge today which is not a simply
straightforward task and experienced susceptible to a variety of factors along with an increasing difficulty in
reaching amicable settlements in respect of complex reasons. Therefore, this research will attempt to identify the
key issues and challenges faced in the management of claims for construction projects and will critical examine
the root causes of these issues and make recommendation to address the issues identified from the study in order
to mitigate the potential risks. For this purpose, a research study through an extensive literature review and
quantitative data collection from varies discipline using questionnaire survey has accomplished to identify the
essential issues faced in the management of claims. The sample size of approximately 200 responses is adequate
to verify on the validity of fact and reflecting the real situation of construction claims in Malaysia. Through
SPSS validity, reliability and factor analysis, the following eight significant factors that faced in the
management of claims for construction projects are identified: (1) Record keeping; (2) Contractual risks; (3)
Training and ICT system support; (4) Client intervention; (5) High turnover of staff; (6) Lack of contractual
knowledge; (7) Contract close out and (8) Administrative support. The identified of these eight critical factors
are crucial for practitioners in the construction industry to further research and develop a management strategy
for better manage construction project by reducing the construction claims dispute effectively. The construction
industry today is too emphasized in disseminate the alternative dispute resolution (ADR) methods such as
negotiation, mediation, adjudication, arbitration and litigation to resolve the construction claims and dispute
cases. There may be too little emphasis placed upon strategy to avoid unnecessary and costly investigations
associated with construction claims. The more discoveries of prevention measures for construction claims
disputes are obviously better than cure.
Keywords: Risks, Strategy, Dispute, Prevention, ADR, Management of claims
1. Introduction
Construction projects have become more complex associated with highly sophisticated structure
system, electrical and mechanical system, green building and sustainable compliances, high quality
assessment and to meet diversified end user requirements. The entire project life cycle revolves
around the pre-construction stage, construction stage, and post-construction stage. The management
of construction claims is become greatest challenge today which is not a simply straightforward task
and experienced susceptible to a variety of factors along with an increasing difficulty in reaching
amicable settlements in respect of complex reasons such as cost recovery, time, quality,
environmental issues, safety and health issues, IT technology revolution, unforeseeable site condition,
changes by client, client-led demands for value added, unfulfilled duties by project participants, force
majeure and etc.
In fact, claims are now considered as a way of life for the construction industry. The traditional claim
management systems no longer effective to address the issues faced in today construction claim
process, making situation worse when lack of methodology in dealing with documentation,
notification time-frame, claim procedures, condition of contract, competency of staff and departure of
key personnel who knows most of the claim and chronology event. As well as, large employers and
clients today use complex contracts to create maximum value for money and mitigate risks related to
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their investments. Therefore, early identify the key issues and determine appropriate actions are very
crucial in order to ensure sufficient cash flow is generated throughout the project process. Poor
management of construction claim may cause vulnerable to company cash flow, furthermore
fluctuation of working capital could lead to contractor insolvency that could not raise loan quickly.
Based on report produced by Ministry of Urban Wellbeing, Housing and Local Government Malaysia
up to April 2015, there are 146 developers were black listed by government due to undelivered and
abandoned project undertake by them.
Therefore this research will attempt to identify the issues and challenges of construction claim process
in Malaysia’s construction industry and then will critical examine the root causes of these issues and
make recommendation to address the issues identified from the study.
2. Issues and Challenges Faced in the Management of Construction Claims
The construction industry in Malaysia can generally divided into two distinct segments namely, real
estate construction and civil engineering and special trade work. Real estate construction refers to the
construction of structures and buildings for residential as well as commercial purpose. Civil
engineering mainly refers to the construction of infrastructures such as roads and highways, utility
structures and buildings and public infrastructure such as bridges, stadiums, ports, dams and railways.
Meanwhile, special trade works consist of activities such as metal works, electrical works,
refrigeration and air conditioning works, painting works, plumbing, sewerage and sanitary works,
glass works, carpentry as well as tiling and flooring works. The industry was estimated at a market
size (revenue) of RM 43.19 billion in 2014, which was an increase of 11.8 percent over the previous
year. In addition, the Malaysian construction industry is expected to grow at a compound annual
growth rate of 10.4 percent for the 2014 to 2019 period (Protégé Associates, 2015).
The general perception of the Malaysian construction industry as a whole is that it is under-achieving
(Construction Industry Development Board Malaysia (CIDB), 2006). It has often been characterized
by opportunistic behaviours, poor communication, and adversarial attitude due to inefficient and
ineffective construction practices. Payment defaults, construction delays, cost overruns and disputes
are common challenges faced by the industry (CIDB, 2006). Government organizations, researchers
and practitioners at large have called for a radical change in attitudes, behaviours and procedures to
address the challenges brought about by industry fragmentation as eluded in Egan Report (2003).
2.1. Background of Construction Claims
A claim was defined by Hughes and Barber in their reference as “a request, demand, application for
payment or notification of presumed entitlement to which the contractor, rightly or wrongly at this
stage, considers himself entitled with respect to an agreement has not yet been reached” (Hughes and
Barber, 1992). Contractors today are not just constructing what an architect or client may have
envisaged but to bear with design and engineering liabilities. In some contract, they may also be
requested to finance, operate and maintain the infrastructure that they built. As such, risk exposure has
changed dramatically which the employers intentionally want to shift their risks to contractor. Hence,
the claim procedures have become complicated.
The construction claims are a routine to settle within the payment mechanisms of the contract by
making additions or deductions to the contract sum. Apart from technical challenges, most managers
faced with interface and collaboration problems that need to be solved in the relationship among the
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project stakeholders such as employer, contractor, subcontractors, specialists and the supply chains. In
complex project, it is often that conflicts and disputes will emerge. This fundamental disagreement
and complex claims that may settle outside the construction contract using common law or quantum
meruit claims for the payment of damages directly from one party to the other which may take years
to be resolved by litigation.
This explains the need for project managers to be equipped with the principles of contract and claim
management in order to avoid conflict with project stakeholders and meditate to solve them when
occur.
Construction project could not survive without continual of claims process. The real measureable
benefits of effective claim management are much more than generate the cash flow to fund the
construction operations and to sustain the business, it is also to prevent contractor lose their
entitlement on delay and variation claims due to lack of notice, failure to justify any extension of time
or cost variation because of a lack of contemporary records to illustrate the effects of the event or
circumstances. Therefore, claims are life support for most construction projects and strong
fundamental in claims management will increase propensity for project success undertake by an
organization.
However, there is little training and education programme on claim management from a construction
perspective. Such a perspective would allow project manager to understand the principles underlying
in the management of claims that relating to interim payment and delay claims. A delay claims on a
construction projects relate to extension of time (EOT), loss and/or expenses (L&E) and additional
compensation.
The most common issues pertaining to claims are included: unforeseen site conditions, lack of
familiarity with condition of contract, variation order, incomplete documentation, payments, defects
and poor workmanship, default notice, interference by the owner, completion issues, bonds and
guarantees, delay and extension of time, liquidated damages and etc. To be successful in claims
submission, some procedures in contract condition need to be complied, adequately establish
causation link demonstrating the extent of time-related damages or disruption cost incurred and
submitted within specified time frame.
More simply, a claim is a request for compensation for damages incurred by any party to the contract.
A number of research projects have been conducted that showed some of the aforesaid issues
pertaining to claims as depicted in Table 1.
Table 1 : Issues faced in the management of claims.
Researcher
-
Burati (1992)
Issues of claims
-
Changes and rework could increase construction cost by
4%-12%.
-
James (1993)
-
Fails to serve a proper claim notice would lose his rights.
-
Zack.J (1993)
-
New approach to doing business through liability
avoidance, risk transfer and claims mitigation.
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-
Rights approach to win claims without violating the
contract terms.
-
Semple, Jergeas and
-
Hartman (1994)
-
Contract clauses dealing with changes/extras, disputes,
soil/site conditions and delays.
-
Increase of scope was the main cause of dispute.
Vidogah and Ndekugri
-
Claim is poorly manage and performed in ad hoc manner.
(1997)
-
Lack of familiarity with the contract obligation and it
relevant clauses.
-
Hanna and Russell (1998)
-
Delay of design during execution phase leading to
variation claims on time and cost.
2.1.1. Understanding of Contractual Arrangements
The contractual arrangements for procuring construction works are covering the basic five phases
consist of design development phase, contract document phase, contract management phase, final
measurement and certificate of fitness for occupation phase and final account.
A contract must contain of various essential requirements typically to achieve client satisfaction for
the finished products (building, civil engineering and special trade work) in term of functionality, ontime, within budget and accordance to specifications and quality. In general, the contract comprises a
variety of documents such as:
a) Letter of award
b) Article of agreement
c) Condition of contract
d) Amendments, amplification and supplementary clauses
e) Contract drawings
f) Contract bills
g) Specifications
h) Tender questionnaires
i)
Appendices
Various alternative arrangements of contracts are available as described below:
a) Lump sum
b) Bill of quantities
c) Schedule of rates
d) Fixed price or percentage fee
e) Cost reimbursement
f) Two stage tender
g) Serial
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h) Direct labour
Once a project is approved out of many potential projects may be considering, it is paramount to
formed a procurement strategy to address the key issues on how the project risks shall be allocated
among the project stakeholders so that a suitable procurement route can be chosen. The four basic
procurement routes are (1) traditional (design-bid-build), (2) design and build, (3) construction
management and (4) management contracting. Obviously, the right procurement route choice will
minimize the overall costs of managing the associated risks. For example, the risk of design failure is
often passed to the consultants or designers as their expertise and responsibility. However, they can
support their work with appropriate professional insurances to keep indemnified the client against all
claims, damages, losses, costs and/or expenses arising out of any act, default, omission or negligence
about the conduct of their duties. The procurement strategy and client’s attitude to risk will determine
the selection of the appropriate procurement routes. Consequently, we must accept a reduction in
autonomy to control those aspects which responsibility and risk have been passed to other
organizations. For example, clients will often use the design and build procurement route to minimize
their exposure to design and construction risks. This means they have least control over the quality of
the design and the contractor. Under a construction management route, the risk and responsibility
does not allocate to a single main contractor. Instead, it allowed client to retain control of programme,
coordinate the design and construction activities to facilitate collaboration in order to improve the
buildability of the design. However, price certainty is not achieved until the last trade packages have
been let and client must bear the associated risk and detrimental consequences. Therefore, this route is
not suitable for inexperienced client and without committed team.
Table 2 : Problems of contract clarity
Researcher
Problem of Clarity
-
Henkin (1988)
-
Ambiguous word or sentence (more than one meaning)
-
Broome and Hayes (1997)
-
Poor explanation on procedure or process
-
Candlin et al (2002), Cutts -
Sentence is too long, too many passive voices and
(2004)
repetition of words
-
Styllis (2005)
-
Too many cross references between clauses and
complexity of noun phrases
-
Duhaime (2007)
-
Ibrahim.M,
Zulkifli.M, -
Rosli.Z, Shaiful.A (2008)
Controversial as legal term
Attitude
problem,
educational
background
and
complexity of document itself
Contractual conflicts or disputes seem to be inevitable in the construction industry especially on
issues concerning interpretation and understanding of construction contracts (Broome and hayes,
1997; Candlin et al, 2002). The understanding of the whole requirement and process of the contract
are important to minimize the construction risks that may lead to unnecessary problems such as delay
claims, default on notice, disputes, rework, loss and/or expenses, litigation and even loss of future
business relations. In general, erroneously interpret and misunderstanding of construction contracts
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can be related to illegibility of contract clauses, legalese or technical jargons and other factors that
summarized in Table 2. More often than not, contractors in Malaysian construction industry are not
bothering to understand the contract documentation until issues arise out of disagreements between
the contracting parties on their contractual rights and responsibilities.
2.1.2. The Use of Standard Forms
Standard forms of construction contract provide mechanisms or claim procedures by which the
contractor can submit claims relating to payment losses or expenses incurred as a consequence of the
employer’s actions (or inactions). A standard forms of contract that drawn up by various professional
bodies are commonly use by most construction stakeholders to regulate their specific needs,
contractual obligations and liability during the contract administration process. There is no best form
to suit all kind of construction work due to construction is one of kind product , whereas different
forms of contract may favored to suit particular type of work such as real estate construction, civil
engineering, special trade of work and client preference.
The need of standard form of contract in construction is to serve as written evidence illustrates the
legal relationship between contract parties and provide for the administrative procedures to construe
the legal obligations. There are four institutions and organizations in Malaysia that produce standard
forms of construction contracts. These are:
a) The Institution of Engineers, Malaysia (IEM)
b) Malaysian Institute of Architects (PAM)
c) Construction Industry Development Board (CIDB)
d) Public Works Department, Malaysia (JKR)
The selection of standard form of contract is dependent on the employer, type of project as well as the
nature of a project and financing involved. IEM standard forms essentially are hybrid forms follows
the corresponding FIDIC standard form. IEM condition of contract mainly for civil engineering works
and MEP works. It was first published in May 1989 and was modelled very much on JKR form of
contract. It was much used in private-finance civil engineering construction works. It has been
renamed as IEM.CE 2011 for civil engineering works and IEM.ME 1/94 for MEP works. The forms
of contract published by IEM, it needs to be appreciated that the form is drafted in plain English
which is easier for engineer to understand as they are not familiar with legalese term. The IEM.CE
2011 has allocated the risks and benefits more appropriate and impartially to both employer and
contractor bound in construction contract. The introduced of new features in this form will minimize
the contract disputes in administration of time, cost variation and claims for construction works.
However, IEM do not produce for nominated sub-contract form.
The PAM building contract form is published in three versions: one with quantities, the other without
quantities and for sub-contract. The PAM standard forms of building contract are used extensively in
private project in the Malaysian building industry. The first PAM 69 was first issued in 1969 and was
amended version of JCT 1963 Form. The revised version of PAM 98 aims to update and replace PAM
69 and also produced for use where the sub-contractor is nominated under the PAM 98 form (with or
without quantities). The latest PAM 2006 was published in 2008 which significantly change has been
made in the allocation of risks for time, monetary matter, quality issues and dispute resolution
between the employer, consultant team and contractor. The Forms are also more procedural, requiring
the contractor, employer and consultants to strictly adhere to time provisions with the attendant loss of
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rights or incurring of liabilities. CIDB has produced two standard forms of Contract there are standard
form for building works (2000 Edition) and the other is for nominated sub-contractor. However, the
two forms of contract do not appear to have been widely adopted by the construction industry in
Malaysia at this time.
Most of the projects under the government will apply JKR contract document (or known as PWD
203A). JKR has produced a number of standard forms for building works and civil engineering works
namely PWD 203 (without quantities), PWD 203A (with quantities), PWD 203N (for NSC), PWD
203P (for nominated suppliers) and PWD DB (for design and build). However, it is not the case that
all public sector works follow the PWD 203A especially for project involving international contracts
or those funded by World Bank or Asian Development Bank (for example) where preference seems to
be for the adoption of FIDIC Forms.
The selection form of contract is a vital factor in the performance of a construction project, it provide
a basic legal framework identifying the rights, obligations and duties of the parties as well as establish
the range of the powers and duties of the contract administrator. The more familiarity of the contents
of forms of contract can assist the parties who involved in managing claims to be more effective and
efficient without seeking legal advice and incur some cost saving. However, in some situation where
amendments is necessary due to the limitations of standard form such as obsolete of certain clauses,
industry shift, inclusion of new term, owner discretion in quality issues and apportionment of liability.
Such amendments are usually attached to standard form as special conditions of contract (often
contained in the preliminaries section of the bills of quantities), supplementary clauses, and
correspondences exchanged between the parties at the time of tender, tender questionnaires and
appendices.
The progressing of large infrastructure projects invested by government initiated since 2010 such as
150km mass rapid transit (MRT) system comprises of three lines covering at least 20km radius of
central Kuala Lumpur which costs over RM 36 billion provide impetus to drive the urbanization
activities in the country. The contracts have been drafted to tailor suit the particular requirements,
some common features of these contracts are that the apportionment of risks are very much inclined in
favour of the Employer or professionals known as the Employer’s Representative and others. These
contracts usually are substantially and extensively amended versions of FIDIC Standard Forms.
There are many conflicts reported in Malaysia’s projects about the occurrences of defective works
either at completed buildings or infrastructure component such as collapsed ceilings, burst pipes,
crack of structure and etc. It is not easy to draw the line based on provision clauses in standard form
of contract between the design responsibility and bad workmanship. Such as occasion was the case of
MRR2 elevated highway which covers a 4 km stretch and cost RM 238.8 million. This project was
awarded as design and build and completed within the contract period on March 2002. The
controversial issues start when the flyover is reported to be faulty on August 2004 because 31 out of
33 pillars supporting the flyover are found to have 7000 cracks. There are three expert investigation
consultants from Australia, Germany and British were engaged to undertake the independent
investigation and studies. Three of them gave different views; among the main causes are design
flaw, improper anchorage of cross beam, expansion of chemical compound (ettringite), deficiency of
design and anchorage of column reinforced into the crosshead. The contractor lack of fund to carry
out the remedy works and government has spent over RM70 million to repair the cracks within three
years.
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Construction projects often run over time and/or budget, the consequent claims for extension of time
and liquidated damages could cause more disputes than any other contractual or technical issues. The
recent case of repeated delay in KLIA2 airport since September 2011, the project was delay more than
two years in its completion and eventually operational in May 2014, wherein the cost was overrun
from RM 1.9 billion to RM 4 billion. The main pitfalls in the project contributing to its failure are
unclear objectives, increase of work scope, lack of change management team, lack of effective
communication processes, poor risk management and etc. The Malaysia Airports Holdings Bhd
(MAHB) is still reviewing its quantum of claims and counter-claims following the imposed liquidated
and ascertained damages (LAD) on the contractors. The LAD was invoke on June 2013 and this work
out to about RM 6 million per month. However, the contractors have appealed against the LAD on
the grounds that there were many last-minute requests and additional changes by the clients that
should entitle it for an extension of time to complete the works. This dispute is still prolong
unresolved despite CPC was issued on Jan 2015.
2.1.3. Roles and Responsibilities of Contract Administrator in Claims
Most of the construction projects in Malaysia, the architect is appointed by client as a contract
administrator in observing construction activities for conformity to construction drawings and
specifications. Legally, the architect held three different roles as the professional service during entire
project life cycle, namely independent contractor, agent of the client and quasi-judicial officer.
All construction claims either makes by the employer or contractor against each other should be
administer by the contract administrator for initial decision as a condition precedent to more formal
dispute resolution such as mediation, adjudication and arbitration. The contract administrator must
make impartial decisions strictly in accordance with the contract, not siding with either party by fairly
interpret the provision of contract clauses (Patrick Mays, 2000).
Generally, contract administrator is assign to execute the tasks specified in condition of engagement
and not limiting to the followings:a) To ensure consultant architect submit building plans in respect of the project to the relevant
authorities for approval.
b) To co-ordinate with other consultants in preparing detail drawings, specifications, bills of
quantities, estimate construction cost and all necessary contract documents for calling tenders.
c) Checking and approving all samples, schedules, shop drawings, other submissions to ensure
conformity with specification in the contract documents, studying claims of contract and then
submitting recommendations to employer, advising and obtaining employer’s approval on
variation works before issue Architect Instruction.
d) To convene and conduct site meeting when necessary, make periodic visit and inspection of
the works on site to determine and ascertain the construction works proceed accordance with
contract documents and performance specifications.
e) To keep informed the employer of the overall progress of the project and shall be advised of
measures taken for the recovery of lost time should the project fall behind schedule.
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f) Prepare the final accounts of the contract for client’s approval, they shall determine the
amount due to the contractor and shall issue certificate of payment as required under the terms
of the contract documents.
g) To apply and render all assistance to obtain for certificate of fitness for occupation on behalf
of the client with regards to the project.
Therefore, the contract administrator must equipped with substantial design and construction
experience with the building process, understanding of building codes and standards , familiar with
construction techniques and work sequencing, able to interpret the design concept, equips with
observational skills, ability to monitor and control project execution and ability to communicate,
negotiate and resolve disputes.
2.2. Issues Related to Construction Claims
Construction claims can be caused by a many factors. Understanding what issues faced in the
management of claims for construction projects is vital in order to avoid them. In general,
construction claims occur during the entire project life cycle are summarized in Table 3.
Table 3 : Summary of Issues Faced in the Management of Claims
Pre-Construction Stage
Construction Stage
Post-Construction Stage
1.
Client attributes – Low &
Chuan (2006), Pinto et al
(2009)
1.
Design changes – Serag.E,
Oloufa.A, Malone.L,
Radwan.E(2010)
1.
Poor quality and defects –
Jeremy.G (2008), Doyles.J
(2005)
2.
Under estimate and pricing –
Paek.J, Lee.Y, OCK.J (1993),
Yiu.CY, Tam.CS (2006)
2.
Delay and extension of time –
2.
Trade Warranty, Guarantee &
Indemnity – Samantha IP
(2005), John.V, Arjan.V (2014)
Lack of design information –
Alaghbari (2005)
3.
3.
Final account and certificate Zarabizan.Z, Syuhaida.I,
Aminah. M.Y ( 2013)
4.
Liquidated damages – John.A
(2010), Onn.CK (2003)
3.
Lester.A (2010), Kamaru,
Mohan, Douglas.R.A (1998)
Default on notice (e.g. failure to
observe the deadlines) –
Robert.J.M (2001), Hamish
(2002)
4.
5.
6.
Late of site possession –
Semple, Hartman, Jergeas
(1994)
4.
Incomplete tender
documentation and owner
requirements - Bob Keen
(2010), Laryea.S (2011)
5.
Late award – Barry.B,
6.
Staff turnover – Tan et al (2013)
7.
Third party’s access -Semple,
Compensation/ Loss and
expenses (L&E) –
Cunningham.T (2014)
Interim payment – Alaghbari et
al, Sam-Basivan & Soon (2007)
Michael.T (2010)
7.
Unforeseen condition – Beh
H.G (1997), Donald.O (2015)
8.
Lack of training on contract
administration – Egan. J (2003)
Hartman, Jergeas (1994)
8.
High expectation in building
performances – Dave.M (2013),
Xia, Bo & Chan, Albert (2011)
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9.
Incomplete contemporary
records and documentation –
Haidar. A (2011)
10. Lack of knowledge and
familiarity with the condition of
contract – Vidogah and
Ndekugri (1998)
11. Failure to keep up-to-date
programme – Toor & Ogunlana
(2009)
12. Challenges posed by the
advancement in ICT –
Haichen.T, Anumba.C (2013)
13. Lack of IT supporting in
managing the claims –
Haichen.T, Anumba.C (2013)
2.2.1. Client’s Attributes
Project stakeholders’ competence is one of the key factors for project success. Competence and
credibility among the stakeholders is vital in engendering an atmosphere of trust and healthy project
relationship in the industry (Mayer et al., 1995; Kadefors, 2004; Pinto et al., 2009). As such, greater
proficiency in managing project inputs will result in a better quality output and detailed perception of
risks throughout the project (Agarwal, 1994).
Therefore, the clients and project managers must be competent to respond to different situations in
order to avoid any ambiguities through-out the project period. Low and Chuan (2006) realized that
clients’ participation and their decisions throughout the project duration could affect the project
performance. Their responsiveness should involve different dimensions, for example, clients need to
be clear about their own decisions, be quick in their responses and make sure that their decisions are
communicated clearly to all stakeholders.
However, the client’s intervention in decision pertaining to the approval and quantum of claims could
be the reason for delay and disruption towards the end of a project. The majority of the claim for
increase work scope and design changes was not subject of a formal change procedures or request for
variation order which clients may issue direct instructions to the contractors. Moreover, there was
hefty design documentation, which contractually had to be approved within a certain time frame, it
was known that the project client taken approval time exceeded of this contractual limit, with some
circumstances the documents taking many times of rejections to gain approval; it was felt that these
unnecessary overspend is contributed to delay. Finally, it was felt that the invalid comments on design
documents were slowing down the design process as the comments had to be answered and the
documents re-entered into the approval process.
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2.2.2. Under Estimate and Pricing
Under estimate and pricing of project cost is defined as the submission of a project budget or tender
price at a significantly below the best estimate for the cost, risks and profit margin for the project.
This tends to be viewed as a cost estimation error rather than as an explicit strategy to win a contract
or execution of new project.
Under‐pricing is a common phenomenon in construction tenders and the motive is often explained by
the need for work or cash flows and penetration strategy. It has been seen in the Malaysia construction
industry that if the contractor’s bid is too low, it may result in excessive time delays and claims from
the contractor in the hope of getting extra claims to compensate for the low price (Chan & Yeong,
1995). Therefore, client should be wary of the lowest bid in the tender process as there is financial
motivation for the contractor to use deceptive practices such as to perform substandard work and
dispute the contract against the client to recoup the cost and improve the profit margin (LePatner,
2008). Another study found that a contractor had even manipulated change order to make up for lost
profits in other areas of construction (Smith & Bohn, 1999).
In client perspective, it will be more vulnerable in case of inaccurate budgets; fluctuations in working
capital could lead to the insolvency of a company who could not raise funds to support during project
implementation stage. When under estimate of certain cost item is discovered during tender process,
client tends to conduct a value engineering to explore available choices to defer or change the original
design intent to meet the allocated budget. However, this consequence may cause delay and variation
claims from contractor associate with prolongation, disruption, loss and expenses.
2.2.3. Lack of Design Information
The most common form of compensable delay is insufficient drawings and specifications. Late
issuance of design information will lead to remedial work prior to completion and incur variation of
works. This delay can also arise from the client’s or its agents failure to respond within the time limits
pertaining to request for information, client’s change in design or materials, disruption and change in
the sequence of work. The foreseeable severe consequences on the overall success of the project are
generally reduced productivity and efficiency, rework and allowed contractor to claim for both money
and time resulting from the said delays (Alaghbari, 2005).
However, contractor in design and build projects will face higher risk probability and impacts include
design stage. The delays due to change of design as well as coordination among various trade of
services, construction method, technical, environment and authorities requirements usually result in
no time and cost claims being granted from client unless client change on design intent or
specification.
Insufficient design information is generally caused by consultant related factors. However, the
contractor is obligated to study the design information and send inquiry about design errors as much
as possible prior submitting its tender. Failure to do so, the contractor may be deprived from making a
claim should the insufficient design information cause damages to the contractor at later stage.
Unfortunately, normal tender periods does not allow for a careful review of either drawings or
specifications before contractor submits its tender whereas consultant had took ample time to prepare
it.
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In a typical construction project, the consultant has no contractual link with the contractor.
Subsequently, when insufficient design information claim arise, the contractor who suffers damages
will demand for compensation from the owner. The damages claims which involved monetary and
time may be awarded to a contractor. In order to succeed, the contractor must able prove the loss
associated with the insufficient design information or design defects. However, the client may be able
to avoid liability for design errors if the contractor discovered prior submitting its tender.
2.2.4. Late of Site Possession
Site possession shall be given to contractor by employer as conferred in many standard form of
contract. Normally it refers to the means and availability for contractor to occupy the site and
commence the execution of contract work and complete the work before completion date ( Adriaanse.
J, 2010).
In the event that employer is delay in giving such possession of site to the contractor, this action is a
breach of contract and the contractor can be adequately compensated by damages through the contract
provisions (PAM contract 2006). This phenomenon is often occur in Malaysia construction projects
when the substructure’s contractor is unable to complete the entire package works and result in delay
hand over to employer for superstructure’s contractor to commence their works. To avoid further
delay of the project, employer may negotiate with the superstructure’s contractor for acceptance of
partial site possession, however the contractor is entitle for extension of time upon the balance of site
is fully hand over.
2.2.5. Incomplete Tender Documentation and Owner Requirements
Tender documents contain of extensive information about the owner requirements, drawings,
specifications, bill of quantities, instruction to tenderers, form of contract, condition of contract and
other enclosures for contractor to price and bid proposal. The quality of tender documents is
increasingly being criticized poor in practice in the construction industry. Lack of clarity and
adequacy of tender documents was identified as a major source of claims and disputes at the
construction stage (Laryea.S, 2011).
The signing of a contract with incomplete tender documentation is a source of significant risk for
owners, general contractors and subcontractors. This makes all contract parties difficult to calculate
tender programme and substantially increase the risk over-runs budget and project delays.
It is becoming realized that incomplete contract documents will lead to claims from contractors for
additional compensation and extension of time. This is where dispute start when owners have
financial constraints or refuse to pay more due to ambiguity of contract works. If the dispute cannot
be resolved by both parties in good faith, the proceeding of contract dispute resolution method is often
leads to further increase with associated legal costs.
An unclear contract document was one of the factors that cause contractors to increase contingency
mark-ups in tenders (Smith and Bohn, 1999). Therefore, the quality of tender documents is invariable
lead to higher accuracy of estimates, optimized bid and minimize the claims and disputes.
2.2.6. Late Award
On each construction project, it involved of large number of specialist consultants, contractors,
subcontractors and suppliers to collaborate and co-operate on an ad hoc basis at different stages to
accomplish a well-defined project scopes and objectives.
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The process of contract award for building construction has becomes more complex with
sophisticated structure system, widest range of building materials, MEP services and equipment. The
award of building work packages could easily divided into seven major categories namely design
works, builder works, MEP works, external works, nominated sub-contractor works, temporary works
and material suppliers.
For each construction project, it may consist of approximately one hundred trades of works and these
construction activities can be sequential dependent series of activities. For example, delay in award of
door frame supplier may subsequently affect the completion of finishing works such as brick wall,
plastering, painting and others interior finishes which is interface with the door frame.
Employer or contractor will be held accountable in award the contracts within a reasonable time by
reference to their approved baseline work programme. If the contractors are able to demonstrate and
prove that there have been effective delays to the completion of works and consequential effect on
succeeding activities due to late award of certain trade of work, the contractor may be able to recover
its with time extension and associated delay costs. These delay costs may refer to its entitlement of
loss and expense together with any documents, supporting vouchers, explanation and calculation
relating to the account of involved parties and notice of claims in writing within the stipulated time in
the contract provision, which enable the contract administrator to reward the claims (Barry.B,
Michael.T, 2010).
Prevention programme should be properly established to avoid delay claims which are less costly than
the preparation and defence of claims.
2.2.7. Unforeseen Condition
Construction tender documents typically contain of tender drawings, specifications, soil investigation
report and possibly a utilities survey mapping report. During tender period, the contractors typically
have limited time to investigate actual site conditions and assume that the information reflected in the
tender document is generally correct.
However, construction is too often that it does not go smooth as planned especially when contractors
encounter that site conditions are different from the information contained in the tender. The client’s
misrepresentation and concealment of site information from contractor is invariably leads to
construction claims dispute relating to unanticipated costs and time extension.
The geological condition of a project is characterized by uncertainty and unpredictability, which
increases the degree of project complexity (Gidado and Millar, 1992). For example, the soft ground
condition and relocation of unexpected underground utility services may result a great havoc and
prevent certain contract works to be completed. The relocation of unexpected life cable supplying
power to the neighbouring properties which involved local authority may take extra longer time due to
its procedural process. This will hinder the construction works on that particular area and subsequent
activities. The soft ground condition may cause even greater detrimental especially during the piling
and substructure excavation works. The weak soil bearing does not provide good platform for
manoeuvre of heavily piling machine, thus change of pile installation method or downgrade the pile
capacity had disrupted the work progress and foundation excavation may cause damage to the
surrounding buildings. These extra workloads and unpredictable risks can easily cause overrun of
project budget.
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Some clients attempt to avoid responsibility for unexpected site conditions by including in the
contract exculpatory clauses disclaiming liability for the accuracy of site information presented in the
contract documents or in geotechnical report made reference to the contractor. If a dispute arises
between the client and contractor relating to differing site condition, the client may take necessary
action to complete the contract works on its own accordance to contract provision if the contractor
refuses or fails to execute the work. However, that it is generally more costly and troublesome for
client to hire a new contractor to complete the contract. It is thus more advisable and cost efficient for
client to defer the incomplete contract work and to be include it in another contract later.
2.2.8. Lack of Training on Contract Administration
The construction industry is considerably different from 20 years ago and training continues to evolve
rapidly in changing world to meet the competitive landscape. The construction industry cannot deliver
continuous improvement year on year without knowledge, emergence of new skills, technological
advance and research learning approach (Egan Report, 2003).
There is an urgent need for effective contract administration practice and training to mitigate the risks
associated with management of construction claims. One of the factors feeding the deficiency of
contract administration is that managers are not taught to lead the project teams so that the desired
project goals can be achieved through people. The people process is more important than either the
strategy or operations processes (Bossidy.L, Charan.R, 2002).
Training increases the likelihood that individuals will monitor contracts reliably by disseminate them
the appropriate background knowledge related to contracts administration works with practical
experience and skills through lecture, discussion/action learning approach. It is imperative that we
develop contract administration professionals by training them appropriately and adequately. There is
no better way to improve efficiency and profitability of the construction industry than develop a
coherent plan for addressing the challenges of training the professionals of the future.
2.2.9. Design Changes
Design changes are inevitable even though project was diligently planned due to complexity of
construction industry in relative of multiple stakeholders’ involvement, change of owner
requirements, errors and lack of coordination, unexpected condition, complicated design, meet higher
score in quality assessment, changes in statutory requirements and etc. (Serag.E, Oloufa.A, Malone.L,
Radwan.E, 2010).
Typically, the lead consultant is empowered by contractual provision to issue instruction for notifying
the contractor of any changes. The lead consultant may be an architect, an engineer or a project
manager. Change requests are named accordingly – architect’s instruction (AI), engineer’s instruction
(EI), project manager’s instruction (PMI).
Some changes in respect of constructability, interfacing of finishes, site adjustment and change of
alternative material due to shortage or long lead item may not have any impact on project timing or
cost. However, large number of changes can have major impact on labour productivity as well as
creating significant delays to the project. All of these changes must be proper documented and agreed
by client, project manager and stakeholders in some cases. After the client had approved the changes,
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the design team will revises the project documentation as needed, and then issues instruction to the
contractor as EI and AI.
For those changes likely to cause the contractor to incur additional cost or time which are deem to be
out of original scope of works, the contractor shall give written notice to contract administrator of his
intention to claim together with an initial estimate of his claim duly supported with all necessary
calculations. If the contractor fails to submit the required particulars within the stated time frame, in
some contract clause may deemed that the contractor has waived his rights to any of such additional
claims.
Therefore, the management of change control must be properly established which will be faced
through the project life cycle to minimize the number of changes, and ensure contract documents are
complete when a contract is signed.
2.2.10. Delay and Extension of Time (EOT)
There are many possible causes of delay to project during the implementation stage. It can be difficult
and time consuming to identify and assess the delay entitlement especially when the delay is involved
by multiple stakeholders. The poor strike rate in achieving extensions of time entitlements by
contractors may cause by the project staff that may be untrained in forensic analysis or programming
skill and further distraction in relative of over-loaded with site issues and other project pressures (
Haichen.T, 2013).
There are two common reasons why the contractor’s EOT application was rejected by contract
administrator. First, that activity is not a critical event, secondly contractor fails to submit a notice or
claim for an EOT commensurate with the notice requirements clause in the contract. Therefore, a time
extension claim should adequately establish in demonstrating the causation (cause-effect) of the
damages or disruption associated with time and cost implication (Hughes and Barber, 1992).
The process of identifying delay events is a fundamental aspect of delay analysis and the purpose of
delay analysis is to establish the factual matrix and chronology events which actually delayed the
work’s completion date.
Poor presentation of the claims that fails to show cause and effect may subject to high rejection rate
by consultant, therefore one of the most popular methods used for delay analysis is critical path
method (CPM) and total float management techniques. The CPM programme can be demonstrating
those events which actually contributed to critical delay to completion and those which may be
deemed merely concurrent events (Braimah and Ndekugri, 2009).
Each and every delay claim has it own life cycle. The various stages may be summarised as follows:
a) Baseline programme is established.
b) Project commences.
c) Deviation from baseline programme is identified.
d) Delay occurrence/ discovery.
e) Delay analysis.
f) Delay claim submission and presentation.
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g) Delay claim response.
h) Negotiations and award of appropriate extension of time.
i)
Revised baseline programme is established and agreed.
j)
Dispute resolution procedures if award is not agreed.
k) Delay claim resolution.
2.2.11. Compensation/ Loss and Expenses (L&E)
When there is disruption or delay in a construction project, it often leads to an extended contract
period and for prolongation costs to be claimed by its contractor, usually as additional Preliminaries,
which is essence of loss and/or expense claim provided under relevant clause of the standard forms of
construction contract (Jeffrey. C, 1995).
Many standard forms of building/construction contract allow L&E to be claimed by contractor and be
ascertained by the lead consultant for payment by the employer. For the L&E claim to be admissible,
it cannot be cause by the contractor’s own default or costs arising from indirect, remote, consequential
or contributory causes.
The contractor is usually entitled to claim for L&E suffered if the work is disrupted or delayed due to
certain specific cause or event stipulated in the contract. In addition, he can also claim for L&E
suffered resulting from the employer’s own breach of contract such as delay and/or non-payment,
wrongful termination of contract and etc.
In simple terms, L&E items may include the following;
a) Prolongation costs.
b) Disruption costs.
c) Additional preliminaries.
d) Overheads.
e) Profit.
f) Finance charges.
g) Other additional costs/expenses not reimbursable under the contract.
2.2.12. Default on Notice
All standard form of contracts frequently contains provisions in notice requirements for construction
claims such as extension of time, variation order, loss and expense and etc. This provision required
the contractor to serve a notice prior to the lead consultant granting the award (Robert.J.M, 2001).
It is common scenario in Malaysia’s construction disputes that contractors had failed to meet the
notice requirements, resulting the submitted claims were rejected by lead consultant. It is true that in
some of the standard form of contract which the service of a notice is not mandatory, meaning that
failure to serve the required notice per se will not deprive the contractor’s rightful entitlement.
However, PAM 2006 construing notices requirements as a condition precedent to any entitlement.
Such notice must be given within 28 days from the date of AI or the commencement of the relevant
event, if the contractor fails to submit required particulars within the stated time, it shall be deemed
that contractor has waived his rights for any of his claims. It may be interesting to note that Malaysian
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provision of Contracts Act 1950 section 29 maybe be defeat the notice requirements as condition
precedent.
In contrast to condition precedent, the prevention principle discourages such early resolution of delay
and disruption disputes (Hamish.L, 2002). For example, the Architect cannot prevent from granting
the delay claims award to contractor if the employer is found default and caused the arising of such
claims.
In modern procurement routes which the financial and contractual certainty is highly seek to allocate
risk. Hence, it is unfair to follow prevention principle to enable contractor simply miss the notice
requirements and assert his right to construction claims at time suitable to him due to his poor project
management. In this circumstance, it is very essential that notice requirements are uphold as condition
precedent and the contractor should fulfil his obligations commensurate with such notice
requirements.
2.2.13. Interim Payment
The construction industry is fragmented, very sensitive to economic cycles and highly competitive
because of the construction companies are consist of medium to small sized businesses with many
sole traders. The perfect competition through open tender is still the key factor for selecting the
winning contractor; lowest bid can put the contractors in a vulnerable and risky position.
Payment is lifeblood of the construction industry because constructions often involve very large
investment in fixed assets and take couples of years to complete. The interim payments available to
contractors and the credit term offer by subcontractors, suppliers and other creditors can reduce the
capital employed. Late or non-payment of interim payment to contractors has affected the
performance of contractors, causing project delays, compromised quality and making worse
contractors became insolvent and folded.
In general, lower profit margin and small fluctuation of working capital can place a construction
company in a vulnerable position. For example, a ten-day delay in interim payments, or undermeasurement of quantities by one per cent that is not corrected until the final account, eventually it
can reduce 25% of the return on a contractor’s total capital employed although the profit to turnover
ratio is unaffected.
In fact, Alaghbari et al. (2007) and Sam-Basivan and Soon (2007) both recognized that one of the
most significant factors causing delay in the Malaysian construction industry is either the delayed
progress payments or non-payment by the employers to the contractors. These include slowing down
their works, stop working, suspending the work and worst scenario abandon the project.
The major standard forms of construction contracts used in Malaysia contain provisions for payments
to be made against Interim Certificates issued within stipulated period by the lead consultant. It is to
alleviate deficit rate in contractor’s cash-flow which may affect the smooth operational of the project.
When the contractor does not receive any payment after 3 to 5 months the period of honouring
certificate, then the employer is considered to have delayed or non payment. In general principle, the
contractor has no legal right to suspend work due to non payment, same apply to employer. Therefore,
once the construction work was commencing, the contractor is contractually obligated to carry out the
work “regularly and diligently” until the project is completed.
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The PWD 203A Standard Form of Contract contains no expressed provision that allows the contractor
to suspend the works if his payment was unduly delayed or he is not receiving his payment at all.
However, the provision in PAM 2006 clause 30.7 and CIDB 2000 clause 42.10 permits the contractor
to suspend the progress of work if the contractor is faced with problem of delayed or non payment by
the employer. But the contractor requires to serve a written a notice to employer with reason to
suspend the works until the employer has paid the amount due to the contractor.
Under the new PAM Form of Contract 2006 Clause 30.17 and CIDB Form of Contract 2000 Clause
42.9(b), the contractor is given the right to claim for interest in case of late or non payment by the
employer. Unfortunately, there is no express provision in PWD203A of construction contract which
entitled the contractor to claim for interest due to late or non payment by the employer.
In April 2014, the promulgation of Construction Industry Payment and Adjudication Act (CIPAA) has
come into force to provide a legal mechanism in dealing with payment disputes resolution. With
CIPAA in force, all payment disputes can be resolved within 100 working days compared to the
traditional dispute resolution method which may take between 9 to 24 months or longer.
2.2.14. Staff Turnover
High turnover of staff can be extremely harmful to construction industry which is affecting
scheduling, productivity, client relationship and quality of client deliverables. In relative to
management of claims, it is not a simple straightforward task whereas the submission of claims
requires compilation of substantiate evidences and details.
Departure of key staff handling claims is being replaced by a novice who does not know the status of
the claims, unfamiliarity of procedures, loss of relevant documents and loss of opportunities to claim
invariably find themselves at the losing end as claimant against the opposing party who is well
prepared with substantiate documents. A high employee turnover rate definitely can affect the
performance of company especially due to limited resources, replacement cost and the investment in
employees (Haichen.T et al, 2013).
Poor succession management causes difficulty to the successor to understand the status of the claims
and time consume to re-investigate the chronology events prior decision is make, hence it may miss
either the deadlines or the opportunities to claim. It making worse when the company involve top
management turnover which may lead to greater turnover in relative to staff poaching by the
predecessor. This will further hinder and delay the administration works such as tender and award,
interim payment claim, confirmation on variation order, delay claims assessment, keeping progress up
to date, compilation of contemporaneous records and etc.
The human-related factors are the main concern to the success of projects and such as building team
spirit through mutual goals and objectives, continuously training and awareness to develop authentic
leadership, foster trust and commitment to improving the team relationship.
2.2.15. Third Party’s Access
Refusal of existing contractor to co-operate and grant access to third party’s contractor is a great
concern to the consultant and employer especially in mega project which involved several parcel of
works carried out by different contractors. This will result serious repercussions to the costs and
progress of works (Semple, Hartman, Jergeas, 1994).
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Therefore, it is important to include the relevant clause in the contract implied that contractors are
required to extend their cooperation and allow third party’s contractors appointed by employer to
carry out work within the site and no claim for extra cost shall be imposed on the ground of delay,
hindrance or obstruction of works.
The PAM 2006 clause 29 is allowing persons engaged by the employer to carry out their work even
not forming part of the main contract and the main contractor shall afford them all necessary facilities
and attendances. Impeding the contractor’s access to the project site will often result in construction
claims for both the time extension and prolongation cost.
It is very challenging in the context of project management when a development of large project was
subset into few work packages and sharing the same basement floors. The interfacing and
coordination works might become complicated where the M&E plant rooms of the individual building
components are also located at the same basements. The contractors must coordinate all aspects of the
construction work such as scheduling, safe work methods, sequence of works, procedures, protection
of works and etc for completing the entire project.
We are fully aware that the disputes arising out of site access between contractors are unavoidable
during project execution stage. Sometime it is a good sign for all parties to understand each other and
work hand in hand together to make things over, in order to achieve the ultimate organizational goal
and safeguard the employer’s interest. Generally, the contractor has the obligation to complete the
work in accordance with the contract documents and stipulated time frame. Failure to extend
cooperation by the contractors often results in a breach of the contract and resulting construction
claims.
2.2.16. High Expectation in Building Performances
High expectation in building performances and quality by owners are regarded as the most important
parameter affecting project complexity (Dave. M, 2013; Xia, Bo & Chan, Albert, 2011). The
building’s owners are become aware of the important of obtaining green building certification and
quality assessment to achieve sustainability, efficient, high performing, healthy, cost-effective
building and as a marketing tool to increase rental and selling price.
The most popular certification that available in Malaysia is Green Building Index (GBI), LEED,
Qlassic and Conquas 7th edition quality assessment. These requirements would constitute great
difficulty to the contractor. Firstly, the contractor may be unfamiliar with the design compliances
including producing all information and supporting documents. Secondly, the contractor may lack the
capability or resources to meet those requirements.
It is uncommon to include these extra demands in the provision of standard form of contract, whereas
in Malaysia’s industry practice it often stipulated the special owner requirements in the supplementary
clause. For example, the supplementary clause may stated:
The contractor shall use their best endeavour to score a minimum of x marks accordance with
the sampling and scoring evaluation method set up under CONQUAS 7th edition/
QLASSIC/GBI/LEED. The contractor shall be rewarded with a monetary incentive at y% of
the awarded contract sum if the contractor achieved x marks or more. In the event the
contractor failed to achieve the minimum x marks, a penalty amounting to z% of the contract
sum shall be imposed.
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Some of the contract may require contractors to achieve minimum score on quality assessment which
shall be assessed by the employer’s auditor as a condition for the acceptance of the works by
employer and for the issuance of Certificate of Practical Completion by the Architect.
2.2.17. Incomplete Contemporary Records and Documentation
Jergeas and Hartman (1994) stipulate that good record keeping is crucial in helping to avoid or
resolve claims. The contemporaneous evidences purported which operations were critical, which
activities had float, and which events are relevant when considering entitlement, concurrent delay and
compensation for delay damages. When the actual progress tracking record does not exist, then the
primary sources of site information are required for EOT submission includes the following:
a) Site diaries.
b) Clear of works records.
c) As-built drawings.
d) Photographs.
e) Daily inspection reports.
f) Valuations/application for payment/ invoices.
g) Material delivery notes and records.
h) Testing results or certifications.
i)
Timesheets or payroll records.
j)
Request for information or approvals.
k) Subcontractor reports.
l)
Meeting minutes.
m) Monthly progress report.
n) Instructions.
o) Job correspondence.
To be successful for the EOT early award and determination of entitlement, the contemporaneous
evidences and aforesaid primary information along the delay claim life cycle are very important
which can demonstrate which events were critical, which events were concurrent, how much time
each event contributed to the critical delay experienced, and when each event occurred and damages
resulting from the delay (Haidar. A, 2011).
2.2.18. Lack of Familiarity with the Conditions of Contract
Construction contract consists large amounts of documents including the procedures for producing
such documents, who is responsible for preparing such document, what to be included in the
document and when to submit the document.
The knowledge and familiarity with the condition of contract is essential to identify the rights and
obligations of the parties of the contract and in order to regulate the progress of the work and the
contract conditions to secure its entitlements related to claims. Failure to recognize events or
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instructions from the consultants will lead to additional expenses or delay which deprive the
contractor’s entitlement to claim (Vidogah and Ndekugri, 1998).
Lack of knowledge about the extent of authority of the consultants with regard to the types of
instruction that they can issue may cause contractor not to pay by employer. For instance, consultant
issue instruction to carry out defect remedy works which should fall under others contractor’s
obligation.
It is far more important for the players to understand and get familiar with the rules and regulations
before he or she could discover the probability of winning the game. As with many issues during
project life cycle, contractual claims arise are rarely the faults of one side only. The both contract
parties need to be familiar with specific business need and contractual term, so that they can negotiate
effectively and identify the risks in order to avoid potential costly mistakes. This is preferable to
pursue lengthy litigation disputes.
2.2.19. Failure to Keep an Up-to-date Programme
Work program is an integral part of project management process and will be monitored closely during
project life cycle. Construction projects need very careful and thorough planning before the actual
execution of the works and effective monitoring while the project is running (Toor and Ogunlana,
2009).
It is common in Malaysia that contractors will adopt Critical Path Method (CPM) to determine the
progress status of the project against the scheduled timeline. Inadequate planning will result in cost
overruns and unexpected delay. Therefore, the setting up of an effective project monitoring
mechanism by all project stakeholders is vital (Lim and Mohamed, 1999). Lacking in site planning
and proper project monitoring will resulting construction mistakes that could affect the profitability of
the project (Sambasivan and Soon, 2007).
Contractors should be conscious of their contractual requirement to update the construction schedule
should any remedial work be done which results in changes to the work and deviation of the contract
time, contractors should alert the consultant and employer the dates which the contractor may expect
on their decision and action.
Time impact analysis technique can be adopted in assessing the impact of the various delaying events,
it derived from the impact of each delaying event on the sectional completion dates taking into
account the progress of work at the particular point in time when the delaying event occurred.
Therefore, up-to-date programme are an important part of proving or refuting delay and other impact
claims because they provide a detailed medium for comparing and measuring time and intended
resources to match.
The time impact analysis involves insertion or addition of activities indicating delays or changes into
an updated programme representing progress up to the point when a delay event occurred to
determine the impact of those delay activities for its entitlement to both time and cost claims.
Failure of contractor to reflect the latest updated programme may cause complexity and extra duration
for consultant to award the application for extension of time and other claims. As such, ensuring
proper schedules is important evidence to any delay claim and
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It serves as an early warning signal to problems in the construction.
2.2.20. Challenges Posed by the Advancement in ICT
The rapid evolution of ICT in construction industry imply that it will not be possible to sustain as a
company just by working harder within the existing structures and using conventional practices and
tools. ICT has importance multipurpose power to offer resolution dealing with work complexity and
efficiency for all classes of work.
The web enabler project management and collaboration system not only adding value to the
organization in term of coordination, management, interoperability and production of works but also
to the whole supply chain and client in exchange of information across the project life cycle
(Haichen.T and Anumba.C, 2013).
In Malaysia, the idea to implement BIM was introduced by the Director of Public Works Department
(PWD) in 2007 and has set to implement BIM for their projects in 2016 to overcome construction
project problems such as delay, clash of design by different professionals and construction cost
overrun (Ismail et al, 2014). The first project in Malaysia that has successfully implemented BIM is
the Multipurpose Hall of University Tun Hussein Onn Malaysia and fully completed in 2012.
Based on the current practice of BIM in Malaysia construction project, the level of detail is attaining
to LOD300. Means, the contractor shall produce a building information model for the project within
stipulated time frame and shall use the model to monitor and update all construction issue drawings
and details, to coordinate drawings from all consultants to identify any technical, structural, MEP and
architectural discrepancies and clashes before construction and shall immediately offer solutions for
remedy.
The challenges posed by the advancement in ICT are:
a) Additional investment to provide adequate training to operate the ICT system.
b) Additional investment on software and system support.
c) Additional investment to upgrade the existing computer hardware.
d) Lack of top management support.
e) Unexpected variation cost due to excessive change of design.
f) Legal requirements on organisations to hold and control the information.
2.2.21. Lack of IT Supporting in Managing the Claims
Effective IT supporting system is seem to be the ideal solution for management of claims in dealing
with large volume of information in a variety of formats and some practical deficiencies such as high
workload, inexperience, unfamiliar with the conditions of the contract, departure of key personnel
handling claims and the loss of relevant critical documents or information (HC.Tan, Anumba.C,
2013).
Despite the technology advance in ICT can improve performances and customer satisfaction in today
modern business. However, the construction industry in Malaysia is slower uptake compare with other
sectors which most parts of the documentation of claims are still done in manually using spread sheet
and compilation with other contemporaneous records.
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The traditional approach of managing claims submission is inefficient, slow and unsecure, such as
spending unnecessary time and money for document filling, retrieving right information, allocate
missing documents and searching information. If the accurate information doesn’t get to the right
person when he/she is needed, the disputing parties may often find themselves at the losing end and
resulting unexpected things occur such as mistake, budget busted, deadline blown, losing of case,
finger pointed and etc.
Retrieving the right information that you need for report and decision making is a key to good project
management and minimize the risk of disputes.
2.2.22. Poor Quality and Defects
The employers are often frustrated by hefty defects which appeared in the completed either building
or infrastructure works due to shoddy workmanship by the contractors. In construction industry terms,
a defect would be defined as the completed work did not complied to specification or otherwise did
not meet its functionality requirements inferred by the contract.
Sometimes, defects are difficult to define the line between design responsibility and poor
workmanship due to incomplete material and workmanship specifications in the contract documents.
(JUBM & DLS, 2010). The defects discovered by the respective consultants must be administer
properly, usually through the issuance of a Non-conformance Report (NCR) to follow up on next
course of action in making good the defects within the stipulated time. The certificate of practical
completion (CPC) shall not be issued without all NCRs are closed.
The CIDB 2000 and PAM 2006 forms of contract empower the contract administrator to specify the
time which the contractor is required to comply with the instruction to carry out remedy work.
Otherwise, the employer is entitled to recover damages for defective works occurring during the
construction period as it is still a breach of contract.
If the contractor fails to remedy the defects, the employer may claim for:
a) Cost of remedy works which is deemed to be reasonable.
b) Diminution of value commensurate with the cost of rectify the defects, however it may
disproportionate to client’s reputation and value of the property.
c) Consequential damage as a result of the defective work such as claims for economic loss due to
disruption of business resulting from the need to carry out remedial work by the contractor.
Defective works whether it is non-compliance or poor workmanship, must be managed promptly and
decisively. Prevention is obviously better than cure and this is best achieved through stringent quality
assurance and quality control procedures.
2.2.23. Trade Guarantee, Warranty and Indemnity
The term of warranty, guarantee, indemnity, defect liability and performance guarantee are often
express or implied in writing and bind in an agreement by one person or company to another person
or company under standard form of contract. This to ensure the relevant parties to be liable for
contract performance, loss and/or damage, good workmanship, quality, fit for the purpose or
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functionality, warranty period and goods or the work delivered shall meet project specification
(John.V and Arjan.V, 2014).
A guarantee must be in writing and may be issued for one contract only which is usually to pay a sum
of money equal to 5% of the contract price or a form of bank guarantee. The employer may draw the
guarantee under the bank if the contractor fails to execute or finalize a contract’s works. However, it
is none of bank’s business to discuss about the contractor’s defaults. When the employer is doubt on
the financial capacity of the local subsidiary, then the parent company guarantee should come into
force and the provision clause must be stated in the agreement to avoid future dispute. In today
Malaysia’s construction projects, there are many materials and building component system is supply
and install by China’s company. Pursuant to Law of People’s Republic of China Article 22 of the
Rules states that if the guarantor is a non-financial enterprise legal person, the outstanding amount
under security to other parties may not exceed 50% of its net assets and may not exceed its foreign
exchange revenue of the preceding year. Failure to issue parent guaranty, it may lead to breach of
contract and eventually determination of the contract.
Warranties can be explicit or implicit written down in contract that relates to a contractor’s obligation
in respect of materials or work executed accordance to specified requirements and performance.
Contractor need to be careful in accepting warranty clauses that go far beyond what commonly is
offer by specialist trade of works. Acceptance of the specific warranty beyond contractor’s capacity
during the negotiations of the main contract, obviously lies at the heart of the problems that appeared
later during project execution. Therefore, if a warranty for material or good performance is violated
during warranty period, the contractor should honour the warranty by making good defect or replace
the sub-standard quality to avoid claim deduction during interim payment or final account.
For certain of the work, the contractor may be required to and often does obtain extended warranties.
Some typical works which have extended warranties include:
Architectural work;
a) Fluid applied waterproofing;
b) Air barrier membrane;
c) Roofing and sheet metal;
d) Aluminum skylights;
e) Glass canopies;
f) Structural glass wall system; Aluminum windows;
g) Wood doors;
h) Finish hardware;
i)
Aluminum curtain wall;
j)
Insulated sealed glass units;
k) Carpeting;
l)
Seamless elastomeric flooring;
m) Painting;
n) Chalkboards and tackboards; and
Page | 24
o) Dock lift
2.2.24. Final Account and Certificate
The contractor should prepare the final account for construction project to show the final cost of a
project that has been completed (Wood et al. 1963).
Most of the standard forms of contract in Malaysia contain provisions relating to final account which
the contract administrator is obliged in closing the final account and issue a final payment certificate
to the contractor within a stipulate time period after receipt of the contractor’s final account statement
including all supporting documents relating to the account, details of all quantities, pricing, any
adjustment of the contract sum and additional payment or compensation claims by the contractor.
There are a lot of problems facing by Malaysia construction industry especially during the closing of
final accounts, among the factors contribute to the failure of final account closing are duplication of
work, lengthy approval and work time, lack of transparency and surging costs (CIDB, 2011).
On the other hand, the factors that caused problem in final account closing can be divided into three
groups, which are contractor-related factors, client-related factors and contractual matters-related
factors (Zarabizan.Z, Syuhaida.I, Aminah. M.Y, 2013). Among the causes of problems in final
account closing which is shown as below:a) Contractor’s delay in submitting claims.
b) Contractor’s failure to follow procedure as stipulated in the contract agreement.
c) Contractors submit claims with mistake.
d) Contractors submit claims with incomplete supporting documents.
e) Contractor’s failure to understand contract agreement.
f) Contractor’s outstanding defect works.
g) Consultants take longer time to certify the claim.
h) Client’s poor financial management.
i)
Client’s poor financial sources.
j)
Client’s unethical employees such as wrongfully withholding the payment.
k) Client’s delay in certification.
l)
Departure of key personal who handling the claims.
m) Rationalisation of rates (work price changes).
n) Lack of communication.
o) The use of pay when paid clauses.
p) Contract used are not comprehensive enough in term of payments.
q) Contract used are too complicated to be understood by both parties.
r) Contract bias to one party.
The process of final account seems to be easier said than done, many potential loose ends are implied
by those document and submittal requirements. All parties should read the contract and comply with
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what is specified, try to understand the other party's perspective and devise a win-win approach to
clear up the paperwork and potential claim situation so that project can be closed out smoothly.
2.2.25. Liquidated Damages
Most standard form of contracts make provision for a reasonable pre-estimate amount of Liquidated
Damages (LD) the employer is likely to incur which is to be paid by the contractor in the event of late
completion.
The lead consultant shall issue a Certificate of Non-Completion (CNC) if the contractor fails to
complete the contract works by the completion date. Consequently, the employer may recover the
sum of LD as a debt or deduct the sum from monies due or recover such sum from the Performance
Bond for the period from completion date to the date of practical completion even though in the event
employer has suffered no loss. If consultant fails to issue proper CNC, employer will lose the right to
deduct LD.
In the event the certificate of EOT is granted by consultant which is later than the dated stated in a
CNC previously issued, such certificate shall have the effect of revoking the CNC earlier issued. The
employer shall then revise the amount of LD he is entitled to retain or repay the surplus amount to the
contractor in the event that amount of LD retained exceeds the amount is entitled to retain.
There are number of grounds for which a LD clause may be held to be unenforceable, including
ambiguity, their penal nature and employer who cause delay to completion and failure to comply with
contractual procedures (Haidar. A, 2011).
When the contractor is argue that the main contract LD are extremely high and the sum involved was
outside his contemplation and the available working capital may not allow him to complete his works,
severe consequences may invariably lead to stop work and insolvency. However, as a matter of goodfaith and in the interest of the project, employer may agreeable to defer the deduction of LD at this
juncture and to be reviewing it upon the completion of the project. This is win-win approach for both
party to minimize the un-liquidated damages and tarnished the reputation of the company image.
2.3. Research Methodology
This research will attempt to identify the issues and new challenges of construction claim process in
Malaysia to facilitate a better decision making. This research process generally consists of four stages
i.e. Stage 1: literature review and exploratory interview, Stage 2: construct questionnaire, Stage 3:
data collection and analysis and Stage 4: write up and conclusion.
This exploration has achieved through unstructured interviews with professional practitioners in
different disciplines such as client’s project manager, architect, engineers (C&S and M&E) and
contractor in order to strengthen and verify the research area in local industry such as diagnosing a
situation, screening alternatives and discovering new ideas (Zikmund, 1997). The three experts
interview consist of chartered quantity surveyor who more than 20 years working experience in the
industry, Architect who serve as Superintendent Officer and has been practicing more than 20 years
and project manager of contracting firm who has more than 20 years in building construction.
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They were asked about three key areas such as what are the practices of today construction claims
management system, key issues and challenges faced in the management of construction claims and
adoption of ICT supporting system in claims management.
The questionnaire survey is the most viable quantitative data based approach to collect wide range of
data based on limited time frame, budget and manpower for analysis with statistical procedures
(Moore, 2000). Approximately 200 responses have been collected from varies discipline use for this
research to determine the facts of the hypothesis.
Likert scale self-administered questionnaire is selected to obtain level of agreement or disagreement
of respondent on the questions related to potential key issues and new challenges faced in the
management of claims in construction project during pre-construction stage, construction stage and
post-construction stage.
The questionnaires were sent to four target population groups in the Malaysian construction industry
namely developer, consultants, contractors and material suppliers who involved with construction
claims.
The stratified random sampling method (Grady et al, 2008) was used to divide the population into
subgroups before sampling. This type of sampling design can result smaller error in estimation.
The samples of population were mostly selected from Klang Valley area (metropolitan area) because
these areas have the largest groups of construction professionals and contractors registered and their
topographic standing as the country’s commercial hub. Furthermore, 52 percent of total adjudication
disputes were registered in states of Selangor and Kuala Lumpur.
The selection of experienced professional consultants as respondents such as Architect, Engineers and
Quantity Surveyor who has been involved as the assessor of construction claims for their respective
expertise. Meanwhile, the target populations for the contractors were those registered under the G7
category of the Construction Industry Development Board (CIDB) which is expected that their
projects would be more exposed to construction claims and disputes compared to the other contractor
categories.
2.4. Result and Analysis
2.4.1. Response Rate
A total of 531 questionnaires were sent to different target groups through several social media such as
email, whatsapp, linkedin, facebook as well as distribute hardcopy during seminar. After several
attempts to get respondents to respond to the survey, including follow-up calls and a reminder through
email, only 216 responses were received, giving a response rate of 40.7%.
The response rate of 40.7% is above the acceptable rate in the construction industry for postal
questionnaires which is around 20-30%. The questionnaire survey conducted by Adnan and Morledge
(2003) for Joint Venture projects in Malaysia received a 20% response rate, Ofori and Chan (2001)
received a 26% response rate, Vidogah and Ndekugri (1998) received a 27% response rate and so
forth.
Although the total 45 questions might not fully cover all the issues faced in the management of
claims, however these questions are essential to capture most common areas and heads of claims
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involved in Malaysia. Moreover, these questionnaires were completed by various professional project
stakeholders in Malaysia, hence it implied that the responses are representative.
2.4.2. Ranking of Attributes
The total 45 key issues faced in the management of claims were examined and the ranking of the
attributes in terms of their criticality as perceived by the respondents was done by use of Relative
Importance Index (RII) and Mean which are presented in Table 4. Out of 45 items, 42 items means
were more than 3.00 which are skewed toward agree category. 6 issues were rated as very critical by
the respondents. There were: familiarity with contract condition (overall mean value = 4.211),
incomplete tender document (overall mean value = 4.201), , keep up-to-date programme (overall
mean value = 4.201), design changes (variation order) (overall mean value = 4.069), competency of
project stakeholders (overall mean value = 4.023) and take longer time for closing final account
(overall mean value = 4.000). The remaining 36 issues were also significant and rated as critical with
mean scores in the range of 3.000 to 3.991. The least critical issues were adopting BIM to resolve
technical issues (overall mean value = 2.823) and company facing high turnover of staff (overall mean
value = 2.819).
Table 4 : Issues faced in the management of claims ranked by RII and Mean score.
Rank
Issues Faced in Management of Claims
RII
Mean
1
Familiarity with contract condition
0.842
4.211
2
Incomplete tender documents
0.840
4.201
3
Keep up-to-date programme
0.840
4.201
4
Design changes (Variation Order)
0.814
4.069
5
Competency of project stakeholders
0.805
4.023
6
Take longer time for closing final account
0.800
4.000
7
Inability to recognize event
0.798
3.991
8
Lack of contract awareness
0.795
3.977
9
Unforeseen actual site condition
0.794
3.972
10
Under estimate budget by project client
0.787
3.935
11
Under estimate pricing by contractor
0.770
3.851
12
Project client take longer approval time for design
documents
0.762
3.810
13
Incomplete contemporaneous records
0.757
3.786
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14
Advancement in ICT adding value in management of
claims
0.748
3.739
15
Outstanding defects
0.745
3.726
16
Lack of competent in-house contract manager
0.739
3.696
17
Delay final payment caused by contractor
0.735
3.673
18
Inadequate information to substantiate the claims
0.734
3.671
19
Late or non payment
0.733
3.667
20
Poor presentation of claims
0.731
3.657
21
Late award of work packages
0.726
3.628
22
Delay final payment caused by client
0.722
3.611
23
Not enough time to prepare tender documents
0.721
3.606
24
Company establish good document filling system
0.719
3.596
25
High turnover of staff delay contract administration
works
0.710
3.551
26
Contractor fails to give written notice regards the
intention to claim
0.704
3.519
27
Inability to quantify items in claims
0.702
3.512
28
Contractor waiving contractual rights to claim
0.698
3.488
29
Late of site possession
0.694
3.472
30
High expectation in building performances add
complexity in contract
0.693
3.467
31
Delay of final payment caused by contractual matters
0.692
3.458
32
Claims for diminution of value always greater than cost
remedying defects
0.687
3.433
33
Failure to extend cooperation by contractor for third
party’s access
0.672
3.358
34
Shorthanded with compilation of contemporaneous
records
0.671
3.361
35
Client’s intervention in approval of claims
0.666
3.330
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36
Liquidated damages enforceable caused by contractor
0.664
3.323
37
Trade guarantee and warranty
0.661
3.304
38
Adopting IT system for documentation
0.661
3.302
39
Client’s intervention in quantum of claims
0.645
3.225
40
Provide sufficient training in contract administration
0.638
3.191
41
Liquidated damages enforceable caused by consultant
0.627
3.135
42
Current work programme is out-of-date
0.604
3.019
43
Liquidated damages enforceable caused by client
0.597
2.986
44
Adopting BIM to resolve technical issues
0.565
2.823
45
Company facing high turnover of staff
0.564
2.819
2.4.3. Exploratory Factor Analysis
Principal component analysis (PCA) was chosen as a method of data reduction towards the 45 items
with oblique rotation (direct oblimin) using SPSS programme. Two statistical tests are required to
perform prior to this PCA namely Kaiser-Meyer-Olkin (KMO) and Bartlett’s test of sphericity. The
KMO value was 0.791, substantially exceeding the recommended value of 0.6 (Tabachnick & Fidell
2013), while the Bartlett’s test was significant 0.000 which is less than 0.05. Hence, the data set is
valid and supported the suitability of PCA.
An initial analysis was run to obtain eigenvalues for each factor in the data. Eight factors had
eigenvalues over Kaiser’s criterion of 1 and in combination explained 62.71% of the variance. The
component correlation matrix denoted variables correlating range from 0.03 to 0.27, thus no
multicollinearity was detected. Therefore, the extracted factors are significant in this study. It can be
used to represent the latent factors within the various variables based on their similar characteristics
(Hsia et al, 2009).
The details of the extracted eight factors, their factor loading, percentage of variance explanations and
the variance cumulative percentage are shown in Table 5.
Table 5 : Critical factors faced in the management of claims for construction project.
Factor
Factor
loading
Factor 1 : Record Keeping
Unforeseen actual site condition
Percentage of
variance
explained
Cumulative
percentage of
variance
23.84
23.84
0.468
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Incomplete contemporaneous records
0.672
Familiarity with contract condition
0.648
Keep up-to-date programme
0.588
Factor 2 : Contractual Risks
Trade guarantee and warranty
0.383
Liquidated damages enforceable caused by
client
0.758
Liquidated damages enforceable caused by
consultant
0.805
Contractor waiving contractual rights
0.622
Factor 3 : Training & ICT System Support
Provide sufficient training in contract
administration
0.697
Adopting IT system for documentation
0.746
Company establish good document filling
system
0.777
Adopting BIM to resolve technical issues
0.672
Factor 4 : Client Intervention
Client intervention in approval of claims
0.920
Client intervention in quantum of claims
0.937
Factor 5 : High Turnover of Staff
High turnover of staff delay the contract
administration works
0.717
Company facing high turnover of staff which
is affecting claims progress
0.730
7.631
31.471
6.642
38.113
6.165
44.278
5.653
49.931
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Factor 6 : Lack of Contractual Knowledge
Inability to recognise event
0.689
Lack of contract awareness
0.781
Inability to quantify items in claims
0.611
Inadequate information to substantiate claims
0.484
Factor 7 : Contract Close Out
Take longer time for closing final account
0.440
Delay of final payment caused by client
0.758
Delay of final payment caused by contractual
matters
0.782
Factor 8: Administrative Support
Lack of competent in-house contract manager
0.594
Third party’s access
0.622
High expectation in building performance
0.408
Advancement in ICT supporting system
0.759
4.784
54.715
4.163
58.878
3.827
62.705
2.5. Discussion of Result
Common claims and disputes in construction contracts is a serious problem in Malaysia construction
industry. Total value of claims registered under adjudication procedures from 15/4/14 to 12/6/15 is
RM 335,571,614.12 (statistics from KLRCA). It is very costly for both employers and contractors in
term of time and monetary to resolve the contract disputes through legal dispute resolution option.
Furthermore, disputes arise are rarely the faults of one side only.
Therefore, determining the factors that cause construction claims is essential to mitigate the
contractual risks as timeless motto prevention better than cure is always applicable in dispute
resolution. Perhaps some industry training and continuous professional development could assist
further development of related skills, knowledge and competency in the workforce to address the
identified issues. There are eight factors extracted from this research finding.
2.5.1. Factor 1 : Record Keeping
Continuous attention to improving contract knowledge, skills and know-how is essential in adding
value to management of construction claims. 78.3% of respondents agreed that the higher competency
of project stakeholders in contract knowledge will invariably result in better quality project output.
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In attempt to avoid contract disputes for unforeseen actual site conditions, the person who possesses
knowledge and experience could obtain accurate information instead of concealment of site
information and make timely decision to mitigate the risks relating to unanticipated cost and time.
This could avoid the long procedural process to resolve the dispute that might disrupted the work
progress.
The contemporaneous records were critical for claims submission especially for extension of time.
These records can demonstrate how the chronology events occur, how much time each event
contributed to the critical delay experienced and the actions you take to control the project.
It is crucial for each of the contracting parties to understand the condition of contract with regard to
familiarity with the time, rights and substance of each provision in order to regulate the progress of
the work and to secure its entitlements related to claims. 84.2% of respondents acknowledged the
important of the contracting parties acquiring knowledge and contract understanding to place
themselves in the best position regarding protecting their interest to any claims, so that they can
negotiate effectively the risks in attempt to avoid potential costly mistake.
Keeping an up-to-date programme is important evidence to facilitate more effective assessment for
any delay claims because accurate progress and programme records can assist contemporaneous
assessment in cause and effect of project changes and they provide a detailed medium for comparing
and measuring time and intended resources to match. Besides, keeping an approved up-to-date
programme is essential to any disputes in relation either to approval or proceeding to whatever dispute
resolution procedure as stipulated in contract.
2.5.2. Factor 2: Contractual Risks
The industry should understand the nature of dispute cycle and take prevention measures to assist the
contracting parties in avoiding contract dispute claims before they escalate to arbitration or litigation.
The effective contract risk management should perform in the first place to avoid such costly
expenditures involved in construction claims.
42.6% of respondents agreed that trade guarantee and warranty are often become issues in
construction claims. The contracting parties onus to understand the term of warranty, guarantee,
indemnity, defect liability and performance guarantee that express or implied in written contract prior
signing. This to mitigate contract risks in related to contract performance, loss and/or damage, shoddy
workmanship, quality, fit for the purpose or functionality, warranty period and goods or the work
delivered shall meet project specification.
There are number of grounds for which a liquidated damages clause may be held to be unenforceable,
including ambiguity, their penal nature and consultant who cause delay to completion and failure to
comply with contractual procedures. Most of the respondents are standing neutral which liquidated
damages are held enforceable caused by clients and consultants.
The contractor should take extra caution prior entering the main contract especially the liquidated
damages amount is extremely high and the sum involved was outside his contemplation and the
available working capital may not allow him to complete his works, severe consequences may
invariably lead to stop work and insolvency.
The contractor should establish an effective claim management system to prevent the loss of any
contractual rights relating to notices provision. However, 53.7% of the respondents reckon that their
Page | 33
contractual rights to claim might waived voluntary due to fear of bruising business relations with the
employer or consultants.
2.5.3. Factor 3: Training and ICT System Support
The people process is more important than either the strategy or operations processes, therefore
develop a coherent plan for addressing the challenges of training the professionals of the future is
important to improve efficiency and profitability of the construction industry. However, 27.3% of the
respondents express that their company do not provide sufficient contract administration training
associated with management of construction claims to them. Hence, there is an urgent need to further
disseminate them with formal education/training to boost their levels of confidence and enabled them
to better discharge their duties.
Most of the respondents agreed that effective IT supporting system is seem to be the ideal solution for
management of claims in dealing with large volume of information in a variety of formats.
Furthermore, most of them have established a good document filling system, so that they can retrieve
important information instantly.
Despite the technology advance in ICT can improve performances and customer satisfaction in today
modern business. However, the construction industry in Malaysia is slower uptake especially in
adopting of BIM to resolve the technical issues. Only 28.7% of respondents are adopting BIM for
their project.
2.5.4. Factor 4: Client Intervention
Most of the respondents reckoned that client intervened in decision pertaining to the approval and
quantum of claims. This could be the reason for delay and disruption towards the end of a project
when large volume of documentation and claims submission which contractually required approval
from project client has been exceeded the stipulated time limit. Furthermore, many of comments on
design documents made by client were invalid, serving no valid design purpose but slowing down the
design process as the comments had to be answered and the documents re-entered into the approval
process.
2.5.5. Factor 5: High Turnover of Staff
55.6% of respondents agreed that high turnover of staff can be extremely harmful to construction
industry which may delay the contract administration works such as award, miss the deadlines or
opportunities to claim, quality of client deliverables and etc. 28.2% of respondents acknowledged that
their company is facing high turnover of staff which is affecting the claims progress. Departure of key
staff handling claims is being replaced by a novice who does not know the status of the claims,
unfamiliarity of procedures, loss of relevant documents and loss of opportunities to claim invariably
affect the performance of company especially due to limited resources, replacement cost and the
investment in employees.
2.5.6. Factor 6: Lack of Contractual Knowledge
The submission of claims is easier said than done, it required substantiating with certain details,
some formal procedures to be complied and needs to be submitted within stipulated time frame.
78.7% of respondents agreed that inability to recognize events or instructions from consultants will
leads to additional expenses or delay.
Page | 34
76.9% of respondents agreed that ost of the project’s site tea carry out field ork ithout
carefully reading the contract documents. This lacking in contract awareness often leads to
substantial profit erosion.
During the verification of claims, 52.3% of respondents found that claimants are inability to quantify
items in claim with precision for instance the EOT claims, the project staff that may be untrained in
forensic analysis or programming skill is fails to demonstrate the cause and effect of the damages
associated with time and cost implication. 59.2% of respondents agreed that most of the submission
is inadequate information to substantiate the claims; this could be caused by lack of knowledge on
how to compile the claims.
2.5.7. Factor 7: Contract Close Out
There are a lot of problems facing by Malaysia construction industry especially during the closing of
final accounts, 73.6% of respondents agreed that closing of final account is always take longer time
than stipulated in the contract provision.
There are many factors contribute to the failure of final account closing, 61.2% of respondents
agreed that delay of final payment certificate is often caused by contractor related factors such as
incomplete details in quantities and pricing, mistakes, delay in submission, failure to follow
procedures and etc. Whilst 58.3% of respondents agreed that delay of final account is often caused
by client related factors such as poor financial sources, wrongful withheld payment, departure of key
staff who handling claims and etc. 48.7% of respondents agreed that contractual matters such as pay
when paid clauses, contract bias to one party, ambiguous of payment term and etc. also among the
factors causing problem in final account closing.
There are many potential loose ends in the process of final account, therefore the contracting
parties should clearly specify in a separate section what is required to meet substantial performance
and all of the documentation that required for contract closeout.
2.5.8. Factor 8: Administrative Support
Administrative support is vital interest in all aspect of company operation includes human resources,
welfare, social facilities, wages, records, technology, education and training.
61.1% of respondents agreed that lack of competent of in-house contract manager is a significant
issue faced in the management of claims. His roles and responsibilities are important to develop and
implement procedures for contract management and administration to mitigate the risks associated
with management of construction claims.
The contractor’s ad i istrati e support to co-operate a d gra t access to third party’s co tractor is
a great concern to the consultant and employer especially in the project which involved several
parcel of works carried out by different contractors to avoid any claims related to disruption of work
progress.
High expectation in building performance and quality by owners will add complexity on contract
administration works. Most of the respondents were rated this as significant issue (total mean value
= 3.467). The contractor may needs to obtain administrative support such as increase resources and
Page | 35
training to facilitate the design compliances including producing all information and supporting
documents to meet those requirements.
The growth of ICT in recent years is becoming importance to offer technical resolution dealing with
work complexity and efficiency for all classes of construction work. 62% of respondents agreed that
advancement in ICT supporting system adding value in dealing with management of claims. The
company strategy and administration procedures must be properly set up in dealing with the
licensed software and IT products to provide reliable data protection for all aspects of the co pa y’s
business.
2.6. Conclusion and Recommendations
2.6.1. Conclusion
The management of construction claims is become greatest challenge today which large employers
and clients today use complex contracts to create maximum value for money and mitigate risks related
to their investments. There are many complex reasons that causing difficulty in reaching amicable
settlements, among the common areas and heads of claim in Malaysia are payments, variation orders,
determination of employment, completion issues, defects, direct loss and expense, bonds, guarantees
and warranty, delay and extension of time, damages and liquidated damages (Ir. Harbans Singh,
2015).
In addressing the issues faced in the management of claims for construction projects in Malaysia, the
construction professional bodies are too emphasized in disseminate the training courses in related to
alternative dispute resolution (ADR) methods such as negotiation, mediation, adjudication, arbitration
and litigation to resolve the construction claims and dispute cases. Whereas, the industry needs to take
radical change rather than provide latest approaches to resolving contractual disputes it is facing.
Therefore, prevention is obviously better than cure, early identify the key issues and determine
appropriate actions are very crucial in order to implement a strategy within claims management
system to avoid unnecessary and costly investigations related to claim.
For this purpose, a research study through an extensive review of literature and industry questionnaire
survey has accomplished a comprehensive analysis and identification of the essential variables faced
in the management of claims. Eight significant issues that faced in the management of claims for
construction projects are identified as outlined below:
1) Record keeping.
2) Contractual risks.
3) Training and ICT system support.
4) Client intervention.
5) High turnover of staff.
6) Lack of contractual knowledge.
7) Contract close out.
8) Administrative support.
It is not surprising that the identified eight issues are caused by human process related factors. With
these facts in mind, we can confidently believe that the claim management system per se is not
fundamentally flawed. Therefore, review and improve the current tools and systems is not priority,
Page | 36
whereas we should asserting on how to implement the claim management system within the
operational level so that it aligned with project strategic level concerning the integration and
organisation aspects. Furthermore, in acquiring an appropriate skills and contract knowledge is still
vital for fostering general aware of contract traps and pitfalls that can occur and how to avoid them.
Such an approach will enable more effective and responsive mitigation strategies to be made prior the
adversarial effects of contract disputes can fully manifest themselves, subsequently reduce the amount
of resource expended on the assessment of claims for determining the entitlement and culpability.
These will also reducing the likelihood of contract parties pursue the dispute through arbitration or
litigation by agrees cause and effect on unequivocal evidence at a much earlier stage.
2.6.2. Recommendations
The construction claims that have resulted in arbitration or litigation are often a costly process.
Fostering effective risk management for avoidance of claims is the most recommended steps in the
first place for improving the construction industry against fragmentation and moving toward
collaboration.
For the purpose of actualizing the aim at assisting construction practitioners to be more effective in
dealing with the management of claims in construction project, the following recommendations are
made to develop good practices and solutions.
1) Establish a project record keeping system accordance to particular contract condition and assign a
person who is responsible for their completion. These records are those important in the
assessment of construction claims such as daily report, progress report, meeting minutes, updated
programme and etc.
2) The people process is more important than either the strategy or operations processes. Therefore,
project client should provide effective contract administration practice and training to the project
team to mitigate the risks associated with management of construction claims.
3) Project client should inquire about the contractor’s knowledge and experiences prior entering into
a contract with that contractor. If the contractor is knowledgeable and skilled, the client may
ultimately save on the contract price by assuming more risk under the contract.
4) Fostering strategic alliances and partnerships approach to establish medium to long term
relationships between clients and their suppliers in order to improve trust between the parties and
reduce contractual risks. Good project management practices should avoid a blame culture,
developing collaborative relationships, accept collective responsibility for risk and avoid win-lose
scenarios.
5) The advancement of building information modelling (BIM) expanding it application to dispute
resolution. Adopting of BIM is a new trend in engineering and construction which is changing a
new way to designing, pricing, constructing, and maintaining buildings. The integrated project
delivery (IPD) approach is expected to inspire the global engineering and construction market to
develop a proper framework for regulating BIM application, meanwhile promoting collaboration
and prevent disputes associated with this application.
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6) Client should aware that changes to the contract work increase the risk of construction claims and
decrease productivity. Furthermore, client’s intervention in decision pertaining to the approval
and quantum of claims could be the reason for delay and disruption towards the end of a project.
Therefore, client should ensure that a project is well planned from the outset to minimize the need
for change orders or change directives.
7) Employer must give attention to the level of motivation of its project team and commitment to
people for both the tangible and psychological rewards in respect of fair wages, job security, work
environment, safety and health, achievement, recognition, training and learning opportunity.
These could encourage the project team to direct their effort towards the successful attainment of
the objectives of the organisation and avoid high turnover of staff that could cause vulnerable
condition to project delivery.
8) Outline the project closeout process unequivocally in flow chart format for easy understanding by
all contract parties in term of whose responsible to obtain certificate of completion and
compliance from relevant local authorities, defect list that appear as per inspection with employer
and contractor, submission of O&M manual and training manual, final testing and commission of
various system, as-built drawings endorsed by professional engineer and etc. Upon satisfactory
compliance of the above, CPC from the Employer will be secured for the works at the end of
contract period and eventually project closeout with final account.
9) Client needs a clear direction and impetus for change to improve the construction industry by
defining the integrated project process. Client should try to hire consultants, contractors and key
suppliers with whom they have a good relationship and who have a good reputation in the
industry, so that their skills and knowledge input can be contribute earlier during planning and
design stage of the project. Each of project stakeholders should understand their duties and
obligations under the contract and share equal responsibilities to resolve problems together in
order to attain mutual common goals. Each party should ensure proper management and
administration of the project, including proper and adequate staffing and permit synergy benefits
through project collaboration.
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