A

rticle

Your Contractual Questions Answered

Must The Contractor Submit His Interim Payment Claims Before The Superintending Officer Certifies For Payment?
By The Entrusty Group Entrusty Group, a multi-displinary group of companies, of which, one of their specialisation is in project, commercial and contractual management, has been running a regular contractual questions and answers section for Master Builders members in the Master Builders Journal. In this instalment of this series, Entrusty Group will provide the answer to another frequently asked question above.

ayments are of major concern to Contractors and Employers. As the duration of the construction projects are usually long, contract sums involved are large and payments are only progressively paid rather then on delivery, thus the payments are lifeblood of the Construction Industry. In common law and in the absence of any provision in the contract for interim payments during the progress of work, the Contractor would not be entitled to such payment for his work done progressively unless he has fully or substantially completed his contracted work. Nevertheless, in the present construction industry, almost all construction contracts have claims or payment application and certification provisions, which are usually applied and implemented on monthly or stage payment basis. Interim or progress payment claims are usually prepared by the Contractor and submitted to the Consulting Quantity Surveyor for valuation, which in turn is then submitted to the Architect/Engineer/ Superintending Officer (SO)/Project Director (PD) for certification. The Employer is required to pay within a specified period after having received the said interim payment certificate

from the Architect/Engineer/SO/PD, who usually acts as the Contract Administrator of the project. Before we go further to answering the above question, let us look into the standard form of contract provision for interim payment applications that is commonly used in the Malaysian Construction Industry.

Standard Forms of Construction Contract

Many standard forms of construction contract in Malaysia provide for payment application and certification clauses. The relevant payment clauses in respect of the various conditions of contract in use in Malaysia are: PAM 1998 and PAM 2006 Clause 30 Certificate and Payment (refer to Flow Chart 1 for PAM 1998 and Flow Chart 2 for PAM 2006) IEM/JKR Clause 47 Payment to Contractor and Interim Certificates (refer to Flow Chart 3 for IEM and Flow Chart 4 for JKR) CIDB Clause 42 Payment (refer to Flow Chart 5) JKR PWD Form DB/T (2002 Edition) Clause 50 Interim Payment (refer to Flow Chart 6)

PAM 1998 Sub-Clause 30.2 and PAM 2006 Sub-Clause 30.1 requires the Contractor to submit sufficient details/particulars to Architect for him to value and ascertain the works (including materials and goods on site) and issue interim certificate for Contractors entitlement to payment. The materials and goods on site shall be reasonably, properly and not prematurely delivered with adequate protection against weather or other casualties. PAM 1998 Sub-Clause 30.2 provides that the Architect shall have the discretion to make the interim valuation whenever he considers necessary for issuing the interim certificate. The following Flow Chart 1 details the procedures of the interim payment process under PAM 1998 form of contract. However, PAM 2006 Sub-Clause 30.1, which has been revised from PAM 1998, states that the Interim Certificate is to be issued within 21 days from the Contractors submission of their interim payment application. In addition, PAM 2006 clearly provides that in the event the Contractor fails to submit the payment application, it shall be deemed to be a waiver

88
1st Quarter 2008

rticle

START

Contractor submits details and particulars to Architect during the Period of Interim Certificate stated in the Appendix Architect ascertains the amount due to the Contractor

Error or discrepancy in the previous certificate detected

Yes

Architect corrects or modifies previous certificate in next certificate

No Architect ascertains: (a) the total value of works properly executed including those executed by sub-contractors (b) the total value of materials and goods including:(i) delivered to or adjacent to the Works (ii) delivered up to and not more than 7 days before the date of certificate (iii) reasonably, properly and not prematurely brought to or adjacent to the Works (iv) adequately protected against weather or other casualties Architect issues Interim Certificate with a copy to the Employer

No

Contractor may serve default notice

Employer pays within the Period of Honouring Certificate stated in the Appendix

Employer stops default in 7 days No Yes

Notice of determination by contractor Carry out provisions of Clause 26.2

END

Yes

Contractor proceeds with the Works

Flow Chart 1: PAM 1998 Form Of Building Contract Clause 30 - Interim Payment Process

START

Contractor submits details and particulars to Architect during the Period of Interim Certificate stated in the Appendix Architect ascertains the amount due to the Contractor

Error or discrepancy in the previous certificate detected

Yes

Architect corrects or modifies previous certificate in next certificate

No Architect ascertains: (a) the total value of works properly executed including those executed by sub-contractors (b) the total value of materials and goods including:(i) delivered to or adjacent to the Works (ii) delivered up to and not more than 7 days before the date of certificate (iii) reasonably, properly and not prematurely brought to or adjacent to the Works (iv) adequately protected against weather or other casualties

No Architect issues Interim Certificate with a copy to the Employer within 21 days from receipt Contractors Application

Contractor may serve default notice

Employer pays within the Period of Honouring Certificate stated in the Appendix

Employer stops default in 14 days

No

Notice of determination by contractor within 10 days Carry out provisions of Clause 26.4 & 26.6
END

Yes Yes Contractor proceeds with the Works

Flow Chart 2: PAM 2006 Form Of Building Contract Clause 30 - Interim Payment Process

89
1st Quarter 2008

rticle

of his contractual entitlement for that interim certificate, and the Architect may at his discretion, issue or not issue the interim certificate under the circumstances. After the issuance of the Certificate of Practical Completion, interim certificate shall be issued as and when further amounts are ascertained by the Architect as payable to the Contractor by the Employer. Flow Chart 2 details the procedures of the interim payment process under PAM 2006 form of contract. Similarly with PAM Form of Contract, IEM/JKR Clause 47 (a) to (d) deals with the interim payment claims, certifications and payments on a monthly basis. IEM/JKR Clause 47 (a) states that when the Contractor has executed the Works including the material on site has reached the minimum value requirement as stated in the Appendix for the First Interim Certificate, the SO shall make the first valuation of the Works, for which is the first claim can be less or more than a month. For subsequent claims, the amount must also exceed the minimum amount as stated in the Appendix, whereby the claims can be on monthly basis or more than a month (at the discretion of the SO). The Engineer/SO is required to make a fair valuation of works properly executed and 75% of the value of unfixed material and goods on-site and issue Interim Certificate to the Contractor for payment by Employer/Government. It is implied that the Engineer/SO is to value the executed works and issue an Interim Certificate on a monthly basis. IEM/ JKR Sub-Clause 47 (b) requires the SO to issue an Interim Certificate within 14 days from the date of valuation. The following Flow Chart 3 and Flow Chart 4 detail the procedures of the interim payment process under IEM and JKR respectively.

For CIDB Form of Contract, the SubClause 42.1 requires the Contractor to submit a Statement of Work Done (SoWD), which would incorporate the work properly executed (subject to any agreement as to stage payment stipulated in the Appendix), any items priced in the contract including Construction Plant, Temporary Works, percentage (as stated in the appendix) of value of equipment, material or goods delivered for incorporation in the Works and any amount due to the Contractor under an Option Module.

Sub-Clause 42.2 (a) requires that the S.O. shall subject to sub-clause 42.2 (c) and (d) issue an Interim Certificate within 21 days from receiving SoWD. As provided under sub-clause 42.2 (c), the Interim Certificate must be issued at regular interval (as stated in the Appendix). After the Practical Completion of the Works, the SO may issue Interim Certificate as and when he ascertains further amounts due to the Contractor. Sub-Clause 42.2 (d) provides that the SO is not required to issue an Interim

START Contractor submits claims to Engineer when the value of executed work including delivery of materials had reached the sum referred to in the Appendix

Engineer makes the first* valuation of the Works

Engineer makes fair valuation of the Works and materials delivered each succeeding month, provided the total value is not less than the sum referred to in the Appendix Within 14 days from the valuation, Engineer issues Interim Certificate stating the amount die to the Contractor

Amount of Interim Certificate includes:(i) Estimated total value of work done (ii) 75% of value of unfixed materials up to and including date of valuation Less (iii) Installment previously paid (iv) Retention Fund

Within the Period of Honouring Interim Certificate stated in the Appendix / Within 30 days if the issues of Interim Certificate, Employer makes payment to the Contractor

YES

Contractor proceeds with the Works

NO Contractor gives notice of default under Clause 52 (a) Contractor terminates the Contract under Clause 52

Recover monies outstanding using Clause 55

END

Flow Chart 3: IEM Form Of Building Contract Clause 47 - Interim Payment Process

90
1st Quarter 2008

rticle

START

Contractor returns Letter of Acceptance of Tender Yes Contractor deposits relevant insurance policies Yes Contractor deposits the Performance Bond

No

No

No Interim Certificate shall be issued

No

Contractor executed works including delivery of materials S.O. makes valuation of the Works executed and materials delivered every month No

Total value more than the sum referred to in Appendix Yes Within 14 days from the valuation, S.O. issues Interim Certificate stating the amount due to the Contractor Amount of Interim Certificate includes:(i) Estimated total value of work done (ii) 75% of value of unfixed materials up to and including date of valuation Less (iii) Installment previously paid

Within the Period of Honouring Interim Certificate stated in the Appendix / Within 30 days of the issue of Interim Certificate, Government makes payment to the Contractor Yes Contractor proceeds with the Works END

No

Dispute or differences arise

Refer Settlement of Dispute Clause 54.0

Flow Chart 4: JKR Form Of Building Contract Clause 47 Interim Payment Process

Certificate if the amount claimed or the amount certified is less than the minimum amount stated in the Appendix. The following Flow Chart 5 details the procedures of the interim

payment process under CIDB form of contract. JKR D&B/T Clause 50 deals with interim payment. The Interim Payment shall be made as set out in the Appendix 2 drawn up by
91
1st Quarter 2008

mutual agreement of the contracting parties. However, the PD reserves the right to make payment according to the value of work done or Payment Schedule. Sub-Clause 50.2 requires the Contractor to submit to the PD written application for Interim

rticle

S.O. Shall notify the Contractor in writing within 21 days of receiving Statement of Work Done

S.O. at his discretion decides not to issue Interim Certificate

Contractor is entitled to some remedy where the Employer is liable. Clause 42.12 NO

NO

NO

YES

YES

YES

START

Contractor submits to the S.O. at the intervals specified in Appendix as Statement of Work Done

Statement of Work Done shall contain: (i) value of works properly executed (ii) items separately priced in the Contract (iii) percentage of value of equipment, materials delivered to Site (iv) amount entitled (v) amount due under Option Module Total amount Contractor stated in Statement of Work Done greater than the minimum amount specified in the Appendix S.O. issues Interim Certificate to the Employer (c.c to the Contractor) stating amount ascertained within 21 days of receiving Statement of Work Done Interim Certificate shall include: (i) The amount Contractor is entitled to Less (ii) Retention Monies (iii) Any amount previously stated (iv) Any amount previously certified to be deducted Total amount which the S.O. considers Contractor to be entitled to greater than the minimum amount specified in the Appendix

S.O. may make any correction or modification on error in previous certificates

After issuance of Certificate of Practical Completion, Interim Certificate shall be issued as and when further amounts are ascertained by the S.O

1st
YES Employers failure to make payment after further 14 days Employers failure to pay for further 14 days YES NO Contractor gives notice of his intention to suspend work Employers pays certificate and interest Interest in respect of the unpaid amount accrued Refer Notice of default Clause 45.1 (a) NO YES

Contractor entitled to Loss and Expense

Contractor entitled to Extension of Time

Contractor protect and secure the Works during suspension

Contractor suspends wholly / partly / reduces the fate of the Work progress

92

Quarter

2008

Contractor submits Loss and Expense/EoT claims

S.O. evaluates claims

Option Module E / Payment Bond applicable

Employer pays the Contractor within 21 days/the Period of Honouring Certificate stipulated in the Appendix YES

Add to Contract sum

Refer Settlement of Disputes Clause 47

Determination subject to Clause 45.1 (b)

Employers failure to pay subsequently

YES

Contractor recovers the unpaid amount from the Bond

YES

NO Contractor proceeds the Works END

Contractor lifts suspension

Flow Chart 5: CIDB Form Of Building Contract Clause 42 Interim Payment Process

rticle

START Contractor executed works including delivery of materials Contractor submit payment application

PD shall issue a notice to Contractor with reasons to the effect No

Payments showing the amounts due under the contract, variations, expenditure of provisional sums and material on site for use in the Works. Where Payment Schedule is included in the Contract, PD shall issue the Interim Certificate within 14 days upon receipt of Contractors application for Interim Payment. Where no Payment Schedule is included in the Contract, the Interim Payment shall be made by the Government based on PDs monthly valuation of the Works properly executed and any goods or unfixed materials delivered to Site intended for use in the Works. Flow Chart 6 details the procedures of the interim payment process under JKR D&B/T form of contract. Table 1 shows the relevant payment clauses in the standard forms of construction contract. Whilst most of the above stipulated forms of contract provided for similar words ...... shall on submission of payment application ........, which make it a mandatory obligation on the Contractor to submit his payment application for the Architect/ Engineer/SO/PD consideration and certification. Whether such obligation
Contract Clauses

Payment Schedule included in Appendix 2 of the Contract

Yes

Contractor executed works and payment application in accordance with Contract

No

No

PD do valuation of the executed Works (including materials delivered) on monthly basis and the total value shall be more than the sum referred to in Appendix 1

Yes PD shall issue interim certificate within 14 days upon received Contractor payment application

Yes PD shall issue Interim Certificate within 28 days from the Contractors payment application stating the amount due to the Contractor

Within the Period of Honouring Interim Certificate stated in the Appendix / Within 30 days of the issue of Interim Certificate Government makes payment to the Contractor Yes Contractor proceeds with the Works

No

Dispute or differences arise

Refer Settlement of Disputes Clause 56.0

END

Flow Chart 6: JKR PWD DB/T Form Of Building Contract Clause 50 Interim Payment Process Table 1 Brief Description of Relevant Contract Clauses The Contractor shall submit a payment application at the Interim Claim Interval stated in the Appendix. The Architect / Engineer / Superintending Officer shall within the stipulated period after the Contractor submitted Interim Payment Claims issues the Interim Certificate. The Employer has to make the payment to the Contractor within stipulated period after the Architect / Engineer / Superintending Officer issued the Interim Payment Certificate. Interest imposed on Employer for late payment.

PAM 2006 30.1

PAM 1998

JKR 203A

IEM 1989 47 (a)

CIDB 2000 42.1

FIDIC 4th Edition 50.2

30.2

30.2 within 21 days

Architect discretion

14 days after Valuation

42.2(a) within 21 days

50.3 (a) 14 days after application

30.2

30.3

47 (d)

42.9 (a)

50.3 (c)

30.17

42.9 (b)

93
1st Quarter 2008

rticle

Kuala Lumpur high rise offices

is indeed a mandatory requirement is debatable, except when it is expressly provided for as condition precedent, as in the case of PAM 2006 Clause 30.1. According to Ir. Harbans Singh K.S.1, ...... non-compliance to such requirements is not fatal to the contractors entitlement, since the employer is obliged, in the absence of such breaches anyway to proceed with the discharge of his side of the bargain. CONCLUSION In normal practice, the Architect/ Engineer/SO/PD usually prepares the Interim Certificate only after the Contractor has submitted their payment application. Whether the

Contractor has to submit their payment application prior to the Architect/Engineer/SO/PD issuance of the interim certificate at the interval period as prescribed in the Appendix of the Conditions of Contracts depends on different forms of Conditions of Contract. PAM 2006 Form of Contract make it a condition precedent in that the Contractor must submit their payment application to the Architect/ SO, otherwise it is deemed a waiver of his contractual entitlement for that interim certificate. Nevertheless, the Architect may issue the interim certificate at his discretion, depending on the circumstances.

PAM 1998, CIDB and JKR PWD Form DB/T Forms of Contract require the Contractor to submit their payment application to the Architect/PD. However, there is no provision stating that the failure of the Contractor to do so will cause the Contractor to waive his contractual entitlement for that interim certificate. Thus, it is still depends on the Architect/SO/ PDs discretion to make an interim valuation whenever he considers necessary for ascertaining the amount due in an interim certificate. IEM/JKR Forms of Contract do not have any provisions that the Contractor must submit his payment application for the Engineer/SO to

1 Ir. Harbans Singh K.S., Engineering and Construction Contracts Management PostCommencement Practice, Chapter 3 Payments, LexisNexis (Singapore) Pte. Ltd., 2003.

94
1st Quarter 2008

rticle

REFERENCE/BIBLIOGRAPHY
1. Malaysian standard forms of contract: i. PAM Form of Building Contract (1998 & 2006) ii. JKR/PWD Form of Contract (203A - Rev 10/83) iii. IEM Conditions of Contract for Works Mainly of Civil Engineering Construction (1st Edition 1989) iv. CIDB Form of Contract for Building Works (2000 Edition) v. JKR PWD/ Standard Form of Design & Build/Turnkey Contract (PWD Form DB/T) (2002 Edition) 2. Sr. Ong Hock Tek, Payment Claims, Valuations, Certification and Final Account, one day seminar organised by Entrusty Management Sdn. Bhd. and B.K. Burns & Ong Sdn. Bhd., 2 November 2004. 3. Ir. Harbans Singh K.S., Engineering and Construction Contracts Management Post-Commencement Practice, Chapter 3 Payments, LexisNexis (Singapore) Pte. Ltd., 2003. 4. Vincent Powell Smith, The Malaysian Standard Form of Building Contract, Clause 30 Interim Certificate and Valuation, Malaysia Law Journal Sdn. Bhd., 1990. 5. Ling Tek Lee, Natural Justice in Adjudication, Chapter 2 The Dilemma in the Construction Industry, University Technology Malaysia, March 2006.

Payment calculations

do the valuation and then issue the interim certificate. However, the Engineer/SO is required to make the first valuation when the Contractor has executed the Works (including material on-site) have reached the minimum value as stated in the Appendix of the said form of contract. Subsequently, the Engineer/SO is also required to do the valuation and issue an Interim Certificate when the Works (including materials on site) have exceeded the minimum amount stated in the Appendix either monthly or more than a month. Failure of the Engineer/SO to issue the Interim Certificate is a breach of conduct for which the Employer/Government can be liable under the Contract. Although certain standard forms of contract do not expressly require the Contractor to submit their payment application, they impose such duty on the Contract Administrator (Architect/Engineer/SO/PD) to initiate the payment process. It is therefore pertinent that the Contractor is proactive and in his interest, to make the necessary payment application regularly and timely, as it will definitely assist the Contract Administrator to expedite the payment process and in turn for the Employer to fulfil his payment obligation, accordingly.

In the next issue of the MBAM journal the article will answer the question on Is determination of employment and termination of contract the same in meaning and implications?

The Entrusty Group includes Entrusty Consultancy Sdn Bhd (formerly known as J.D. Kingsfield (M) Sdn Bhd) , BK Burns & Ong Sdn Bhd (a member of the Asia wide group BK Asia Pacific) , Pro-Value Management, Proforce Management Services Sdn Bhd / Agensi Pekerjaan Proforce Sdn Bhd and International Master Trainers Sdn Bhd. providing project, commercial and contractual management services, risk, resources, quality and value management, recruitment consultancy services and corporate training programmes to various industries, particularly in construction and petrochemical, both locally and internationally. For further details, please visit website: www.entrusty.com. or contact HT Ong at 22-1& 2 Jalan 2/109E, Desa Business Park, Taman Desa, 58100 Kuala Lumpur, Malaysia. Tel: 6(03)-7982 2123 Fax: 6(03)-7982 3122 Email: enquiry@entrusty.com.my. Entrusty Group provides 30 minutes of free consultancy (with prior appointment) to MBAM members on their contractual questions. The Group also provides both in-house and public seminars/workshops in its various areas of expertise.
95
1st Quarter 2008